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EXHIBIT 10.5

                              INVESTMENT AGREEMENT

         INVESTMENT AGREEMENT (this "AGREEMENT"), dated as of July 18, 2003, by
and among American Oriental Bioengineering Inc., a Nevada corporation (the
"Company" or "AOBO"), and BH Capital Investments, LP, an Ontario Limited
Partnership and Excalibur Limited Partnership, an Ontario Limited Partnership,
(collectively the "Investors").

         WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein , the Investor shall invest up to $3,000,000 to
purchase the Company's common stock, $0.001 par value per share (the "COMMON
STOCK");

         WHEREAS, such investments will be made in reliance upon the provisions
of Section 4(2) under the Securities Act of 1933, as amended (the "1933 ACT"),
Rule 506 of Regulation D, and the rules and regulations promulgated thereunder,
and/or upon such other exemption from the registration requirements of the 1933
Act as may be available with respect to any or all of the investments in Common
Stock to be made hereunder.

         WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration Rights
Agreement substantially in the form attached hereto as Exhibit A (the
"REGISTRATION RIGHTS AGREEMENT") pursuant to which the Company has agreed to
provide certain registration rights under the 1933 Act, and the rules and
regulations promulgated thereunder, and applicable state securities laws.

         NOW THEREFORE, the Company and the Investor hereby agree as follows:

         1. DEFINITIONS. As used in this Agreement, the following terms shall
have the following meanings specified or indicated, and such meanings shall be
equally applicable to the singular and plural forms of the defined terms.

         "1933 ACT" shall mean the Securities Act of 1933, as it may be amended.

         "1934 ACT" shall mean the Securities Exchange Act of 1934, as it may be
         amended.

         "AFFILIATE" shall have the meaning specified in Section 5(f).

          "AGREEMENT" shall mean this Investment Agreement.

         "APPROVED MARKET" shall mean the American Stock Exchange, Inc., the New
York Stock Exchange, Inc., the Nasdaq National Market System, the Nasdaq
SmallCap Market or the National Association of Securities Dealer's, Inc. OTC
electronic bulletin board.

         "CLOSING" shall have the meaning specified in Section 2(f).

         "CLOSING DATE" shall mean, as defined in Section 2(f), the date which
is three (3) Trading Days following the Put Date.


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         "COMPANY DESIGNATED MINIMUM PRICE" shall mean a minimum purchase price
per Share acceptable to the Company, which price the Company has sole discretion
to determine.

         "CONTROL" or "CONTROLS" shall have the meaning specified in Section
5(f).

         "DAILY TRADING VOLUME" shall mean the closing bid price multiplied by
the volume of trading in the Shares for a particular full trading day.

         "EFFECTIVE DATE" shall mean the date of this Agreement.

         "ENVIRONMENTAL LAWS" shall have the meaning specified in Section 4(m).

         "ESCROW AGENT" shall mean Computershare Trust Company, Inc.

         "ESCROW AGREEMENT" shall mean the Escrow Agreement entered into between
the Company, Investor and Escrow Agent and attached as Exhibit C.

         "EXECUTION DATE" shall mean the date all Transaction Documents are
executed by the Company and Investor.

         "INDEMNITEES" shall have the meaning specified in Section 10.

         "INDEMNIFIED LIABILITIES" shall have the meaning specified in Section
10.

         "INEFFECTIVE PERIOD" shall mean any period of time that the
Registration Statement or any Supplemental Registration Statement (as defined in
the Registration Rights Agreement) becomes outdated, ineffective or unavailable
for use for the resale of any or all of the Registrable Securities (as defined
in the Registration Rights Agreement) for any reason (or in the event the
prospectus under either of the above is not current and deliverable) during any
time period required under the Registration Rights Agreement.

         "INVESTOR" shall mean the undersigned investors.

         "MARKET PRICE" shall mean the average of the five (5) lowest closing
bid prices of the Shares over the Pricing Period.

         "MATERIAL ADVERSE EFFECT" shall have the meaning specified in Section
4(a).

         "OPEN PERIOD" shall mean the period beginning on and including the
Trading Day immediately following the Effective Date and ending on the
termination of the Agreement in accordance with Section 9.

         "PAYMENT AMOUNT" shall have the meaning specified in Section 2(j).

         "PRICING PERIOD" shall mean ten (10) Trading Days before the Put Date.

         "PRINCIPAL MARKET" shall mean the National Association of Securities
Dealer's, Inc. OTC electronic bulletin board or, if the Common Stock ceases to
be traded on the OTC electronic bulletin board, such other Approved Market on
which the Common Stock is principally listed or quoted.

                                       2

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         "PROSPECTUS" shall mean the prospectus, preliminary prospectus and
supplemental prospectus used in connection with the Registration Statement.

         "PURCHASE AMOUNT" shall mean the total amount being paid by the
Investor on a particular Closing Date to purchase the Shares.

         "PURCHASE PRICE" shall mean ninety percent (90%) of the Market Price.
If during the Open Period the Company sells any common stock or securities
convertible or exchangeable into common stock for cash at a higher percentage
discount to the market price of the Common Stock on the date of issuance then
the discount percentage to the Purchase Price will automatically and immediately
be increase by the same amount except for the issuances of securities on shares
of common stock pursuant to an employee benefit or incentive plan or the Warrant
issued as part of this agreement.

         "PUT AMOUNT" shall mean, with respect to any single Put Notice, up to
one hundred and twenty five percent (125%) of the Weighted Average Daily Dollar
Volume of the Common Stock for the 10 trading days prior to Put Notice Date, but
in no event shall the Put Amount be less than $50,000.

         "PUT DATE" shall mean fifteen (15) Trading Days after the PUT NOTICE
DATE

         "PUT NOTICE" shall mean a written notice sent to the Investor by the
Company stating the Put Amount of Shares the Company intends to sell to the
Investor pursuant to the terms of the Agreement and stating the current number
of Shares issued and outstanding on such date.

         "PUT NOTICE DATE" shall mean the Trading Day during the Open Period on
which the Investor receives a Put Notice, however a Put Notice shall be deemed
delivered on (i) the Trading Day it is received by facsimile or otherwise by the
Investor if such notice is received prior to 5:00 p.m. Eastern Time (receipt
being deemed to occur if the Company possesses a facsimile confirmation showing
completed transmission by such time), or (ii) the immediately succeeding Trading
Day if it is received by facsimile or otherwise after 5:00 p.m. Eastern Time on
a Trading Day (receipt being documented as described in (i) above). No Put
Notice may be deemed delivered on a day that is not a Trading Day.

         "REGISTRATION PERIOD" shall have the meaning specified in Section 5(c).

         "REGISTRATION RIGHTS AGREEMENT" shall mean the Agreement entered into
by the Company with Investor for the registration for resale of the Shares
issuable as contemplated by this transaction.

         "REGISTRATION STATEMENT" means the registration statement of the
Company filed under the 1933 Act covering the Shares issuable in connection with
transactions contemplated hereunder.

         "RELATED PARTY" shall have the meaning specified in Section 5(f).

                                       3

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         "REPURCHASE EVENT" shall have the meaning specified in Section 2(j).

         "RESOLUTION" shall have the meaning specified in Section 8(f).

         "SEC" shall mean the Securities & Exchange Commission.

         "SEC DOCUMENTS" shall have the meaning specified in Section 4(f).

         "SECURITIES" shall mean the shares of Common Stock and Warrants issued
pursuant to the terms of the Agreement.

         "SHARE" OR "SHARES" shall mean the shares of common stock of the
Company having a par value of $0.001 per share.

         "SUBSIDIARIES" shall have the meaning specified in Section 4(a).

         "TERMINATION WARRANTS" shall mean the warrants, in substantially the
form of Exhibit G attached hereto, issued to the Investors pursuant to Section 9
hereof.

         "TRADING DAY" shall mean any day on which the Principal Market for the
Company's common stock is open for trading.

         "TRANSACTION DOCUMENTS" shall mean the Agreement, Registration Rights
Agreement and the Escrow Agreement.

         "WARRANTS" shall mean the warrants to be issued or issuable to the
Investors hereunder including the Initial Warrants, the Termination Warrants and
the 15% Warrants.

         "WARRANT SHARES" shall mean all shares of Common Stock or other
securities issued or issuable pursuant to exercise of the Warrants.

         "15% WARRANTS" shall mean the warrants, in substantially the form of
Exhibit G attached hereto, issued to the Investors pursuant to Section 2(i)
hereof.

         "WEIGHTED AVERAGE DAILY DOLLAR VOLUME" shall mean the closing bid price
multiplied by the volume of trading of shares for a particular full trading day
averaged over specified number of days.

         2.       PURCHASE AND SALE OF COMMON STOCK.

         a.       PURCHASE AND SALE OF COMMON STOCK. Upon the terms and
                  conditions set forth herein, the Company shall issue and sell
                  to the Investor, and the Investor shall purchase from the
                  Company, up to that number of Shares having an aggregate
                  Purchase Price of $3,000,000 and a per Share price equal to
                  the Purchase Price (as defined herein); provided, that the
                  Company is not required to sell and the Investor is not
                  required to purchase, any Share with Share at price less than
                  the Company's designated Minimum Price. Also, upon signing of
                  the investment Term Sheet associated with this Investment
                  Agreement, the Company should as soon as practical, but no
                  later than the execution of this Agreement issues Initial
                  Warrants to the Investor covering the rights to purchase
                  450,000 Shares at the exercise price of $0.30 per share in the
                  form specified in Exhibit G.

                                       4

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         b.       DELIVERY OF PUT NOTICES. Subject to the terms and conditions
                  of the Transaction Documents, at any time and from time to
                  time during the Open Period, the Company may, in its sole
                  discretion, deliver a Put Notice to the Investor which states
                  (i) the Put Amount which the Company intends to sell to the
                  Investor during the Pricing Period and (ii) the Company
                  Designated Minimum Price. If the Company fails to designate a
                  Company Designated Minimum Price in a Put Notice, the Company
                  Designated Minimum Price for the related Pricing Period shall
                  be the Purchase Price on the put date. There will be a minimum
                  of fifteen (15) Trading Days between each Put Notice. The
                  Purchase Price shall be equal to 90% of the Market Price.

         c.       INVESTOR'S OBLIGATION TO PURCHASE SHARES. Subject to the
                  conditions set forth in this Agreement, following the
                  Investor's receipt of a validly delivered Put Notice, the
                  Investor shall be required to purchase from the Company at the
                  Closing Date that number of Shares equal to the lesser of (i)
                  the Put Amount set forth in the Put Notice divided by the
                  Purchase Price and (ii) 125% of daily average trading volume
                  of the Shares during the applicable Pricing Period, but only
                  if (i) the said Shares bear no restrictive legend, are not
                  subject to stop transfer instructions and are being held in
                  escrow, pursuant to Section 2(h), prior to the applicable
                  Closing Date; (ii) the Weighted Average Daily Dollar Volume
                  within the Pricing Period shall be at least US$ 100,000; (iii)
                  the average closing bid price shall be at least $1.00 per
                  Share over the Pricing Period, and (iv) the Company is not in
                  default under any of the Transaction Documents.

         d.       LIMITATION ON INVESTOR'S OBLIGATION TO PURCHASE SHARES.
                  Notwithstanding anything to the contrary in this Agreement, in
                  no event shall the Investor be required to purchase, and the
                  Company shall in no event sell to the Investor, that number of
                  Shares, which when added to the sum of the number of Shares
                  beneficially owned (as such term is defined under Section
                  13(d) and Rule 13d-3 of the 1934 Act) by the Investor, would
                  exceed 4.99% of the number of Shares outstanding on the Put
                  Notice Date for such Pricing Period, as determined in
                  accordance with Rule 13d-1(j) promulgated under the 1934 Act.
                  Each Put Notice shall include a representation of the Company
                  as to the number of Shares outstanding on the related Put
                  Notice Date as determined in accordance with Section 13(d) of
                  the 1934 Act. In the event that the number of Share
                  outstanding as determined in accordance with Section 13(d) of
                  the 1934 Act is different on any date during a Pricing Period
                  than the number of Share outstanding on the Put Notice Date
                  associated with such Pricing Period, then the number of Shares
                  outstanding on such date during such Pricing Period shall
                  govern for purposes of determining whether the Investor would
                  be acquiring beneficial ownership of more than 4.99% of the
                  number of Shares outstanding during such period.

                                       5

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         e.       CONDITIONS TO INVESTOR'S OBLIGATION TO PURCHASE SHARES.
                  Notwithstanding anything to the contrary in this Agreement,
                  the Company shall not be entitled to deliver a Put Notice and
                  require the Investor to purchase any Shares at a Closing (as
                  defined in Section 2(f)) unless each of the following
                  conditions are satisfied:

                  (i)      a Registration Statement shall have been declared
                           effective and shall remain effective and available
                           for the immediate resale of all the Registrable
                           Securities (as defined in the Registration Rights
                           Agreement) at all times during the Pricing Period;
                           Also the Company must not be aware of any
                           circumstances that may result in an Ineffective
                           Period within 3 months of Put Date.

                  (ii)     at all times during the period beginning on the
                           related Put Notice Date and ending on and including
                           the related Closing Date, the Common Stock shall have
                           been listed on the Principal Market or Approved
                           Markets and shall not have been suspended from
                           trading, nor has the Company received or been
                           notified of any delisting notices from Approved
                           Market;

                  (iii)    the Company has complied in all material respects
                           with its obligations and is otherwise not in breach
                           of a material provision, or in material default
                           under, this Agreement, the Escrow Agreement, the
                           Registration Rights Agreement or the Warrant, which
                           has not been corrected prior to delivery of the Put
                           Notice; (iv) no injunction, rule, regulation, order
                           or ruling shall have been issued and remain in force,
                           or action commenced by a governmental authority which
                           has not been stayed or abandoned, prohibiting the
                           purchase or the issuance of the Common Stock or other
                           transactions contemplated by this Agreement; and

                  (v)      the issuance of the Common Stock will not violate the
                           shareholder approval requirements of the Principal
                           Market

                  (vi)     the Company has delivered a certificate at each Put
                           Date executed by its Chief Executive Officer to the
                           effect that all conditions have been satisfied.

                           If any of the events described in clauses (i) through
                           (v) above occurs during a Pricing Period, then the
                           Investor shall have no obligation to purchase the Put
                           Amount of Common Stock set forth in the applicable
                           Put Notice.

         f.       MECHANICS OF PURCHASE OF SHARES BY INVESTOR. Subject to the
                  satisfaction of the conditions set forth in Sections 2(e), 7
                  and 8, the closing of the purchase by the Investor of Shares
                  during any Pricing Period (each, a "CLOSING") shall occur on
                  the date which is three (3) Trading Days following the
                  applicable Put Date (each, a "CLOSING DATE"). Prior to each
                  Closing Date, (i) the Company shall deliver to the Escrow

                                       6

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                  Agent pursuant to the Escrow Agreement, annexed hereto as
                  Exhibit C, certificates representing the Shares to be issued
                  to the Investor on such date and registered in the name of the
                  Investor or deposit such Shares into the account(s) (with the
                  Investor receiving confirmation that the Shares are in such
                  account(s)) designated by the Investor for the benefit of the
                  Investor and (ii) the Investor shall deliver to the Escrow
                  Agent the Purchase Price to be paid for such Shares (after
                  receipt of confirmation of delivery of such Shares),
                  determined as aforesaid, by wire transfer. In lieu of
                  delivering physical certificates representing the Common Stock
                  and provided that the Company's transfer agent then is
                  participating in The Depository Trust Company ("DTC") Fast
                  Automated Securities Transfer ("FAST") program, upon request
                  of the Investor, the Company shall use its commercially
                  reasonable efforts to cause its transfer agent to
                  electronically transmit the Shares by crediting the account of
                  the Investor's prime broker (which shall be specified by the
                  Investor a reasonably sufficient time in advance) with DTC
                  through its Deposit Withdrawal Agent Commission ("DWAC")
                  system, and provide proof satisfactory to the Escrow Agent of
                  such delivery. In case of electronic delivery of shares, the
                  Escrow Agent with arrange with the transfer agent to transfer
                  the shares on Closing Date before transferring the Purchase
                  Price to the Company.

         g.       PARTIAL RELEASE OF SHARES. There shall be no partial release
                  of Shares allowed.

         h.       OVERALL LIMIT ON COMMON STOCK ISSUABLE. Notwithstanding
                  anything contained herein to the contrary, during the Open
                  Period, to the extent the Company were to become listed on the
                  Principal Market or Approved Market that limits the number of
                  shares of Common Stock that may be issued without shareholder
                  approval, then the number of Shares issuable by the Company
                  and purchasable by the Investor, including the shares of
                  Common Stock issuable to the Investors pursuant to Section
                  11(b), shall not exceed that number of the shares of Common
                  Stock that may be issued without shareholder approval, subject
                  to appropriate adjustment for stock splits, stock dividends,
                  combinations or other similar recapitalization affecting the
                  Common Stock (the "MAXIMUM COMMON STOCK ISSUANCE"), UNLESS the
                  issuance of Shares hereunder (including any Common Stock to be
                  issued to the Investors pursuant to Section 11(b)) in excess
                  of the Maximum Common Stock Issuance shall first be approved
                  by the Company's shareholders in accordance with applicable
                  law, the rules of the Principal Market or Approved market and
                  the By-laws and Articles of Incorporation of the Company. The
                  parties understand and agree that the Company's failure to
                  seek or obtain such shareholder approval shall in no way
                  adversely affect the validity and due authorization of the
                  issuance and sale of Shares hereunder or the Investor's
                  obligation in accordance with the terms and conditions hereof
                  to purchase a number of Shares in the aggregate up to the
                  Maximum Common Stock Issuance limitation, and that such
                  approval pertains only to the applicability of the Maximum
                  Common Stock Issuance limitation provided in this Section
                  2(h).

                                       7

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         i.       THE WARRANTS. The Investor shall receive 15% warrant coverage
                  in 5 year warrants to purchase the Shares with an exercise
                  price equal to 120% of the average of the closing bid price
                  over the Pricing Period with provisions for cashless exercise
                  at the Investor's option. The said warrant is to be issued at
                  each closing on the form attached as Exhibit G.

         j.       DELISTING; SUSPENSION. If at any time during a Pricing Period
                  or the twenty (20) Trading Days following the end of any
                  Pricing Period, (i) the Registration Statement, after it has
                  been declared effective, shall not remain effective and
                  available for sale of all the Registrable Securities (as
                  defined in the Registration Rights Agreement), (ii) the Common
                  Stock shall not be listed on the Principal Market or shall
                  have been suspended from trading thereon (excluding
                  suspensions of not more than one Trading Day resulting from
                  business announcements by the Company) or the Company shall
                  have been notified of any pending or threatened proceeding or
                  other action to delist or suspend the Common Stock, (iii) the
                  Registration Statement is no longer effective or becomes stale
                  for a period of more than ten (10) Trading Days as a result of
                  the Company's failure to timely file its financials, the
                  Company shall have obligation to repurchase within thirty (30)
                  calendar days of the occurrence of one of the events listed in
                  clauses (i), (ii) or (iii) above (each a "REPURCHASE EVENT"),
                  subject to the limitations imposed by applicable federal and
                  state law, all or any part of the Shares issued to the
                  Investor and then held by the Investor at a price per Share
                  equal to the highest closing sale price on any day during the
                  period beginning on the date of the Repurchase Event and
                  ending on and including the date on which the Investor is paid
                  by the Company for the repurchase of the Shares (the "PAYMENT
                  AMOUNT"). If the Company fails to pay to the Investor the full
                  aggregate Payment Amount within ten (10) calendar days after
                  the occurrence of a Repurchase Event, the Company shall pay to
                  the Investor compounded annual interest of 18% on such Payment
                  Amount during the period, beginning on the day following such
                  tenth calendar day, during which such Payment Amount, or any
                  portion thereof, is outstanding.

         3. INVESTOR'S REPRESENTATIONS AND WARRANTIES. The Investor represents
and warrants to the Company that:

         a.       SOPHISTICATED INVESTOR. The Investor has such knowledge,
                  sophistication and experience in business and financial
                  matters so as to be capable of evaluating the merits and risks
                  of the prospective investment in the Securities. The Investor
                  acknowledges that it is able to bear the financial risks
                  associated with an investment in the Securities and that it
                  has been given full access to the records of the Company and
                  its Subsidiaries and to the officers of the Company and its
                  subsidiaries as it has deemed necessary or appropriate to
                  conduct its due diligence investigation.

                                       8

<PAGE>

         b.       INFORMATION. The Investor understands that its investment in
                  the Shares involves a high degree of risk. The Investor has
                  sought such accounting, legal and tax advice as it has
                  considered necessary to make an informed investment decision
                  with respect to its acquisition of the Shares.

         c.       ORGANIZATION. The Investor is a limited partnership duly
                  organized, validly existing and in good standing under the
                  laws of Ontario, Canada.

         d.       AUTHORIZATION; ENFORCEMENT. The Investor has the requisite
                  power and authority to enter into and perform its obligations
                  under the Transaction Documents in accordance with the terms
                  hereof and thereof, (i) the execution and delivery of the
                  Transaction Documents by the Investor and the consummation by
                  it of the transactions contemplated hereby and thereby have
                  been duly and validly authorized by the Investor and no
                  further consent or authorization is required by the Investor,
                  (ii) the Transaction Documents have been duly and validly
                  executed and delivered by the Investor, and (iii) the
                  Transaction Documents constitute the valid and binding
                  obligations of the Investor enforceable against the Investor
                  in accordance with their terms, except as such enforceability
                  may be limited by general principles of equity or applicable
                  bankruptcy, insolvency, reorganization, moratorium,
                  liquidation or similar laws relating to, or affecting
                  generally, the enforcement of creditors' rights and remedies.

         e.       COMPLIANCE WITH THE SECURITIES LAWS. During the Open Period,
                  the Investor will comply with all of the provisions of federal
                  securities laws, and the rules promulgated thereunder, with
                  respect to its transactions involving the Common Stock.

         f.       ACCREDITED INVESTOR. Investor is an "Accredited Investor" as
                  that term is defined in Rule 501(a)(3) of Regulation D of the
                  1933 Act.

         g.       NO CONFLICTS. The execution, delivery and performance of the
                  Transaction Documents by the Investor and the consummation by
                  the Investor of the transactions contemplated hereby and
                  thereby will not result in a violation of documents of
                  organization of the Investor.

         h.       ACKNOWLEDGEMENTS. The Investor acknowledges that in the
                  ordinary course of the Company's business, the Company's stock
                  price and volume have been and are likely to continue to be
                  highly volatile; provided, that, the foregoing acknowledgement
                  is not intended to relieve the Company from any liability or
                  diminish the Company's liability under this Agreement for a
                  breach of its representations or warranties made to the
                  Investor herein.

         i.       The Investor is not a broker-dealer or an affiliate of a
                  broker-dealer in the United States and is purchasing the
                  Securities for its own account.

         4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as set forth
in the Schedules attached hereto, the Company represents and warrants to the
Investor that:

                                       9

<PAGE>

         a.       ORGANIZATION AND QUALIFICATION. The Company and its
                  "SUBSIDIARIES" (which for purposes of this Agreement means any
                  entity in which the Company, directly or indirectly, owns more
                  than 50% of the outstanding capital stock or holds an equity
                  or similar interest representing at least 50% of the
                  outstanding equity or similar interests of such entity) (a
                  complete list of which is set forth in Schedule 4(a)) are
                  corporations duly organized and validly existing in good
                  standing under the laws of the respective jurisdictions of
                  their incorporation, and have the requisite corporate power
                  and authorization to own their properties and to carry on
                  their business as now being conducted. Each of the Company and
                  its Subsidiaries is duly qualified as a foreign corporation to
                  do business and is in good standing in every jurisdiction in
                  which its ownership of property or the nature of the business
                  conducted by it makes such qualification necessary, except to
                  the extent that the failure to be so qualified or be in good
                  standing would not have a Material Adverse Effect. As used in
                  this Agreement, "MATERIAL ADVERSE EFFECT" means any material
                  adverse effect on the business, properties, assets,
                  operations, results of operations or financial condition of
                  the Company and its Subsidiaries, if any, taken as a whole, or
                  on the transactions contemplated hereby or by the agreements
                  and instruments to be entered into in connection herewith, or
                  on the authority or ability of the Company to perform its
                  obligations under the Transaction Documents (as defined in
                  Section 1 and 4(b)below).

         b.       AUTHORIZATION; ENFORCEMENT; COMPLIANCE WITH OTHER INSTRUMENTS.
                  (i) The Company has the requisite corporate power and
                  authority to enter into and perform its obligations under the
                  Transaction Documents, and to issue the Shares and Warrants in
                  accordance with the terms hereof and thereof, (ii) the
                  execution and delivery of the Transaction Documents by the
                  Company and the consummation by it of the transactions
                  contemplated hereby and thereby, including without limitation
                  the reservation for issuance of the Shares and Warrants
                  pursuant to this Agreement, have been duly and validly
                  authorized by the Company's Board of Directors and no further
                  consent or authorization is required by the Company, its Board
                  of Directors, or its shareholders, except for, if required by
                  the Principal Market, approval by the Company's shareholders
                  prior to the issuance of a number of shares of Common Stock
                  equal to or in excess of 20% of the number of shares of Common
                  Stock outstanding immediately prior to the date hereof, (iii)
                  the Transaction Documents have been duly and validly executed
                  and delivered by the Company, and (iv) the Transaction
                  Documents constitute the valid and binding obligations of the
                  Company enforceable against the Company in accordance with
                  their terms, except as such enforceability may be limited by
                  general principles of equity or applicable bankruptcy,
                  insolvency, reorganization, moratorium, liquidation or similar
                  laws relating to, or affecting generally, the enforcement of
                  creditors' rights and remedy

         c.       CAPITALIZATION. As of the date hereof, the authorized capital
                  stock of the Company consists of 60,000,000 shares of Common
                  Stock and 2,000,000 shares of Preferred Stock, of which as of
                  June 30, 2003, 31,625,827 shares of Common Stock and 1,000,000

                                       10

<PAGE>

                  shares of Preferred Stock are issued and outstanding. All of
                  such outstanding shares have been, or upon issuance will be,
                  validly issued and are fully paid and nonassessable. (i) No
                  shares of the Company's capital stock are subject to
                  preemptive rights or any other similar rights or any liens or
                  encumbrances suffered or permitted by the Company, (ii) there
                  are no outstanding debt securities, (iii) there are no
                  outstanding shares of capital stock, options, warrants, scrip,
                  rights to subscribe to, calls or commitments of any character
                  whatsoever relating to, or securities or rights convertible
                  into, any shares of capital stock of the Company or any of its
                  Subsidiaries, or contracts, commitments, understandings or
                  arrangements by which the Company or any of its Subsidiaries
                  is or may become bound to issue additional shares of capital
                  stock of the Company or any of its Subsidiaries or options,
                  warrants, scrip, rights to subscribe to, calls or commitments
                  of any character whatsoever relating to, or securities or
                  rights convertible into, any shares of capital stock of the
                  Company or any of its Subsidiaries, (iv) there are no
                  agreements or arrangements under which the Company or any of
                  its Subsidiaries is obligated to register the sale of any of
                  their securities under the 1933 Act (except the Registration
                  Rights Agreement), (v) there are no outstanding securities of
                  the Company or any of its Subsidiaries which contain any
                  redemption or similar provisions, and there are no contracts,
                  commitments, understandings or arrangements by which the
                  Company or any of its Subsidiaries is or may become bound to
                  redeem a security of the Company or any of its Subsidiaries,
                  (vi) there are no securities or instruments containing
                  anti-dilution or similar provisions that will be triggered by
                  the issuance of the Securities as described in this Agreement,
                  (vii) the Company does not have any stock appreciation rights
                  or "phantom stock" plans or agreements or any similar plan or
                  agreement and (viii) there is no dispute as to the class of
                  any shares of the Company's capital stock. The Company has
                  furnished to the Investor, or the Investor has had access
                  through EDGAR to, true and correct copies of the Company's
                  Articles of Incorporation, as in effect on the date hereof
                  (the "ARTICLES OF INCORPORATION"), and the Company's By-laws,
                  as in effect on the date hereof (the "BY-LAWS `), and the
                  terms of all securities convertible into or exercisable for
                  Common Stock and the material rights of the holders thereof in
                  respect thereto.

         d.       ISSUANCE OF SHARES. Upon issuance in accordance with this
                  Agreement and the Warrants, the Securities and the Warrant
                  shares will be validly issued, fully paid and nonassessable
                  and free from all taxes, liens and charges with respect to the
                  issue thereof. Subject to the accuracy of the Investor's
                  representations in the Article 3, the Company's sales of the
                  Securities do not and will not require registration under the
                  Securities Act and any applicable State securities laws

         e.       NO CONFLICTS. Except as disclosed in Schedule 4(e), the
                  execution, delivery and performance of the Transaction
                  Documents by the Company and the consummation by the Company
                  of the transactions contemplated hereby and thereby will not
                  (i) result in a violation of the Articles of Incorporation,
                  any Certificate of Designations, Preferences and Rights of any
                  outstanding series of preferred stock of the Company or the
                  By-laws; or (ii) conflict with, or constitute a material

                                       11

<PAGE>

                  default (or an event which with notice or lapse of time or
                  both would become a material default) under, or give to others
                  any rights of termination, amendment, acceleration or
                  cancellation of, any material agreement, contract, indenture
                  mortgage, indebtedness or instrument to which the Company or
                  any of its Subsidiaries is a party; or (iii) result in a
                  violation of any law, rule, regulation, order, judgment or
                  decree (including United States federal and state securities
                  laws and regulations and the rules and regulations of the
                  Principal Market or principal securities exchange or trading
                  market on which the Common Stock is traded or listed)
                  applicable to the Company or any of its Subsidiaries or by
                  which any property or asset of the Company or any of its
                  Subsidiaries is bound or affected. The business of the Company
                  and its Subsidiaries is not being conducted, and shall not be
                  conducted, in violation of any law, statute, ordinance, rule,
                  order or regulation of any governmental authority or agency,
                  regulatory or self-regulatory agency, or court, except for
                  possible violations the sanctions for which either
                  individually or in the aggregate would not have a Material
                  Adverse Effect. Except as specifically contemplated by this
                  Agreement and as required under the 1933 Act, the Company is
                  not required to obtain any consent, authorization, permit or
                  order of, or make any filing or registration (except the
                  filing of a registration statement) with, any court,
                  governmental authority or agency, regulatory or
                  self-regulatory agency or other third party in order for it to
                  execute, deliver or perform any of its obligations under, or
                  contemplated by, the Transaction Documents in accordance with
                  the terms hereof or thereof. All consents, authorizations,
                  permits, orders, filings and registrations which the Company
                  is required to obtain pursuant to the preceding sentence have
                  been obtained or effected on or prior to the date hereof and
                  are in full force and effect as of the date hereof.

         f.       SEC DOCUMENTS; FINANCIAL STATEMENTS. Since December 31, 2000,
                  the Company has filed all reports, schedules, forms,
                  statements and other documents required to be filed by it with
                  the SEC pursuant to the reporting requirements of the 1933 Act
                  and the 1934 Act (all of the foregoing filed prior to the date
                  hereof and all exhibits included therein and financial
                  statements and schedules thereto and documents incorporated by
                  reference therein being hereinafter referred to as the "SEC
                  DOCUMENTS"). The Company has delivered to the Investor or its
                  representatives, or they have had access through EDGAR, true
                  and complete copies of the SEC Documents. As of their
                  respective dates, the SEC Documents complied in all material
                  respects with the requirements of the 1933 Act and the 1934
                  Act and the rules and regulations of the SEC promulgated
                  thereunder applicable to the SEC Documents, and none of the
                  SEC Documents, at the time they were filed with the SEC,
                  contained any untrue statement of a material fact or omitted
                  to state a material fact required to be stated therein or
                  necessary to make the statements therein, in light of the
                  circumstances under which they were made, not misleading. Such
                  financial statements have been prepared in accordance with
                  generally accepted accounting principles, consistently
                  applied, during the periods involved (except (i) as may be
                  otherwise indicated in such financial statements or the notes
                  thereto, or (ii) in the case of unaudited interim statements,
                  to the extent they may exclude footnotes or may be condensed
                  or summary statements) and fairly present in all material
                  respects the financial position of the Company as of the dates
                  thereof and the results of its operations and cash flows for
                  the periods then ended (subject, in the case of unaudited
                  statements, to normal year-end audit adjustments).

                                       12

<PAGE>

         g.       ABSENCE OF CERTAIN CHANGES. Except as disclosed in Schedule
                  4(g) of the SEC Documents filed at least five (5) days prior
                  to the date hereof, since November 30, 2001, there has been no
                  change or development in the business, properties, assets,
                  operations, financial condition or results of operations of
                  the Company or its Subsidiaries which has had or, to the
                  knowledge of the Company and its Subsidiaries, reasonably
                  could have a Material Adverse effect. The Company has not
                  taken any steps, and does not currently expect to take any
                  steps, to seek protection pursuant to any bankruptcy law nor
                  does the Company or its Subsidiaries have any knowledge or
                  reason to believe that its creditors intend to initiate
                  involuntary bankruptcy proceedings.

         h.       ABSENCE OF LITIGATION. There is no action, suit, proceeding,
                  inquiry or investigation before or by any court, public board,
                  government agency, self-regulatory organization or body
                  pending or, to the knowledge of the executive officers of
                  Company or any of its Subsidiaries, threatened against or
                  affecting the Company, the Common Stock or any of the
                  Company's Subsidiaries or any of the Company's or the
                  Company's Subsidiaries' officers or directors in their
                  capacities as such, in which an adverse decision could have a
                  Material Adverse Effect.

         i.       ACKNOWLEDGMENT REGARDING INVESTOR'S PURCHASE OF SHARES. The
                  Company acknowledges and agrees that the Investor is acting
                  solely in the capacity of arm's length purchaser with respect
                  to the Transaction Documents and the transactions contemplated
                  hereby and thereby. The Company further acknowledges that the
                  Investor is not acting as a financial advisor or fiduciary of
                  the Company (or in any similar capacity) with respect to the
                  Transaction Documents and the transactions contemplated hereby
                  and thereby and any advice given by the Investor or any of its
                  respective representatives or agents in connection with the
                  Transaction Documents and the transactions contemplated hereby
                  and thereby is merely incidental to the Investor's purchase of
                  the Securities. The Company further represents to the Investor
                  that the Company's decision to enter into the Transaction
                  Documents has been based solely on the independent evaluation
                  by the Company and its representatives.

         j.       NO UNDISCLOSED EVENTS, LIABILITIES, DEVELOPMENTS OR
                  CIRCUMSTANCES. No event, liability, development or
                  circumstance has occurred or exists, or to its knowledge is
                  contemplated to occur, with respect to the Company or its
                  Subsidiaries or their respective business, properties, assets,
                  operations or financial condition, that would be required to
                  be disclosed by the Company under applicable securities laws
                  on a registration statement filed with the SEC relating to an
                  issuance and sale by the Company of its Shares and which has
                  not been publicly announced.

                                       13

<PAGE>

         k.       EMPLOYEE RELATIONS. Neither the Company nor any of its
                  Subsidiaries is involved in any union labor dispute nor, to
                  the knowledge of the Company or any of its Subsidiaries, is
                  any such dispute threatened.

         l.       INTELLECTUAL PROPERTY RIGHTS. The Company and its Subsidiaries
                  own or possess adequate rights or licenses to use all
                  trademarks, trade names, service marks, service mark
                  registrations, service names, patents, patent rights,
                  copyrights, inventions, licenses, approvals, governmental
                  authorizations, trade secrets and rights necessary to conduct
                  their respective businesses as now conducted. None of the
                  Company's trademarks, trade names, service marks, service mark
                  registrations, service names, patents, patent rights,
                  copyrights, inventions, licenses, approvals, government
                  authorizations, trade secrets or other intellectual property
                  rights necessary to conduct its business as now or as proposed
                  to be conducted have expired or terminated or infringe the
                  intellectual property of another party.

         m.       ENVIRONMENTAL LAWS. The Company and its Subsidiaries are in
                  compliance with any and all applicable foreign, federal, state
                  and local laws and regulations relating to the protection of
                  human health and safety ("ENVIRONMENTAL LAWS").

         n.       TITLE. The Company and its Subsidiaries have good and
                  marketable title to all real property and good and marketable
                  title to all personal property owned by them which is material
                  to the business of the Company and its Subsidiaries, in each
                  case free and clear of all liens and encumbrances.

         o.       INSURANCE. The Company and each of its Subsidiaries are
                  insured by insurers of recognized financial responsibility
                  against such losses and risks that are customary in its
                  industry and with customary coverage amounts.

         p.       REGULATORY PERMITS. The Company and its Subsidiaries have in
                  full force and effect all certificates, approvals,
                  authorizations and permits from the appropriate federal,
                  state, local or foreign regulatory authorities and comparable
                  foreign regulatory agencies, necessary to own, lease or
                  operate their respective properties and assets and conduct
                  their respective businesses, except where the failure to
                  possess such certificates, approvals, authorizations or
                  permits would not result in a Material Adverse Effect.

         q.       INTERNAL ACCOUNTING CONTROLS. The Company and each of its
                  Subsidiaries maintain a system of internal accounting controls
                  sufficient to provide reasonable assurance that (i)
                  transactions are executed in accordance with management's
                  general or specific authorizations, (ii) transactions are
                  recorded as necessary to permit preparation of financial
                  statements in conformity with generally accepted accounting
                  principles and to maintain asset accountability, (iii) access
                  to assets is permitted only in accordance with management's
                  general or specific authorization.

                                       14

<PAGE>

         r.       TAX STATUS. The Company and each of its Subsidiaries has made
                  or filed all United States federal and state income and all
                  other tax returns, reports and declarations required by any
                  jurisdiction to which it is subject (unless and only to the
                  extent that the Company and each of its Subsidiaries has set
                  aside on its books provisions reasonably adequate for the
                  payment of all unpaid and unreported taxes) and has paid all
                  taxes and other governmental assessments and charges that are
                  material in amount, shown or determined to be due on such
                  returns, reports and declarations, except those being
                  contested in good faith and has set aside on its books
                  provision reasonably adequate for the payment of all taxes for
                  periods subsequent to the periods to which such returns,
                  reports or declarations apply. There are no unpaid taxes in
                  any material amount claimed to be due by the taxing authority
                  of any jurisdiction, and the officers of the Company know of
                  no basis for any such claim.

         s.       CERTAIN TRANSACTIONS. Except for those already disclosed in
                  the SEC documents and for arm's length transactions pursuant
                  to which the Company makes payments in the ordinary course of
                  business upon terms no less favorable than the Company could
                  obtain from third parties, none of the officers, directors, or
                  employees of the Company is presently a party to any
                  transaction with the Company or any of its Subsidiaries (other
                  than for services as employees, officers and directors).

         t.       DILUTIVE EFFECT. The Company understands and acknowledges that
                  the number of shares of Common Stock issuable upon purchases
                  may have dilutive effect on the ownership interests of other
                  shareholders of the Company.

         u.       LOCK UP PERIOD. The Company shall not, without the prior
                  written consent of the Investor for one (1) year from
                  Effective Date, make any offerings of common stock or
                  securities convertible into common stock at a discount
                  exceeding 10% from the market price of the Common Stock on the
                  date of issuance. If within the one (1) year lock up period
                  the Company sells any common stock or securities convertible
                  into common stock for cash at a discount of more than 10%, the
                  discount to the Purchase Price for the Investor shall also be
                  adjusted by the same percentage amount.

         v.       NO GENERAL SOLICITATION. Neither the Company, nor any of its
                  affiliates, nor any person acting on its behalf, has engaged
                  in any form of general solicitation or general advertising
                  (within the meaning of Regulation D) or has engaged or will
                  engage in any directed selling efforts in violation of the
                  requirements of Regulation S in connection with the offer or
                  sale of the Securities offered hereby.

         5.       COVENANTS.

         a.       BEST EFFORTS. Each party shall use its best efforts timely to
                  satisfy each of the conditions to be satisfied by it as
                  provided in Sections 7 and 8 of this Agreement.

                                       15

<PAGE>

         b.       SECURITIES LAW COMPLIANCE. The Company shall, at its sole cost
                  and expense, on or before each of the Closing Dates, take such
                  action as the Company shall reasonably determine is necessary
                  to qualify the Securities for, or obtain exemption for the
                  Securities for, sale to the Investor at each of the Closings
                  pursuant to this Agreement under applicable federal and state
                  securities or "Blue Sky" laws in the United States.

         c.       REPORTING STATUS. Until the earlier to occur of (i) the first
                  date which is after the date this Agreement is terminated
                  pursuant to Section 9 and on which the Holders (as that term
                  is defined in the Registration Rights Agreement) may sell all
                  of the Securities acquired pursuant to this Agreement without
                  restriction pursuant to Rule 144(k) promulgated under the 1933
                  Act (or successor thereto), and (ii) the date on which (A) the
                  Holders shall have sold all the Securities issuable hereunder
                  and (B) this Agreement has been terminated pursuant to Section
                  9 (the "REGISTRATION PERIOD"), the Company shall file all
                  reports required to be filed with the SEC pursuant to the 1934
                  Act, and the Company shall not terminate its status as a
                  reporting company under the 1934 Act.

         d.       USE OF PROCEEDS. The Company will use the proceeds from the
                  sale of the Shares (excluding amounts paid by the Company for
                  fees as set forth in the Transaction Documents) in order to
                  expand the Company's business, to pursue mergers and
                  acquisitions and for other legally permissible general
                  corporate and working capital purposes.

         e.       LISTING. The Company shall promptly secure the listing of all
                  of the Registrable Securities (as defined in the Registration
                  Rights Agreement) upon the Principal Market and shall
                  maintain, so long as any other shares of Common Stock shall be
                  so listed, such listing of all Registrable Securities from
                  time to time issuable under the terms of the Transaction
                  Documents. The Company shall maintain the Common Stock's
                  authorization for quotation on the Principal Market. Neither
                  the Company nor any of its Subsidiaries shall take any action
                  which would be reasonably expected to result in the delisting
                  or suspension of the Common Stock on the Principal Market
                  (excluding suspensions of not more than one trading day
                  resulting from business announcements by the Company).

         f.       TRANSACTIONS WITH AFFILIATES. The Company shall not, and shall
                  cause each of its Subsidiaries not to, enter into, amend,
                  modify or supplement, or permit any Subsidiary to enter into,
                  amend, modify or supplement, any agreement, transaction,
                  commitment or arrangement with any of its or any Subsidiary's
                  officers, directors, persons who were officers or directors at
                  any time during the previous two years, shareholders who
                  beneficially own 5% or more of the Common Stock, or affiliates
                  or with any individual related by blood, marriage or adoption
                  to any such individual or with any entity in which any such
                  entity or individual owns a 5% or more beneficial interest
                  (each a "RELATED PARTY"), except for (i) customary employment
                  arrangements and benefit programs on reasonable terms, (ii)
                  any agreement, transaction, commitment or arrangement on an
                  arms-length basis on terms no less favorable than terms which

                                       16

<PAGE>

                  would have been obtainable from a person other than such
                  Related Party, or (iii) any agreement, transaction, commitment
                  or arrangement which is approved by a majority of the
                  disinterested directors of the Company. For purposes hereof,
                  any director who is also an officer of the Company or any
                  Subsidiary of the Company shall not be a disinterested
                  director with respect to any such agreement, transaction,
                  commitment or arrangement. "AFFILIATE" for purposes hereof
                  means, with respect to any person or entity, another person or
                  entity that, directly or indirectly, (i) has a 5% or more
                  equity interest in that person or entity, (ii) has 5% or more
                  common ownership with that person or entity, (iii) controls
                  that person or entity, or (iv) shares common control with that
                  person or entity. "CONTROL" or "CONTROLS" for purposes hereof
                  means that a person or entity has the power, direct or
                  indirect, to conduct or govern the policies of another person
                  or entity.

         g.       FILING OF FORM 8-K. On or before the date required by
                  applicable law, the Company shall file a Current Report on
                  Form 8-K with the SEC describing the terms of the transaction
                  contemplated by the Transaction Documents in the form required
                  by the 1934 Act, if such filing is required.

         h.       CORPORATE EXISTENCE. The Company shall use its best efforts to
                  preserve and continue the corporate existence of the Company.

         6. NOTICE OF CERTAIN EVENTS AFFECTING REGISTRATION; SUSPENSION OF RIGHT
TO MAKE A PUT. The Company shall promptly notify Investor upon the occurrence of
any of the following events in respect of a Registration Statement or related
prospectus in respect of an offering of the Shares: (i) the issuance by the SEC
or any other federal or state governmental authority of any stop order
suspending the effectiveness of any Registration Statement or the initiation of
any proceedings for that purpose; (ii) receipt of any notification with respect
to the suspension of the qualification or exemption from qualification of any of
the Shares for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose; (iv) the happening of any event that makes any
statement made in such Registration Statement or related prospectus or any
document incorporated or deemed to be incorporated therein by reference untrue
in any material respect or that requires the making of any changes in the
Registration Statement, related prospectus or documents so that, in the case of
a Registration Statement, it will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and that in the case of
the related prospectus, it will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading. The maximum period for such
suspension will be restricted to 60 days in aggregate during any 365 day period.
In case the period of suspension exceeds 60 days, it will be a Repurchase Event
as defined in Section 2(j). The Company cannot deliver to the Investor any Put
Notice during the continuation of the foregoing events

         7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligation
hereunder of the Company to issue and sell the Shares to the Investor is further
subject to the satisfaction, at or before each Closing Date, of each of the
following conditions set forth below. These conditions are for the Company's
sole benefit and may be waived by the Company at any time in its sole
discretion.

                                       17

<PAGE>

         a.       The Investor shall have executed each of the Transaction
                  Documents and deliver the same to the Company.

         b.       The Investor shall have delivered to the Escrow Agent on
                  behalf of the Company and the Escrow Agent on behalf of the
                  Company shall have received the Purchase Price for the Shares
                  being purchased by the Investor at such Closing (after receipt
                  of confirmation of delivery of such Shares) by wire transfer
                  of immediately available funds pursuant to the wire
                  instructions provided by the Company.

         c.       The representations and warranties of the Investor shall be
                  true and correct as of the date when made and as of the
                  applicable Closing Date as though made at that time (except
                  for representations and warranties that speak as of a specific
                  date), and the Investor shall have performed, satisfied and
                  complied with the covenants, agreements and conditions
                  required by the Transaction Documents to be performed,
                  satisfied or complied with by the Investor at or prior to such
                  Closing Date.

         d.       No statute, rule, regulation, executive order, decree, ruling
                  or injunction shall have been enacted, entered, promulgated or
                  endorsed by any court or governmental authority of competent
                  jurisdiction which prohibits the consummation of any of the
                  transactions contemplated by this Agreement.

         8. FURTHER CONDITIONS OF THE INVESTOR'S OBLIGATION TO PURCHASE. The
obligation of the Investor hereunder to purchase Shares is subject to the
satisfaction, on or before each Closing Date, of each of the following
conditions set forth below.

         a.       The Company shall have executed each of the Transaction
                  Documents and delivered the same to the Investor.

         b.       The Common Stock shall be authorized for quotation on the
                  Principal Market and trading in the Common Stock shall not
                  have been suspended by the Principal Market or the SEC, at any
                  time beginning on the date hereof and through and including
                  the respective Closing Date (excluding suspensions of not more
                  than one Trading Day resulting from business announcements by
                  the Company, provided that such suspensions occur and are
                  lifted prior to the Company's delivery of the Put Notice
                  related to such Closing).

         c.       The representations and warranties of the Company shall be
                  true and correct as of the date when made and as of the
                  applicable Closing Date as though made at that time (except
                  for (i) representations and warranties that speak as of a
                  specific date and (ii) with respect to the representations
                  made in Sections 4(g), (h) and (j) hereof, events which occur
                  on or after the date of this Agreement and are disclosed in
                  SEC filings) and the Company shall have performed, satisfied

                                       18

<PAGE>

                  and complied with the covenants, agreements and conditions
                  required by the Transaction Documents to be performed,
                  satisfied or complied with by the Company on or before such
                  Closing Date. The Investor may request an update as of such
                  Closing Date regarding the representation contained in Section
                  4(c) above.

         d.       Investor shall have received an opinion letter of the
                  Company's counsel on or before the first Closing Date.

         e.       The Company shall have executed and delivered to the Escrow
                  Agent or Investor the certificates representing, or have
                  executed electronic book-entry transfer of, the Shares, (in
                  such denominations as such Investor shall request) being
                  purchased by the Investor at such Closing.

         f.       The board of directors of the Company shall have adopted
                  resolutions consistent with Section 4(b)(ii) above and in a
                  form reasonably acceptable to the Investor (the "RESOLUTIONS")
                  and such Resolutions shall not have been amended or rescinded
                  prior to such Closing Date.

         g.       No statute, rule, regulation, executive order, decree, ruling
                  or injunction shall have been enacted, entered, promulgated or
                  endorsed by any court or governmental authority of competent
                  jurisdiction which prohibits the consummation of any of the
                  transactions contemplated by this Agreement.

         h.       The Registration Statement shall be effective on each Closing
                  Date and no stop order suspending the effectiveness of the
                  Registration statement shall be in effect or shall be pending
                  or threatened.

         i.       There shall have been no filing of a petition in bankruptcy,
                  either voluntarily or involuntarily, with respect to the
                  Company and there shall not have been commenced any
                  proceedings under any bankruptcy or insolvency laws, or any
                  laws relating to the relief of debtors, readjustment of
                  indebtedness or reorganization of debtors, and there shall
                  have been no calling of a meeting of creditors of the Company
                  or appointment of a committee of creditors or liquidating
                  agents or offering of a composition or extension to creditors
                  by, for, with or without the consent or acquiescence of the
                  Company.

         j.       The conditions to such Closing set forth in Section 2(e) shall
                  have been satisfied on or before such Closing Date.

         9. TERMINATION. This Agreement shall terminate upon any of the
following events:

         a.       when the Investor has purchased an aggregate of $3,000,000 in
                  the Common Stock of the Company pursuant to this Agreement;
                  provided that the Company's representations, warranties and
                  covenants contained in this Agreement insofar as applicable to
                  the transactions consummated hereunder prior to such
                  termination, shall survive the termination of this Agreement
                  for the period of any applicable statute of limitations;

                                       19

<PAGE>

         b.       on the date which is twelve (12) months after the Effective
                  Date;

         c.       if the Company shall file or consent by answer or otherwise to
                  the entry of an order for relief or approving a petition for
                  relief, reorganization or arrangement or any other petition in
                  bankruptcy for liquidation or to take advantage of any
                  bankruptcy or insolvency law of any jurisdiction, or shall
                  make an assignment for the benefit of its creditors, or shall
                  consent to the appointment of a custodian, receiver, trustee
                  or other officer with similar powers of itself or of any
                  substantial part of its property, or shall be adjudicated a
                  bankrupt or insolvent, or shall take corporate action for the
                  purpose of any of the foregoing, or if a court or governmental
                  authority of competent jurisdiction shall enter an order
                  appointing a custodian, receiver, trustee or other officer
                  with similar powers with respect to the Company or any
                  substantial part of its property or an order for relief or
                  approving a petition for relief or reorganization or any other
                  petition in bankruptcy or for liquidation or to take advantage
                  of any bankruptcy or insolvency law, or an order for the
                  dissolution, winding up or liquidation of the Company, or if
                  any such petition shall be filed against the Company;

         d.       at any time by the Company if (a) the Investor fails to
                  deliver the appropriate funds to the Company for the purchase
                  of the Shares pursuant to this Agreement within three (3)
                  Trading Days after any Closing Date (regardless of whether
                  such failure is subsequently cured), (b) the Investor
                  materially breaches any of its obligations under this
                  Agreement or the Registration Rights Agreement, or (c) the
                  Investor receives notice from a governmental or
                  self-regulatory agency that the Investor does not then possess
                  one or more required registrations or approvals to perform it
                  obligations under this Agreement;

         e.       the trading of the Common Stock is suspended by the SEC, the
                  Principal Market or the NASD for a period of thirty days (30)
                  cummulative Trading Days during the Open Period; (vii) the
                  Registration Statement has not been declared effective within
                  one hundred and eighty days (180) calendar days of the date
                  hereof;

         f.       The Common Stock ceases to be registered under the 1934 Act or
                  listed or traded on the Principal Market or Approved Markets;

         g.       The Company requires shareholder approval under Nasdaq rules
                  to issue additional shares and such approval is not obtained
                  within 60 days from the date when the Company has issued its
                  19.9% maximum allowable shares; or

         h.       at any time by the Investor upon a Repurchase Event; or

         i.       at any time by the Company, in its sole discretion.

         Upon the occurrence of one of the above-described events, the Company
shall send written notice of such event to the Investor; provided that the
Investor shall provide the Company with written notice of its receipt of a
notice pursuant to subsection (iv)(c).

                                       20

<PAGE>

         Upon Termination, if the Company has not drawn a minimum of $750,000
under the Agreement (whether due to failure to draw or a breach by Company), the
Company shall issue to Investor, upon Termination, number of warrants that cover
for the undrawn balance which equals to $750,000 minus the drawn amount before
the Termination ("Undrawn Balance") with an exercise price equal to 100% of the
average of the closing bid prices of the Shares over one month period prior to
Termination. The form of the warrants will be the same as stipulated in Exhibit
G and the number of shares issuable upon exercise of the warrants will be
equaled to the Undrawn Balance divided by 100% of the average of the closing bid
prices of the Share over one month period prior to Termination.

         10.      INDEMNIFICATION.

         a.       In consideration of the Investor's execution and delivery of
                  the this Agreement and acquiring the Shares hereunder and in
                  addition to all of the Company's other obligations under the
                  Transaction Documents, the Company shall defend, protect,
                  indemnify and hold harmless the Investor and all of its
                  officers, directors, employees and direct investors and any of
                  the foregoing person's agents or other representatives from
                  and against any and all actions, causes of action, suits,
                  claims, losses, costs, penalties, reasonable fees, liabilities
                  and damages, and reasonable expenses in connection therewith
                  as a result of any misrepresentation or breach of any material
                  representation or warranty covenant or agreement made by the
                  Company in the Transaction Documents or any other certificate,
                  instrument or document contemplated hereby or thereby.

         b.       In consideration of the Company's execution and delivery of
                  the Agreement, and in addition to all of the Company's other
                  obligations under the Transaction Documents, the Investor
                  shall defend, protect, indemnify and hold harmless the Company
                  and all of its officers, directors, employees, shareholders
                  and any of the foregoing persons' agents or other
                  representatives from and against any and all actions, causes
                  of action, suits, claims, losses, costs, penalties, reasonable
                  fees, liabilities and damages, and expenses in connection and
                  therewith as a result of any illegal or grossly negligent or
                  wilfully wrongful actions concerning or related to the trading
                  of the Shares.

         11.      GOVERNING LAW; MISCELLANEOUS.

         a.       GOVERNING LAW.

                  (i)      Any dispute, controversy or claim arising out of or
                           relating to this Agreement, or the breach,
                           termination or invalidity thereof, shall be finally
                           and exclusively resolved by an arbitration tribunal
                           (the "Tribunal") in accordance with the Arbitration
                           Rules of the American Arbitration Association ("AAA")
                           as at present in force. THE DECISION OF THE TRIBUNAL
                           SHALL BE FINAL AND BINDING UPON THE PARTIES HERETO.

                                       21

<PAGE>

                  (ii)     The arbitration shall take place in New York City,
                           the State of New York and shall be conducted in the
                           English language. The parties hereby submit
                           themselves to the exclusive jurisdiction of the
                           arbitration tribunal in the City of New York, the
                           State of New York under the auspices of AAA. The
                           arbitration shall be conducted by three (3)
                           arbitrators, one to be appointed by the Company, one
                           to be appointed by the Consultant and a third by the
                           two arbitrators so selected.

                  (iii)    Each party shall cooperate with the other in making
                           full disclosure of and providing complete access to
                           all information and documents requested by the other
                           party in connection with the arbitration proceedings.
                           Arbitration shall be the sole, binding, exclusive and
                           final remedy for resolving any dispute between the
                           parties; either party may apply to any court of
                           competent jurisdiction in the State of New York for
                           enforcement of any award granted by the Tribunal.

                  (iv)     To the extent permitted by law, the award of the
                           Tribunal may include, without limitation, one or more
                           of the following: a monetary award, a declaration of
                           rights, an order of specific performance, an
                           injunction, reformation of the contract.

                  (v)      The cash expenses of the arbitration (including
                           without limitation reasonable fees and expenses of
                           counsel, experts and consultants) shall be borne by
                           the Party against whom the decision of the
                           arbitrators is rendered; provided that if a Party
                           prevails only partially, such Party shall be entitled
                           to be reimbursed for such costs and expenses in the
                           proportion that the dollar amount successfully
                           claimed by the prevailing Party bears to the
                           aggregate dollar amount claimed.

                  (vi)     During the period when a dispute is being resolved,
                           except for the matter being disputed, the parties
                           shall in all other respects continue to abide by the
                           terms of this Agreement.

         b.       COMMITMENT FEES; ADVISORY FEES; LEGAL FEES; AND ESCROW FEES.

                  (i)      Upon execution of this Agreement, the Company shall
                           issue warrants for purchasing 300,000 shares of
                           common stock to FirsTrust Group, Inc. or its
                           designee. The warrants shall have the same terms,
                           including registration rights, as the Investors'
                           warrants. The exercise price of the warrants shall be
                           $0.30 per Share. The warrants shall have a cashless
                           exercise provision, be exercisable immediately after
                           the date of issuance, and shall expire 5 years after
                           the date of issuance, unless otherwise extended by
                           the Company. The warrants shall also be transferable,
                           subject only to the securities laws, by the holders
                           thereof.

                                       22

<PAGE>

                  (ii)     The Company has paid to Investors' counsel, Wyrick
                           Robbins Yates & Ponton LLP, a fee of $3,000 for its
                           initial review of the Transaction Documents. The
                           Company shall also pay the fees and expenses, if any,
                           of Investor's counsel as may be necessary to complete
                           the Registration Statement.

                  (iii)    The Company shall also pay the Escrow Agent for
                           escrow services pursuant to a separate escrow
                           agreement.

                  (iv)     Except as otherwise set forth herein, each party
                           shall pay the fees and expenses of its advisers,
                           counsel, accountants and other experts, if any, and
                           all other expenses incurred by such party incident to
                           the negotiation, preparation, execution, delivery and
                           performance of this Agreement. In the event that any
                           suit or action is instituted to enforce any provision
                           of this Agreement, the prevailing party in such
                           dispute shall be entitled to recover from the losing
                           party all fees, costs and expenses of enforcing any
                           right of such prevailing party under or with respect
                           to this Agreement, including without limitation, such
                           reasonable fees and expenses of attorneys and
                           accountants, which shall include, all fees, costs and
                           expenses of appeals. The Company shall pay all stamp
                           and other taxes and duties levied in connection with
                           the issuance of any Securities issued pursuant
                           hereto.

         c.       COUNTERPARTS. This Agreement may be executed in two or more
                  identical counterparts, all of which shall be considered one
                  and the same agreement and shall become effective when
                  counterparts have been signed by each party and delivered to
                  the other party; provided that a facsimile signature shall be
                  considered due execution and shall be binding upon the
                  signatory thereto with the same force and effect as if the
                  signature were an original, not a facsimile signature.

         d.       HEADINGS; SINGULAR/PLURAL. The headings of this Agreement are
                  for convenience of reference and shall not form part of, or
                  affect the interpretation of, this Agreement. Whenever
                  required by the context of this Agreement, the singular shall
                  include the plural and masculine shall include the feminine.

         e.       SEVERABILITY. If any provision of this Agreement shall be
                  invalid or unenforceable in any jurisdiction, such invalidity
                  or unenforceability shall not affect the validity or
                  enforceability of the remainder of this Agreement in that
                  jurisdiction or the validity or enforceability of any
                  provision of this Agreement in any other jurisdiction.

         f.       ENTIRE AGREEMENT; AMENDMENTS. This Agreement supersedes all
                  other prior oral or written agreements between the Investor,
                  the Company, their affiliates and persons acting on their
                  behalf with respect to the matters discussed herein, and this
                  Agreement and the instruments referenced herein (including the
                  other Transaction Documents) contain the entire understanding
                  of the parties with respect to the matters covered herein and

                                       23

<PAGE>

                  therein and, except as specifically set forth herein or
                  therein, neither the Company nor the Investor makes any
                  representation, warranty, covenant or undertaking with respect
                  to such matters. No provision of this Agreement may be amended
                  other than by an instrument in writing signed by the Company
                  and the Investor, and no provision hereof may be waived other
                  than by an instrument in writing signed by the party against
                  whom enforcement is sought.

         g.       NOTICES. Any notices or other communications required or
                  permitted to be given under the terms of this Agreement must
                  be in writing (including electronic forms of communication)
                  and will be deemed to have been delivered (i) upon receipt,
                  when delivered personally; (ii) upon receipt, when sent by
                  facsimile (provided confirmation of transmission is
                  mechanically or electronically generated and kept on file by
                  the sending party); or (iii) one (1) day after deposit with a
                  nationally recognized overnight delivery service, in each case
                  properly addressed to the party to receive the same. The
                  addresses and facsimile numbers for such communications shall
                  be:

                  If to the Company:

                  No. 12 Jiance Road, Nangang District
                  Harbin, China
                  Attention: Shujun Liu, Chairman and CEO

                  with a copy to:

                  Davies Ward Phillips & Vineberg LLP
                  625 Madison Avenue, 12th Floor, New York
                  NY 10022, USA

                  If to the Investor:

                  At the Address given on Signature Page

                  With a copy to:

                  Wyrick Robbins Yates & Ponton LLp
                  4101 Lake Boone Trail, Suite 300
                  Raleigh, North Carolina 27607
                  Attention: Kevin A. Prakke
                  Fax: (919) 781-4865

                  Each party shall provide five (5) days' prior written notice
                  to the other party of any change in address or facsimile
                  number.

         h.       NO ASSIGNMENT. This Agreement may not be assigned.

                                       24

<PAGE>

         i.       NO THIRD PARTY BENEFICIARIES. This Agreement is intended for
                  the benefit of the parties hereto and is not for the benefit
                  of, nor may any provision hereof be enforced by, any other
                  person.

         j.       SURVIVAL. The representations and warranties of the Company
                  and the Investor contained in Sections 3 and 4, the agreements
                  and covenants set forth in Sections 5 and 6, and the
                  indemnification provisions set forth in Section 10, shall
                  survive each of the Closings; but in no event shall any other
                  provisions of this Agreement survive the termination of this
                  Agreement in accordance with Section 9.

         k.       PUBLICITY. The Company and Investor shall consult with each
                  other in issuing any press releases or otherwise making public
                  statements with respect to the transactions contemplated
                  hereby and no party shall issue any such press release or
                  otherwise make any such public statement without the prior
                  written consent of the other parties, which consent shall not
                  be unreasonably withheld or delayed, except that no prior
                  consent shall be required if such disclosure is required by
                  law or the rules of a stock exchange, in which such case the
                  disclosing party shall use commercially reasonable efforts to
                  provide the other parties with prior notice of such public
                  statement. Investor acknowledges that this Agreement and all
                  or part of the Transaction Documents may be deemed to be
                  "material contracts" as that term is defined by Item
                  601(b)(10) of Regulation S-K, and that the Company may
                  therefore be required to file such documents as exhibits to
                  reports or registration statements filed under the Securities
                  1933 Act or the 1934 Act. Investor further agrees that the
                  status of such documents and materials as material contracts
                  shall be determined solely by the Company, in consultation
                  with its counsel.

         l.       FURTHER ASSURANCES. Each party shall do and perform, or cause
                  to be done and performed, all such further acts and things,
                  and shall execute and deliver all such other agreements,
                  certificates, instruments and documents, as the other party
                  may reasonably request in order to carry out the intent and
                  accomplish the purposes of this Agreement and the consummation
                  of the transactions contemplated hereby.

         m.       BROKER'S FEES. Except as set forth in Section 11(b) hereof,
                  party hereto represents and warrants that no placement agent,
                  broker, investment banker, person or firm acting on behalf of
                  or under the authority of such party hereto is or will be
                  entitled to any broker's or finder's fee or any other
                  commission directly or indirectly in connection with the
                  transactions contemplated by the Transaction Documents. Each
                  party hereto further agrees to indemnify each the other party
                  for any claims, losses or expenses incurred by such other
                  party as a result of the representation in this Section 11(m)
                  being untrue.

         n.       NO STRICT CONSTRUCTION. The language used in this Agreement
                  will be deemed to be the language chosen by the parties to
                  express their mutual intent, and no rules of strict
                  construction will be applied against any party.

                                       25

<PAGE>

         o.       REMEDIES. The Investor and each holder of the Shares shall
                  have all rights and remedies set forth in this Agreement and
                  the Registration Rights Agreement and all rights and remedies
                  which such holders have been granted at any time under any
                  other agreement or contract and all of the rights which such
                  holders have under any law. Any person having any rights under
                  any provision of this Agreement shall be entitled to enforce
                  such rights specifically (without posting a bond or other
                  security), to recover damages by reason of any default or
                  breach of any provision of this Agreement, including the
                  recovery of reasonable attorneys fees and costs, and to
                  exercise all other rights granted by law.

         p.       PAYMENT SET ASIDE. To the extent that the Company makes a
                  payment or payments to the Investor hereunder or the
                  Registration Rights Agreement or the Investor enforces or
                  exercises its rights hereunder or thereunder, and such payment
                  or payments or the proceeds of such enforcement or exercise or
                  any part thereof are subsequently invalidated, declared to be
                  fraudulent or preferential, set aside, recovered from,
                  disgorged by or are required to be refunded, repaid or
                  otherwise restored to the Company, a trustee, receiver or any
                  other person under any law (including, without limitation, any
                  bankruptcy law, state or federal law, common law or equitable
                  cause of action), then to the extent of any such restoration
                  the obligation or part thereof originally intended to be
                  satisfied shall be revived and continued in full force and
                  effect as if such payment had not been made or such
                  enforcement or setoff had not occurred.

         q.       CHOICE OF LAW. This Agreement shall be construed under the
                  laws of the State of New York, without regard to choice of law
                  provisions

                [Balance of this page intentionally left blank.]

                                       26

<PAGE>

         IN WITNESS WHEREOF, the parties have caused this Investment Agreement
to be duly executed as of the day and year first above written.

                                      AMERICAN ORIENTAL BIOENGINEERING, INC.

                                      By:
                                          --------------------------------------
                                          Name:
                                          Title: President and CEO

                                      BH Capital Investments, LP

 175 Bloor Street East,
 South Tower, Suite 705,
 Toronto, ON M4W 3R8
 Canada

                                      By:
                                          --------------------------------------
                                          Name: Henry Brachfeld
                                          Title: President of General Partner

                                      Excalibur Limited Partnership

 33 Prince Arthur Avenue,
 Toronto, ON M5R 1B2
 Canada

                                          By:
                                             -----------------------------------
                                          Name: William S. Hechter
                                          Title: President of General Partner

                                       27

<PAGE>

                                LIST OF EXHIBITS

                                -----------------

EXHIBIT A                  Registration Rights Agreement
EXHIBIT B                  Opinion of Company's Counsel

EXHIBIT C                  Escrow Agreement
EXHIBIT D                  Broker Representation Letter
EXHIBIT F                  Put Notice

EXHIBIT G                  Form of Warrants

                                       28

<PAGE>

                                    EXHIBIT D

                              [BROKER'S LETTERHEAD]

Date
Via Facsimile

Attention:

----------------------

----------------------

----------------------

         Re:      AMERICAN ORIENTAL BIOENGINEERING, INC.

Dear __________________:

         It is our understanding that the Form______ Registration Statement
bearing SEC File Number ( ___-______) filed by AMERICAN ORIENTAL BIOENGINEERING,
INC. on Form _____ on __________, 200_ was declared effective on _________,
200_.

         This letter shall confirm that ______________ shares of the common
stock of AMERICAN ORIENTAL BIOENGINEERING, INC. are being sold on behalf of
__________________ and that we shall comply with the prospectus delivery
requirements set forth in that Registration Statement by filing the same with
the purchaser.

         If you have any questions please do not hesitate to call.

                                                 Sincerely,

                                                 ----------------------

                                       29

<PAGE>

                                    EXHIBIT F

PUT NOTICE NO. ______

         AMERICAN ORIENTAL BIOENGINEERING, INC.., a Nevada corporation (the
"Company"), hereby elects to exercise its right pursuant to the Investment
Agreement to require Investor to purchase shares of its common stock. The
Company hereby certifies that:

         1.       The Put Amount is: $_______________.

         2.       The Pricing Period runs from ___________________ to
                  ___________________.

         3.       The current number of shares of common stock issued and
                  outstanding as of _____________ are
                  __________________________.

         4.       The Company Designated Minimum Price is: $
                  _____________________.

The undersigned has executed this Put Notice as of this __ day of ______, 200_.

                                         AMERICAN ORIENTAL BIOENGINEERING, INC.

                                         By:
                                             -----------------------------------
                                             Name and Title:

                                       30

<PAGE>

                                    EXHIBIT A

                          REGISTRATION RIGHTS AGREEMENT

         This Registration Rights Agreement (the "Agreement") is made and
entered into as of July 18, 2003 by and among BH Capital Investments, LP and
Excalibur Limited Partnership (Collectively the "Investor") and American
Oriental Bioengineering, Inc., a Nevada corporation (the "Company" and, together
with the Investor, the "Parties").

         WHEREAS, the Company has an authorized capitalization of 60,000,000
shares of common stock (the "Common Stock") and 2,000,000 shares of preferred
stock;

         WHEREAS, the Company and the Investor have entered into an Investment
Agreement (" Investment Agreement") dated of even date hereof;

         WHEREAS, the Investor has agreed to up purchase to $3 million worth of
shares of common stock and Warrants ("Securities") pursuant to the Investment
Agreement by and among the Company and the Investor made as of the date hereof;

         WHEREAS, the Investor was induced to purchase the Securities in part by
the Company's agreement to enter into this Agreement; and

         WHEREAS, the Parties desire that the Investor has registration rights
with respect to the Securities as set forth in this Agreement;

         NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Parties hereto
agree as follows:

         12.      Registration Rights. The Company covenants and agrees as
                  follows:

         a.       Definitions. For purposes of this Section 1:

                  (i)      "Act" shall mean the Securities Act of 1933, as
                           amended;

                  (ii)     "Agreement" shall have the meaning set forth in the
                           recital above;

                  (iii)    "Exchange Act" shall mean the Securities Exchange Act
                           of 1934, as amended;

                  (iv)     "Form S-4 or S-8" means such form under the Act as in
                           effect on the date hereof or any registration form
                           under the Act subsequently adopted by the SEC which
                           permits the registration of securities to be issued
                           in a merger or other Rule 145 transaction under the
                           Act, or securities to be issued to an employee,
                           consultant or other similar person pursuant to a
                           plan;

                  (v)      "Holder" means a holder of Registrable Securities;

                                       31

<PAGE>

                  (vi)     "register," "registered," and "registration" refer to
                           a registration effected by preparing and filing a
                           registration statement or similar document in
                           compliance with the Act, and the declaration or
                           ordering of effectiveness of such registration
                           statement or document;

                  (vii)    "Registrable Securities" means (i) the Shares and
                           Warrant Shares, whether issued or issuable and (ii)
                           any shares of capital stock issued or issuable with
                           respect to the foregoing as a result of any stock
                           split, stock dividend, recapitalization,
                           anti-dilution adjustment, exchange or similar event
                           or otherwise without regard to any limitation on
                           exercise of warrants; and

                  (viii)   "SEC" shall mean the Securities and Exchange
                           Commission.

                  Terms not defined herein shall have the definitions ascribed
                  to them in the Investment Agreement.

         b.       COMPANY REGISTRATION.

                  (i)      MANDATORY REGISTRATION. The Company shall prepare,
                           and, as soon as practicable (the "Schedule Filing
                           Date"), file with the SEC a Registration Statement or
                           registration Statements (as is necessary) on Form
                           SB-2 the resale of all of the Registrable Securities.
                           In the event SB-2 is unavailable for such
                           registrations, the Company shall use such other form
                           as is available for such registrations, subject to
                           the provisions of this Section 1.2. Any Registration
                           Statement prepared pursuant hereto shall register for
                           resale sufficient number of shares of Common Stock
                           equal to the number of Registrable Securities issued
                           and issuable as of the date immediately preceding the
                           date the Registration Statement is initially filed
                           with the SEC including an estimate for the number of
                           Shares and Warrant Shares potentially issuable
                           assuming puts for the full $3,000,000 at an assumed
                           purchase Price equal to 70% of the current Market
                           Price. The Company shall use its best efforts to have
                           each Registration Statement declared effective by the
                           SEC as soon as practicable but in no event later than
                           November 15, 2003 (the "Scheduled Effective Date").
                           The Company represents and covenants that no Person
                           other than an Investor has or will have the right to
                           include any securities of the Company in the
                           Registration Statement to be filed in accordance with
                           this Section 1.2.a. The Company will not include any
                           selling stockholder other than the investor in any
                           Registration Statement it files pursuant to this
                           Section 1.2.a without the Investors' written consent.

                  (ii)     PIGGY-BACK REGISTRATIONS. If at any time prior to the
                           expiration of the Registration Period (as hereinafter
                           denied) the Company proposes to file with the SEC a
                           Registration Statement relating to an offering for
                           its own account or the account of others under the
                           1933 Act of any of its securities (other than a

                                       32

<PAGE>

                           Registration Statement on Form S-4 or Form S-8 (or
                           their equivalents at such time) relating to
                           securities to be issued solely in Registrable
                           Securities included in such Registration Statement
                           for such transferor. Any shares of Common Stock
                           included in a Registration Statement and which remain
                           allocated to any Person which ceases to hold any
                           Registrable Securities shall be allocated to the
                           remaining Investors, pro rata based on the number of
                           Registrable Securities then held by such Investors.

                  (iii)    Allocation of Registrable Securities. The Initial
                           number of Registrable Securities included in any
                           Registration Statement and each increase in the
                           number of Registrable Securities included therein
                           shall be allocated pro rata among the investors based
                           on the number of Registrable Securities held by each
                           Investor at the time the Registration Statement
                           covering such initial number of Registrable
                           Securities or increase thereof is declared effective
                           by the SEC.

                  (iv)     LEGAL COUNSEL. Subject to Section 5 hereof, the
                           Investors holding a majority of the Registrable
                           Securities shall have the right to select one legal
                           counsel to review and oversee as their counsel any
                           offering pursuant to this Section 2 ("Legal
                           Counsel"), which shall be Kevin Prakke of Wyrick
                           Robbins Yates & Ponton LLP or such other counsel as
                           thereafter designated by the holders of a majority of
                           Registrable Securities. The Company shall reasonably
                           cooperate with Legal Counsel in performing the
                           Company's obligations under this Agreement.

                  (v)      Ineligibility for Form SB-2. In the event that Form
                           SB-2 is unavailable for any registration of
                           Registrable Securities hereunder, the Company shall
                           (i) register the sale of the Registrable Securities
                           on another appropriate form and (ii) undertake to
                           register the Registrable Securities on Form SB-2 as
                           soon as such form is available, provided that the
                           Company shall maintain the effectiveness of the
                           Registration Statement then in effect until such time
                           as a Registration Statement on Form SB-2 covering the
                           Registrable Securities has been declared effective by
                           the SEC.

         c.       OBLIGATIONS OF THE COMPANY. Whenever required hereunder to
                  effect the registration of any Registrable Securities, the
                  Company shall, as expeditiously as reasonably possible:

                  (i)      prepare and file with the SEC a registration
                           statement with respect to such Registrable Securities
                           and use all commercially reasonable efforts to cause
                           such registration statement to become effective, and
                           to keep such registration statement effective until
                           the distribution contemplated by the Company of its
                           securities registered under the registration
                           statement has been completed; PROVIDED, HOWEVER, in
                           the case of any registration by the Company (and
                           incidentally by the Holders) on Form SB-2 which are
                           intended to be offered on a continuous or delayed
                           basis, the Company may keep such registration
                           effective for so long as is necessary to sell all of
                           the securities registered thereunder;

                                       33

<PAGE>

                  (ii)     prepare and file with the SEC such amendments and
                           supplements to such registration statement and the
                           prospectus used in connection with such registration
                           statement as may be necessary to comply with the
                           Agreement and the provisions of the Act with respect
                           to the disposition of all securities covered by such
                           registration statement;

                  (iii)    furnish to the Holders such numbers of copies of a
                           prospectus, including a preliminary prospectus, in
                           conformity with the requirements of the Act, and such
                           other documents as the Holders may reasonably request
                           in order to facilitate the disposition of Registrable
                           Securities owned by them;

                  (iv)     use all commercially reasonable efforts to register
                           and qualify the securities covered by such
                           registration statement under such other securities or
                           Blue Sky laws of such jurisdictions as shall be
                           reasonably requested by the Holders;

                  (v)      notify each Holder of Registrable Securities covered
                           by such registration statement at any time when a
                           prospectus relating thereto is required to be
                           delivered under the Act of the happening of any event
                           as a result of which the prospectus included in such
                           registration statement, as then in effect, includes
                           an untrue statement of a material fact or omits to
                           state a material fact required to be stated therein
                           or necessary to make the statements therein not
                           misleading in the light of the circumstances then
                           existing and then amend or supplement such
                           registration statement to correct any such
                           misstatement or omission as soon as reasonably
                           practicable but in any event within 30 days, and then
                           prompt deliver a copy of the amended or supplemental
                           documents to the Investors. Maximum Ineffective
                           Period shall be on aggregation of 60 days during any
                           365-day period;

                  (vi)     provide a transfer agent and registrar for all
                           Registrable Securities registered pursuant hereunder
                           and a CUSIP number for all such Registrable
                           Securities, in each case not later than the effective
                           date of such registration;

         d.       INFORMATION. It shall be a condition precedent to the
                  obligations of the Company to take any action pursuant to this
                  Section 1 with respect to the Registrable Securities of any
                  selling Holder that the Holder shall furnish to the Company
                  such information regarding itself, the Registrable Securities
                  held by it, and the intended method of disposition of such
                  securities as shall be required to effect the registration of
                  the Holder's Registrable Securities.

         e.       EXPENSES OF COMPANY REGISTRATION. The Company shall bear and
                  pay all expenses incurred in connection with any registration,
                  filing or qualification of Registrable Securities with respect
                  to any registration pursuant to Section 1.2 for each Holder
                  (which right may be assigned as provided in Section 1.12),
                  including (without limitation) all registration, filing, and

                                       34

<PAGE>

                  qualification fees, printers and accounting fees relating or
                  apportionable thereto and the fees and disbursements of
                  counsel for the Company , the Company will pay the reasonable
                  fees and disbursements of one counsel for the selling Holders
                  selected by them, but the reimbursement of expenses shall
                  exclude underwriting discounts and commissions relating to the
                  offer and sale of the Registrable Securities.

         f.       DELAY OF REGISTRATION. No Holder shall have the right to
                  obtain or seek an injunction restraining or otherwise delaying
                  any such registration as the result of any controversy that
                  might arise with respect to the interpretation or
                  implementation of this Section 1, except in the case of bad
                  faith or unreasonable determinations by the Company or the
                  chosen underwriters.

         g.       INDEMNIFICATION. In the event any Registrable Securities are
                  included in a registration statement under this Section 1:

                  (i)      To the extent permitted by law, the Company will
                           indemnify and hold harmless each Holder, any
                           underwriter (as defined in the Act) for such Holder
                           and each person, if any, who controls such Holder or
                           underwriter within the meaning of the Act or the
                           Exchange Act, against losses, claims, damages, or
                           liabilities (joint or several) to which they may
                           become subject under the Act, the Exchange Act, or
                           other federal or state law, insofar as such losses,
                           claims, damages, or liabilities (or actions in
                           respect thereof) arise out of or are based upon any
                           of the following statements, omissions or violations
                           (collectively a "Violation"): (i) any untrue
                           statement or alleged untrue statement of a material
                           fact contained in such registration statement,
                           including any preliminary prospectus or final
                           prospectus contained therein or any amendments or
                           supplements thereto, (ii) the omission or alleged
                           omission to state therein a material fact required to
                           be stated therein, or necessary to make the
                           statements therein not misleading, or (iii) any
                           violation or alleged violation by the Company of the
                           Act, the Exchange Act, any state securities law or
                           any rule or regulation promulgated under the Act, the
                           Exchange Act or any state securities law; and the
                           Company will pay to each such Holder, underwriter or
                           controlling person, as incurred, any legal or other
                           expenses reasonably incurred by them in connection
                           with investigating or defending any such loss, claim,
                           damage, liability, or action; PROVIDED, HOWEVER, that
                           the indemnity agreement contained in this subsection
                           1.7(a) shall not apply to amounts paid in settlement
                           of any such loss, claim, damage, liability, or action
                           if such settlement is effected without the consent of
                           the Company (which consent shall not be unreasonably
                           withheld), nor shall the Company be liable in any
                           such case for any such loss, claim, damage,
                           liability, or action to the extent that it arises out
                           of or is based upon a violation which occurs in
                           reliance upon and in conformity with written
                           information furnished expressly for use in connection
                           with such registration by the Holder, underwriter or
                           controlling person,

                                       35

<PAGE>

                  (ii)     To the extent permitted by law, each selling Holder
                           will indemnify and hold harmless the Company against
                           any losses, claims, damages, or liabilities caused by
                           the Holder to which of the Company may become
                           subject, under the Act, the Exchange Act or other
                           federal or state law, insofar as such losses, claims,
                           damages, or liabilities (or actions in respect
                           thereto) directly arise out of or are based directly
                           upon any Violation, in each case to the extent (and
                           only to the extent) that such Violation occurs as a
                           result of the Company's reliance upon and inclusion
                           of in such registration of written information
                           provided by the Holder in connection with such
                           registration and in each case to the extent (and only
                           to the extent) that such violation occurs as a result
                           of the gross negligence or wilful misconduct of such
                           Holder provided, however, that liability of such
                           Holder hereunder shall not in any event exceed the
                           amount of the proceeds received by such Holder from
                           the sale of the Registrable Securities covered by
                           such registration statement and/or prospectus and
                           provided further, that the indemnity agreement
                           contained in this Section 1.7(b) shall not apply to
                           amounts paid in settlement of any such loss, claim,
                           damage, liability or action if such settlement is
                           effected without the consent of such Holder, which
                           consent shall not be unreasonably withheld.

                  (iii)    Promptly after receipt by an indemnified party under
                           this Section 1.7 of notice of the commencement of any
                           action (including any governmental action), such
                           indemnified party will, if a claim in respect thereof
                           is to be made against any indemnifying party under
                           this Section 1.7, deliver to the indemnifying party a
                           written notice of the commencement thereof and the
                           indemnifying party shall have the right to
                           participate in, and, to the extent the indemnifying
                           party so desires, jointly with any other indemnifying
                           party similarly noticed, to assume the defence
                           thereof with counsel mutually satisfactory to the
                           parties; PROVIDED, HOWEVER, that an indemnified party
                           (together with all other indemnified parties which
                           may be represented without conflict by one counsel)
                           shall have the right to retain one separate counsel,
                           with the fees and expenses to be paid by the
                           indemnifying party, if representation of such
                           indemnified party by the counsel retained by the
                           indemnifying party would be inappropriate due to
                           actual or potential differing interests between such
                           indemnified party and any other party represented by
                           such counsel in such proceeding. The failure to
                           deliver written notice to the indemnifying party
                           within a reasonable time of the commencement of any
                           such action, if prejudicial to its ability to defend
                           such action, shall relieve such indemnifying party of
                           any liability to the indemnified party under this
                           Section 1.7, but the omission so to deliver written
                           notice to the indemnifying party will not relieve it
                           of any liability that it may have to any indemnified
                           party otherwise that under this Section 1.8.

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<PAGE>

                  (iv)     If the indemnification provided for in this Section
                           1.7 is held by a court of competent jurisdiction to
                           be unavailable to an indemnified party with respect
                           to any loss, liability, claim, damage, or expense
                           referred to therein, then the indemnifying party, in
                           lieu of indemnifying such indemnified party
                           hereunder, shall contribute to the amount paid or
                           payable by such indemnified party as a result of such
                           loss, liability, claim, damage, or expense in such
                           proportion as is appropriate to reflect the relative
                           fault of the indemnifying party on the one hand and
                           of the indemnified party on the other in connection
                           with the statements or omissions that resulted in
                           such loss, liability, claim, damage, or expense as
                           well as any other relevant equitable considerations
                           However, in any such case a Holder will not be
                           required to contribute any amount in excess of the
                           proceeds received by such Holder from the sale of the
                           Registrable Securities covered by such registration
                           statement and/or prospectus, and no person or entity
                           guilty of fraudulent misrepresentation (within the
                           meaning of Section 12 (f) of the Act) will be
                           entitled to contribution from any person or entity
                           who is not guilty of such fraudulent
                           misrepresentation. The relative fault of the
                           indemnifying party and of the indemnified party shall
                           be determined by reference to, among other things,
                           whether the untrue or alleged untrue statement of a
                           material fact or the omission to state a material
                           fact relates to information supplied by the
                           indemnifying party or by the indemnified party and
                           the parties' relative intent, knowledge, access to
                           information, and opportunity to correct or prevent
                           such statement of omission.

                  (v)      Notwithstanding the foregoing, to the extent that the
                           provisions on indemnification and contribution
                           contained in the underwriting agreement entered into
                           in connection with the underwritten public offering
                           are in conflict with the foregoing provisions, the
                           provisions in the underwriting agreement shall
                           control.

                  (vi)     The obligations of the Company under this Section 1.7
                           shall survive the completion of any offering of
                           Registrable Securities in a registration statement
                           under this Section 1, and otherwise.

         h.       REPORTS UNDER EXCHANGE ACT. With a view to making available to
                  the Holders the benefits of Rule 144 promulgated under the Act
                  and any other rule or regulation of the SEC that may at any
                  time permit a Holder to sell securities of the Company to the
                  public without registration or pursuant to a registration on
                  Form S-3 or another registration form that permits a
                  comparable amount of information to be incorporated by
                  reference, the Company agrees to:

                  (i)      make and keep public information available, as those
                           terms are understood and defined in SEC Rule 144, at
                           all times after ninety (90) days after the effective
                           date of the first registration statement filed by the
                           Company for the offering of its securities to the
                           general public;

                  (ii)     file with the SEC in a timely manner all reports and
                           other documents required of the Company under the Act
                           and the Exchange Act; and

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<PAGE>

                  (iii)    furnish to any Holder forthwith upon request (i) a
                           written statement by the Company that it has complied
                           with the reporting requirements of SEC Rule 144 (at
                           any time after ninety (90) days after the effective
                           date of the first registration statement filed by the
                           Company), the Act and the Exchange Act (at any time
                           after it has become subject to such reporting
                           requirements), or that it qualifies as a registrant
                           whose securities may be resold pursuant to Form S-3
                           (at any time after it so qualifies), (ii) a copy of
                           the most recent annual or quarterly report of the
                           Company and such other reports and documents so filed
                           by the Company, and (iii) such other information as
                           may be reasonably requested in availing the Holder of
                           any rule or regulation of the SEC which permits the
                           selling of any such securities without registration
                           or pursuant to such form.

         i.       ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
                  Company to register Registrable Securities pursuant to this
                  Section 1 may be assigned to a transferee or assignee of such
                  securities, PROVIDED THAT (a) the Company is, within a
                  reasonable time after such transfer, furnished with written
                  notice of the name and address of such transferee or assignee
                  and the securities with respect to which such registration
                  rights are being assigned, and (b) such transferee or assignee
                  agrees in writing to be bound by and subject to the terms and
                  conditions of this Agreement.

         j.       REGISTRATION DEFAULT. Each of the following events shall
                  constitute a "Registration Default" for a purpose of this
                  agreement:

                  (i)      The SEC's failure to declare a Registration effective
                           on or before sixty (60) days following the Scheduled
                           Effective Date except where the failure to meet such
                           deadline is the result solely of actions by the
                           holders of Registrable Securities or their Legal
                           Counsel;

                  (ii)     The Company's failure to request acceleration of the
                           effectiveness of a Registration Statement within
                           three (3) business days after the SEC has notified
                           the Company that it may file such an acceleration
                           request as required by Section 3.a hereof, except
                           where the failure to meet such deadline is a result
                           solely of actions by the holders of Registrable
                           Securities or Legal Counsel; or

                  (iii)    The Investors' inability to sell all Registrable
                           Securities pursuant to an effective Registration
                           Statement (whether because of a failure to keep the
                           Registration Statement effective, to disclose such
                           information as is necessary for sales to be made
                           pursuant to the Registration Statement, to register
                           sufficient shares of Common Stock, or otherwise)

                  Upon the occurrence of a Registration Default, the Company
                  shall pay each Investor an amount determined in accordance
                  with the following formula for each 30-day period of such
                  Registration Default for a period starting from commencing of
                  a Registration Default and ending upon the earlier of (a) one
                  year from the Effective Date, or (b) a termination of the
                  Investment Agreement by the Investors:

                                       38

<PAGE>

                  1.0%  x  P  x  N

                  Where

                  P = the average closing sale price of the Common Stock on the
                  Principal Market for the applicable thirty (30) days; and

                  N = the number of Registrable Securities that such Investor
                  holds or may acquire pursuant to exercise of Warrants on the
                  last day of the applicable 30-day period (without giving
                  effect to any of the limitations on exercise).

                  If a Registration Default is cured before the end of a 30-day
                  period, the applicable formula shall be pro-rated. The Company
                  shall pay such amount in cash on demand by an Investor made at
                  any time during the continuance or after termination of such
                  Registration Default. If the Company does not remit payment of
                  the amount due to such Investor, the Company will pay the
                  Investor's reasonable costs of collection, including
                  attorneys' fees. An Investor's right to demand such payment
                  shall be in addition to any other rights it may have under
                  this Agreement, the Investment Agreement or otherwise.

         13.      Miscellaneous.

         a.       SUCCESSORS AND ASSIGNS. Except as otherwise provided herein,
                  the terms and conditions hereof shall inure to the benefit of
                  and be binding upon the respective successors and assigns of
                  the parties (including transferees or assignees of any shares
                  of Registrable Securities). Nothing herein, express or
                  implied, is intended to confer upon any party other than the
                  parties hereto or their respective successors and assigns any
                  rights, remedies, obligations, or liabilities under or by
                  reason hereof, except as expressly provided herein.

         b.       REGISTRATION RIGHTS GRANTED TO THIRD PARTIES. The Company
                  shall not, pursuant to a subsequent registration rights
                  agreement, grant to any third party registration rights more
                  favorable than as provided to Holders pursuant to this
                  Agreement. In any event, Holders shall be entitled to any
                  future registration rights granted by the Company under a
                  subsequent registration rights agreement that are more
                  favorable than the registration rights provided to Holders
                  hereunder and this Agreement shall be amended to reflect any
                  such more favorable registration rights.

         c.       AMENDMENTS AND WAIVERS. Any term hereof may be amended and the
                  observance of any term hereof may be waived (either generally
                  or in a particular instance and either retroactively or
                  prospectively), only with the written consent of the Company
                  and the holders of a majority of the Registrable Securities
                  then outstanding. Any amendment or waiver effected in
                  accordance with this paragraph shall be binding upon each
                  Holder, and each future Holder of all such Registrable
                  Securities, and the Company.

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<PAGE>

         d.       ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement
                  constitutes the full and entire undertaking by the Company and
                  the full agreement of the Holder with regard to the
                  registration rights contemplated by this Agreement.

         e.       GOVERNING LAW AND JURISDICTION.

                  (i)      Any dispute, controversy or claim arising out of or
                           relating to this Agreement, or the breach,
                           termination or invalidity thereof, shall be finally
                           and exclusively resolved by an arbitration tribunal
                           (the "Tribunal") in accordance with the Arbitration
                           Rules of the American Arbitration Association ("AAA")
                           as at present in force. THE DECISION OF THE TRIBUNAL
                           SHALL BE FINAL AND BINDING UPON THE PARTIES HERETO.

                  (ii)     The arbitration shall take place in New York City,
                           the State of New York and shall be conducted in the
                           English language. The parties hereby submit
                           themselves to the exclusive jurisdiction of the
                           arbitration tribunal in the City of New York, the
                           State of New York under the auspices of AAA. The
                           arbitration shall be conducted by three (3)
                           arbitrators, one to be appointed by the Company, one
                           to be appointed by the Investor and a third by the
                           two arbitrators so selected.

                  (iii)    Each party shall cooperate with the other in making
                           full disclosure of and providing complete access to
                           all information and documents requested by the other
                           party in connection with the arbitration proceedings.
                           Arbitration shall be the sole, binding, exclusive and
                           final remedy for resolving any dispute between the
                           parties; either party may apply to any court of
                           competent jurisdiction in the State of New York for
                           enforcement of any award granted by the Tribunal.

                  (iv)     To the extent permitted by law, the award of the
                           Tribunal may include, without limitation, one or more
                           of the following: a monetary award, a declaration of
                           rights, an order of specific performance, an
                           injunction, reformation of the contract.

                  (v)      The cash expenses of the arbitration (including
                           without limitation reasonable fees and expenses of
                           counsel, experts and consultants) shall be borne by
                           the Party against whom the decision of the
                           arbitrators is rendered; PROVIDED THAT if a Party
                           prevails only partially, such Party shall be entitled
                           to be reimbursed for such costs and expenses in the
                           proportion that the dollar amount successfully
                           claimed by the prevailing Party bears to the
                           aggregate dollar amount claimed.

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<PAGE>

                  (vi)     During the period when a dispute is being resolved,
                           except for the matter being disputed, the parties
                           shall in all other respects continue to abide by the
                           terms of this Agreement.

         f.       CHOICE OF LAW. This Agreement shall be construed under the
                  laws of the State of New York, without regard to choice of law
                  provisions

         g.       COUNTERPARTS. This Agreement can be executed in several
                  counterparts with each counterpart properly executed having
                  the same validity and legal force.

         IN WITNESS WHEREOF, this Registration Rights Agreement has been duly
executed and delivered by each party hereto as of the date first above written.

                                        AMERICAN ORIENTAL BIOENGINEERING, INC.

                                        By:
                                            ------------------------------------
                                                 Name:
                                                 Title:

                                         BH Capital Investments, LP

                                            175 Bloor Street East,
                                            South Tower, Suite 705,
                                            Toronto, ON M4W 3R8
                                        Canada

                                        By:
                                            ------------------------------------
                                            Name: Henry Brachfeld
                                            Title: President of General Partner

                                        Excalibur Limited Partnership

                                            33 Prince Arthur Avenue,
                                            Toronto, ON M5R 1B2
                                            Canada

                                        By:
                                            ------------------------------------
                                            Name: William S. Hechter
                                            Title: President of General Partner

                                       41