Commonwealth

Biotechnologies, Inc.

A Solutions
Provider
to the
Life Sciences
Industry

“From Concept to Clinic”

Annual Report 2005

 Commonwealth Biotechnologies, Inc.
Table of Contents

Memo to Shareholders 1

Stockholder Matters 6

Management Discussion and Analysis

Of Financial Condition and Results
Of Operations 7

Report of Independent Registered

Public Accounting Firm 17

Financial Statements

Balance Sheets 18

Statements of Operations 20

Statements of Changes in Stockholders’

Equity 21

Statements of Cash Flows 22

Summary of Significant Accounting Policies 23

Notes to Financial Statements 29

record performance
Commonwealth Biotechnologies Inc. posted a record year
in 2005. We had the highest revenue and highest return
of cash from operations than ever before in our
history as a public corporation.
2005 was our first year of modest profits.

strength
"CBI's strength in helping clients to think
through and creatively solve early-stage
problems from both a design and
implementation standpoint is not only what
drives people inside the organization but is
also the reason clients choose CBI over
the competition."

broad ranging expertise

“CBI has assembled an outstanding group of scientist
and technicians which encompass a broad spectrum of
technology and experience.”

breadth of technologies
“CBI has invested in a broad variety of state-of-the-art
technologies, providing a range of options to solve almost
any problem.”

.
 Highlights from 2005

January, 2006. CBI and Prism

Pharmaceuticals, Inc., Enter into a License Agreement to
Develop Helix-Based Peptide Technologies.

Global Partnership
December, 2005. CBI and Intertek ASG
Launch Global Marketing Agreement Companies will Co-
Promote Services to the Life Sciences Industry with
International Focus.

More Contracts signed

April, 2005. CBI Announces New Contract Signings
Work to begin in the Second and Third Quarters of 2005.
Includes protein stability, developing antibodies and novel
immuno-assays, and qualifying molecular genetic assays for
use in clinical trial work.

Contracts signed
March, 2005. CBI Announces Contract Signings
New contract awards totaling nearly $2 million. Expands Work-
Load at CBI in Support of Vaccine Development.

January, 2005. CBI Announces Contract Signings

Totaling $1.1 million, Includes First Major Contract for CBI’s
new division, Fairfax Identity Labs (FIL).
 To Our Shareholders:
Our Company recorded many exciting accomplishments in 2005. CBI recorded its
highest revenues ever, and it was our first year of profitability, however modest. 2005
marked CBI’s re-entrance into the arena of forensic analysis, and it was the year in
which CBI’s Fairfax Identity Lab (FIL) rapidly transitioned to CBI ownership. FIL quickly
captured its first major forensics contract and completed its first year of operations
under CBI leadership with a performance that out-paced our budget expectations. In
2005, CBI completed a branding survey and as a consequence, has re-positioned itself
as a Solutions Provider, rather than as a purveyor of a menu of individual service
offerings. In January, 2006, CBI executed a License and Royalty Agreement for
commercialization of HepArrest®, the premier entry in our IP portfolio. We expanded our
presence overseas through a strategic alliance with Intertek ASG, and continue to
pursue client leads brought to us by domestic alliance partners, including Fisher
Scientific, LLC. The BSL3 laboratory suite was expanded to include virology, and the
Company quickly captured several contracts which require BSL3 virology capabilities.
We are currently building out a 1,000 sq ft laboratory to house its select agent toxin
production activities in support of an on-going contract that will extend into 2008. To
accommodate new staff, we have completed the construction of nearly 2,000 sq ft of
office space. All of these new labs and offices are housed within our existing facility. CBI
added critical new instruments, which enable it to pursue the latest methods in
proteomics and high throughput DNA sequence analysis. In addition to these our capital
projects, the Company added key scientific staff in virology, mass spectrometry, and in
the FIL division. Many of our new clients come to us through the internet, and so, CBI
re-vamped its web page to make it more user-friendly and informative. New entry
pages for bio-defense, vaccine development, and forensic work were added.

FINANCIAL HIGHLIGHTS

Years Ended December 31, 1997 1998 1999 2000 2001 2002 2003 2004 2005
in thousands, except per share amounts
Revenue $ 1,761 $ 1,604 $ 2,565 $ 4,366 $ 4,786 $ 4,434 $ 5,104 $ 5,748 $ 7,803
Net Income (loss) $ (1,168) $ (2,096) $ (2,091) $ (921) $ (1,673) $ (625) $ (80) $ (367) 79

Net income(loss) per share - basic $ (3.55) $ (1.29) $ (1.27) $ (0.51) $ (0.81) $ (0.29) $ (0.03) $ (0.12) 0.02
Net income (loss) per share – diluted $ (3.55) $ (1.29) $ (1.27) $ (0.51) $ (0.81) $ (0.29) $ (0.03) $ (0.12) 0.02

At year end:
Cash, cash equivalents $ 6,273 $ 2,091 $ 31 $ 587 $ 116 $ 270 $ 294 $ 2,742 $ 2,811

Total Assets $ 7,931 $ 10,401 $ 8,250 $ 10,343 $ 8,348 $ 7,823 $ 7,581 $ 11,003 $ 11,144
Long Term Debt $ 624 $ 5,000 $ 4,000 $ 4,077 $ 3,890 $ 3,730 $ 3,630 $ 4,081 $ 4,007
EBITDA $ (655) $ (1,602) $ (1,252) $ 8 $ (729) $ 289 $ 776 $ 882 $ 1,285
 CBI continues to be a well-recognized key player in bio-defense, vaccine development,
clinical trial support, and genetic
8,000,000 identity work. We continued to meet
the needs of our clients with superior
7,000,000
service, and added new clients in
6,000,000 2005 who are industry leaders in our
core focus areas. We believe that
5,000,000
CBI is very well positioned for
Revenues

4,000,000 continued growth in these areas, and

that our Company presents an
3,000,000
integrated team to deliver what we
2,000,000 believe to be the best service
possible to our clients.
1,000,000

0 CBI posted record revenues of about

1997 1998 1999 2000 2001 2002 2003 2004 2005
$7.80 million for fiscal year 2005,
which represents 35.7% revenue
Revenue Growth 1997 -2005 growth over 2004. CBI also posted
its first ever year-end profit of
$79,123, which compares to a loss of $367,549 in 2004. 2005 is the first fiscal year
since its initial public offering in 1997, that the Company has returned positive earnings
per share. These earnings were $0.02 calculated on a primary and fully diluted basis.

CBI signed over $8 million in contracts in 2005. The Company has been operating
solely on revenues from day-to-day operations. CBI’s overall gross revenues have
increased from $5.7 million in 2004 to $ 7.8 million in 2005. Revenues generated from
government contracts amounted to 54% of the total revenue in 2005; the remainder was
derived from non-government sources and of these, 25% of our revenues were
recognized due to genetic testing. Equalizing our revenue stream has been a focus of
CBI management, but clearly our job is not done. We must dramatically increase our
revenues in the private sector.

The Company has been EBITDA positive for four consecutive years, and in 2005,
recorded EBITDA of about $1.28 million which compares to $882 thousand in 2004.

EBITDA CALCULATIONS
2005 2004
Net Income (Loss) $ 79,123 $ (367,549)
Depreciation $ 666,106 $ 586,620
Bond Prepayment Penalties $ - $ 217,800
Bond Write-off Costs $ - $ 206,930
Interest/Amortization $ 540,208 $ 238,077
EBITDA $ 1,285,436 $ 881,878

The Company’s financial condition continues to improve through organic growth, CBI
will continue to capitalize from its successful acquisition of Fairfax Identity Labs.
Through other acquisitions, not only will CBI continue to look for targets that are
2
compatible with existing capabilities, but will look into expansion of our service offerings
into new markets.

Laboratory Services CBI entered 2006 with approximately

Contract Research
Genetic Identity $6.3 million in anticipated laboratory
Government Contracts
52.8% Clinical Services work for the year. The Company is
Other
actively engaged in on-going contract
work and has submitted numerous
long-term contract proposals to
prospective government and private
sector clients, not the least of which is
4.47% oversight of GMP synthesis of
0.96%
25.5% 8.39% HepArrest, and pre-clinical
7.88% development work in anticipation of an
Investigational New Drug (IND) filing
in late 2006.

Sources of CBI Revenue in 2005

500,000
Thank You for Your Continued
Support 0
1997 1998 1999 2000 2001 2002 2003 2004 2005

In 2006, CBI welcomed one new -500,000

Board members, Mr. Joseph Slay,
Net Income

and said goodbye to Mr. Pete -1,000,000

Einselen. Pete has been with CBI
since its inception, and has -1,500,000
weathered all of the same storms
that we founders went through. We -2,000,000
thank Pete for his efforts on our
behalf, and look forward to Joe’s -2,500,000
insights and contributions. He is
already hard at work in helping to P&L 1997 - 2005
implement CBI’s branding strategy
to new potential clients.
Management is again beholden to the efforts of its Board of Directors.

Through press releases, 8-K announcements, and now, on-site presentations and
quarterly electronic newsletters, CBI endeavors to keep its shareholders informed of
new contract signings and significant news of Company’s operations.

CBI’s continued improvement is testament to our employee’s productivity. Fully 34% of

our employees hold advanced degrees in various life science disciplines, and it is their
commitment to excellence that has brought us our diverse client base.

3
You are cordially invited to attend CBI’s 2005 Annual Meeting of Shareholders on May
19, 2006 at 11:00 a.m. at the Company’s facility.

With best regards,

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

__________________________ ____________________________
Thomas R. Reynolds James H. Brennan
Executive Vice-President, Vice President, Financial Operations
Science and Technology

4
CBI is a premiere solutions provider
In the private sector, a client will look to CBI in the early stage of research and
development work because we offer:
• Innovative approaches and Optimized Technology
• Depth and breath of expertise needed
• Exceptional Problem-Solving Abilities
• Wide range of options for complex questions
• Faster, cheaper, and innovative solutions and tools
• CBI is accredited by the CDC, the AABB, the USDA, the NFSTC and
operates accredited CLIA laboratories
• A partner and

In the government sector, our clients

• Appreciate CBI’s sophisticated level of expertise
• Value CBI’s breadth of service offerings
• Benefit from CBI’s flexibility and cooperative management style.

CBI offers innovative and custom services

• CBI facilitates one-time and strategic decisions
• Accommodates short term and long term clients
• Offers flexibility in services options
• Offers GLP and non-GLP rated services

CBI accommodates ALL levels of service

• Bench to production scales
• High throughput, automation
• Operates Specialty labs, including
3 Biosafety level 3 labs
3 DNA Identity labs
3 Calorimetry and mass spectrometry labs
3 Cell culture/fermentation labs
3 High throughput DNA sequence labs
3 Peptide synthesis labs

5
Stockholder Matters
Market for Common Equity

The Company completed its initial public offering on October 28, 1997 at a price per
share of $6.00. Since that time, the common stock has traded on the NASDAQ Captial
Market (“NASDAQ”). The following table sets forth the range of high and low sales price
per share of common stock for 2005 and 2004. These market quotations reflect inter-
dealer prices, without retail mark-up, markdown, or commission and may not
necessarily represent actual transactions.

Period High Stock Price Low Stock Price

1st Quarter, 2005 $ 6.27 $ 3.59

2nd Quarter, 2005 $ 4.78 $ 3.69
3rd Quarter, 2005 $ 5.70 $ 4.05
4th Quarter, 2005 $ 5.14 $ 3.80

Period High Stock Price Low Stock Price

1st Quarter, 2004 $10.41 $ 3.00

2nd Quarter, 2004 $10.12 $ 4.66
3rd Quarter, 2004 $ 7.66 $ 3.78
4th Quarter, 2004 $ 7.47 $ 5.74

On March 17, 2006, the last reported sales price for a share of the Company’s Common
Stock on NASDAQ was $ 3.62. As of March 17, 2006 there were 32 holders of record
of the Company’s Common stock and 1208 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.

Selected Financial Data

Set forth below is selected financial data with respect to the Company for the years
ended December 31, 2005, December 31, 2004, and December 31, 2003, which has
been derived from the audited financial statements of the Company. The selected
financial data set forth below should be read in conjunction with “Management’s
Discussion and Analysis of Financial Conditions and Results of Operation.”

6
 For the years Ended December 31,

2005 2004 2003

Operational Data
Revenues $ 7,802,891 $ 5,748,704 $ 5,104,056
Net Income (loss) $ 79,123 $ (367,549) $ (80,601)
Net income (loss) per common
share – basic $ 0.02 $ (0.12) $ (0.03)
Net income (loss) per common
share- diluted $ 0.02 $ (0.12) $ (0.03)
Weighted average common
shares outstanding 3,229,243 3,001,682 2,488,699

Balance Sheet Data:

Total Current Assets $ 4,276,348 $ 4,139,195 $ 1,155,839
Total Assets $ 11,143,632 $ 11,003,008 $ 7,581,213
Total Current Liabilities $ 1,120,522 $ 959,747 $ 579,920
Total Liabilities $ 5,127,032 $ 5,041,200 $ 4,209,920
Total Stockholders equity $ 6,016,600 $ 5,961,808 $ 3,371,293

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS.

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

Overview

CBI (The Company) is a solutions provider to the global biotechnology industry,

academic institutions, government agencies, and pharmaceutical companies. It offers
broad ranging expertise and a complete array of the most current analytical and
synthetic chemistries and biophysical analysis technologies, many of which are not
available from other commercial sources. The Company has crafted a stimulating, open
environment where scientists collaborate among themselves and with our clients, take
on interesting challenges and develop creative solutions. CBI offers comprehensive
genetic identity testing, including paternity, forensic, and Convicted Offender DNA Index
System (“CODIS”) analyses. We are accredited by the American Association of Blood
Banks, Clinical Laboratory Investigation Act (“CLIA”), and the National Forensic Science
Technology Council, and operates fully accredited BSL-3 laboratory. The results of a
recent branding analysis done by CBI shows that it enjoys an excellent reputation with
its customers and that CBI is valued for its ability to bring novel and imaginative
solutions to problems in life-sciences research.

7
CBI is a preferred provider of early development contract research. We facilitate
strategic decisions to both short term and long term clients. CBI offers both Good
Laboratory Practices (GLP and non-GLP) rated services, and accommodates all levels
of service, from bench to production scale processes. The Company prides itself on its
high throughput and fully integrated platform technologies, and over the years, has put
in place numerous specialty labs, including Biosafety level 3 labs for bacteriology and
virology, a DNA reference Lab, calorimetry and mass spectrometry labs, cell culture and
fermentation labs, high throughput DNA sequence labs, and peptide synthesis labs.

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

We are vigorously pursuing revenue opportunities in four principal focus areas: bio-
defense; laboratory support services for on-going clinical trials; comprehensive contract
projects in the private sector; and DNA reference lab activities. Our revenues are
equally divided between the government and private sectors. The bulk of CBI’s
government derived revenues are from government contracts dealing with bio-defense
related matters.

CBI acts as both prime and subcontractor for bio-defense related work. More often than
not, we are the prime (if not the only) contractor performing clinical laboratory or
comprehensive contracts for its private sector clients.

The Company views commercial and government contracts as its most important
sources of revenue. For this reason, it is beginning to move away from concept of
“piece work” for individual investigators. Further, We are now emphasizing its creative
solutions approach, rather than its large litany of individual technology offerings. The
branding analysis shows that the Company’s customers see its creative solutions
approach as a value added, and are willing to contract with CBI for this premium
service. CBI has entirely re-vamped its web page (www.cbi-biotech.com) to help clarify
its potential role is solving its customers problems. With all its contracts, revenues are
generally recognized as services are rendered or as products are delivered. In some
instances, revenue is also recognized with performance-based installments payable
over the contract as milestones are achieved.

8
Results of Operations

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

Revenues

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

The Company experiences fluctuations in all revenue categories. Continuation of

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

Revenues realized from various government contracts increased by $140,290 or 3.4%,

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

Revenues realized from genetic identity increased by $1,894,109 or 2,560.3%, from

$73,981 during 2004 to $1,968,090 during 2005. This increase was primarily due to The
Company acquiring Fairfax Identity Labs in December 2004.

Revenues realized from various commercial contracts decreased by $304,384 or

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

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

9
Cost of Services

Cost of services consists primarily of materials, labor, subcontractor costs and

overhead. The cost of services increased by $1,725,387 or 45.8%, from $3,768,278
during 2004 to $5,493,665 during 2005. The cost of services as a percentage of
revenue was 70.4% and 65.5% during 2005 and 2004, respectively.

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

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

Overhead cost consists of indirect labor, amortization costs associated with the
acquisition of Fairfax Identity Labs, depreciation, freight charges, repairs, travel and
miscellaneous supplies not directly related to a particular project. Total overhead costs
increased by $731,881 or 46.0%, from $1,590,496 during 2004 to $2,322,377 during
2005. Increased costs directly associated with the acquisition of FIL were amortization
costs ($297,889), and postage ($98,450). Other increases included maintenance and
repairs ($24,099), depreciation ($66,019), and utilities ($94,732).

Sales, General and Administrative

Sales, general and administrative expenses (“SGA”) consist primarily of compensation

and related costs for administrative, facility expenditures, professional fees, consulting,
taxes, and depreciation and marketing. Total SGA costs increased by $337,314, or
19.6%, from $1,718,874 during 2004 to $2,056,188 during 2005. As a percentage of
revenue, these costs were 26.3% and 29.9% during 2005 and 2004, respectively.

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

10
during 2005. This increase is due to additional sales tax paid for materials purchased.
Office expenses increased by $24,227 or 18.2%, from $133,193 during 2004 to
$157,420 during 2005. This increase is primarily due to additional costs associated with
travel expenses for employees attending meetings with potential clients.

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

Marketing costs increased by $422,000 or 143.4%, from $294,347 during 2004 to

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

Other Income (Expenses)

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

Other expenses decreased by $409,745 or 62.8% from $652,064 during 2004 to

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

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003.

Revenues

Gross revenues increased by $644,648 or 12.6% from $5,104,056 during the year
ended December 31, 2003 (“2003") to $5,748,704 during the year ended December 31
2004 (“2004").

Revenues realized from various commercial contracts decreased by $100,243 or

10.1%, from $997,680 during 2003 to $897,437 during 2004. This decrease is primarily
due to (1) work being completed with two major clients and (2) increased focus in
government contracts awarded to the Company. Of the $897,437 in commercial
contracts, two major clients represented 59.8% and 11.0%, respectively of the revenue
earned during 2004. The Company continued to work with both of these clients in 2005.

11
Revenues realized from various government contracts increased by $929,574 or 29.5%,
from $3,153,690 during 2003 to $4,083,264 during 2004. This increase was primarily
due to eight new contracts awarded to the Company in 2004. Revenue in 2004
amounted to $1,916,620 for these projects. In addition work that is being performed on
fourteen projects that were awarded in prior years, are still continuing to bring revenue
into the Company.

Revenues realized from various genetic testing decreased by $156,441 or 67.9%, from
$230,422 during 2003 to $73,981 during 2004. This decrease is a direct result of the
ending of two major contracts in performing genetic identity analysis.

Cost of Services

Cost of services consists primarily of materials, labor, subcontractor costs and

overhead. The cost of services increased by $239,779 or 6.8% from $3,528,499 during
2003 to $3,768,278 during 2004. The cost of services as a percentage of revenue was
65.6% and 69.2% during 2004 and 2003, respectively.

Direct labor costs increased by $75,835, or 6.6%, from $1,141,551 during 2003 to
$1,217,386 during 2004. This increase is a direct result of additional projects initialized
during the year.

The costs for direct materials increased by $3,583, or 0.4%, from $936,205 during 2003,
to $939,788 during 2004. Costs in materials remained constant due to the more efficient
utilization of the purchasing of materials from the Company’s suppliers.

Overhead cost consists of indirect labor, depreciation, freight charges, repairs, travel
and miscellaneous supplies not directly related to a particular project. Total overhead
costs increased by $151,788 or 10.6%, from $1,438,708 during 2003 to $1,590,496
during 2004. This increase is primarily due additional staff added to the Company in the
last month from the Fairfax Identity Labs acquisition and additional repairs needed to
equipment throughout the course of the year.

Sales, General and Administrative

Sales, general and administrative expenses (“SGA”) consist primarily of compensation

and related costs for administrative, marketing, facility expenditures, professional fees,
consulting, taxes, and depreciation. Total SGA costs increased by $297,995, or 21.0%,
from $1,420,879 during 2003 to $1,718,874 during 2004. As a percentage of revenue,
these costs were 29.9% and 27.8% during 2004 and 2003, respectively.

12
Total compensation and benefits increased by $40,847 or 8.1% from $505,678 during
2003 to $546,525 during 2004. This increase is primarily due to corporate bonuses
accrued in 2004.

Professional fees increased by $133,768 or 57.3% from $233,288 during 2003 to

$367,056 during 2004. This increase is primarily due one-time costs associated with the
elimination of the Industrial Revenue Bonds. Additional costs associated with
recruitment charges for the hiring of additional personnel. Office expenses increased by
$32,843 or 32.7%, from $100,350 during 2003 to $133,193 during 2004. This increase
is primarily due to additional costs associated with travel expenses for employees
attending meetings with potential clients. Other costs increased by $36,105 or 49.6%
from $72,816 during 2003 to $108,921 during 2004. Increases in this category were
from expenses associated with the relocation of employees from the acquisition of
Fairfax Identity Labs as well as increasing the allowance for potential write-offs in bad
debt.

Marketing costs increased by $61,395 or 26.4%, from $232,950 during 2003 to

$294,345 during 2004. This increase was primarily due to consulting fees. Additional
costs associated with press releases for the Company also led to the increase over
2003.

Other Income (Expenses)

Other income remained relatively flat from 2004 compared to 2003.

Other expenses includes (1) interest expense paid in the fourth quarter for the refinance
of the facility with Branch Banking and Trust, (2) interest paid for the Company's IRBs;
(3) prepayment penalty for the refinancing of the industrial revenue bonds to a variable
rate mortgage and (4) write-off of remaining unamortized bond issuance costs. Interest
costs increased by $197,629 or 79.8% from $247,505 during 2003 to $445,134 during
2004. Amortization costs increased by $196,186 or 1,826.0% from $10,744 during 2003
to $206,930 during 2004. This increase is due to paying off the Industrial Revenue
Bonds in November 2004.

Liquidity and Capital Resources

The 2005 Period reflected cash provided by operating activities of $1,007,757, as

compared to cash used in operating activities of $40,334 during the 2004 Period. This
increase was the result of the Company’s positive cash flow changes in the working
capital accounts, primarily in accounts receivable and accounts payable. The 2005
Period reflected a use of cash from investing activities of $479,658, as compared to
$1,089,690 during the 2004 Period. This decrease is due to the FIL acquisition in 2004,
partially offset by an increase in the purchase of equipment in 2005 needed to maintain
and begin servicing new contract work. The 2005 Period reflected net cash used in
financing activities of $459,005, as compared to net cash provided by financing

13
activities of $3,577,136 during the 2004 Period, primarily due to issuance of common
stock for proceeds of $2,979,905, net during the 2004 Period.

Net working capital as of December 31, 2005 and December 31, 2004 was $3,115,826
and $3,179,448 respectively. The current ratio for the 2005 Period is 3.81 as compared
to 4.31 during the 2004 Period.

Critical Accounting Policies

A summary of the Company’s accounting policies follows:

Estimates: The preparation of the financial statements requires management to make

estimates and assumptions that affect the reported amounts of asset and liabilities and
disclosure of contingent asset and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results could
differ from those estimates.

Revenue Recognition: The Company recognizes revenue upon the completion of

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

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

CBI has met the SEC and NASDAQ Corporate Governance Rules.

As a consequence of the Sarbanes-Oxley Act, the NASDAQ imposed certain changes

in the rules of corporate governance which are aimed at strengthening its listing
standards. The Securities and Exchange Commission (SEC) approved the rules
imposed by NASDAQ which include

• Independent Directors. CBI’s Board is composed of 5 independent and 3

employee directors.

14
 • The Independent Directors serve on the three principal committees; Audit,
Compensation, and Nominations.

• The Independent Directors meet in executive session at each quarterly Board

meeting.

• At least one Independent Director, Mr. Sam Sears, who serves on the Audit
Committee, meets all of the requirements as defined by the SEC for being a
“financial expert.”

• The Audit Committee reviews and approves all related-party transactions. CBI
has adapted a formal Corporate Code of Conduct. Copies are available on
request from Dr. Robert B. Harris, President and Chief Executive Officer, and on
the Company’s website at www.cbi-biotech.com.

Forward Looking Statements

Management has included herein certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. When used, statements that are not
historical in nature, including the words “anticipated”, “estimate”, “should”, “expect”,
“believe”, “intend”, and similar expressions are intended to identify forward-looking
statements. Such statements are, by their nature, subject to certain risks and
uncertainties.

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

• business conditions and the general economy,

• the development and implementation of the Company’s long-term business

goals,
• federal, state, and local regulatory environment,

• lack of demand for the Company's services,

• the ability of the Company's customers to perform services similar to those

offered by the Company “in-house,”

• potential cost containment by the Company's customers resulting in fewer

research and development projects,

• the Company’s ability to receive accreditation to provide various services,

including, but not limited to paternity testing, and

15
 • the Company’s ability to hire and retain highly skilled employees,

Other risks, uncertainties, and factors that could cause actual results to differ materially
from those projected are detailed from time to time in reports filed by the company with
the Securities and Exchange Commission, including Forms 8-K, 10-QSB, and 10-KSB.

Controls and Procedures

The Company’s Chief Executive Officer and Controller have concluded that the
Company’s controls and other procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
Securities and Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods as specified in the Commission’s rules
and forms are effective, based upon their evaluation of these controls and procedures
as of December 31, 2005.

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

16
17
 Commonwealth Biotechnologies, Inc.

Balance Sheets

December 31, 2005 2004

Assets
Current Assets (Note 2)
Cash and cash equivalents $ 2,811,129 $ 2,742,034
Accounts receivable, net of allowance for doubtful accounts
of approximately $90,000 and $92,000 (Note 5) 1,342,292 1,331,940
Prepaid expenses and other current assets 122,927 65,221

Total current assets 4,276,348 4,139,195

Property and equipment, net (Notes 1 and 2) 5,971,730 5,701,158

Other Assets
Intangible assets (Note 9) 317,879 561,569
Mortgage costs (Note 2) 87,675 111,086
Goodwill (Note 9) 490,000 490,000

Total other assets 895,554 1,162,655

$11,143,632 $11,003,008

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

18
 Commonwealth Biotechnologies, Inc.

Balance Sheets
(continued)

December 31, 2005 2004

Liabilities and Stockholders’ Equity

Current liabilities
Current maturities of long-term debt (Note 2) $ 512,729 $ 409,541
Accounts payable and other current liabilities 406,370 377,862
Deferred compensation 126,830 −
Deferred revenue 57,904 161,511
Interest payable 16,689 10,833

Total current liabilities 1,120,522 959,747

Long-term debt, less current maturities (Notes 2) 4,006,510 4,081,453

Total liabilities 5,127,032 5,041,200

Commitments and contingencies (Notes 3 and 4)

Stockholders’ equity
Common stock, no par value, 10,000,000 shares authorized,
2005 − 3,253,556; 2004 − 3,203,556, shares issued and
outstanding (Notes 7 and 8) − −
Additional paid-in capital 15,489,370 15,273,870
Restricted Stock (Note 7) (191,556) −
Other Comprehensive Income/(Loss) (48,275) −
Accumulated deficit (9,232,939) (9,312,062)

Total stockholders’ equity 6,016,600 5,961,808

$ 11,143,632 $ 11,003,008

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

19
 Commonwealth Biotechnologies, Inc.

Statements of Operations

Year Ended December 31, 2005 2004

Revenues (Note 5)
Government contracts $ 4,223,554 $ 4,083,264
Genetic identity 1,968,090 73,981
Laboratory services 623,473 486,719
Commercial contracts 593,053 897,437
Clinical services 328,272 194,473
Other revenue 66,449 12,830

Total revenues 7,802,891 5,748,704

Cost of services
Overhead 2,322,377 1,590,496
Direct labor 1,868,806 1,217,386
Direct materials 1,292,943 939,788
Other direct costs 9,539 20,608

Total cost of services 5,493,665 3,768,278

Gross profit 2,309,226 1,980,426

Selling, general and administrative expenses 2,056,188 1,718,874

Operating income 253,038 261,552

Other income (expense)

Interest expense and financing costs (242,319) (652,064)
Other income 68,404 22,963

Total other income (expense) (173,915) (629,101)

Net income (loss) $ 79,123 $ (367,549)

Income (loss) per common share, basic and diluted $ 0.02 $ (0.12)

See accompanying summary of accounting policies and notes to financial statements

20
 Commonwealth Biotechnologies, Inc.

Statements of Changes in Stockholders’ Equity

Number
of Additional Other
Shares Paid-in Restricted Comprehensive Accumulated
Outstanding Capital Stock Income(Loss) Deficit Total

Balance, December 31, 2003 2,534,928 $12,315,806 $ − $ − $(8,944,513) $3,371,293

Stock options exercised 668,628 2,958,064 − − − 2,958,064

Net loss − − (367,549) (367,549)

Balance, December 31, 2004 3,203,556 15,273,870 − − (9,312,062) 5,961,808

Restricted Stock 50,000 215,500 (191,556) − − (23,944)

Net income − − − − 79,123 79,123

Change in unrealized gain

(loss) on interest rate swap − − − (48,275) − (48,275)
Total comprehensive income 30,848

Balance, December 31, 2005 3,253,556 $15,489,370 $ (191,556) $ (48,275) $(9,232,939) $6,016,600

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

21
 Commonwealth Biotechnologies, Inc.

Statement of Cash Flows

Years Ended December 31, 2005 2004

Operating activities
Net income (loss) $ 79,123 $ (367,549)
Adjustments to reconcile net income (loss) to cash provided by
(used in) operating activities
Depreciation and amortization 963,526 793,082
Changes in assets and liabilities
Accounts receivable (10,353) (531,958)
Prepaid expenses and inventory (57,707) (4,286)
Accounts payable and accrued expenses 136,865 (76,929)
Deferred revenue (103,698) 147,306

Cash provided by (used in) operating activities 1,007,757 (40,334)

Investing activities
Purchases of property and equipment (450,711) (551,272)
Purchase of FIL, net (28,947) (538,418)

Cash used in investing activities (479,658) (1,089,690)

Financing activities
Decrease (increase) in restricted cash - 569,255
Principal payments on debt obligations, including capital
lease obligations (457,634) (100,000)
Increase in loan costs, net (1,371) (111,086)
Proceeds from debt obligations, net - 260,903
Proceeds from issuance of common net stock - 2,958,064

Cash provided by (used in) financing activities (459,005) 3,577,136

Net increase in cash and cash equivalents 69,094 2,447,112

Cash and cash equivalents, beginning of year 2,742,035 294,922

Cash and cash equivalents, end of year $ 2,811,129 $ 2,742,034

Supplemental Disclosure of Cash Flow Information

Cash payments for interest $248,175 $247,505
Non cash investing and financing activities, purchase of equipment
through a capitalized lease $485,968 -

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

22
 Commonwealth Biotechnologies, Inc.

Summary of Significant Accounting Policies

Nature of Business

Commonwealth Biotechnologies, Inc., (the “Company”), was formed on September 30, 1992,
for the purpose of providing specialized analytical laboratory services for the life scientist. As
the Company matured, it re-focused its core business activities and now provides integrated
contract research support in four principal areas; bio-defense; laboratory support services for
on-going clinical trials; comprehensive contract projects in the private sector; and through FIL,
paternity testing, forensic case-work analysis and CODIS work. In each of these areas, the
Company provides sophisticated macromolecular synthetic and analytical services, integrating
individual platform technologies so as to provide a comprehensive approach to solving complex
problems in life science research.

Estimates

The preparation of financial statements requires management to make estimates and

assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent asset and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the period. Actual results could differ from those estimates.

Revenue Recognition

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

Long-Lived Assets

Long-lived assets, such as property, plant, and equipment, are evaluated for impairment when
events or changes in circumstances indicate that the carrying amount of the asset may not be
recoverable through the estimated undiscounted future cash flows from the use of those assets.
When any such impairment exists, the related assets will be written down to fair value. No
impairment losses have been recorded through December 31, 2005.

23
 Commonwealth Biotechnologies, Inc.

Summary of Significant Accounting Policies

(continued)

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents. At times, the Company maintains cash balances
in excess of FDIC insured amounts. As of December 31, 2005 the excess over the FDIC
amount was approximately $2,400,000.

Accounts Receivable

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

Property and Equipment

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

Buildings 39.5
Laboratory and computer equipment 3 − 10
Furniture and fixtures and office equipment 7

Intangible assets

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

24
 Commonwealth Biotechnologies, Inc.

Summary of Significant Accounting Policies

(continued)

Loan Costs

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

Goodwill

Goodwill, which represents the excess of purchase price over fair value of net assets acquired,
is evaluated at least annually for impairment by comparing its fair value with its recorded
amount and is written down when appropriate. Projected net operating cash flows are
compared to the carrying amount of the goodwill recorded and if the estimated net operating
cash flows are less than the carrying amount, a loss is recognized to reduce the carrying
amount to fair value. The goodwill as of December 31, 2005 is a result of the acquisition by the
Company of Fairfax Identity Labs during 2004.

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 (see Note 7) have not been included in the computation because
their inclusion would have been antidilutive in 2004. Weighted average shares outstanding for
basic and diluted income (loss) per common share were 3,229,243 and 3,001,682 for the years
ended December 31, 2005 and 2004, respectively.

25
 Commonwealth Biotechnologies, Inc.

Summary of Significant Accounting Policies

(continued)

Employee Stock Plans

The Company adopted a Stock Incentive Plan on June 24, 1997. The Plan provides for granting to
employees, officers, directors, consultants and certain other non-employees of the Company options to
purchase shares of common stock. A maximum of 410,000 shares of common stock may be issued
pursuant to the Plan. Of the maximum number of shares to be issued under the Plan, 270,000 have
been reserved for incentive awards to be granted to the founders of the Company, and 140,000 are
reserved for incentive awards to be granted to others.
A 2000 Stock Incentive Plan was adopted by the Board of Directors and approved by the shareholders.
The Plan makes up to 300,000 shares of common stock available for grants of restricted stock awards
and stock options in the form of incentive stock options and non-qualified options to employees, directors
and consultants of the Company.

A 2002 Stock Incentive Plan was adopted by the Board of Directors and approved by the shareholders.
The Plan makes up to 600,000 shares of common stock available for grants of restricted stock awards
and stock options in the form of incentive stock options and non-qualified options to employees, directors
and consultants of the Company.
Incentive awards may be in the form of stock options, restricted stock, incentive stock or tax offset rights.
In the case of incentive stock options (within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended), the exercise price will not be less than 100% of the fair market value of shares
covered at the time of the grant, or 110% for incentive stock options granted to persons who own more
than 10% of the Company’s voting stock. Options granted under the Plans generally vest over a five-
year period from the date of grant and are exercisable for ten years, except that the term may not
exceed five years for incentive stock options granted to persons who own more than 10% of the
Company’s outstanding common stock. Options granted in 2005 were vested immediately.

The Company applies Accounting Principles Board Opinion No. 25 and related accounting
interpretations in accounting for its plan and for management warrants and, accordingly, no
compensation cost has been recognized. Had compensation cost for the Company’s plan been
determined based on the fair value at the grant dates for awards under the plan consistent with the
method prescribed by FASB No. 123, Accounting for Stock-Based Compensation, the Company’s net
income (loss) and income (loss) per share would have increased to the pro-forma amounts indicated
below:

26
 Commonwealth Biotechnologies, Inc.

Summary of Significant Accounting Policies

(continued)

2005 2004

Net income (loss)

As reported $79,123 $(367,549)
Proforma effect of recognizing stock-based compensation in
accordance with FASB No. 123 (670,927) (144,964)
Proforma net income (loss) $(591,804) $(512,513)
Basic and diluted income (loss) per common share
As reported $0.02 $(0.12)
Proforma effect of recognizing stock-based compensation in
accordance with FASB No. 123 (0.18) (0.17)
Proforma $(0.16) $(0.29)

Under FASB No. 123, the fair value of each stock option and warrant is estimated on the date of grant
using the Black-Scholes option pricing model. The following weighted-average assumptions were used
for grants in 2005 and 2004, respectively: No dividend yield, expected volatility of 42% and 93%, risk-
free interest rate of 4.39% and 4.28%, and expected lives of 10 years. In 2005, the Company vested all
outstanding options of employees, excluding certain members of senior management.

Fair Value of Financial Instruments

The Company has determined, based on available market information and appropriate valuation
methodologies, that the fair value of its financial instruments approximates carrying value. The carrying
amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair
value due to the short-term maturity of the instruments. The carrying amount of debt approximates fair
value because the interest rates under the credit agreement are predominantly variable, based on
current market conditions.

27
 Commonwealth Biotechnologies, Inc.

Summary of Significant Accounting Policies

(continued)

Derivative Instruments and Hedging Activities

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

Changes in the ineffective portion of the fair value of the derivative are accounted for through interest
expense. The notional principal value of the Company’s swap agreement outstanding as of December 31,
2005 is equal to the outstanding principal balance of the corresponding debt instrument.

New Accounting Pronouncements

SFAS No. 123 (Revised 2004), “Share-Based Payment,” issued in December 2004, is a revision of FASB
Statement 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and its related implementation guidance. The Statement
focuses primarily on accounting for transactions in which an entity obtains employee services in share-
based payment transactions. SFAS No. 123 (Revised 2005) requires an entity to measure the cost of
employee services received in exchange for an award of equity instruments based on the grant-date fair
value of the award (with limited exceptions). That cost will be recognized over the period during which
an employee is required to provide service in exchange for the award. This statement is effective as of
the beginning of the interim or annual reporting period that begins after June 15, 2007. The Company
estimates the impact on the financial position or results of operations will be approximately $81,000,
$48,000 and $41,000 in 2006, 2007 and 2008 respectively.

28
 Commonwealth Biotechnologies, Inc.

Notes to Financial Statements

1. Property and Equipment

Property and equipment consisted of the following:

December 31, 2005 2004

Land $ 403,919 $ 403,919

Building 5,107,006 4,999,496
Laboratory equipment 5,043,837 3,851,501
Furniture, fixtures and office and computer equipment 618,638 498,737

11,173,400 9,753,653
Less accumulated depreciation 5,201,670 4,052,495

$5,971,730 $5,701,158

Depreciation expense was $666,106 and $586,620 for the years ended December 31, 2005 and 2004,
respectively.

29
 Commonwealth Biotechnologies, Inc.

Notes to Financial Statements

(continued)

2. Long-Term Debt

Long-term debt consists of:

December 31, 2005 2004

Mortgage note payable to bank with interest at prime minus 0.25%. The note
payable will mature in November 2009; with estimated monthly payments of
principal and interest of $32,351; collateralized by building and other assets $3,825,433 $3,890,994
of the Company. The Company also entered into a swap transfer agreement
with the Bank essentially locking the interest rate paid by the Company to
7.725%

Note payable to Genetics & IVF Institute due on two installments due
December 15, 2005 and December 15, 2006. The note is secured by letter 300,000 600,000
of credit.

On January 20, 2005, the Company entered into a capitalized leasing

agreement with Technology Leasing Concepts for leasing of two pieces of
laboratory equipment. The monthly principal and interest payments are
$11,378. Both leases are for a 48 month period. 393,806 −

4,519,239 4,490,994
Less current maturities 512,729 409,541

$4,006,510 $4,081,453

Scheduled maturities of long-term debt are as follows:

2006 $ 512,729
2007 224,457
2008 238,979
2009 3,543,074
2010 −

$4,519,239

30
 Commonwealth Biotechnologies, Inc.

Notes to Financial Statements

(continued)

2. Long Term Debt (continued):

The mortgage agreements required the Company to maintain a reserve fund for a period of one year
which is held in a certificate of deposit. This reserve fund, in the amount of $360,345 is included in the
balance sheet as a cash equivalent at December 31, 2005.

3. Leasing Commitments

The Company leases equipment under non-cancelable operating leases. Total expense for the years
ended December 31, 2005 and 2004 was $28,636 and $37,236, respectively. Future minimum rental
commitments under operating leases as of December 31, 2005 are as follows:

2006 $42,394
2007 41,302
2008 40,159
2009 11,924

$135,779

4. Retirement Plan

The Company maintains a 401(k) Plan (the “Plan”) which covers substantially all employees. Under the
Plan, employees may elect to defer a portion of their salary, up to the maximum allowed by law, and the
Company can elect to match the contribution up to 1% of the employee’s salary. Company contributions
in 2005 and 2004 were $6,331 were $5,231 respectively.

5. Major Customers

Revenues for the years ended December 31, 2005 and 2004 include revenues from five major
customers in 2005 of approximately $3,534,004 or 45% and 2004 of approximately $2,779,278 or 48%
of total revenues. Trade receivables due from these customers as of December 31, 2005 and 2004 were
$775,079 and $938,714, respectively.

31
 Commonwealth Biotechnologies, Inc.

Notes to Financial Statements

(continued)

6. Income Taxes

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

Year Ended December 31, 2005 2004

Income taxes (benefit) computed at 34% statutory rate $ 26,900 $(124,900)

State income tax benefit, net 4,000 (18,400)
Change in valuation allowance 7,500 117,400
Other (38,400) 25,900

$ − $ −

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

December 31, 2005 2004

Deferred tax assets

Net operating loss carryforward $3,595,000 $3,625,900
Research and development credit carryforward 52,600 52,600
Deferred compensation − 20,800
Goodwill 173,800 186,200
Allowance for doubtful accounts 34,200 34,900
Interest rate swap 48,200 −
Other 106,600 96,300

4,010,400 4,016,700
Deferred tax liabilities
Tax depreciation in excess of book depreciation 302,300 301,100

Net deferred tax asset before valuation allowance 3,708,100 3,715,600

Less valuation allowance 3,708,100 3,715,600

$ − $ −

Operating loss carryforwards of approximately $9,105,000 may be used to offset future taxable income
and expire in various years through 2023. The Company also has research and development credit
carryforwards of approximately $53,000 that expire in various years through 2020.

32
 Commonwealth Biotechnologies, Inc.

Notes to Financial Statements

(continued)

7. Stock Compensation

During 2005, the Company issued 50,000 restricted shares to an executive officer at the fair market
value at the date of grant.

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

Stock option transactions are summarized as follows:

Weighted Weighted
Average Average
Exercise Exercise
2005 Price 2004 Price

Options and warrants outstanding, beginning of year 889,598 $5.03 1,186,572 $5.01
Granted 286,021 4.98 177,903 6.47
Exercised - - (268,628) 2.69
Expired (188,700) 6.45 (206,249) 3.40

Options and warrants outstanding, end of year 986,919 5.60 889,598 6.34

Options and warrants exercisable, end of year 916,331 6.01 889,598 6.34

Weighted-average fair value per option and warrants for

options and warrants granted during the year $2.35 $2.79

33
 Commonwealth Biotechnologies, Inc.

Notes to Financial Statements

(continued)

7. Stock Compensation (continued):

The following table summarizes information about stock options and warrants outstanding at December
31, 2005:

Outstanding Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Exercise Prices Number Life Price Number Price
Per Share Outstanding (Years) Per Share Exercisable Per Share

$0.90 – 2.00 77,882 8 $ 1.16 77,882 $1.16

$2.01 – 5.49 424,615 7 4.12 364,027 4.10
$5.50 – 7.00 215,663 3 6.28 118,063 5.98
$7.01 – 9.49 139,000 6 7.56 139,000 7.56
$9.50 – 12.50 217,359 4 9.95 217,359 9.95

$0.90 – 12.50 986,919 $ 5.60 916,331 $ 6.01

8. Private Placement Offering

On May 27, 2004, the Company completed an offering of 400,000 shares of its common stock, without
par value per share, and warrants to purchase an additional 100,000 shares of common stock to several
accredited investors. The shares were sold for a cash consideration of $6.25 per share, for a total of
$2,500,000. Net proceeds to the Company were $2,299,842. The exercise price for the warrants, which
are exercisable for a period of five years were set at 110% of the closing price of the Company’s
common stock on the closing date of the transaction.

9. Purchase of Fairfax Identity Labs

In December, 2004, the Company purchased the assets of Fairfax Identity Labs, (FIL), a division of
Genetics and In-Vitro Fertilization Institute for total consideration, including associated costs of
$1,149,000, which includes a $600,000 note payable due in equal installments due December 16, 2005
and 2006. The principal focus of the purchase was to increase the revenue base of private paternity,
contract paternity testing, and forensic DNA analysis. The acquisition has been accounted for by the
purchase method of accounting.

34
 Commonwealth Biotechnologies, Inc.

Notes to Financial Statements

(continued)

9. Purchase of Fairfax Identity Labs

A Summary of the transaction was as follows:

Purchase Price $ 1,149,000

Less fair value of assets acquired

Equipment 97,000
Draw Sites 307,000
Physicians Listing 145,000
Covenant Not to Compete 110,000

Total fair value of assets acquired 659,000

Goodwill $ 490,000

The pro forma, unaudited 2004 financial information below is presented as if the acquisition had
occurred at the beginning of the respective period. It is not necessarily indicative of the operating results
that would have actually occurred and is not indicative of future operating results.

Year Ended December 31, 2004

Operating revenue $7,355,989

Net loss (791,806)
Basic and diluted loss per common share $ (.25)

The above proforma results for 2004 include FIL’s operating results through September 30, 2004, the
last interim date prior to the consummation of the acquisition.

35
Corporate Information
Corporate Office
Commonwealth Biotechnologies, Inc.
601 Biotech Drive
Richmond, VA 23235
Telephone: 800-735-9224;
Telephone: 804-648-3820
Fax: 804-648-2641
E-mail: [email protected]
Web site: www.cbi-biotech.com

General Counsel
Kaufman and Canoles, PC
1051 E. Cary St
3 James Center
Richmond, VA 23219

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

Transfer Agent and Registrar35

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

Independent Auditors
BDO Seidman, LLP
300 Arboretum Place
Suite 520
Richmond, VA 23236

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Executive Officers
Richard J. Freer, Ph.D. Robert B. Harris, Ph.D.
Chairman of the Board; COO President; CEO

Thomas R. Reynolds James H. Brennan, MBA

Executive Vice President, Vice President, Financial Operations
Science and Technology;
Secretary
irectors
Richard J. Freer, Ph.D. Robert B. Harris, Ph.D.
Chairman of the Board; COO President, CEO

Thomas R. Reynolds Samuel P. Sears, Jr., Esq.

Executive Vice President Attorney at Law
Science and Technology;
Secretary

James Causey Donald A. McAfee, Ph.D.

VP, Consumer Industry Magazines VP New Product Development
Trader Publications Cardiome Pharma Corp

Joseph Slay Gerald P. Krueger, Ph.D., CPE

President Director, Human Factors and Ergonomics
Slay Public Relations The Wexford Group International

37