<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                 ---------------
                                   FORM 10-KSB

            |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

                                       OR

          |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
               FOR THE TRANSITION PERIOD FROM _____ TO __________



                           COMMISSION FILE NO. 001-32569
                     AMERICAN ORIENTAL BIOENGINEERING, INC.

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

                 (Name of Small Business Issuer in Its Charter)

 NEVADA                                                               84-0605867
 (State or other jurisdiction of            (I.R.S. Employer Identification No.)
 incorporation or organization)

           NO. 308 XUEFU ROAD, NANGANG DISTRICT, HARBIN, CHINA, 150086
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                86-451-8666-6601
                (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:



COMMON STOCK, PAR VALUE $0.001 PER SHARE        THE AMERICAN STOCK EXCHANGE
----------------------------------------        ---------------------------
         (Title of Class)                 (Name of exchange on which registered)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:            NONE.

         Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.     Yes [ ]                   No [X]

         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports); and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X]                     No [ ]

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form 10-KSB
or any amendment to this Form 10-KSB. [ ]

         Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).   Yes [ ]                     No [X]

         The issuer's revenues for the fiscal year ended December 31, 2005 were
$54,732,557.

         The aggregate market value of the registrant's common stock held by
non-affiliates as of March 28, 2006 was $214,588,489.

         State the number of shares outstanding of each of the issuer's classes
of equity securities, as of the latest practicable date:

Title of Each Class of                        Number of Shares Outstanding
Equity Securities                             as of March 15, 2006
--------------------------------------        ----------------------------------
Common Stock, $0.001 par value                62,635,788
Preferred Stock, $0.001 par value             1,000,000


         Documents incorporated by reference: None.

         Transitional Small Business Disclosure Format (check one):
                Yes [ ]                     No [X]

<PAGE>

                                TABLE OF CONTENTS
                                -----------------


                                                                            PAGE
                                                                            ----

PART I ........................................................................2

    ITEM 1.   Description of Business..........................................2
    ITEM 2.   Description of Property.........................................10
    ITEM 3.   Legal Proceedings...............................................11
    ITEM 4.   Submission Of Matters To A Vote Of Security Holders.............11

PART II ......................................................................12

    ITEM 5.   Market For Common Equity and Related Stockholder Matters........12
    ITEM 6.   Management Discussion and Analysis..............................13
    ITEM 7.   Financial Statements............................................33
    ITEM 8.   Changes In And Disagreements With Accountants On
              Accounting And Financial Disclosures............................33
    ITEM 8A.  Controls and Procedures.........................................34
    ITEM 8B.  Other Information...............................................34

PART III .....................................................................35

    ITEM 9.   Directors, Executive Officers, Promoters And Control Persons,
              Compliance With Section 16(A) Of The Exchange Act...............35
    ITEM 10.  Executive Compensation..........................................38
    ITEM 11.  Security Ownership of Certain Beneficial Owners and Management..42
    ITEM 12.  Certain Relationships and Related Transaction...................44
    ITEM 13.  Exhibits........................................................44
    ITEM 14.  Principal Accounting Fees and Services..........................47

                                       1



<PAGE>

         This annual report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These include
statements about our expectations, beliefs, intentions or strategies for the
future, which we indicate by words or phrases such as "anticipate," "expect,"
"intend," "plan," "will," "we believe," "our company believes," "management
believes" and similar language. These forward-looking statements are based on
our current expectations and are subject to certain risks, uncertainties and
assumptions, including those set forth in the discussion under Item 1.
Description of Business" and Item 6. "Management's Discussion and Analysis",
including under the heading "- Risk Factors" under Item 6. Our actual results
may differ materially from results anticipated in these forward-looking
statements. We base our forward-looking statements on information currently
available to us, and we assume no obligation to update them. In addition, our
historical financial performance is not necessarily indicative of the results
that may be expected in the future and we believe such comparisons cannot be
relied upon as indicators of future performance.

         Certain financial information included in this annual report has been
derived from data originally prepared in Renminbi (RMB), the currency of the
People's Republic of China ("China" or "PRC"). For purposes of this annual
report, conversion rates of US$1.00 to RMB 8.0702 and RMB 8.1734 were utilized
to convert 2005 amounts. There is no assurance that RMB amounts could have been
or could be converted into US dollars at that rate.

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

HISTORY

         Our company, American Oriental Bioengineering, Inc. ("we", "us", "our",
"AOB" or "our company"), was founded as Champion Ventures, Inc. on November 30,
1970. On May 7, 1999, we acquired Internet Golf Association, Inc. From 1999
until 2001, we attempted to build a business that would organize and conduct
interactive golf tournaments on the internet. During our fiscal year ended 2001,
we ceased to have operations and as of December 31, 2001, we had no employees.

         On December 18, 2001, our company and Harbin Three Happiness
Bioengineering Co., Ltd. ("Harbin Bioengineering"), a company organized under
the laws of the People's Republic of China, entered into an exchange agreement
whereby we agreed to acquire 100% of the equity interest of Harbin
Bioengineering through the exchange of 8,538,943 shares of common
stock, resulting in our ownership of Harbin Bioengineering. That transaction was
a triangular merger with Bestkey International, Ltd., a British Virgin Island
corporation, and was treated as a reverse merger for accounting purposes. That
merger transaction was completed on June 26, 2002.

         In February 2003, we acquired a soybean protein peptide biochemical
engineering project (the "Project"). The Project covers derivatives and
extractions of soybean protein peptides, substances derived from soybeans
through a biochemical engineering process involving cutting, decomposition,
conversion and synthesis of soybean protein that can be absorbed by the body. In
addition to absorbing soybean peptide directly in the form of various tablets or
powders, soybean peptide can also be used as an additive in various foods and
beverages, including milk, tea and coffee. By acquiring the Project, we acquired
ownership of the properties associated with the Project, the manufacturing
plant, manufacturing equipment and environmental control equipment.

         In November 2004, we acquired Heilongjiang Songhuajiang Pharmaceutical
Limited, or HSPL, a Chinese state-owned pharmaceutical company.

                                       2


<PAGE>

         On July 18, 2005, our common stock commenced trading on the American
Stock Exchange under the ticker symbol "AOB."

         On November 14, 2005, our common stock commenced trading on the
Archipelago Exchange ("ArcaEx"), a facility of the Pacific Exchange, under the
same symbol, "AOB."

         Through the expansion of our existing businesses and through the
acquisition of HSPL in November 2004, our revenue increased by 71% from
$31,966,927 in 2004 to $54,732,557 in 2005, and our net income increased by 73%
from $7,771,382 in 2004 to $13,426,381 in 2005.

BUSINESS OVERVIEW

         We are presently engaged in the development and production of plant
based pharmaceutical ("PBP") products and plant based nutraceutical ("PBN")
products.

         PBPs are composed of the leaves and roots of one or more plants and do
not use synthetic chemicals. Each PBP has a certain medicinal function and
treats one or more illnesses or symptoms of illnesses. For example, our
Shuanghuanglian Lyophilized Injection Powder can be used to treat the viral flu.
Most of our PBP are prescription-based, although there are cases in which
certain PBPs, such as Double Ginseng Yishen Grain, are both prescribed by
doctors and available over-the-counter. All PBPs require the approval of China's
State Food and Drug Administration (the "SFDA") before their sale.

         PBNs, also frequently referred to as "dietary supplements" or
"nutritional supplements", are essentially prophylactic or preventive, in
contrast to our PBP products which are used to treat an illness or symptoms of
an illness. PBNs represent a different approach to medicine, one based on
nutrition and the health or wellness of the whole body. PBNs are also composed
of the leaves and roots of one or more plants. All PBNs are available
over-the-counter, without a prescription and, in China, they only require
approval of the local government before their sale.

         We believe that our company is well-positioned to take advantage of the
increasing demand for PBPs and PBNs. We have become a leading developer and
producer of PBP and PBN products in China.

         During the year ended December 31, 2005, each of the following
products, or series of products, reflected more than 5% of our gross sales:

         PBP PRODUCTS
         ------------
         o    Cease-Enuresis Soft Gel (Prescription)
         o    Double Ginseng Yishen Grain (OTC)
         o    Root of red-rooted salvia tablet (Prescription)
         o    Cease-Enuresis Patch (OTC)
         o    Shuanghuanglian Lyophilized Injection Powder (Prescription)

         PBN PRODUCTS
         ------------
         o    Protein peptide products series (which includes the Soy Peptide
              Tablets)
         o    Compound bio-functional beverage series

         In addition, in 2005, we introduced the following new products:

         o    UrinStopper Patch
         o    UrinStopper Capsule


                                       3


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THE EMPLOYEES

         As of December 31, 2005, we had 780 full-time employees and, as of
December 31, 2004, we had 762 full-time employees, an increase of 2.4%. For
Harbin Bioengineering, we increased the number of full-time employees by 3.3%
from 546 as of December 31, 2004 to 564, as of December 31, 2005. For HSPL, we
had 216 full-time employees as of December 31, 2005, which was the same for our
fiscal year ended December 31, 2004.

THE PRODUCTS

         In 2005, in an effort to strengthen and enrich our product mixes, we
recategorized our existing products into two main categories, PBP products and
PBN products, according to their product nature and respective target markets.

Harbin Bioengineering
---------------------

         The products produced by Harbin Bioengineering which currently comprise
the PBP and PBN categories are as follows:

         PBP PRODUCT SERIES
         ------------------

         Cease Enuresis Soft Gel           Composed of triterpeniod saponin
                                           specially formulated to help
                                           alleviate bed-wetting and urination
                                           disorder (especially at night or due
                                           to urinal incontinence). This is
                                           available by prescription.

         Double Ginseng Yishen Grain       Double Ginseng Yishen Grain is useful
                                           for those suffering from neurosis,
                                           vegetative nerve functional
                                           disturbance and hypo-immunity. It is
                                           a non-prescription medicine (OTC) and
                                           is sold in drugstores and hospitals
                                           in China.

         Root of red-rooted salvia tablet  Composed of three kinds of Chinese
                                           herbs that are believed to improve
                                           blood circulation and increase blood
                                           flow to the coronary artery to
                                           relieve pain. It is mainly used for
                                           coronary ischemia and angina pectoris
                                           caused by coronary heart disease.
                                           This product is a non-prescription
                                           medicine (OTC) and is available from
                                           drugstores and hospitals in China.

         UrinStopper Patch                 This is a new product launched by our
                                           Company in 2005. Composed of Chinese
                                           herbs, this product can be used
                                           together with Cease - Enuresis Soft
                                           Gel to avoid frequent urination,
                                           urinal incontinence and bed wetting.
                                           It is a non-prescription medicine
                                           (OTC) and is sold in drugstores and
                                           hospitals in China.


                                       4


<PAGE>

         PBN PRODUCTS SERIES
         -------------------

         Protein peptide products series   Protein peptides are derived from
                                           soybeans through a biochemical
                                           process involving cutting,
                                           decomposition, conversion and
                                           synthesis of soybean protein. Soybean
                                           peptides may be absorbed by the human
                                           body directly in the form of various
                                           tablets or powders, or as an additive
                                           in various foods.

                                           Our protein peptide products series
                                           includes:
                                                1.    Soypeptide Tablets
                                                2.    Soypeptide Milk Powder
                                                3.    Soypeptide Coffee

         Compound bio-functional beverage  Derived from honey products, marine
         series                            plants and natural herbs. These
                                           products are rich in natural amino
                                           acids and vitamins.

                                           Products within this category
                                           include:

                                           1. 1,500 ml. bottle pack
                                              bio-functional beverage
                                           2. 160 ml. bottle pack bio-functional
                                              beverage
                                           3. 245 ml. bottle pack bio-functional
                                              beverage
                                           4. 500 ml. bottle pack bio-functional
                                              beverage
                                           5. Gift pack bio-functional beverage

         Vitamate Oral Liquid              Vitamate Oral Liquid is designed to
                                           strengthen the immune system.
                                           Vitamate's immune-boosting formula is
                                           derived from bee products, marine
                                           proteins, natural herbs, unsaturated
                                           fatty acid, ginsenoside as well as
                                           certain amino acids, vitamins and
                                           minerals.

                                           Vitamate Oral Liquid is intended to
                                           help regulate blood lipids and
                                           enhance the immune system. It can be
                                           used by healthy adults, middle-aged,
                                           elderly and convalescents.

                                           Vitamate Oral Liquid is made from all
                                           natural ingredients. It does not have
                                           preservatives, stimulants,
                                           artificially added pigment or added
                                           sugar.

         UrinStopper Capsule               This is a new product developed in
                                           2005. It is composed of seed kernel
                                           cream of xanthoceras sorbifolia
                                           bunge. It is a health supplement for
                                           children suffering from bed wetting
                                           and for middle-aged and elderly
                                           adults suffering from urinary
                                           incontinence.

                                       5


<PAGE>

HSPL
----

         We expanded our products in 2004 through the acquisition of HSPL. HSPL
focuses on PBP products in the form of injection powder, pills, capsules and
oral liquid. Our major PBP product is the Shuanghuanglian Lyophilized Injection
Powder which consists of chlorogenic acid and baicalin as the effective
ingredients. It is used as a direct injection into the body for anti-bacteria
and anti-virus purposes.

PRODUCTION FACILITIES AND EQUIPMENT

         Headquartered in the city of Harbin, Heilongjiang Province in
Northeastern China, our production facilities and equipment and personnel
resources in 2005 were as follows:

         Harbin Bioengineering Facilities
         --------------------------------

         (1)  A GMP certified pharmaceutical manufacturing plant;

         (2)  A GMP certified bio-food processing manufacturing plant;

         (3)  A GMP certified soybean protein peptide product manufacturing
              plant;

         (4)  A GMP certified 49,000 square foot building, currently under
              construction, to be used as a manufacturing and production
              facility for our protein peptide product series expected to be
              completed in mid 2006; and

         (5)  564 employees as of December 31, 2005.

         HSPL Facilities
         ---------------

         (1)  GMP certified manufacturing plants including pre-treatment,
              extraction, solid preparation and powder injection;

         (2)  A GMP certified power and water supply plant;

         (3)  A GMP certified warehouse facility; and

         (4)  216 employees as of December 31, 2005.

         The Harbin Bioengineering facilities are located on 220,000 square feet
of land and the HSPL facilities are located on 490,000 square feet of land.
According to Chinese law, the government owns all the land in China and
companies or individuals are authorized to use the land only through land use
rights granted by the Chinese government. Both Harbin Bioengineering and HSPL
have long term leases with the Chinese government.

DISTRIBUTION

         Our products are distributed primarily in China, and to a smaller
extent in Hong Kong. In 2005, we continued to expand our distribution channels.
As such, we expanded the distribution of our products in China and established a
new store in Hong Kong to sell our products.

                                       6


<PAGE>

Distribution platform in China
------------------------------

         We sell our products both directly to retail stores, pharmacies and
hospitals and to independent distributors who act as resellers. We maintain 28
regional representative offices throughout China which are primarily responsible
for servicing these distribution platforms and monitoring the markets. During
2005, we continued to penetrate all major provinces and cities in China for our
existing products.


         In 2005, the majority of our product sales, including newly introduced
products, were generated through our sales by independent distributors. Where
appropriate, we leveraged on the synergies between complementary products and
identical distribution channels to accelerate the market penetration of our new
products. For instance, UrinStopper Patch, a new product that we launched in
2005, was sold through the same distribution channels as Cease-Enuresis Soft
Gel, since both products target the same market.

Specialty store in Hong Kong
----------------------------

         In 2005, we established our specialty store in Hong Kong to sell our
PBN products and to serve as a showcase of our products for the Asian markets.
Furthermore, in order to accelerate our product penetration in the Hong Kong
market, we established contractual relationships with three chain stores in Hong
Kong that we sell our protein peptide products series to directly. These
contracts are renewable every year.

COMPETITION

         All of our PBP products and PBN products face competition in China and
Hong Kong.

Competition faced by PBP products
---------------------------------

         We compete with various companies, many of which produce and market
products similar to our PBP products. In 2005, some of our major competitors
included:

         o    Jianpizhiyi Tablet produced by Shangdong Zhiling Pharmaceutical
              Company Jianpizhiyi Tablet is a PBP product functionally similar
              to our Cease Enuresis Soft Gel.

         o    Yeniaoying produced by Tianjin Zhongxin Company, a PBP product
              functionally similar to our Cease Enuresis Soft Gel.

         o    Shengjiyiniaokang produced by Shanxi Dingxing Healthcare
              Scientific Limited, a PBP product functionally similar to our
              Cease Enuresis Soft Gel.

         o    Suoquan pill produced by Jilin Tianguang Pharmaceutical Limited, a
              PBP product functionally similar to our Cease Enuresis Soft Gel.

         o    Shuanghuanglian Injection Powder produced by Harbin Pharmaceutical
              Group No. 2 Chinese (traditional) Medicine Plant, a PBP product
              functionally similar to our Shuanghuanglian Lyophilized Injection
              Powder produced by HSPL.

                                       7


<PAGE>

Competition faced by PBN products
---------------------------------

         During 2005, the following were our competitors in the Chinese market
that produced and marketed similar PBN products:

         o    Leneng Peptide Powder, produced by Leneng Bioengineering Company.

         o    Soybean Protein Peptide produced by Harbin High - Tech Company
              Limited.

         In 2005, our main competitor in PBN products was Harbin High - Tech
Company Limited.

INTELLECTUAL PROPERTY

         We regard our service marks, trademarks, trade secrets, patents and
similar intellectual property as critical to our success. We rely on patent,
trademark and trade secret law, as well as confidentiality and license
agreements with certain of our employees, customers and others to protect our
proprietary rights.

         Pursuant to the PRC State Protection law, certain herbal medicine
products which have received China State FDA approval, have automatic protected
intellectual property rights for a seven-year period from the date of grant of
such approval. An application can subsequently be made to extend such protection
for up to three consecutive seven-year periods. Once this protection period has
expired, a company may apply for patent protection.

         To a large extent, the Company relies on such State Protection law to
protect its intellectual property rights with respect to such products. In
addition, as of December 31, 2005, the Company owned a total of six patents,
primarily relating to its soybean peptide product series and related
manufacturing techniques.

         In 2005, Harbin Bioengineering registered 11 trademarks with the
Trademark Bureau of China Industrial and Commercial Administration Authority and
our Hong Kong branch registered 9 trademarks with the Hong Kong Trademark
Bureau. In addition, AOB obtained a new trademark, "Polar Light," owned by HSPL
due to our acquisition of HSPL in 2004.

GOVERNMENT REGULATION

Regulatory Environment
----------------------

         Our principal sales market is in the People's Republic of China. We are
subject to the Pharmaceutical Administrative Law, which governs the licensing,
manufacturing, marketing and distribution of pharmaceutical products in China
and sets penalties for violations. We are also subject to the Food Sanitation
Law, which provides the food sanitation standards.

         The governmental approval process in the PRC for a newly developed
health product is as follows: a product sample is sent to a clinical testing
agent designated by the Ministry of Health, which conducts extensive clinical
testing and examinations to verify if the product has the specified functions as
stated by the company producing the product. A report will be issued by the
clinical testing agent confirming or negating such functions. It takes
approximately six months to one year for the report to be issued. This report
must then be submitted to a provincial Health Management Commission for
approval. A letter of approval issued by such commission will then be submitted
to the Ministry of Health for the issuance of a certificate that authorizes the


                                       8


<PAGE>

sales and marketing of the product in the PRC. The whole process generally takes
one and a half to two years. Whereas approval for PBP products requires the
approval of the State FDA, PBN products require approval from state or local
governments prior to manufacturing and sales. In addition, all of our products
must be manufactured in compliance with Good Manufacturing Practices (GMP).

         Because Harbin Bioengineering is a wholly-owned foreign enterprise, we
are subject to the law on foreign investment enterprises in China, and the
foreign company provisions of the Company Law of China, which governs the
conduct of our wholly owned subsidiaries and their respective officers and
directors. Additionally, we are also subject to varying degrees of regulations
including permit requirements by the Chinese government.

Compliance with Environmental Law
---------------------------------

         We comply with the Environmental Protection Law of China as well as
applicable local regulations. In addition to statutory and regulatory
compliance, we actively ensure the environmental sustainability of our
operations. Our costs of compliance with applicable environmental laws are
minimal, since the manufacturing of herbal-based pharmaceutical, soybean protein
peptides products and health supplement products generate little damage and
pollution to the environment. Penalties would be levied upon us if we fail to
adhere to and maintain certain standards. Such failure has not occurred in the
past, and we generally do not anticipate that it will occur in the future, but
no assurance can be given in this regard.

RESEARCH AND DEVELOPMENT

         We currently perform all of our own research and development
activities. We have our own research, development and laboratory facilities
located at our Harbin headquarters and retain our own professional research and
development team. In the past, we entered into joint research and development
agreements with outside research institutes in China; however, all of these
agreements have expired. Notwithstanding, in the future, we may enter into
agreements for research and development activities with third parties.

                                       9


<PAGE>

BUSINESS DEVELOPMENT AND ACQUISITIONS

         We have set a two-pronged strategy for our business development,
organic growth and acquisitions. We plan to continue this strategy in 2006.

Business Development through Organic Growth
-------------------------------------------

         In 2006, Harbin Bioengineering plans to achieve the following:

         o    Expand our product lines;

         o    Expedite the expansion of our distribution channels throughout
              China to strengthen our ability to distribute our products;

         o    Lay the foundation so that we can ultimately penetrate into new
              international markets, e.g. Asian markets and the US market;

         o    Increase our brand awareness; and

         o    Continue to educate the market on the acceptance of our products
              to increase consumer awareness of our products.

         In 2006, HSPL plans to continue to consolidate the product position of
Shuanghuanglian Lyophilized Injection Power in the Chinese market and
concentrate on expanding its market share.

Business Development through Acquisitions
-----------------------------------------

         In 2004, we successfully acquired HSPL, as our wholly owned subsidiary.
In 2005, we focused on consolidating HSPL's operations into our operations. In
2006, we expect to explore new acquisition targets in China which have business
synergy with our existing operations.

ITEM 2.  DESCRIPTION OF PROPERTY

         The Harbin Bioengineering facilities are located on 220,000 square feet
of land and the HSPL facilities are located on 490,000 square feet of land.
According to Chinese law, the government owns all the land in China and
companies or individuals are authorized to use the land only through land use
rights granted by the Chinese government. Both Harbin Bioengineering and HSPL
have long term leases with the Chinese government affording them the use of this
land through 2039. We own GMP certified buildings located on each of those
properties which HSPL and Harbin Bioengineering each use for manufacturing,
office, warehouse and staff facilities.

         In addition to the above, we lease 28 sales representative offices
throughout China and we lease offices in Hong Kong and New York.

         There is no lien or encumbrance on any of our properties and, we
currently do not have any intention to make large scale improvements or
developments with respect to these properties other than construction already in
progress at our Harbin Bioengineering facilities with respect to a new
production facility for our protein peptide product series.

                                       10


<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

         We are currently not involved in any litigation that we believe could
have a material adverse effect on our financial condition or results of
operations. 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 our executive officers or
any of our subsidiaries, threatened against or affecting our company, our common
stock, any of our subsidiaries or of our companies or our Company's
subsidiaries' officers or directors in their capacities as such, in which an
adverse decision could have a material adverse effect.

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

         A preliminary and a definitive information statement pursuant to
Section 14C of the Securities Exchange Act of 1934, as amended, were filed with
the Securities and Exchange Commission on December 7, 2005 and December 30,
2005, respectively. The information statements disclosed the written consent, in
lieu of a meeting of stockholders, from the holders of 51.6% of the outstanding
voting stock to approve an amendment to our Articles of Incorporation increasing
the number of shares of the common stock authorized from 60,000,000 shares to
150,000,000 shares and the issuance in a private placement transaction, at below
market price, of greater than 19.99% of shares of the common stock outstanding
immediately prior to the initial issuance of shares in the private placement.
The private placement was completed on December 8, 2005.

                                       11


<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Our common stock was initially quoted on the Over-the-Counter Bulletin
Board ("OTCBB") under the symbol "IGAI." From February 13, 2002 to July 17,
2005, our common stock was quoted on the OTCBB under the symbol "AOBO.OB." On
July 18, 2005 and November 11, 2005, our common stock commenced trading on the
American Stock Exchange and Archipelago Exchange, respectively, under the ticker
symbol "AOB."

         The following table shows the range of high and low bid quotations
reported by the OTCBB in each fiscal quarter from January 1, 2004 to July 17,
2005 and the high and low sales prices by AMEX from July 18, 2005 to December
31, 2005, and the subsequent interim period. The Over-the-Counter Bulletin Board
quotations may not represent actual transactions.

         YEAR       PERIOD                                      HIGH      LOW
         ----       ------                                      ----      ---

         2004       First Quarter                              4.900     3.080
                    Second Quarter                             3.430     1.750
                    Third Quarter                              1.780     1.250
                    Fourth Quarter                             1.760     1.230

         2005       First Quarter                              1.530     1.280
                    Second Quarter                             1.780     1.080
                    Third Quarter                              5.650     1.720
                    Fourth Quarter                             7.340     4.150

         2006       First Quarter (through March 28, 2006)     5.750     4.410

STOCKHOLDERS AND DIVIDENDS

         As of March 24, 2006, there were approximately 729 record holders of
our common stock. As of March 30, 2006, we have not paid any cash dividends on
shares of our common stock and do not plan to do so. We currently plan to retain
future earnings to fund the development and growth of our business.

ISSUANCE OF UNREGISTERED SHARES

         On October 27, 2005, we issued 22,026 shares of common stock to Cosimo
J. Patti pursuant to the Service Agreement with Mr. Patti, as further described
herein.

                                       12


<PAGE>

ITEM 6.  MANAGEMENT DISCUSSION AND ANALYSIS

         This annual report contains forward-looking statements within the
meaning of the federal securities laws. These include statements about our
expectations, beliefs, intentions or strategies for the future, which we
indicate by words or phrases such as "anticipate," "expect," "intend," "plan,"
"will," "we believe," "AOB believes," "management believes" and similar
language. The forward-looking statements are based on the current expectations
of AOB and are subject to certain risks, uncertainties and assumptions,
including those set forth in the discussion under "Description of Business" and
"Management's Discussion and Analysis or Plan of Operation," including the
discussion under "Risk Factors" thereunder. The actual results may differ
materially from results anticipated in these forward-looking statements. We base
the forward-looking statements on information currently available to us, and we
assume no obligation to update them.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         We have identified one policy area as critical to the understanding of
our consolidated financial statements. The preparation of our consolidated
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of sales and expenses during the reporting
periods. With respect to net realizable value of the Company's accounts
receivable and inventories, significant estimation judgments are made and actual
results could differ materially from these estimates.

         In 2005, the management of the Company provided an allowance against
its accounts receivable to reflect management's expectation on the
collectibility of aged accounts receivable. Management's estimation of the
reserve on accounts receivable at December 31, 2005 was based on the current
facts that there are aged accounts receivable. In making their judgment,
management has assessed customers' ability to continue to pay their outstanding
invoices timely, and whether their financial position will deteriorate
significantly in the future, which would result in their inability to pay their
debts to the Company. At December 31, 2005, the Company provided a $266,248
reserve against accounts receivable pertaining to the HSPL subsidiary
operations.

         At December 31, 2005, the Company provided an allowance against its
inventories amounting to $842,112, of which $107,364 was provided against the
inventories of Harbin Bioengineering and $734,748 was provided against the
inventories of HSPL. Management's estimation that a provision is needed is based
on the current facts that there are potential impairments on the current
carrying value of the inventories due to potential obsolescence as a result of
aged inventories. The Company might not be able to realize the existing carrying
value of the inventories. In making their judgment, management made their
estimations of the potential impairments based on the demand for their products
in the future and the trends of turnover of the inventories.

         While the Company's management currently believes that there is little
likelihood that the actual results of their current estimates will differ
materially from such current estimates, if customer demand for its products
decreases significantly in the near future, or if the financial position of its
customers deteriorates in the near future, the Company could realize significant
write downs for slow moving inventories or uncollectible accounts receivable.

         We believe the following is among the most critical accounting policies
that impact our consolidated financial statements. We suggest that our
significant accounting policies, as described in our consolidated financial
statements in the Summary of Significant Accounting Policies, be read in
conjunction with this Management's Discussion and Analysis of Financial
Condition and Results of Operations.

                                       13


<PAGE>

         We recognize revenue in accordance with Staff Accounting Bulletin
("SAB") No. 104. All of the following criteria must exist in order for us to
recognize revenue:

         1. Persuasive evidence of an arrangement exists;

         2. Delivery has occurred or services have been rendered;

         3. The seller's price to the buyer is fixed or determinable; and

         4. Collectibility is reasonably assured.

         The majority of the Company's revenue results from sales contracts with
distributors and revenues are generated upon the shipment of goods. The
Company's pricing structure is fixed and there are no rebate or discount
programs. Management conducts credit background checks for new customers as a
means to reduce the subjectivity of assuring collectibility. Based on these
factors, the Company believes that it can apply the provisions of SAB 104 with
minimal subjectivity.

         We established a subsidiary in Hong Kong with a specialty store to sell
our products. Our subsidiary in Hong Kong also sells certain products to certain
customers on consignment. We record revenue for consignment transactions when
the consignee sells the product to the end user.

RESULTS OF OPERATIONS

         The following table sets forth selected statement of income data as a
percentage of revenues for the years indicated.

                                                    YEAR ENDED        YEAR ENDED
                                                  DECEMBER 31,      DECEMBER 31,
                                                          2005              2004
                                                  ------------      ------------
      Revenues                                         100.00%           100.00%
      Cost of Goods Sold                                35.82%            35.25%
      Gross Profit                                      64.18%            64.75%
      Selling and Distribution Expenses                  5.88%             7.47%
      Advertising                                        9.57%             9.16%
      General and Administrative Expenses               12.93%            14.23%
      Depreciation and Amortization                      2.29%             2.37%
      Interest Expense, Net                              0.92%             0.32%
      Income Taxes                                       8.04%             6.93%
      Net Income                                        24.53%            24.31%


                                       14


<PAGE>

YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004

Revenues, Cost of Goods Sold and Gross Profit
---------------------------------------------

         Revenues for the year ended December 31, 2005 were $54,732,557, an
increase of $22,765,630 from $31,966,927 for the year ended December 31, 2004.
The increases in sales of our two main categories of products were as follows:

                                                                    Increase /
     Product                     2005               2004            (Decrease)
     ------------------     --------------     --------------     --------------

     PBP products           $  34,184,853      $  15,941,246      $  18,243,607
     PBN products              20,547,704         16,025,681          4,522,023

                            --------------     --------------     --------------
     TOTAL                  $  54,732,557      $  31,966,927      $  22,765,630
                            ==============     ==============     ==============

         In 2005, the sales of our PBP products increased by $18,243,607, or
114% as compared to 2004. This was mainly due to an increase in our sales of
Cease Enuresis Soft Gel by 52% from $6,628,210 in 2004 to $10,073,289 in 2005.
Our continued marketing efforts on Cease Enuresis Soft Gel together with the
growing demand of such product in the Chinese market resulted in increased sales
of our Cease Enuresis Soft Gel. The sales of our Shuanghuanglian Injection
Powder produced by HSPL also increased from $4,985,768 in 2004 to $16,288,193 in
2005 by 227%. Such increase was due to the fact that in 2004, there were only 3
months of sales of Shuanghuanglian Injection Powder consolidated into the sales
performance of our Company, while in 2005 we consolidated 12 months of sales
total of Shuanghuanglian Injection Powder into our sales revenue. UrinStopper
Patch, our new product in 2005, also recorded sales revenue of $1,845,130 that
did not happen in 2004. Compared to 2004, the sales revenues from other PBP
products also increased by $1,650,973 in 2005.

         The sales revenue from our PBN products increased to $20,547,704 in
2005 from $16,025,681 in 2004, representing a growth of 28%. During 2005, our
sales of Protein Peptide products series increased by 32% from $11,423,092 in
2004 to $15,061,386 in 2005. Such increase was mainly attributable to increased
sales of peptide coffee and peptide tablets of $1,235,011 and $2,321,443,
respectively, in 2005 as compared to 2004. Our sales of Compound bio-functional
beverage series also increased from $2,616,866 in 2004 to $3,464,314 in 2005,
representing an increase of 32%. Such increase resulted from our marketing
efforts on such products. Other PBN products recorded an increase in sales from
$1,986,158 in 2004 to $2,022,004 in 2005, or an increase of $35,846.

         Cost of goods sold for the year ended December 31, 2005 were
$19,607,240, an increase of $8,339,593 from $11,267,647 for the year ended
December 31, 2004. The increases by product categories were as follows:

                                                                    Increase /
     Product                     2005               2004            (Decrease)
     ------------------     --------------      -------------     --------------

     PBP products           $  12,483,535       $  5,887,657      $   6,595,878
     PBN products               7,123,705          5,379,990          1,743,715

                            --------------      -------------     --------------
     TOTAL                  $  19,607,240       $ 11,267,647      $   8,339,593
                            ==============      =============     ==============

                                       15


<PAGE>

         The cost of goods sold of PBP products increased by $6,595,878, or 112%
in 2005 compared to 2004. This increase resulted from our 114% increase in sales
revenue from our PBP products in 2005 compared to 2004.

         The cost of goods sold of PBN products increased by $1,743,715, or 32%
in 2005 compared to 2004. This increase resulted from our 28% increase in sales
revenue from our PBN products in 2005 compared to 2004. The increase in cost of
sales was higher in proportion than the increase in sales revenue because the
profit margin of PBN products decreased from 65.3% in 2004 to 65.4% in 2005. The
decrease in profit margin was mainly because of the increase in the cost of raw
materials for the peptide protein products.

         Our overall gross profit margin reduced from 64.8% in 2004 to 64.2% in
2005. This was mainly due to the fact that the gross profit margin of PBN
products decreased from 66.4% in 2004 to 65.4% in 2005.

Selling and Distribution Expenses
---------------------------------


         Selling and marketing expenses increased from $2,387,805 in 2004 to
$3,216,545 in 2005, representing a 35% increase. The detail of our sales and
distribution expenses were as follows:

                                                                       Increase/
                                             2005          2004       (Decrease)
                                          -----------   -----------   ----------

       Payroll                            $  883,919    $  492,290          80%
       Transportation                        925,982       615,808          50%
       Promotional materials and fees        504,672       431,161          17%
       Offices and sundries                  483,502       745,405         (35%)
       AOB Hong Kong marketing                55,269         9,240         498%
       AOB US marketing                        9,448         1,635         478%
       Other                                 353,753        92,266         283%

                                          -----------   -----------
                TOTAL                     $3,216,545    $2,387,805          35%
                                          ===========   ===========

         Our increase in selling and distribution expenses in 2005 against 2004
was as a result of increased selling and distribution expenses in our AOB US,
AOB Hong Kong, Harbin Bioengineering and HSPL operations.

AOB US and AOB Hong Kong Operations
-----------------------------------

         In 2005, our sales and distribution expenses for AOB Hong Kong and AOB
US increased by 498% and 478%, respectively. This was because AOB Hong Kong
marketing activities and AOB US marketing activities reached full operational
levels in August, 2004 and October, 2004, respectively. As a result, the
financial results of 2004 did not reflect full year operations in Hong Kong and
US while the financial results of 2005 reflected the full year operations in
these 2 regions.

                                       16


<PAGE>

Harbin Bioengineering and HSPL Operations
-----------------------------------------

         For the year ended 2005, the detailed breakdowns of our sales and
distribution expenses incurred by Harbin Bioengineering and HSPL were as
follows:


PAYROLL                                                                Increase/
                                             2005          2004       (Decrease)
                                          -----------   -----------   ----------

Harbin Bioengineering                     $  649,083    $  470,100          38%
HSPL                                         234,836        22,190         958%
                                          -----------   -----------

TOTAL                                     $  883,919    $  492,290          80%
                                          ===========   ===========

         In 2005, our payroll expenses for Harbin Bioengineering increased by
38% due to the increase in the number of employees. HSPL increased its payroll
expenses by 958% in 2005 compared to 2004. We completed our acquisition of HSPL
in the fourth quarter of 2004 and as a result, the financial statements of our
Company reflected only approximately 3 months' operating results of HSPL.
However, we consolidated a full year of operations of HSPL in 2005. Therefore,
expenses increased in 2005 as compared to 2004.

                                                                       Increase/
                                             2005          2004       (Decrease)
                                          -----------   -----------   ----------

Transportation
         Harbin Bioengineering            $  705,605    $  609,901          16%
         HSPL                                220,377         5,907        3631%

Promotional materials and fees
         Harbin Bioengineering               371,604       423,932         (12%)
         HSPL                                133,068         7,229        1741%


Offices and sundries
         Harbin Bioengineering               315,260       724,013         (56%)
         HSPL                                168,242        21,392         686%

Other
         Harbin Bioengineering                56,847        71,792         (21%)
         HSPL                                296,906        20,474        1350%

                                          -----------   -----------
                       TOTAL non payroll  $2,267,909    $1,884,640          20%
                                          ===========   ===========


         Transportation expenses for Harbin Bioengineering increased by 16% in
2005 against 2004 as a result of increased sales revenues in 2005. HSPL also
increased its transportation expenses by 3631%. This was because we completed
our acquisition of HSPL in the fourth quarter of 2004 and as a result, the
financials of our Company reflected only approximately 3 months' operating
results of HSPL. However, we consolidated full year operation results of HSPL in
2005. Therefore, expenses increased in 2005 as compared to 2004.

                                       17


<PAGE>

         Harbin Bioengineering reduced its promotional materials expenses by 12%
in 2005 compared to 2004. This was because in 2004 our spending on promotional
materials covered a portion of our requirements in 2005 and as a result, our
spending in 2005 was reduced as compared to 2004. HSPL, however, increased its
expenses in promotional materials by 1741% in 2005 as compared to 2004. We
completed our acquisition of HSPL in the fourth quarter of 2004 and as a result,
the financials of our Company reflected only approximately 3 months' operating
results of HSPL. However, we consolidated full year operation results of HSPL in
2005. Therefore, expenses increased in 2005 as compared to 2004.

         Harbin Bioengineering reduced its office sundries expenses by 56% in
2005 compared to 2004. This was because in 2004 our spending on office sundries
covered a portion of our requirements in 2005 and as a result, our spending in
2005 was reduced as compared to 2004. HSPL, however, increased its expenses in
office sundries by 686% in 2005 as compared to 2004. We completed our
acquisition of HSPL in the fourth quarter of 2004 and as a result, the
financials of our Company reflected only approximately 3 months' operating
results of HSPL. However, we consolidated full year operation results of HSPL in
2005. Therefore, expenses increased in 2005 as compared to 2004.

         As a result of the increase in selling and distribution expenses in
HSPL, our overall selling and distribution expenses increased by 35% in 2005 as
compared to 2004.

Advertising Expenses
--------------------

         Advertising expenses increased by $2,311,557, from $2,926,629 in 2004
to $5,238,186 in 2005. The increase in advertising expenses resulted from an
increase in advertising and promotional efforts in 2005 to promote the Company's
Protein Peptide product series and new products of Urinstopper Capsule and
UrinStopper Patch to increase the sales revenues of our PBP and PBN products.

General and Administrative Expenses
-----------------------------------

         General and administrative expenses increased from $4,582,388 in 2004
to $7,076,139 in 2005, or a 54% increase. The details of general and
administrative expenses were as follows:

                                                                       Increase/
                                             2005         2004        (Decrease)
                                          ----------   ----------     ----------
     Payroll                              $  897,422   $  536,099           67%
     Directors' remuneration                 442,000      275,250           61%
     Stock compensation - directors          327,509       32,000          923%
     Stock compensation - consultants        934,032    1,072,790          (13%)
     Office rental                           184,570       23,758          677%
     Professional fees                     1,359,319      498,065          173%
     Office sundries                         177,426      302,855          (41%)
     Transportation                           66,337       29,567          124%
     Vehicles                                192,057      193,118           (1%)
     Utilities                               175,948       89,908           96%
     Research                                537,795      309,302           74%
     Entertainment                           170,206      282,854          (40%)
     Provision for bad debts                 266,248           --          100%
     Provision for obsolete inventories      842,112           --          100%
     Miscellaneous                           503,158      936,822          (46%)
                                          ----------   ----------
         TOTAL                            $7,076,139   $4,582,388           54%
                                          ==========   ==========


                                       18


<PAGE>

         Our increase in general and administrative expenses in 2005 against
2004 was as a result of increased general and administrative expenses in our AOB
US, AOB Hong Kong, Harbin Bioengineering and HSPL operations.

AOB US and AOB Hong Kong Operations
------------------------------------

         For the year ended 2005, the detailed breakdowns of our general and
administrative expenses incurred by AOB US and AOB Hong Kong offices were as
follows:

                                                                      Increase/
                                                2005        2004      (Decrease)
                                            ----------   ----------   ----------

AOB Hong Kong
         Payroll                            $  153,318   $  115,385         33%
         Office rental                         128,983       14,608        783%
         Professional fees                      54,624           --        100%
         Office sundries                        18,815        3,900        382%
         Other                                  81,773       14,097        480%
                                            ----------   ----------
         TOTAL AOB Hong Kong                $  437,513   $  147,990        196%
                                            ==========   ==========

AOB US
         Payroll                            $   94,522   $    6,874       1275%
         Directors' remuneration               442,000      275,250         61%
         Stock compensation - directors        327,509       32,000        923%
         Stock compensation - consultants      934,032    1,072,790        (13%)
         Office rental                          55,587        9,150        508%
         Professional fees                   1,304,695      498,065        162%
         Office sundries                        19,200        5,850        228%
         Other                                  76,520      205,975        (63%)
                                            ----------   ----------
         TOTAL AOB US                       $3,254,065   $2,105,954         55%
                                            ==========   ==========

         For the year ended 2005, general and administrative expenses incurred
in the AOB Hong Kong office increased by 196% as compared to 2004. This was
because AOB Hong Kong commenced full scale operations in approximately August
2004 and our general and administrative expenses in 2004 only reflected
approximately 4 months of full scale operations while in 2005 a full year of
operations were incorporated. As a result, there were increase in expenses in
payroll, office rental, professional fees, office sundries and other expense in
2005 as compared to 2004.

         For the year ended 2005, general and administrative expenses incurred
in the AOB US office increased by 55% as compared to 2004. This was because AOB
US commenced full scale operations in approximately October 2004 and our general
and administrative expenses in 2004 only reflected approximately 3 months of
full scale operations, while in 2005 full year of operations were incorporated.
As a result, there were increases in expenses in payroll, office rental, office
sundries and other expenses in 2005 as compared to 2004. Director remuneration
and stock compensation for directors increased by 61% and 923%, respectively, as
a result of the appointment of 2 new independent directors in 2005. Stock based
compensation for consultants, however, decreased by 13% because some of the
expenses for consultants were fully amortized in 2004 and, as a result, such
expenses did not recur in 2005. Professional fees expenses for 2005 increased by
162% as compared to 2004 as a result of an increase in legal and audit services
needs for our listing on AMEX and $60.0 million Private Placement.

                                       19


<PAGE>

Harbin Bioengineering and HSPL Operations
-----------------------------------------

         For the years ended December 31, 2005 and 2004, the detailed breakdowns
of our general and administrative expenses incurred by Harbin Bioengineering and
HSPL were as follows:

PAYROLL:                                                              Increase/
                                             2005         2004       (Decrease)
                                          ----------   ----------    ----------
Payroll
         Harbin Bioengineering            $  486,918   $  378,003        29%
         HSPL                                162,664       35,837       354%
                                          ----------   ----------
TOTAL                                     $  649,582   $  413,840        57%
                                          ==========   ==========


         For the year ended 2005, our payroll expenses in Harbin Bioengineering
increased by 29% as a result of an increased number of employees in 2005 against
2004. Our payroll expenses in HSPL also increased by 354%. This was because we
completed our acquisition of HSPL in the fourth quarter of 2004 and, as a
result, the financials of our Company in 2004 reflected only approximately 3
months' operating results of HSPL. However, we consolidated a full year of
operations of HSPL in 2005. Therefore, expenses increased in 2005 as compared to
2004.

         The breakdown for our non-payroll expenses in Harbin Bioengineering and
HSPL were as follow:


NON - PAYROLL:                                                        Increase/
                                             2005         2004       (Decrease)
                                          ----------   ----------    ----------

Research
         Harbin Bioengineering            $  515,576   $  276,562          86%
         HSPL                                 22,219       32,740         (32%)
                                          ----------   ----------
TOTAL                                     $  537,795   $  309,302          74%
                                          ==========   ==========

Office sundries
         Harbin Bioengineering            $  126,975   $  290,802         (56%)
         HSPL                                 12,436        2,303         440%
                                          ----------   ----------
TOTAL                                     $  139,411   $  293,105         (52%)
                                          ==========   ==========

Provision for bad debts
         Harbin Bioengineering            $       --   $       --          --
         HSPL                                266,248           --         100%
                                          ----------   ----------
TOTAL                                     $  266,248   $       --         100%
                                          ==========   ==========

Provision for obsolete inventories
         Harbin Bioengineering            $  107,364   $       --         100%
         HSPL                                734,748           --         100%
                                          ----------   ----------
TOTAL                                     $  842,112   $       --         100%
                                          ==========   ==========

Other
         Harbin Bioengineering            $  619,365   $  991,714         (38%)
         HSPL                                330,048      320,483           3%
                                          ----------   ----------
TOTAL                                     $  949,413   $1,312,197         (28%)
                                          ==========   ==========

                                       20


<PAGE>

         In 2005, Harbin Bioengineering increased its research expenses by 86%
as compared to 2004. This was because Harbin Bioengineering devoted additional
resources to research on new products of UrinStopper Capsule and UrinStopper
Patch and, as a result of such research effort, Harbin Bioengineering
successfully launched new products to the market in 2005. HSPL also incurred
research expenses of $22,219 while there was no research expense in 2004. Such
research expenses were incurred on improving Shuanghuanglian Injection Powder.
There were no research expenses recorded in 2004 because we completed our
acquisition of HSPL in the fourth quarter of 2004 and, as a result, our
financials in 2004 reflected only approximately 3 months' operating results of
HSPL.

         In 2005, we successfully reduced our expenses in Harbin Bioengineering
in office sundries by 56% as a result of tightening our cost controls over
expenses. In 2004, we stocked-up office supplies that were consumed in 2005
which enabled us to reduce our office sundries expenses in 2005. HSPL, however,
increased its sundries expenses by 440% in 2005 compared to 2004. We completed
our acquisition of HSPL in the fourth quarter of 2004 and as a result, the
financials of our Company in 2004 reflected only approximately 3 months'
operating results of HSPL. However, we consolidated a full year of operating
results of HSPL in 2005. Therefore, expenses increased in 2005 as compared to
2004.

         HSPL, provided a provision for bad debts of $266,248 in 2005 based on
the fact that there were aged accounts receivable in HSPL. In 2004 no provision
for bad debt expense was recorded because there was no aged accounts receivable
in HSPL as of the end of 2004.

         In 2005, Harbin Bioengineering and HSPL provided reserves for obsolete
inventories of $107,364 and $734,748, respectively. Provisions were based on the
fact that there were potential impairments on the current carrying value of the
inventories due to potential obsolescence as a result of aged inventories. In
2004 no such reserves were made in either of Harbin Bioengineering or HSPL.

         Harbin Bioengineering reduced its other expenses by 38% in 2005 as
compared to 2004. In Harbin Bioengineering, we increased transportation expenses
and utility expenses by 124% and 96%, respectively, as a result of the increase
in number of employees. However, in 2005 Harbin Bioengineering successfully
reduced entertainment expenses by 40% as a result of cost reduction efforts.
Also, we tightened our control on entertainment expenses to reduce cost. Other
expenses in 2005 in Harbin Bioengineering were reduced by 66% as compared to
2004. This was due to one time training expenses of $299,581 incurred in 2004,
which was not repeated during 2005. HSPL's other expenses increased by 3% in
2005 as compared to 2004. We completed our acquisition of HSPL in the fourth
quarter of 2004 and as a result, the financials of our Company in 2004 reflected
only approximately 3 months' operating results of HSPL. However, we consolidated
full year operation results of HSPL in 2005. Therefore, expenses increased in
2005 as compared to 2004.

Depreciation and Amortization
-----------------------------

         Depreciation and amortization of plant and equipment increased $496,778
in 2005 compared to 2004. The increase was mainly due to the increase in the
assets in Harbin Bioengineering as a result of the transfer of $5.3 million
worth of assets from construction in progress and also from the HSPL acquisition
that increased the assets of our Company.

Income Taxes
------------

         Income tax expense in 2005 was $4,400,870 as compared to $2,216,626 in
2004. The increase was due to the increase in pre-tax income of Harbin
Bioengineering and the contribution of profit from HSPL, which could not be
offset against the losses of AOB Hong Kong and AOB US operations.

                                       21


<PAGE>

         The income tax was provided at 15% of income before tax at the Harbin
Bioengineering level and 33% at the HSPL level in China. The effective tax rate
applied for tax expenses in the current period, however, was 25%. This was
because there were other operating expenses incurred at the holding company
level as well as at AOB HK and at AOB US, and these expenses could not enjoy tax
benefits in China and so the effective income tax rate provided for the Company
was 25%.

LIQUIDITY AND CAPITAL RESOURCES

Cash
----

         Our cash balance increased by $46,127,900 to $57,532,049 at December
31, 2005, as compared to $11,404,149 at December 31, 2004. The increase was
mainly attributable to the completion of our private placement funding on
November 23, 2004 with net proceeds of approximately $31,470,000 and another
$10,951,500 cash proceeds from the exercise of warrants that were issued with
our private placement. Cash flow from operations in 2005 amounted to
approximately $11,616,086, being offset by cash spent in the construction of our
new protein peptide manufacturing facilities.

         Our cash flow generated from operations amounted to $11,616,086 in
2005. Our account receivables and advances to suppliers increased by $3,697,768
and $3,063,844, respectively. Expanded scale of operations, increase in sales
revenues and consolidation of HSPL operations in 2005 resulted in additional
demand on working capital. Therefore, we experienced increased account
receivables and advances to suppliers to support our increased sales revenues
and production activities. Also, expansion in our scale of operations resulted
in increases in accounts payable, customer deposits and other payables,
resulting in $1,599,981 in cash flow. Compared to 2004, our cash flow generated
from operations in 2005 increased by $3,252,845 and this increase was mainly due
to an increase in our net income for 2005 compared to 2004.

         Our cash flow used in investing activities amounted to $6,075,681.
During 2005, we used $5,037,514 for the construction of the new protein peptide
facilities. The facilities are expected to be completed in mid 2006. Compared to
2004, our cash flow used in investing activities reduced by $3,012,831 because,
in 2004, we spent $7,070,883 for the acquisition of HSPL.

         Our cash flow generated from financing activities amounted to
$39,663,836. We entered into a $60 million private placement in 2005 and the
private placement was divided into two tranches, the first tranche was completed
on December 8, 2005 and second tranche was completed on January 23, 2006. Net
cash proceeds of $31,470,487 were received from the first tranche of the private
placement. Also, we received net proceeds of $10,951,500 from the exercise of
warrants associated with the private placement completed on November 23, 2004.
In 2005, we also paid $1,342,861 and $1,404,522 to settle our short - term bank
loans and shareholders' loan, respectively, to reduce our liabilities in view of
sufficient cash flow.

         On January 23, 2006, we received net proceeds of $25,036,290 in
connection with the second tranche of the private placement.

Working Capital
---------------

         Our working capital increased by $52,010,439 to $66,813,509 at December
31, 2005, as compared to $14,803,070 at December 31, 2004. The increase in
working capital at December 31, 2005 was the result of our increase in cash of
$46,127,900, accounts receivable of $3,431,519 and advance to suppliers of
$2,975,731.

                                       22


<PAGE>

         The Company currently generates its cash flow through operations which
it believes will be sufficient to sustain operations for at least the next
twelve months. In 2006, we intend to continue to work to expand our product
lines and product mix, as well as our product distribution throughout China. We
plan to use our working capital for such purposes. In addition, we plan to
explore one or more acquisition targets in China which have business synergy
with our existing operations. To the extent we are successful in identifying any
such acquisition target and negotiating the terms of such acquisition, and the
purchase price includes a cash component, we plan to use our working capital to
finance such acquisition costs.

RECENT ACCOUNTING PRONOUNCEMENTS

         In December 2004, the Financial Accounting Standards Board ("FASB")
issued a revised SFAS No. 123, Accounting for Stock-Based Compensation, which
supersedes APB opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. This statement requires a public entity to
recognize and measure the cost of employee services it receives in exchange for
an award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). These costs will be recognized over the period during
which an employee is required to provide service in exchange for the award - the
requisite service period (usually the vesting period). This statement also
establishes the standards for the accounting treatment of these share-based
payment transactions in which an entity exchanges its equity instruments for
goods or services. It addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments. This statement shall be effective the first interim or
annual reporting period that begins after December 15, 2005 for small business
public entities and nonpublic companies.

         We believe that the implementation of this new pronouncement will not
have any affect on our 2006 consolidated financial statements.

ISSUANCE OF COMMON STOCK

         See PART II Item 5 for issuance of common stock for the year ended
2005.

INFLATION

         Inflation has not had a material impact on our business.

CURRENCY EXCHANGE FLUCTUATIONS

         All of the Company's revenues and the majority of the expenses in 2005
were denominated primarily in Renminbi ("RMB"), the currency of China, and were
converted into US dollars at the exchange rate of 8.1734 to 1. In the third
quarter of 2005, the Renminbi began to rise against the US dollar. As a result
of the appreciation of RMBs, we recognized a foreign currency translation gain
of $1,429,279. There can be no assurance that RMB-to-US dollar exchange rates
will remain stable. A devaluation of RMB relative to the US dollar would
adversely affect our business, financial condition and results of operations. We
do not engage in currency hedging.

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<PAGE>

RISK FACTORS

         Our business, financial condition, operating results and prospects are
subject to the following risks. Additional risks and uncertainties not presently
foreseeable to us may also impair our business operations. If any of the
following risks actually occur, our business, financial condition or operating
results could be materially or adversely affected. In such case, the trading
price of our common stock could decline, and our stockholders may lose all or
part of their investment in our common stock.

RISKS RELATING TO OUR COMPANY

WE NEED TO MANAGE GROWTH IN OPERATIONS TO MAXIMIZE OUR POTENTIAL GROWTH AND
ACHIEVE OUR EXPECTED REVENUES.

         In order to maximize potential growth in our current and potential
markets, we believe that we must expand our manufacturing and marketing
operations. This expansion will place a significant strain on our management and
our operational, accounting, and information systems. We expect that we will
need to continue to improve our financial controls, operating procedures, and
management information systems. We will also need to effectively train,
motivate, and manage our employees. Our failure to manage our growth could
disrupt our operations and ultimately prevent us from generating the revenues we
expect.

WE CANNOT ASSURE YOU THAT OUR ORGANIC GROWTH STRATEGY WILL BE SUCCESSFUL.

         One of our growth strategies is to grow organically through increasing
the distribution and sales of our products by penetrating existing markets in
China and Hong Kong and entering new geographic markets in China as well as
other parts of Asia and the United States. However, many obstacles to entering
such new markets exist, including, but not limited to, international trade and
tariff barriers, shipping and delivery costs, costs associated with marketing
efforts abroad and maintaining attractive foreign exchange ratios. We cannot,
therefore, assure you that we will be able to successfully overcome such
obstacles and establish our products in any additional markets. Our inability to
implement this organic growth strategy successfully may have a negative impact
on our growth, future financial condition, results of operations or cash flows.

WE CANNOT ASSURE YOU THAT OUR ACQUISITION GROWTH STRATEGY WILL BE SUCCESSFUL.

         In addition to our organic growth strategy, we also expect to grow
through strategic acquisitions. We intend to pursue opportunities to acquire
businesses in China that are complementary or related in product lines and
business structure to us. We may not be able to locate suitable acquisition
candidates at prices that we consider appropriate or to finance acquisitions on
terms that are satisfactory to us. If we do identify an appropriate acquisition
candidate, we may not be able to negotiate successfully the terms of an
acquisition, or, if the acquisition occurs, integrate the acquired business into
our existing business. Acquisitions of businesses or other material operations
may require debt financing or additional equity financing, resulting in leverage
or dilution of ownership. Integration of acquired business operations could
disrupt our business by diverting management away from day-to-day operations.
The difficulties of integration may be increased by the necessity of
coordinating geographically dispersed organizations, integrating personnel with
disparate business backgrounds and combining different corporate cultures. We
also may not be able to maintain key employees or customers of an acquired
business or realize cost efficiencies or synergies or other benefits we
anticipated when selecting our acquisition candidates. In addition, we may need
to record write-downs from future impairments of intangible assets, which could
reduce our future reported earnings. At times, acquisition candidates may have


                                       24


<PAGE>

liabilities or adverse operating issues that we fail to discover through due
diligence prior to the acquisition. In addition to the above, acquisitions in
China, including of state owned businesses, will be required to comply with laws
of the People's Republic of China ("PRC"), to the extent applicable. There can
be no assurance that any given proposed acquisition will be able to comply with
PRC requirements, rules and/or regulations, or that we will successfully obtain
governmental approvals which are necessary to consummate such acquisitions, to
the extent required.

IF WE ARE NOT ABLE TO IMPLEMENT OUR STRATEGIES IN ACHIEVING OUR BUSINESS
OBJECTIVES, OUR BUSINESS OPERATIONS AND FINANCIAL PERFORMANCE MAY BE ADVERSELY
AFFECTED.

         Our business plan is based on circumstances currently prevailing and
the bases and assumptions that certain circumstances will or will not occur, as
well as the inherent risks and uncertainties involved in various stages of
development. However, there is no assurance that we will be successful in
implementing our strategies or that our strategies, even if implemented, will
lead to the successful achievement of our objectives. If we are not able to
successfully implement our strategies, our business operations and financial
performance may be adversely affected.

IF WE NEED ADDITIONAL CAPITAL TO FUND OUR GROWING OPERATIONS, WE MAY NOT BE ABLE
TO OBTAIN SUFFICIENT CAPITAL AND MAY BE FORCED TO LIMIT THE SCOPE OF OUR
OPERATIONS.

         In connection with our growth strategies, we may experience increased
capital needs and accordingly, we may not have sufficient capital to fund our
future operations without additional capital investments. Our capital needs will
depend on numerous factors, including (1) our profitability; (2) the release of
competitive products by our competition; (3) the level of our investment in
research and development; and (4) the amount of our capital expenditures,
including acquisitions. We cannot assure you that we will be able to obtain
capital in the future to meet our needs.

         If we cannot obtain additional funding, we may be required to:

              o    reduce our investments in research and development;
              o    limit our marketing efforts; and
              o    decrease or eliminate capital expenditures.

         Such reductions could materially adversely affect our business and our
ability to compete.

         Even if we do find a source of additional capital, we may not be able
to negotiate terms and conditions for receiving the additional capital that are
acceptable to us. Any future capital investments could dilute or otherwise
materially and adversely affect the holdings or rights of our existing
shareholders. In addition, new equity or convertible debt securities issued by
us to obtain financing could have rights, preferences and privileges senior to
our common stock. We cannot give you any assurance that any additional financing
will be available to us, or if available, will be on terms favorable to us. See
"Management's Discussion and Analysis--Liquidity and Capital Resources."

WE MAY HAVE DIFFICULTY DEFENDING OUR INTELLECTUAL PROPERTY RIGHTS FROM
INFRINGEMENT.

         We regard our service marks, trademarks, trade secrets, patents and
similar intellectual property as critical to our success. We rely on trademark,
patent and trade secret law, as well as confidentiality and license agreements
with certain of our employees, customers and others to protect our proprietary
rights. We have received trademark and patent protection for certain of our
products in the People's Republic of China. No assurance can be given that our
patents and licenses will not be challenged, invalidated, infringed or


                                       25


<PAGE>

circumvented, or that our intellectual property rights will provide competitive
advantage to us. There can be no assurance that we will be able to obtain a
license from a third-party technology that we may need to conduct our business
or that such technology can be licensed at a reasonable cost.

         Presently we sell our products mainly in China, including Hong Kong. To
date, no trademark or patent filings have been made other than in China and Hong
Kong. To the extent that we market our products in other countries, we may have
to take additional action to protect our intellectual property. The measures we
take to protect our proprietary rights may be inadequate and we cannot give you
any assurance that our competitors will not independently develop formulations
and processes that are substantially equivalent or superior to our own or copy
our products.

WE ACQUIRED CERTAIN PATENTS IN 2003 BUT THE OWNERSHIP OF SUCH PATENTS WAS NEVER
TRANSFERRED TO US.

         In February 2003, we acquired a soybean protein peptide biochemical
engineering project. Pursuant to the underlying purchase agreement, we acquired
ownership of the properties associated with such projects, including the
manufacturing plant, manufacturing and environmental control equipment and the
related patents. The registration of such patents was never transferred to the
Company. Although we believe that the purchase agreement secures our ownership
rights to such intellectual property, we have not investigated what risks we may
be subject to as a result of the failure to register such intellectual property
in the Company's name and effect a change of ownership with applicable State
agencies in the PRC.

A DISPROPORTIONATE AMOUNT OF OUR SALES REVENUE IS DERIVED FROM FOUR
PRODUCT LINES AND A DISRUPTION IN, OR COMPROMISE OF, OUR MANUFACTURING OR SALES
OPERATIONS, OR DISTRIBUTION CHANNELS, RELATED TO ANY OF THESE PRODUCT LINES
COULD ADVERSELY IMPACT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

         Our top four product lines include Shuanghuanglian Lyophilized
Injection Powder, Cease-Enuresis Soft Gel, Double Ginseng Yishen Grain and
Soybean Peptide Product Series. A disruption in, or compromise of, our
manufacturing or sales operations, or distribution channels, relating to any of
these four product lines could result in our failure to meet shipping and
delivery deadlines or meet quality standards, which in turn could result in the
cancellation of purchase orders, refusal to accept deliveries or a reduction in
purchase prices, any of which could have a material adverse effect on our
financial condition and results of operations.

WE DEPEND ON THE SUPPLY OF RAW MATERIALS, AND ANY ADVERSE CHANGES IN SUCH SUPPLY
OR THE COSTS OF RAW MATERIALS MAY ADVERSELY AFFECT OUR OPERATIONS.

         We currently obtain all of our raw materials from various farms in the
Northeast region of China and a few herbal medicine farms in North China and
are, therefore, dependent on the stable and reliable supply of such raw
materials in these regions. The supply of these raw materials can be adversely
affected by any material change in the climatic or environmental conditions in
North and Northeast China, which may, in turn, have a material adverse effect on
the cost of our raw materials and on our operations.

INTENSE COMPETITION FROM EXISTING AND NEW ENTITIES MAY ADVERSELY AFFECT OUR
REVENUES AND PROFITABILITY.

         We compete with other companies, many of whom are developing or can be
expected to develop products similar to ours. Our market is large with
many competitors. Many of our competitors are more established than we are, and
have significantly greater financial, technical, marketing and other resources
than us. Some of our competitors may have greater name recognition
and a larger customer base. These competitors may be able to respond more


                                       26


<PAGE>

quickly to new or changing opportunities and customer requirements and may be
able to undertake more extensive promotional activities, offer more attractive
terms to customers, and adopt more aggressive pricing policies. We intend to
create greater brand awareness for our brand name so that we can successfully
compete with our competitors. We cannot assure you that we will be able to
compete effectively with current or future competitors or that the competitive
pressures we face will not harm our business.

OUR PRODUCTS AND THE PROCESSES COULD EXPOSE US TO SUBSTANTIAL LIABILITY.

         We face an inherent business risk of exposure to product liability
claims in the event that the use of our products is alleged to have resulted in
adverse side effects. Side effects or marketing or manufacturing problems
pertaining to any of our products could result in product liability claims or
adverse publicity. These risks will exist for those products in clinical
development and with respect to those products that have received regulatory
approval for commercial sale. To date, we have not experienced any product
liability claims. However, that does not mean that we will not have any such
claims with respect to our products in the future. We currently carry insurance
policies which are customary for enterprises in China providing for total
coverage of approximately $6.6 million, including property coverage of
approximately $6 million, transport vehicles of approximately $216,000, and
workers' medical and accident coverage of approximately $361,000. There are no
special restrictions or exceptions attached to this coverage other than
fraudulent or criminal conducts on part of the claimant. We do not carry product
liability insurance. The lack of product liability insurance may expose us to
enormous risks associated with potential product liability claims.

WE DEPEND ON OUR KEY MANAGEMENT PERSONNEL AND THE LOSS OF THEIR SERVICES COULD
ADVERSELY AFFECT OUR BUSINESS.

         We place substantial reliance upon the efforts and abilities of our
executive officers, Shujun Liu, our Chief Executive Officer and Chairman of the
Board, Yanchun Li, our Acting Chief Financial Officer, Chief Operations Officer,
Secretary and Director, Jun Min, our Vice President and Director, and Binsheng
Li our Chief Accounting Officer and Director. The loss of the services of any of
our executive officers could have a material adverse effect on our business,
operations, revenues or prospects. We do not maintain key man life insurance on
the lives of these individuals. None of our executive officers received
compensation from us for year 2001 and 2002 due to their desire to put our
company's growth above their personal compensation in their capacity as founders
of the business. They started receiving compensation in year 2003. In March
2004, we entered into employment agreements with each of our four key executive
officers. For a discussion of the terms of these agreements, see
"Management--Employment Agreements."

WE MAY NEVER PAY ANY DIVIDENDS TO SHAREHOLDERS.

         We did not declare any dividends for the year ended December 31, 2005.
Our board of directors does not intend to distribute dividends in the near
future. The declaration, payment and amount of any future dividends will be made
at the discretion of the board of directors, and will depend upon, among other
things, the results of our operations, cash flows and financial condition,
operating and capital requirements, and other factors as the board of directors
considers relevant. There is no assurance that future dividends will be paid,
and, if dividends are paid, there is no assurance with respect to the amount of
any such dividend.

                                       27


<PAGE>

MANAGEMENT EXERCISES SIGNIFICANT CONTROL OVER MATTERS REQUIRING SHAREHOLDER
APPROVAL.

         Mr. Shujun Liu, our Chief Executive Officer and Chairman of the Board,
through his common and preferred stock ownership, currently has voting power
equal to approximately 44% of our voting securities. When combined with the
common stock ownership of our other officers and directors, management has
combined voting power in our Company equal to approximately 46% of our voting
securities. As a result, management through such stock ownership exercises
significant control over all matters requiring shareholder approval, including
the election of directors and approval of significant corporate transactions.
This concentration of ownership in management may also have the effect of
delaying or preventing a change in control of us that may be otherwise viewed as
beneficial by shareholders other than management.

INTERNATIONAL OPERATIONS REQUIRE US TO COMPLY WITH A NUMBER OF U.S. AND
INTERNATIONAL REGULATIONS.

         We are required to comply with a number of international regulations in
countries outside of the United States. In addition, we must comply with the
Foreign Corrupt Practices Act, or FCPA, which prohibits U.S. companies or their
agents and employees from providing anything of value to a foreign official for
the purposes of influencing any act or decision of these individuals in their
official capacity to help obtain or retain business, direct business to any
person or corporate entity or obtain any unfair advantage. Any failure by us to
adopt appropriate compliance procedures and ensure that our employees and agents
comply with the FCPA and applicable laws and regulations in foreign
jurisdictions could result in substantial penalties and/or restrictions in our
ability to conduct business in certain foreign jurisdictions. The U.S.
Department of The Treasury's Office of Foreign Asset Control, or OFAC,
administers and enforces economic and trade sanctions against targeted foreign
countries, entities and individuals based on U.S. foreign policy and national
security goals. As a result, we are restricted from entering into transactions
with certain targeted foreign countries, entities and individuals except as
permitted by OFAC which may reduce our future growth.

WE MAY HAVE RESCISSION LIABILITY IN CONNECTION WITH THE NOVEMBER 2004 PRIVATE
PLACEMENT OF OUR SHARES AND WARRANTS.

         In November 2004, we consummated a private placement of units
consisting of shares of our common stock and Class A and Class B common stock
purchase warrants, raising gross proceeds of $6 million. During the course of
such private placement, we had two resale registration statements on file with
the Securities and Exchange Commission with respect to an intended equity line
of credit which we subsequently terminated. Such registration statements, both
filed in December 2003, were subsequently withdrawn in January 2005 ("Resale
Registrations"). We intended to qualify the November 2004 private placement as
an exempt offering under Regulation D under the Securities Act of 1933, as
amended ("Securities Act"). However, the fact that such registration statements
were on file with the Securities and Exchange Commission while we were
conducting the November 2004 private placement may have resulted in integration
of the offerings and the failure to qualify the November 2004 private placement
as an exempt offering under Regulation D. As a result, we may be subject to
rescission liability both under the Securities Act of 1933, as amended, and
under applicable "blue sky" laws, to any of those investors who participated in
the private placement in an amount up to the sum of the purchase price of all
the investors, plus interest. Such contingent liability could be for up to a
period of one year from the date of violation under Federal law, or possibly
longer periods under applicable state "blue sky" laws. Our common stock is
currently trading at levels significantly above the price paid by investors in
the November 2004 private placement, and we believe that as long as our common
stock continues to trade at such levels, investors would be unlikely to exercise
any possible rescission rights. In addition, we believe that many of such
investors may have already sold all or a portion of the common stock purchased
in the private placement, as well as the common stock underlying the Class A and
Class B Warrants, all of which have been exercised. We believe that with the
continued passage of time, the likelihood of any one or more investors
exercising a right of rescission and the attendant potential aggregate liability


                                       28


<PAGE>

will continue to decrease. However, there can be no assurance that one or more
investors that continues to hold common shares purchased in the November 2004
private placement or issued upon exercise of the Class A or Class B Warrants
will not choose to exercise his remedies under applicable Federal or state
securities laws resulting in company liability, to the extent the applicable
statute of limitations has not expired.

WE MAY INCUR SIGNIFICANT COSTS TO ENSURE COMPLIANCE WITH U.S. CORPORATE
GOVERNANCE AND ACCOUNTING REQUIREMENTS.

         We may incur significant costs associated with our public company
reporting requirements, costs associated with newly applicable corporate
governance requirements, including requirements under the Sarbanes-Oxley Act of
2002 and other rules implemented by the Securities and Exchange Commission and
the American Stock Exchange. We expect all of these applicable rules and
regulations to increase our legal and financial compliance costs and to make
some activities more time consuming and costly. We also expect that these
applicable rules and regulations may make it more difficult and more expensive
for us to obtain director and officer liability insurance and we may be required
to accept reduced policy limits and coverage or incur substantially higher costs
to obtain the same or similar coverage. As a result, it may be more difficult
for us to attract and retain qualified individuals to serve on our board of
directors or as executive officers. We are currently evaluating and monitoring
developments with respect to these newly applicable rules, and we cannot predict
or estimate the amount of additional costs we may incur or the timing of such
costs.

WE MAY NOT BE ABLE TO MEET THE ACCELERATED FILING AND INTERNAL CONTROL REPORTING
REQUIREMENTS IMPOSED BY THE SECURITIES AND EXCHANGE COMMISSION.

         We may become an accelerated filer in calendar year 2006. As an
accelerated filer, we would be required to file our Annual Report on Form 10-K
for fiscal year ending December 31, 2006 by March 13, 2007. While we expect to
meet the accelerated filer deadlines, there is a risk that we may not be able to
comply with these accelerated filing requirements. If we fail to meet the
accelerated filing requirements by the time we are required to file our Annual
Report on Form 10-K, then the market price for our common stock may decline.

         As directed by Section 404 of the Sarbanes-Oxley Act, the Securities
and Exchange Commission adopted rules requiring each public company to include a
report of management on the company's internal controls over financial reporting
in its annual reports. In addition, the independent registered public accounting
firm auditing a company's financial statements must also attest to and report on
management's assessment of the effectiveness of the company's internal controls
over financial reporting as well as the operating effectiveness of the company's
internal controls. We will not be subject to these requirements for the fiscal
year ended December 31, 2005.

         While we expect to expend significant resources in developing the
necessary documentation and testing procedures required by Section 404 of the
Sarbanes-Oxley Act, there is a risk that we may not be able to comply timely
with all of the requirements imposed by this rule. At present, there is no
precedent available with which to measure compliance adequacy. In the event that
we conclude that there are significant deficiencies or material weaknesses and
we cannot remediate such significant deficiencies or material weaknesses in a
timely manner or we are unable to receive a positive attestation from our
independent registered public accounting firm with respect to our internal
controls, investors and others may lose confidence in the reliability of our
financial statements and our stock price and ability to obtain equity or debt
financing as needed could suffer.

                                       29


<PAGE>

         In addition, in the event that our independent registered public
accounting firm is unable to rely on our internal controls in connection with
its audit of our financial statements, and in the further event that it is
unable to devise alternative procedures in order to satisfy itself as to the
material accuracy of our financial statements and related disclosures, it is
possible that we would be unable to file our Annual Report on Form 10-K with the
Securities and Exchange Commission, which could also adversely affect the market
price of our common stock and our ability to secure additional financing as
needed.

WE MAY HAVE DIFFICULTY RAISING NECESSARY CAPITAL TO FUND OPERATIONS AS A RESULT
OF MARKET PRICE VOLATILITY FOR OUR SHARES OF COMMON STOCK.

         In recent years, the securities markets in the United States have
experienced a high level of price and volume volatility, and the market price of
securities of many companies have experienced wide fluctuations that have not
necessarily been related to the operations, performances, underlying asset
values or prospects of such companies. For these reasons, our shares of common
stock can also be expected to be subject to volatility resulting from purely
market forces over which we will have no control. If our business development
plans are successful, we may require additional financing to continue to develop
and exploit existing and new technologies and to expand into new markets. The
exploitation of our technologies may, therefore, be dependent upon our ability
to obtain financing through debt and equity or other means.

RISKS RELATING TO THE PEOPLE'S REPUBLIC OF CHINA

THERE COULD BE CHANGES IN GOVERNMENT REGULATIONS TOWARDS THE PHARMACEUTICAL AND
HEALTH SUPPLEMENT INDUSTRIES THAT MAY ADVERSELY AFFECT OUR BUSINESS.

         The manufacture and sale of pharmaceutical products in the PRC is
heavily regulated by many state, provincial and local authorities. These
regulations significantly increased the difficulty and costs involved in
obtaining and maintaining regulatory approvals for marketing new and existing
products. Our future growth and profitability depend to a large extent on our
ability to obtain regulatory approvals.

         The State Food and Drug Administration of China recently implemented
new guidelines for licensing of pharmaceutical products. All existing
manufacturers with licenses, which are currently valid under the previous
guidelines, are required to apply for the Good Manufacturing Practices ("GMP")
certifications by June 30, 2004, and to receive approvals by December 31, 2004.
We have received our certifications. However, should we fail to receive or
maintain the GMP certifications under the new guidelines in the future, our
businesses would be materially and adversely affected.

         Moreover, the laws and regulations regarding acquisitions of the
pharmaceutical industry in the PRC may also change and may significantly impact
our ability to grow through acquisitions.

CERTAIN POLITICAL AND ECONOMIC CONSIDERATIONS RELATING TO THE PRC COULD
ADVERSELY AFFECT OUR COMPANY.

         The PRC is transitioning from a planned economy to a market economy.
While the PRC government has pursued economic reforms since its adoption of the
open-door policy in 1978, a large portion of the PRC economy is still operating
under five-year plans and annual state plans. Through these plans and other
economic measures, such as control on foreign exchange, taxation and
restrictions on foreign participation in the domestic market of various
industries, the PRC government exerts considerable direct and indirect influence
on the economy. Many of the economic reforms carried out by the PRC government
are unprecedented or experimental, and are expected to be refined and improved.
Other political, economic and social factors can also lead to further
readjustment of such reforms. This refining and readjustment process may not
necessarily have a positive effect on our operations or future business


                                       30


<PAGE>

development. Our operating results may be adversely affected by changes in the
PRC's economic and social conditions as well as by changes in the policies of
the PRC government, such as changes in laws and regulations (or the official
interpretation thereof), measures which may be introduced to control inflation,
changes in the interest rate or method of taxation, and the imposition of
additional restrictions on currency conversion.

THE RECENT NATURE AND UNCERTAIN APPLICATION OF MANY PRC LAWS APPLICABLE TO US
CREATE AN UNCERTAIN ENVIRONMENT FOR BUSINESS OPERATIONS AND THEY COULD HAVE A
NEGATIVE EFFECT ON US.

         The PRC legal system is a civil law system. Unlike the common law
system, the civil law system is based on written statutes in which decided legal
cases have little value as precedents. In 1979, the PRC began to promulgate a
comprehensive system of laws and has since introduced many laws and regulations
to provide general guidance on economic and business practices in the PRC and to
regulate foreign investment. Progress has been made in the promulgation of laws
and regulations dealing with economic matters such as corporate organization and
governance, foreign investment, commerce, taxation and trade. The promulgation
of new laws, changes of existing laws and the abrogation of local regulations by
national laws could have a negative impact on our business and business
prospects. In addition, as these laws, regulations and legal requirements are
relatively recent, their interpretation and enforcement involve significant
uncertainty.

CURRENCY CONVERSION AND EXCHANGE RATE VOLATILITY COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION.

         The PRC government imposes control over the conversion of Renminbi into
foreign currencies. Under the current unified floating exchange rate system, the
People's Bank of China publishes an exchange rate, which we refer to as the PBOC
exchange rate, based on the previous day's dealings in the inter-bank foreign
exchange market. Financial institutions authorized to deal in foreign currency
may enter into foreign exchange transactions at exchange rates within an
authorized range above or below the PBOC exchange rate according to market
conditions.

         Pursuant to the Foreign Exchange Control Regulations of the PRC issued
by the State Council which came into effect on April 1, 1996, and the
Regulations on the Administration of Foreign Exchange Settlement, Sale and
Payment of the PRC which came into effect on July 1, 1996, regarding foreign
exchange control, conversion of Renminbi into foreign exchange by Foreign
Investment Enterprises, or FIEs, for use on current account items, including the
distribution of dividends and profits to foreign investors, is permissible. FIEs
are permitted to convert their after-tax dividends and profits to foreign
exchange and remit such foreign exchange to their foreign exchange bank accounts
in the PRC. Conversion of Renminbi into foreign currencies for capital account
items, including direct investment, loans, and security investment, is still
under certain restrictions. On January 14, 1997, the State Council amended the
Foreign Exchange Control Regulations and added, among other things, an important
provision, which provides that the PRC government shall not impose restrictions
on recurring international payments and transfers under current account items.

         Enterprises in the PRC (including FIEs) which require foreign exchange
for transactions relating to current account items, may, without approval of the
State Administration of Foreign Exchange, or SAFE, effect payment from their
foreign exchange account or convert and pay at the designated foreign exchange
banks by providing valid receipts and proofs.

         Convertibility of foreign exchange in respect of capital account items,
such as direct investment and capital contribution, is still subject to certain
restrictions, and prior approval from the SAFE or its relevant branches must be
sought.

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<PAGE>

         Since 1994, the exchange rate for Renminbi against the United States
dollars has remained relatively stable, most of the time in the region of
approximately RMB8.28 to US$1.00. However, in 2005, the Chinese government
announced that it would begin pegging the exchange rate of the Chinese Renminbi
against a number of currencies, rather than just the U.S. dollar and, the
exchange rate for the Renminbi against the U.S. dollar became RMB8.02 to
US$1.00. As our operations are primarily in China, any significant revaluation
or devaluation of the Chinese Renminbi may materially and adversely affect our
cash flows, revenues and financial condition. We may not be able to hedge
effectively against in any such case. For example, to the extent that we need to
convert United States dollars into Chinese Renminbi for our operations,
appreciation of this currency against the United States dollar could have a
material adverse effect on our business, financial condition and results of
operations. Conversely, if we decide to convert Chinese Renminbi into United
States dollars for other business purposes and the United States dollar
appreciates against this currency, the United States dollar equivalent of the
Chinese Renminbi we convert would be reduced. There can be no assurance that
future movements in the exchange rate of Renminbi and other currencies will not
have an adverse effect on our financial condition. AOB's wholly owned
subsidiaries Harbin Bioengineering and HSPL are FIEs to which the Foreign
Exchange Control Regulations are applicable. There can be no assurance that we
will be able to obtain sufficient foreign exchange to pay dividends or satisfy
other foreign exchange requirements in the future.

IT MAY BE DIFFICULT TO EFFECT SERVICE OF PROCESS AND ENFORCEMENT OF LEGAL
JUDGMENTS UPON OUR COMPANY AND OUR OFFICERS AND DIRECTORS BECAUSE THEY RESIDE
OUTSIDE THE UNITED STATES.

         As our operations are presently based in China and a majority of our
directors and all of our officers reside in China, service of process on our
company and such directors and officers may be difficult to effect within the
United States. Also, our main assets are located in China and any judgment
obtained in the United States against us may not be enforceable outside the
United States.

ANY FUTURE OUTBREAK OF AVIAN INFLUENZA, OR THE ASIAN BIRD FLU, OR ANY OTHER
EPIDEMIC IN CHINA COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
OPERATIONS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

         Since mid-December 2003, a growing number of Asian countries have
reported outbreaks of highly pathogenic avian influenza in chickens and ducks.
Since all of our operations are in China, an outbreak of the Asian Bird Flu in
China in the future may disrupt our business operations and have a material
adverse effect on our financial condition and results of operations. For
example, a new outbreak of Asian Bird Flu, or any other epidemic, may reduce the
level of economic activity in affected areas, which may lead to a reduction in
our revenue if our clients cancel existing contracts or defer future
expenditures. In addition, health or other government regulations may require
temporary closure of our offices, or the offices of our customers or partners,
which will severely disrupt our business operations and have a material adverse
effect on our financial condition and results of operations.

OUR BUSINESS MAY BE AFFECTED BY UNEXPECTED CHANGES IN REGULATORY REQUIREMENTS IN
THE JURISDICTIONS IN WHICH WE OPERATE.

         We are subject to many general regulations governing business entities
and their behavior in China and in other jurisdictions in which we have, or plan
to have, operations and market our products. In particular, we are subject to
laws and regulations covering food, dietary supplements and pharmaceutical
products. Such regulations typically deal with licensing, approvals and permits.
Any change in product licensing may make our products more or less available on
the market. Such changes may have a positive or negative impact on the sale of
our products and may directly impact the associated costs in compliance and our
operational and financial viability. Such regulatory environment also covers any
existing or potential trade barriers in the form of import tariff and taxes that
may make it difficult for us to import our products to certain countries and
regions, such as Hong Kong, which would limit our international expansion.

                                       32


<PAGE>

WE MAY HAVE DIFFICULTY ATTRACTING TALENT IN FOREIGN COUNTRIES.

         Other than China, we currently conduct sales in Hong Kong and have an
operational presence in this location. We have a representative office in the
United States for investor relations and market study. In the future, we may
explore expanding our operations in the United States, as well as other
countries in Asia. Upon effecting any such expansion, we may not be able to
identify and retain qualified personnel due to our lack of understanding of
different cultures and lack of local contacts. This may impede our international
expansion.

WE MAY EXPERIENCE CURRENCY FLUCTUATION AND LONGER EXCHANGE RATE PAYMENT CYCLES.

         The local currencies in the countries in which we sell our products may
fluctuate in value in relation to other currencies. Such fluctuations may affect
the costs of our products sold and the value of our local currency profits.
While we are not conducting any meaningful operations in countries other than
China at the present time, we may expand to other countries and may then have an
increased risk of exposure of our business to currency fluctuation.

SINCE MOST OF OUR ASSETS ARE LOCATED IN CHINA, ANY DIVIDENDS OF PROCEEDS FROM
LIQUIDATION IS SUBJECT TO THE APPROVAL OF THE RELEVANT CHINESE GOVERNMENT
AGENCIES.

         Our assets are predominantly located inside China. Under the laws
governing foreign invested enterprises in China, dividend distribution and
liquidation are allowed but subject to special procedures under the relevant
laws and rules. Any dividend payment will be subject to the decision of the
board of directors and subject to foreign exchange rules governing such
repatriation. Any liquidation is subject to both the relevant government
agency's approval and supervision as well as the foreign exchange control. This
may generate additional risk for our investors in case of dividend payment and
liquidation.

ITEM 7.  FINANCIAL STATEMENTS.

         The information required by Item 7 appears after the signature page to
this report.

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

         As disclosed in our Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 13, 2004, Thomas Leger & Co.
("Thomas"), our certifying accounting firm, resigned as our principal
independent accountant on February 6, 2004. On February 17, 2004, we announced
that we engaged Weinberg & Company, P.A. ("Weinberg") as the principal
accountant to audit our financial statements.

         We did not have any disagreements with Thomas on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved to Thomas' satisfaction, would have
caused Thomas to make reference to the subject matter of the disagreement in
connection with its report.

         Thomas did not advise the Company that (1) the internal controls
necessary to develop reliable financial statements did not exist, (2)
information had come to Thomas' attention which made it unwilling to rely on
management's representations, or unwilling to be associated with the financial
statements prepared by management, and (3) the scope of the audit needed to be
expanded significantly, and information had come to Thomas' attention that it


                                       33


<PAGE>

had concluded will, or if further investigated might, materially impact the
fairness or reliability of a previously issued audit report or the underlying
financial statements, or the financial statements issued or to be issued
covering the fiscal period(s) subsequent to the date of the most recent audited
financial statements (including information that might preclude the issuance of
an unqualified audit report), and the issue was not resolved to Thomas'
satisfaction prior to its resignation or dismissal.

ITEM 8A. CONTROLS AND PROCEDURES

         As of the end of the period covered by this report (the "Evaluation
Date"), we carried out an evaluation in accordance with the requirements of the
Chinese auditing standards as well as the applicable rules in the United States.
The Company had set up an audit group, which consisted of the Chief Executive
Officer, Chief Financial Officer, one of the members of the board of directors
and two executives (including the manager) from our internal audit department.
This audit group is under the supervision of our Chief Executive Officer and
Chief Financial Officer. The Company's audit group evaluated the effectiveness
of the design and operation of our disclosure controls and procedures as defined
in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") of our Annual Report on Form 10-KSB before it was
filed with the Securities and Exchange Commission. The audit group made their
evaluation pursuant to Rule 13a-15 under the Exchange Act to the maximum
possible extent and to the best knowledge of the audit group. Based upon our
evaluation, our Chief Executive Officer and our Chief Financial Officer
concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective and basically sound in all material aspects under Rule
13a-15.

         However, given the fact that our major operations are located China,
the Company and the audit group consistently make efforts to coordinate the
evolving control and disclosure environment in China with the regulatory
environment in the United States. The Company has identified this aspect as an
area for improvement and is taking measures to train its staff for better
performance.

         The Company anticipates that it will be fully compliant with Section
404 of the Sarbanes-Oxley Act of 2002 by the required date for non-accelerated
filers and it is in the process of reviewing its internal control systems in
order to be compliant with Section 404 of the Sarbanes-Oxley Act. However, at
this time the Company makes no representation that its systems of internal
control comply with Section 404 of the Sarbanes-Oxley Act.

ITEM 8B. OTHER INFORMATION.

         Not applicable.

                                       34


<PAGE>

                                    PART III

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

         The following table sets forth the names, ages, principal offices and
positions and the date each such person became a director or executive officer.
Executive officers are elected annually by our Board of Directors. Each
executive officer holds his office until he resigns, is removed by the Board or
his successor is elected and qualified. Directors are elected annually by our
stockholders at the annual meeting. Each director holds his office until his
successor is elected and qualified or his earlier resignation or removal.


    NAME                  AGE   POSITION                     DATE OF APPOINTMENT
    ----                  ---   --------                     -------------------
    Shujun Liu            53    Chief Executive Officer and  December 18, 2001
                                Chairman of the Board
    Jun Min               47    Director and Vice President  May 8, 2002
    Yanchun Li            37    Director, Acting Chief       May 8, 2002
                                Financial Officer, Chief
                                Operations Officer and
                                Secretary
    Binsheng Li           42    Director and Chief           May 8, 2002
                                Accounting and Finance
                                Officer
    Cosimo J. Patti (1)   56    Independent Director         September 27, 2004
    Xianmin Wang (1)      63    Independent Director         January 1, 2005
    Eileen Brody (1)      44    Independent Director         June 22, 2005

          (1) Denotes member of Audit Committee, Compensation Committee and
Nominating Committee.

         Below are brief descriptions of the backgrounds and experiences of the
officers and directors:

         SHUJUN LIU - CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF
DIRECTORS. Shujun Liu, age 53, is our Chairman and the Chief Executive Officer.
He graduated from Wuhan Communication College and he also completed the EMBA
study at Qinghua University. He was the representative of the National People's
Congress (the national legislative body of China) of Harbin and was elected as
the outstanding entrepreneur of the Three Northeast Provinces of China. In 1994,
he was appointed to serve as the senior manager of Three-Happiness
Bioengineering Company Limited until December 2001, when he was appointed
Chairman and Chief Executive officer of AOB. The research and development
projects he has personally taken charge of have gained several outstanding
awards including, Third Class Prize of Harbin Scientific and Technological
Advancement, Second Class Prize of HeiLongJiang Scientific and Technological
Advancement and three scientific research achievements awards granted by
HeiLongJiang Province.

         JUN MIN - VICE PRESIDENT AND DIRECTOR. Jun Min, age 47 and university
educated in China, previously worked as the Chief Executive of the Price
Checking Department of HeiLongJiang Province Price Bureau from 1987 through the
end of 1992. He then worked for Three-Happiness Bioengineering from 1993 until


                                       35


<PAGE>

he was appointed as the Vice President and director of AOB in May 2002. He is
responsible for AOB's capital control and liquidity management. He has over 20
years of working experience in financial management and Chinese securities
market with extensive business networks over the securities companies, banks and
investment consultation organizations in China.

         YANCHUN LI - ACTING CHIEF FINANCIAL OFFICER, CHIEF OPERATIONS OFFICER,
SECRETARY AND DIRECTOR. Yanchun Li, age 37 and university educated in China, has
extensive experience in market planning and sales operations. Before joining
AOB, from 1993 until 1994, Ms. Li was responsible for the marketing and selling
campaign of the frozen food brand, "RuiDa". RuiDa is a well known branded
product in China's frozen food market. Beginning in 1994, Ms. Li was appointed
by Three-Happiness Bioengineering as senior personnel in sales and marketing
until May 2002, when she was appointed as the Acting Chief Financial Officer and
Chief Operations Officer, as well as a director of AOB.

         MR. BINSHENG LI - CHIEF ACCOUNTING AND FINANCE OFFICER AND DIRECTOR.
Mr. Li, age 42, is our chief accounting and finance officer and is in charge of
all financial management and accounting work. He graduated from Dalian
University of Finance and Economics, where he majored in financial management.
Mr. Li has over 19 years of experience in accounting and finance. He was
appointed by Three-Happiness Bioengineering as the Financial Controller of AOB
in 1994 and stayed with our company in this position until May 2002, when he was
appointed as one of our directors.

         COSIMO J. PATTI - INDEPENDENT DIRECTOR. Mr. Patti, age 56, is an
independent director. Before joining AOB, Mr. Patti was an arbitrator of the
National Association of Securities Dealers (NASD) and the New York Stock
Exchange (NYSE) for 18 years. Mr. Patti's recent experience includes Director of
Strategic Cross border Business with Cedel Bank (1996-1998), President and
Founder of FSI Advisors Group (1998-2002), and Senior Director of Applications
Planning with iCi/ADP (2002-2004). He has broad experience with international
business development, management and finance.

         XIANMIN WANG - INDEPENDENT DIRECTOR. Mr. Wang, age 63, is an
independent director. Mr. Wang brings more than 37 years of experience in
political, economic and cultural affairs to the Company. He is thought to be a
leader on the subject of privatization of Chinese state-owned enterprises. Mr.
Wang's previous experience includes vice governor of Heilongjiang province in
charge of Financial and Economic Affairs (1998-2001), secretary of Daqing
Municipal party committee (1996-1998), vice secretary of Harbin municipal party
committee (1991-1992), and professor of economics at Northeast Forestry
University.

         EILEEN BRODY - INDEPENDENT DIRECTOR. Ms. Brody, age 44, is a senior
retail executive, with 22 years of experience helping retailers increase growth
and profitability. In August 2005, Ms. Brody became the President of
Dawson-Forte Cashmere, a trading company. From 1997 to 2004, Ms. Brody was Vice
President of Merchandising and the General Merchandising Manager for Carter's
Childrenswear Retail Division, a division of The William Carter Company. There,
she was in charge of the merchandising P&L for the 175 store nationwide chain.
She helped lead a turnaround effort, which produced record sales and
profitability for seven consecutive years. She also assisted The William Carter
Company in its successful initial public offering and listing on the New York
Stock Exchange. From 1983 to 1990, she was a Senior Manager and a CPA at the
accounting firm of KPMG Peat Marwick. Ms. Brody received her undergraduate and
MBA degrees from Pace University and a second MBA from the Harvard Graduate
School of Business. She received the Fitzie Foundation Award in 1991, where she
was chosen by the Harvard Business School and Fitzie Board of Trustees as the
HBS Woman Best Demonstrating Exemplary Leadership, Academic Excellence and
Commitment to Community.

                                       36


<PAGE>

AUDIT COMMITTEE OF THE BOARD OF DIRECTORS

         The audit committee members for the fiscal year ended December 31, 2005
consisted of Cosimo J. Patti, Xianmin Wang and Eileen Brody. Each of these
members are considered "independent" under Section 121(A) (as currently
applicable to us) of the listing standards of The American Stock Exchange, as
determined by our board of directors. The audit committee recommends to the
board of directors the annual engagement of a firm of independent accountants
and reviews with the independent accountants the scope and results of audits,
our internal accounting controls and audit practices and professional services
rendered to us by our independent accountants.

         Our board of directors has determined that we have at least one audit
committee financial expert, as defined in the Exchange Act, serving on our audit
committee. Eileen Brody is the "audit committee financial expert" and is an
independent member of our board of directors.

FAMILY RELATIONSHIPS

         There are no family relationships between any of our directors or
executive officers or any other director or executive officer.

COMPLIANCE WITH SECTION 16(a) OF EXCHANGE ACT

         Based on the Company's review of copies of Forms 3, 4 and 5 filed with
the Securities and Exchange Commission or written representations from certain
reporting persons, we believe that during the fiscal year 2005, none of the
executive officers timely complied with the filing requirements of Section 16(a)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with
respect to the filing of Form 4s reflecting the grant of options pursuant to the
Stock Option Plan. Additionally, we believe that during the fiscal year ending
2005, some of our officers, directors, and greater than ten-percent beneficial
owners did not timely comply with other filing requirements of Section 16(a) of
the Exchange Act. Each of the officers and directors intends to make their
respective filings as soon as possible.

         Shujun Liu did not timely file a Form 4 reflecting the grant of 4,902
options on September 30, 2005 and 5,187 options on December 31, 2005.

         Yanchun Li did not timely file a Form 4 reflecting the grant of 2,941
options on September 30, 2005 and 3,112 options on December 31, 2005.

         Jun Min did not timely file a Form 4 reflecting the grant of 2,941
options on September 30, 2005 and 3,112 options on December 31, 2005.

         Binsheng Li did not timely file a Form 4 reflecting the grant of 1,765
options on September 30, 2005 and 1,867 options on December 31, 2005.

         Cosimo J. Patti did not timely file a Form 4 upon the grant of 22,026
shares of Common Stock on October 27, 2005.

         Xianmin Wang did not timely file a Form 3 upon becoming a director of
the Company on January 1, 2005.

                                       37


<PAGE>

         Eileen Brody did not timely file a Form 3 upon becoming a director of
the Company on June 22, 2005.

CODE OF ETHICS

         We adopted a code of ethics that applies to our officers, employees and
directors, including our Chief Executive Officer and Chief Financial Officer,
and other persons who perform similar functions. A copy of our Code of Ethics is
filed as an exhibit to this Annual Report for the fiscal year ended December 31,
2005 on Form 10-KSB. Our Code of Ethics is intended to be a codification of the
business and ethical principles which guide us, and to deter wrongdoing, to
promote honest and ethical conduct, to avoid conflicts of interest, and to
foster full, fair, accurate, timely and understandable disclosures, compliance
with applicable governmental laws, rules and regulations, the prompt internal
reporting of violations and accountability for adherence to this Code.

ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

         The following table sets forth all cash compensation paid or to be paid
by AOB, as well as certain other compensation paid or accrued, for each of the
last three fiscal years of our company to each named executive officer.

                                --------------------------------------------
                                            ANNUAL COMPENSATION
                                --------------------------------------------

        ----------------------- --------------------------------------------
        NAME / PRINCIPAL         FISCAL   SALARY     BONUS    OTHER ANNUAL
        POSITION                  YEAR    (CASH &     ($)     COMPENSATION
                                          NON-CASH)                ($)
                                           ($) (1)
        ----------------------- -------- ---------- -------- ---------------
        Shujun (Tony) Liu,       2005     $175,000       $0              $0
        CEO and Chairman
        ----------------------- -------- ---------- -------- ---------------
                                 2004     $162,500       $0              $0
        ----------------------- -------- ---------- -------- ---------------
                                 2003     $200,000       $0              $0
        ----------------------- -------- ---------- -------- ---------------

        ----------------------- -------- ---------- -------- ---------------
        Yanchun (Lili) Li,       2005     $105,000       $0              $0
        Acting CFO, COO,
        Secretary and Director
        ----------------------- -------- ---------- -------- ---------------
                                 2004     $ 97,500       $0              $0
        ----------------------- -------- ---------- -------- ---------------
                                 2003     $120,000       $0              $0
        ----------------------- -------- ---------- -------- ---------------

        ----------------------- -------- ---------- -------- ---------------
        Jun Min, Vice            2005     $ 85,000       $0              $0
        President and Director
        ----------------------- -------- ---------- -------- ---------------
                                 2004     $ 77,500       $0              $0
        ----------------------- -------- ---------- -------- ---------------
                                 2003     $100,000       $0              $0
        ----------------------- -------- ---------- -------- ---------------

(1) Includes both cash compensation and stock option issued pursuant to the
Stock Option Plan, as further described herein.

                                       38


<PAGE>

EMPLOYEE STOCK OPTION PLAN

         In March 2004, our board of directors formally adopted a Stock Option
Plan (the "Plan"). Under the Plan, we are authorized to grant non-qualified
options to purchase up to 2,900,000 shares of our common stock to our employees,
officers, directors and consultants. The Plan is presently administered directly
by our board of directors. Subject to the provisions of the Plan, the board of
directors will determine who will receive stock options, the number of shares of
common stock that may be covered by the option grants, the time and manner of
exercise of options and exercise prices, as well as any other pertinent terms of
the options.

         As of December 31, 2005, the Company granted an aggregate of 68,925
options under the Plan. For the fiscal year ended December 31, 2005, options to
purchase a total of 25,827 shares of common stock were granted to the executive
officers. In 2005, the Company granted the following options to the named
executive officers pursuant to the Plan:


<TABLE>
<CAPTION>
NAME OF EMPLOYEE    NUMBER OF SECURITIES  PERCENTAGE OF
OF WHOM THE OPTION    UNDERLYING STOCK    TOTAL OPTIONS   EXERCISE
WAS GRANTED            OPTIONS GRANTED       GRANTED        PRICE       EXPIRATION DATE
-----------            ---------------       -------        -----       ---------------

<S>                         <C>               <C>            <C>      <C>
Shujun Liu                  4,902             18.98%         $2.00    September 30, 2010
                            5,187             20.08%         $2.00     December 30, 2010
Yanchun Li                  2,941             11.39%         $2.00    September 30, 2010
                            3,112             12.05%         $2.00     December 30, 2010
Jun Min                     2,941             11.39%         $2.00    September 30, 2010
                            3,112             12.05%         $2.00     December 30, 2010
Binsheng Li                 1,765              6.83%         $2.00    September 30, 2010
                            1,867              7.23%         $2.00     December 30, 2010
</TABLE>

OPTION EXERCISES DURING 2005 FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

         There were no options exercised during our 2005 fiscal year.

COMPENSATION OF INDEPENDENT DIRECTORS

         We have entered into a service agreement with each of our independent
directors, Cosimo J. Patti, Xianmin Wang and Eileen Brody, pursuant to which
each shall carry out the duties of an independent director and serve on our
Audit Committee and Compensation Committee. Pursuant to the terms of each such
agreement, as amended, we have agreed to pay to each of our independent
directors an annual cash retainer of $30,000, payable in monthly installments of
$2,500, for participation in board meetings or meetings of committees of the
board. In addition, pursuant to each of the agreements, we are obligated to
issue to each independent director on the anniversary of the date of each
service agreement, $30,000 worth of our common stock valued based on 100% of the
average closing prices for the five trading days prior to the signing of each
such independent director's service agreement with the Company. Based on such
information, Mr. Patti, Mr. Wang and Ms. Brody is each entitled to receive, for
each year of service, an aggregate of 22,026, 19,506, and 21,552 shares,
respectively.

                                       39


<PAGE>

EMPLOYMENT AGREEMENTS

         In March 2004, we entered into employment agreements with Shujun Liu,
our Chairman and Chief Executive Officer, Yanchun Li, our Acting Chief Financial
Officer and Chief Operations Officer, Jun Min, our Vice President, and Binsheng
Li, our Chief Accounting and Finance Officer, all of whom are also directors of
the Company.

         Shujun Liu's employment agreement has a term of five years, effective
as of October 1, 2003, and provides for a salary of $150,000 for the first year
of the term, subject to subsequent annual review by our board of directors. The
agreement also provides for the grant of options to purchase shares of our
common stock pursuant to the Plan, the terms of which are described below. These
options are to be awarded in four quarterly installments, effective on the last
date of such quarter, beginning with the first quarter of 2004, during the term
of the employment agreement, and will have an exercise price of $2.00 per share.
Each quarterly grant shall consist of the quantity of shares of our common stock
whose aggregate market price at close of trading on the date of grant minus
their aggregate exercise price equals $12,500.00. We can terminate Mr. Liu's
employment with cause, or without cause pursuant to a decision by our board of
directors. In the event Mr. Liu's employment is terminated without cause, he
will be eligible to receive monthly payments at his then applicable monthly base
salary for the rest of his term from the date of termination of his employment.

         Yanchun Li's employment agreement has a term of five years, effective
as of October 1, 2003, and provides for an annual salary of $90,000 for the
first year of the term, subject to subsequent annual review by our board of
directors. The agreement also provides for the grant of options to purchase
shares of our common stock pursuant to the Plan. These options are to be awarded
in four quarterly installments, effective on the last date of such quarter,
beginning with the first quarter of 2004, during the term of the employment
agreement, and will have an exercise price of $2.00 per share. Each quarterly
grant shall consist of the quantity of shares of our common stock whose
aggregate market price at close of trading on the date of grant minus their
aggregate exercise price equals $7,500.00. We can terminate Ms. Li's employment
with cause, or without cause at the sole discretion of our Chief Executive
Officer. In the event Ms. Li's employment is terminated without cause, she will
be eligible to receive monthly payments at her then applicable monthly base
salary for the rest of her term from the date of termination of her employment.

         Jun Min's employment agreement has a term of three years, effective as
of October 1, 2003, and provides for an annual salary of $70,000 for the first
year of the term, subject to subsequent annual review by our board of directors.
The agreement also provides for the grant of options to purchase shares of our
common stock pursuant to the Plan. These options are to be awarded in four
quarterly installments, effective on the last date of such quarter, beginning
with the first quarter of 2004, during the term of the employment agreement, and
will have an exercise price of $2.00 per share. Each quarterly grant shall
consist of the quantity of shares of our common stock whose aggregate market
price at close of trading on the date of grant minus their aggregate exercise
price equals $7,500.00. We can terminate Mr. Min's employment with cause, or
without cause at the sole discretion of our Chief Executive Officer. In the
event Mr. Min's employment is terminated without cause, he will be eligible to
receive monthly payments at his then applicable monthly base salary for the rest
of his term from the date of termination of his employment.

         Binsheng Li's employment agreement has a term of three years, effective
as of October 1, 2003, and provides for an annual salary of $57,000 for the
first year of the term, subject to subsequent annual review by our board of
directors. The agreement also provides for the grant of options to purchase
shares of our common stock pursuant to the Plan. These options are to be awarded


                                       40


<PAGE>

in four quarterly installments, effective on the last date of such quarter,
beginning with the first quarter of 2004, during the term of the employment
agreement, and will have an exercise price of $2.00 per share. Each quarterly
grant shall consist of the quantity of shares of our common stock whose
aggregate market price at close of trading on the date of grant minus their
aggregate exercise price equals $4,500.00. We can terminate Mr. Li's employment
with cause, or without cause at the sole discretion of our Chief Executive
Officer. In the event Mr. Li's employment is terminated without cause, he will
be eligible to receive monthly payments at his then applicable monthly base
salary for the rest of his term from the date of termination of his employment.

         In June 2004, the employment agreements for certain executive officers
were amended to include a provision that if the closing stock price is less than
$2.00 on the last day of the applicable quarter, the employees would not be
entitled to receive their quarterly stock options. For the first and second
fiscal quarters of the year ended December 31, 2005, the closing stock price on
the last day of each such quarter was less than $2.00. As such, the Company did
not grant stock options to the executive officers for these fiscal quarters.


                                       41


<PAGE>


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information regarding beneficial
ownership of common stock as of March 14, 2006 by each person known to us to own
beneficially more than 5% of our common stock, each of our directors, each of
our named executive officers; and all executive officers and directors as a
group.

<TABLE>
<CAPTION>
----------------------- --------------------- ------------------- -------------------- ----- --------------------
                                                                  AMOUNT AND NATURE OF
NAME                    POSITION HELD         TITLE OF CLASS      BENEFICIAL OWNER           PERCENT OF CLASS (1)
----------------------- --------------------- ------------------- -------------------- ----- --------------------
<S>                     <C>                   <C>                      <C>             <C>         <C>
Shujun Liu (2)          Chief Executive       Series A Preferred        1,000,000      (2)         100.00%
                        Officer and Chairman  Stock
----------------------- --------------------- ------------------- -------------------- ----- --------------------
                        Chief Executive
Shujun Liu (2)          Officer and Chairman  Common Stock             15,935,795      (2)          25.53%
----------------------- --------------------- ------------------- -------------------- ----- --------------------
Yanchun Li              Acting Chief          Common Stock                756,604      (3)           1.21%
                        Financial Officer,
                        Chief Operating
                        Officer, Secretary
                        and Director
----------------------- --------------------- ------------------- -------------------- ----- --------------------
Jun Min                 Vice President and    Common Stock                902,382      (4)           1.45%
                        Director
----------------------- --------------------- ------------------- -------------------- ----- --------------------
Binsheng Li             Chief Accounting      Common Stock                288,639      (5)             *
                        and Finance Officer
                        and Director
----------------------- --------------------- ------------------- -------------------- ----- --------------------
Cosimo J. Patti         Independent Director  Common Stock                 22,026                      *
----------------------- --------------------- ------------------- -------------------- ----- --------------------
Xianmin Wang            Independent Director  Common Stock                      0                      *
----------------------- --------------------- ------------------- -------------------- ----- --------------------
Eileen Brody            Independent Director  Common Stock                      0                      *
----------------------- --------------------- ------------------- -------------------- ----- --------------------
Total Ownership of
Common Stock by All
Directors and
Officers as a Group              -                                     17,905,446                   28.67%
----------------------- --------------------- ------------------- -------------------- ----- --------------------
</TABLE>
         (1)      Based upon 62,385,788 shares outstanding as of March 1, 2006
                  plus, in the case of each of the executive officer and
                  directors and all officers and directors as a group, all
                  shares issuable upon the exercise of the options held by them,
                  which were exercisable as of December 31, 2005 or within 60
                  days thereafter. Pursuant to Rule 13d-3 under the Securities
                  Exchange Act of 1934, as amended, and the rules promulgated by
                  the Securities and Exchange Commission, every person who has
                  or shares the power to vote or to dispose of shares of common
                  stock are deemed to be the "beneficial owner" of all the
                  shares of common stock over which any such sole or shared
                  power exists.


                                       42


<PAGE>

         (2)      Includes 26,924 shares of common stock issuable upon exercise
                  of stock options which are immediately exercisable at $2.00
                  per share, of which 7,576 expire on December 31, 2008, 9,259
                  expire on March 31, 2009, 4,902 expire on September 30, 2010
                  and 5,187 expire on December 30, 2010. Through his common
                  preferred stock ownership, (without giving effect to the
                  exercise of such options) currently Mr. Liu has voting power
                  equal to approximately 44% of our voting securities.

         (3)      Includes 16,154 shares of common stock issuable upon exercise
                  of stock options which are immediately exercisable at $2.00
                  per share, of which 4,545 expire on December 31, 2008, 5,556
                  expire on March 31, 2009, 2,941 expire on September 30, 2010
                  and 3,112 expire on December 30, 2010.

         (4)      Includes 16,154 shares of common stock issuable upon exercise
                  of stock options which are immediately exercisable at $2.00
                  per share, of which 4,545 expire on December 31, 2008, 5,556
                  expire on March 31, 2009, 2,941 expire on September 30, 2010
                  and 3,112 expire on December 30, 2010.

         (5)      Includes 9,693 shares of common stock issuable upon exercise
                  of stock options which are immediately exercisable at $2.00
                  per share, of which 2,727 expire on December 31, 2008, 3,333
                  expire on March 31, 2009, 1,765 expire on September 30, 2010
                  and 1,867 expire on December 30, 2010.

The following table sets forth aggregate information regarding our equity
compensation plans in effect as of December 31, 2005:


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                        EQUITY COMPENSATION PLAN INFORMATION
---------------------------------------------------------------------------------------------------------------------
                                                                                              NUMBER OF SECURITIES
                                                                                               REMAINING AVAILABLE
                                                                                               FOR FUTURE ISSUANCE
                                             NUMBER OF SECURITIES                                 UNDER EQUITY
                                               TO BE ISSUED UPON       WEIGHTED-AVERAGE        COMPENSATION PLANS
                                                  EXERCISE OF          EXERCISE PRICE OF      (EXCLUDING SECURITIES
                                             OUTSTANDING OPTIONS,     OUTSTANDING OPTIONS,     REFLECTED IN COLUMN
                                            WARRANTS AND RIGHTS (1)   WARRANTS AND RIGHTS             (a))
------------------------------------------- ------------------------ ----------------------- ------------------------
              PLAN CATEGORY                           (a)                     (b)                     (c)
------------------------------------------- ------------------------ ----------------------- ------------------------
<S>                                                    <C>                     <C>                      <C>
Equity compensation plans approved by
security holders                                      -0-                     -0-                      -0-
------------------------------------------- ------------------------ ----------------------- ------------------------
Equity compensation plans not approved by
security holders                                   2,900,000                 $2.00                  2,831,075
------------------------------------------- ------------------------ ----------------------- ------------------------
Total                                              2,900,000                 $2.00                  2,831,075
------------------------------------------- ------------------------ ----------------------- ------------------------
</TABLE>

         (1)      Includes shares issuable pursuant to our "Plan" approved by
                  our board of directors in March 2004. The Plan provides for
                  the grant of options to purchase shares of our common stock to
                  our employees, officers, directors and consultants, which
                  options vest immediately, expire 5 years from date of grant
                  and have an exercise price of $2.00.

                                       43


<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION

         Not applicable.

ITEM 13. EXHIBITS

-------------------- -----------------------------------------------------------
Exhibit No.           Description
-------------------- -----------------------------------------------------------

2                    Purchase Agreement, dated as of September 8, 2004, between
                     American Oriental Bioengineering, Inc., the Government of
                     Heilongjiang Province of China and Heilongjiang
                     Songhuajiang Pharmaceutical Limited (incorporated by
                     reference from the Report on Form 8-K, Commission File No.
                     000-29785, filed with the Commission on September 14,
                     2004).
-------------------- -----------------------------------------------------------
3.1(a)               Amendment and Restatement of Articles of Incorporation of
                     American Oriental Bioengineering, Inc. (incorporated by
                     reference from the Registration Statement on Form SB-2
                     Commission File No. 333-124133, filed with the Commission
                     on April 18, 2005).
-------------------- -----------------------------------------------------------
3.1(b)               Certificate of Amendment to Amendment and Restatement of
                     Articles of Incorporation of American Oriental
                     Bioengineering, Inc. (incorporated by reference from the
                     Registration Statement on Form S-3 Commission File No.
                     333-131229, filed with the Commission on January 23, 2006).
-------------------- -----------------------------------------------------------
3.2                  Bylaws of American Oriental Bioengineering, Inc.
                     (incorporated by reference from the Report on Form 10-KSB,
                     Commission File No. 000-29785, filed with the Commission on
                     April 15, 2004).
-------------------- -----------------------------------------------------------
4.1                  Form of Warrant (incorporated by reference from the Current
                     Report on Form 8-K, Commission File No. 001-32569, filed
                     with the Commission on December 1, 2005).
-------------------- -----------------------------------------------------------
4.2                  American Oriental Bioengineering, Inc. 2003 Stock Option
                     Plan (incorporated by reference from the Report on Form
                     10-KSB, Commission File No. 000-29785, filed with the
                     Commission on April 15, 2004).
-------------------- -----------------------------------------------------------
10.1                 Stock and Warrant Purchase Agreement, dated as of November
                     28, 2005, by and among American Oriental Bioengineering,
                     Inc. and the signatory purchasers named therein
                     (incorporated by reference from the Current Report on Form
                     8-K, Commission File No. 001-32569, filed with the
                     Commission on December 1, 2005).
-------------------- -----------------------------------------------------------
10.2                 Form of Registration Rights Agreement by and among American
                     Oriental Bioengineering, Inc. and the signatories thereto
                     (incorporated by reference from the Current Report on Form
                     8-K, Commission File No. 001-32569, filed with the
                     Commission on December 1, 2005).
-------------------- -----------------------------------------------------------
10.3(a)              Employment Agreement, dated as of March 24, 2004, between
                     American Oriental Bioengineering, Inc. and Tony Liu
                     (incorporated by reference from the Report on Form 10-KSB,
                     Commission File No. 000-29785, filed with the Commission on
                     April 15, 2004).
-------------------- -----------------------------------------------------------
10.3(b)              Employment Agreement, dated as of March 24, 2004, between
                     American Oriental Bioengineering, Inc. and Lily Li
                     (incorporated by reference from the Report on Form 10-KSB,
                     Commission File No. 000-29785, filed with the Commission on
                     April 15, 2004).
-------------------- -----------------------------------------------------------

                                       44


<PAGE>

-------------------- -----------------------------------------------------------
10.3(c)              Employment Agreement, dated as of March 24, 2004, between
                     American Oriental Bioengineering, Inc. and Jun Min
                     (incorporated by reference from the Report on Form 10-KSB,
                     Commission File No. 000-29785, filed with the Commission on
                     April 15, 2004).
-------------------- -----------------------------------------------------------
10.3(d)              Employment Agreement, dated as of March 24, 2004, between
                     American Oriental Bioengineering, Inc. and Binsheng Li
                     (incorporated by reference from the Report on Form 10-KSB,
                     Commission File No. 000-29785, filed with the Commission on
                     April 15, 2004).
-------------------- -----------------------------------------------------------
10.4                 Purchase Agreement, dated September 8, 2004, by and between
                     American Oriental Bioengineering, Inc. and the Government
                     of Heilongjiang Province of China and Heilongjiang
                     Songhuajiang Pharmaceutical Limited (incorporated by
                     reference from the Current Report on Form 8-K, Commission
                     File No. 000-29785, filed with the Commission on September
                     14, 2004).
-------------------- -----------------------------------------------------------
10.5                 Purchase Agreement, dated as of August 18, 2002, by and
                     between American Oriental Bioengineering, Inc. and Shujun
                     Liu (incorporated by reference from the Schedule 14C
                     Commission File No. 000-29785, filed with the Commission on
                     October 15, 2002).
-------------------- -----------------------------------------------------------
10.6                 Subscription Agreement, dated as of November 23, 2004,
                     between American Oriental Bioengineering, Inc. and the
                     Subscribers (incorporated by reference from the
                     Registration Statement on Form SB-2, Commission File No.
                     333-124133, filed with the Commission on April 18, 2005).
-------------------- -----------------------------------------------------------
10.7(a)              Consulting Agreement, dated June 28, 2004, by and between
                     American Oriental Bioengineering, Inc. and Bai Chao
                     (incorporated by reference from the Registration Statement
                     on Form S-8, Commission File No. 333-117276, filed with the
                     Commission on July 9, 2004).
-------------------- -----------------------------------------------------------
10.7(b)              Consulting Agreement, dated June 28, 2004, by and between
                     American Oriental Bioengineering, Inc. and Kou Yumin
                     (incorporated by reference from the Registration Statement
                     on Form S-8, Commission File No. 333-117276, filed with the
                     Commission on July 9, 2004).
-------------------- -----------------------------------------------------------
10.7(c)              Consulting Agreement, dated June 28, 2004, by and between
                     American Oriental Bioengineering, Inc. and Xiangli Men
                     (incorporated by reference from the Registration Statement
                     on Form S-8 Commission File No. 333-117276, filed with the
                     Commission on July 9, 2004).
-------------------- -----------------------------------------------------------
10.7(d)              Consulting Agreement, dated June 28, 2004, by and between
                     American Oriental Bioengineering, Inc. and Linda Welsh
                     (incorporated by reference from the Registration Statement
                     on Form S-8 Commission File No. 333-117276, filed with the
                     Commission on July 9, 2004).
-------------------- -----------------------------------------------------------
10.7(e)              Consulting Agreement, dated June 28, 2004, by and between
                     American Oriental Bioengineering, Inc. and Dr. Jie Zhu
                     (incorporated by reference from the Registration Statement
                     on Form S-8 Commission File No. 333-117276, filed with the
                     Commission on July 9, 2004).
-------------------- -----------------------------------------------------------
10.7(f)              Consulting Agreement, dated June 28, 2004, by and between
                     American Oriental Bioengineering, Inc. and Brian Corday
                     (incorporated by reference from the Registration Statement
                     on Form S-8 Commission File No. 333-117276, filed with the
                     Commission on July 9, 2004).
-------------------- -----------------------------------------------------------

                                       45


<PAGE>

-------------------- -----------------------------------------------------------
10.7(g)              Consulting Agreement, dated October 1, 2003, by and between
                     American Oriental Bioengineering, Inc. and Haishan Wang
                     (incorporated by reference from the Registration Statement
                     on Form S-8 Commission File No. 333-109832, filed with the
                     Commission on October 10, 2003).
-------------------- -----------------------------------------------------------
10.7(h)              Consulting Agreement, dated October 1, 2003, by and between
                     American Oriental Bioengineering, Inc. and Xiangli Men
                     (incorporated by reference from the Registration Statement
                     on Form S-8 Commission File No. 333-109832, filed with the
                     Commission on October 10, 2003).
-------------------- -----------------------------------------------------------
10.7(i)              Consulting Agreement, dated October 1, 2003, by and between
                     American Oriental Bioengineering, Inc. and Lau Chak Wong
                     (incorporated by reference from the Registration Statement
                     on Form S-8 Commission File No. 333-109832, filed with the
                     Commission on October 10, 2003).
-------------------- -----------------------------------------------------------
10.8(a)              Service Agreement, dated September 27, 2004, and as amended
                     on March 8, 2006, by and between American Oriental
                     Bioengineering, Inc. and Cosimo J. Patti, filed herewith.
-------------------- -----------------------------------------------------------
10.8(b)              Service Agreement, dated January 1, 2005, and as amended on
                     March 8, 2006, by and between American Oriental
                     Bioengineering, Inc. and Xianmin Wang, filed herewith.
-------------------- -----------------------------------------------------------
10.8(c)              Service Agreement, dated June 22, 2005, and as amended on
                     March 8, 2006, by and between American Oriental
                     Bioengineering, Inc. and Eileen Brody, filed herewith.
-------------------- -----------------------------------------------------------
14                   Code of Ethics of American Oriental Bioengineering, Inc.,
                     dated November 8, 2005, filed herewith.
-------------------- -----------------------------------------------------------
16                   Letter on Change in Certifying Accountant (incorporated by
                     reference from the Report on Form 8-K, Commission File No.
                     000-29785, filed with the Commission on February 13, 2004).
-------------------- -----------------------------------------------------------
21                   Subsidiaries of the Registrant (incorporated by reference
                     from the Registration Statement on Form SB-2 Commission
                     File No. 333-124133, filed with the Commission on April 18,
                     2005).
-------------------- -----------------------------------------------------------
23                   Consent of Weinberg & Company, PA, Independent Registered
                     Public Accounting Firm filed herewith.
-------------------- -----------------------------------------------------------
31.1                 Certification of Chief Executive Officer pursuant to Rule
                     13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,
                     as adopted pursuant to Section 302 of the Sarbanes-Oxley
                     Act of 2002, filed herewith.
-------------------- -----------------------------------------------------------
31.2                 Certification of Acting Chief Financial Officer pursuant to
                     Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
                     1934, as adopted pursuant to Section 302 of the
                     Sarbanes-Oxley Act of 2002, filed herewith.
-------------------- -----------------------------------------------------------
32                   Certification of Chief Executive Officer and Acting Chief
                     Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906
                     of the Sarbanes-Oxley Act of 2002), filed herewith.
-------------------- -----------------------------------------------------------

                                       46


<PAGE>


ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Audit Fees
----------

         The aggregate fees billed for each of the last two years for
professional services rendered by the principal accountant for our audits of our
annual financial statements and interim reviews of our financial statements
included in our Form 10-KSBs and 10-QSBs or services that are normally provided
by the accountant in connection with statutory and regulatory filings or
engagements for those years were approximately:

                          2005:          $335,000  Weinberg & Company, P.A.

                          2004:          $157,000  Weinberg & Company, P.A.

Audit Related Fees
------------------

         The aggregate fees billed in each of the last two years for the
assurance and related services provided by the principal accountant that are not
reasonably related to the performance of the audit or review of the Company's
financial statements and are not reported in paragraph (1) were approximately:

                          2005:           $79,000  Weinberg & Company, P.A.

                          2004:                $0  Weinberg & Company, P.A.

We incurred these fees in connection with registration statements and financing
transactions.

Tax Fees
--------

         The aggregate fees billed in each of the last two years for the
professional services rendered by the principal accountant for tax compliance,
tax advice and tax planning were approximately:

                          2005:           $17,000  Weinberg & Company, P.A.

                          2004:                $0  Weinberg & Company, P.A.

We incurred these fees due to the preparation of our tax returns.

All Other Fees
--------------

         The aggregate fees billed in each of the last two years for the
products and services provided by the principal accountant, other than the
services reported in paragraph (1) were approximately:

                          2005:                $0  Weinberg & Company, P.A.

                          2004:                $0  Weinberg & Company, P.A.

                                       47


<PAGE>

Audit Committee Approval
------------------------

         Our Audit Committee must pre-approve all audit and permissible
non-audit services performed by the independent accountants. These services may
include audit services, audit-related services, tax services and other services.

         All of the services described herein were approved by the Audit
Committee pursuant to its pre-approval policies. None of the hours expended on
the principal accountant's engagement to audit the Company's financial
statements for the most recent fiscal year were attributed to work performed by
persons other than the principal accountant's full-time permanent employees.


                                       48


<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.


Date:  March 30, 2006           By: /s/ Shujun Liu
                                    --------------------------------------------
                                    By:     Shujun Liu
                                    Title:  Chief Executive Officer and Director

         Pursuant to the requirements of the Securities and Exchange Act of
1934, this Report has been signed below by the following person on behalf of the
Registrant and in the capacities and on the dates indicated.

SIGNATURE              TITLE                                      DATE
---------              -----                                      ----

/s/ Shujun Liu
-------------------
Shujun Liu             Chief Executive Officer and Chairman       March 30, 2006
                       of the Board of Directors


/s/ Yanchun Li
-------------------
Yanchun Li             Acting Chief Financial Officer, Chief      March 30, 2006
                       Operating Officer, Secretary and Director


/s/ Jun Min
-------------------
Jun Min                Vice President and Director                March 30, 2006


/s/ Binsheng Li
-------------------
Binsheng Li            Chief Accounting and Finance Officer and
                       Director                                   March 30, 2006


/s/ Cosimo J. Patti
-------------------
Cosimo J. Patti        Independent Director                       March 30, 2006

/s/ Xianmin Wang
-------------------
Xianmin Wang           Independent Director                       March 30, 2006

/s/ Eileen Brody
-------------------
Eileen Brody           Independent Director                       March 30, 2006


                                       49



<PAGE>

                     AMERICAN ORIENTAL BIOENGINEERING, INC.
                                AND SUBSIDIARIES
                        CONSOLIDATED FINANCIAL STATEMENTS
                               FOR THE YEARS ENDED
                           DECEMBER 31, 2005 AND 2004








<PAGE>



             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES




                                    CONTENTS


PAGE 52       REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

PAGE 53       CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2005 AND 2004

PAGE 54       CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE
                YEARS ENDED DECEMBER 31, 2005 AND 2004

PAGE 55       CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE
                YEARS ENDED DECEMBER 31, 2005 AND 2004

PAGES 56-57   CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
                DECEMBER 31, 2005 AND 2004

PAGES 58-80   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005
                AND 2004







                                        51




<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders of
American Oriental Bioengineering, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of American
Oriental Bioengineering, Inc. and Subsidiaries (the "Company") as of December
31, 2005 and 2004 and the related consolidated statements of income and
comprehensive income, changes in shareholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Oriental Bioengineering, Inc. and Subsidiaries as of December 31, 2005
and 2004 and the results of their consolidated operations and their consolidated
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.



/s/ Weinberg & Company, P.A.
Certified Public Accountants

Boca Raton, Florida
March 13, 2006




                                        52




<PAGE>
<TABLE>

                        AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                                      CONSOLIDATED BALANCE SHEETS


                                                 ASSETS
                                                 ------
                                                                              DECEMBER 31,  DECEMBER 31,
                                                                                 2005          2004
                                                                              -----------   -----------
<S>                                                                           <C>           <C>
CURRENT ASSETS
  Cash and cash equivalents                                                   $57,532,049   $11,404,149
  Accounts receivable, net                                                      8,168,420     4,736,901
  Inventories, net                                                              4,916,500     5,673,059
  Advances to suppliers                                                         3,494,320       518,589
  Other receivables                                                               102,611       156,062
  Due from employees                                                              409,159       182,099
  Deferred consulting expenses                                                    752,620     1,686,652
                                                                              -----------   -----------
          Total Current Assets                                                 75,375,679    24,357,511

PLANT AND EQUIPMENT, NET                                                       13,386,439     8,068,776
LAND USE RIGHTS, NET                                                            7,925,763     7,871,497
CONSTRUCTION IN PROGRESS                                                        1,655,349     1,836,714
DEFERRED TAX ASSETS                                                               614,336       159,958
LICENSE, NET                                                                      464,673       542,168
                                                                              -----------   -----------
    TOTAL ASSETS                                                              $99,422,239   $42,836,624
                                                                              ===========   ===========

                                  LIABILITIES AND SHAREHOLDERS' EQUITY
                                  ------------------------------------

CURRENT LIABILITIES
Accounts payable                                                              $ 1,230,767   $   755,266
Other payables and accrued expenses                                             1,604,096     1,064,411
Taxes payable                                                                   1,485,872     1,096,545
Short-term bank loans                                                           3,717,380     5,060,241
Customer deposits                                                                 355,975       160,504
Due to shareholders                                                                    --     1,404,522
Other liabilities                                                                 168,080        12,952
                                                                              -----------   -----------
          Total current liabilities                                             8,562,170     9,554,441

DEFERRED TAX LIABILITIES                                                          232,505       107,201
OTHER LIABILITIES                                                                  23,018        34,548
                                                                              -----------   -----------
TOTAL LIABILITIES                                                               8,817,693     9,696,190
                                                                              -----------   -----------

SHAREHOLDERS' EQUITY
Preferred stock, $0.001 par value; 2,000,000 shares authorized;
  1,000,000 shares issued and outstanding                                           1,000         1,000
Common stock, $0.001 par value; 150,000,000 shares authorized
  57,109,188 and 39,746,827 shares issued and outstanding, respectively            57,109        39,747
Additional paid-in capital                                                     59,491,393    16,900,303
Retained earnings (the restricted portion of retained earnings is
  $4,104,115 and $1,294,689 as of December 31, 2005 and 2004, respectively)    29,625,765    16,199,384
Accumulated other comprehensive income                                          1,429,279            --
                                                                              -----------   -----------
        Total Shareholders' Equity                                             90,604,546    33,140,434
                                                                              -----------   -----------
   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                 $99,422,239   $42,836,624
                                                                              ===========   ===========


                    See accompanying notes to the consolidated financial statements.

                                                   53




<PAGE>


                 AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
                      FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004



                                                                2005            2004
                                                            ------------    ------------

REVENUES                                                    $ 54,732,557    $ 31,966,927

COST OF GOODS SOLD                                           (19,607,240)    (11,267,647)
                                                            ------------    ------------

GROSS PROFIT                                                  35,125,317      20,699,280

Selling and distribution                                      (3,216,545)     (2,387,805)

Advertising                                                   (5,238,186)     (2,926,629)

General and administrative                                    (7,076,139)     (4,582,388)

Depreciation and amortization                                 (1,254,498)       (757,720)
                                                            ------------    ------------

INCOME FROM OPERATIONS                                        18,339,949      10,044,738

INTEREST EXPENSE, NET                                           (505,822)       (100,765)

OTHER INCOME(EXPENSE), NET                                        (6,876)         44,035
                                                            ------------    ------------

INCOME BEFORE INCOME TAXES                                    17,827,251       9,988,008

INCOME TAXES                                                  (4,400,870)     (2,216,626)
                                                            ------------    ------------

NET INCOME                                                    13,426,381       7,771,382
                                                            ------------    ------------

OTHER COMPREHENSIVE INCOME

Foreign currency translation gain                              1,429,279              --
                                                            ------------    ------------
Other comprehensive income before tax                          1,429,279              --

Income tax expenses related to other comprehensive income       (471,662)             --
                                                            ------------    ------------

TOTAL OTHER COMPREHENSIVE INCOME, NET OF TAX                     957,617              --
                                                            ------------    ------------

COMPREHENSIVE INCOME                                        $ 14,383,998    $  7,771,382
                                                            ============    ============

NET INCOME PER SHARE
         BASIC                                              $       0.31    $       0.23
         DILUTED                                            $       0.31    $       0.23

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
         BASIC                                                43,827,725      33,595,685
         DILUTED                                              43,840,463      33,953,507



             See accompanying notes to the consolidated financial statements.

                                            54


<PAGE>


                                       AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                           FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004




                                  Preferred Stock           Common Stock          Additional                  Other
                                            Stated                      Par         Paid-in      Retained  Comprehensive
                                 Shares      Value      Shares         Value        Capital      Earnings     Income        Total
                              -----------  ---------  -----------   -----------   -----------  -----------  -----------  -----------

BALANCE AT
  JANUARY 1, 2004               1,000,000  $   1,000   32,725,827   $    32,726   $10,048,734  $ 8,428,002  $        --  $18,510,462

Common stock issued
  for consulting services              --         --    1,021,000         1,021     1,354,955           --           --    1,355,976

Common stock and warrants
  issued in private
   placement, net                      --         --    6,000,000         6,000     5,432,614           --           --    5,438,614

Stock options granted
  to executives                        --         --           --            --        64,000           --           --       64,000

Net income                             --         --           --            --            --    7,771,382           --    7,771,382
                              -----------  ---------  -----------   -----------   -----------  -----------  -----------  -----------
BALANCE AT DECEMBER 31, 2004    1,000,000      1,000   39,746,827        39,747    16,900,303   16,199,384           --   33,140,434
                              -----------  ---------  -----------   -----------   -----------  -----------  -----------  -----------

Common stock and warrants
  issued in private
  placement, net                       --         --    6,973,400         6,973    31,463,514           --           --   31,470,487

Common stock issued
  for director services                --         --       22,026            22       122,443           --           --      122,465

Stock options granted
  to executives                        --         --           --            --        64,000           --           --       64,000

Exercise of warrants                   --         --   10,518,935        10,519    10,940,981           --           --   10,951,500

Cancellation of shares                 --         --     (152,000)         (152)          152           --           --           --

Foreign currency
  translation                          --         --           --            --            --           --    1,429,279    1,429,279

Net income                             --         --           --            --            --   13,426,381           --   13,426,381
                              -----------  ---------  -----------   -----------   -----------  -----------  -----------  -----------
BALANCE AT
  DECEMBER 31, 2005             1,000,000  $   1,000   57,109,188   $    57,109   $59,491,393  $29,625,765  $ 1,429,279  $90,604,546
                              ===========  =========  ===========   ===========   ===========  ===========  ===========  ===========


                                  See accompanying notes to the consolidated financial statements.

                                                                 55



<PAGE>


                AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                         CONSOLIDATED STATEMENTS OF CASH FLOWS
                    FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004


                                                              2005            2004
                                                          ------------    ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income                                               $ 13,426,381    $  7,771,382
 Adjustments to reconcile net income to net cash
  provided by operating activities:
    Depreciation and amortization                            1,254,498         757,720
    Amortization of deferred consulting expenses               934,032       1,106,124
    Stock options granted to executives                         64,000          32,000
    Common stock issued and to be issued for services          263,508         165,976
    Provision for doubtful accounts                            266,248              --
    Inventory provision                                        842,112              --
    Deferred taxes                                            (329,075)         25,682

Changes in operating assets and liabilities, net of the
  effects of the acquisition:
  (Increase) Decrease In:
    Accounts receivable                                     (3,697,768)       (807,686)
    Inventories                                                (85,553)     (1,606,851)
    Advances to suppliers                                   (3,063,844)        381,724
    Other receivables                                          141,566        (105,455)

Increase (Decrease) In:
 Accounts payable                                              475,501      (1,289,640)
 Customer deposits                                             195,471          81,786
 Tax payable                                                   389,327         786,065
 Other payables and accrued expenses                           539,682       1,064,414
                                                          ------------    ------------
 Net cash provided by operating activities                  11,616,086       8,363,241
                                                          ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Due from employees                                           (213,736)       (126,983)
 Purchases of construction in progress                      (5,037,514)     (1,826,089)
 Purchases of plant and equipment                             (824,431)        (64,557)
 Purchases of a subsidiary, net of cash acquired                    --      (7,070,883)
                                                          ------------    ------------
 Net cash used in investing activities                      (6,075,681)     (9,088,512)
                                                          ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from short-term bank loans                                --       1,445,783
 Repayments of short-term bank loans                        (1,342,861)     (1,445,783)
 Net proceeds from private placement                        31,470,487       5,438,614
 Proceeds from exercise of warrants                         10,951,500              --
 Repayment of capital lease                                    (10,768)        (27,161)
 Cash (repayment to) received from shareholders             (1,404,522)      1,351,110
                                                          ------------    ------------
 Net cash provided by financing activities                  39,663,836       6,762,563
                                                          ------------    ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                   45,204,241       6,037,292

  Effect of exchange rate changes on cash                      923,659              --
  Cash and cash equivalents, at beginning of year           11,404,149       5,366,857
                                                          ------------    ------------

CASH AND CASH EQUIVALENTS, END OF YEAR                    $ 57,532,049    $ 11,404,149
                                                          ============    ============



           See accompanying notes to the consolidated financial statements.

                                           56
</TABLE>



<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 and 2004



SUPPLEMENTARY CASH FLOW INFORMATION                      2005           2004
                                                      ----------     ----------

Interest paid                                         $  313,537     $  130,601
                                                      ==========     ==========

Income taxes paid                                     $4,370,165     $1,404,878
                                                      ==========     ==========

NON CASH INVESTING AND FINANCING ACTIVITIES

   On October 12, 2004, the Company completed the acquisition of Heilongjiang
   Songhuajiang Pharmaceuticals Co., Ltd. for $7,228,916 The following
   represents the assets purchased and liabilities assumed at the acquisition
   date:
            Land Use Right                                        $   7,137,137
            Construction in progress                                     10,627
            Fixed Assets                                              2,098,683
            Cash and cash equivalents                                   158,033
            Accounts receivable                                         672,408
            Inventories                                               1,519,398
            Other receivables and prepayments                            82,462
                                                                  -------------
      Total assets purchased                                         11,678,748
                                                                  -------------

            Short Term Bank Loans                                     3,656,627
            Accounts payable and accrued expenses                       791,080
            Customer deposits                                             2,125
                                                                  -------------
      Total liabilities assumed                                       4,449,832
                                                                  -------------

      Net assets acquired                                         $   7,228,916
                                                                  =============

   Total consideration paid                                       $   7,228,916
                                                                  =============

21,000 warrants were exercised (under cashless provision) for repurchasing
18,935 shares of common stock in 2005.

152,000 shares of common stock were cancelled in 2005.

Assets of $5,271,180 were transferred from construction in progress to property,
plant and equipment at completion in 2005.

52,037 shares of common stock issued and to be issued valued at $263,508 for
services

Issued 321,000 shares of common stock valued at $165,975 for consulting services
in 2004.

Issued 700,000 shares of common stock valued at $1,190,000 for deferred
consulting services in 2004.




        See accompanying notes to the consolidated financial statements.


                                       57



<PAGE>

             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004


1. ORGANIZATION AND PRINCIPAL ACTIVITIES

         In an agreement dated December 18, 2001, Internet Golf Association
         agreed to acquire Harbin Three Bioengineering Limited, a limited
         liability company formed in the People's Republic of China ("PRC").
         Under the terms of the agreement, Internet Golf Association had
         reversed split its common stock 100 to 1, reduced the authorized shares
         to 20,000,000 shares and changed its name to American Oriental
         Bioengineering, Inc. (the "Company"). The Company also acquired Bestkey
         International, Ltd., a British Virgin Island Corporation. This
         transaction was treated as a reverse merger for accounting purposes.

         On December 18, 2001, the Company acquired 100% of the equity interest
         of Harbin Three Happiness Bioengineering Co., Ltd. ("Harbin
         Bioengineering"), a company organized under the laws of China, through
         the exchange of 8,538,943 shares of the Company's restricted common
         stock. The transaction was a triangular merger with Bestkey
         International, Ltd., a British Virgin Island corporation, and was
         treated as a reverse merger for accounting purposes. That merger
         transaction was completed on June 26, 2002. Bestkey International, Ltd
         is an inactive company.

         On April 16, 2004 American Oriental Bioengineering (Hong Kong) Limited
         was set up as a wholly-owned subsidiary.

         The Company signed a purchase agreement relating to the acquisition of
         Heilongjiang Songhuajiang Pharmaceutical Co., Ltd. ("HSPL") on
         September 8, 2004 and on October 12, 2004 the transaction was
         completed. The Company acquired 100% of the equity interest of HSPL for
         $7,228,916 in cash. That transaction was a triangular merger with
         Goware Holding International, Ltd., a British Virgin Island
         corporation. Goware Holding International, Ltd. is an inactive company.

         The principal activities of the Company in Mainland China are research,
         manufacture and sale of prescription and non-prescription health care
         products and Chinese medical products. The principal activities in Hong
         Kong are marketing and trading of health care products.



                                        58




<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


2. BASIS OF CONSOLIDATION

         The consolidated financial statements include the accounts of the
         Company, Bestkey International, Ltd., Harbin Three Happiness
         Bioengineering Limited, American Oriental Bioengineering (Hong Kong)
         Limited, Goware Holding International, Ltd., and Heilongjiang
         Songhuajiang Pharmaceutical Company, Limited. All material
         inter-company accounts and transactions have been eliminated in the
         consolidation.

         Certain amounts in the prior year have been reclassified to conform to
         current year's presentation.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     (a) Economic and Political Risks

         The Company's operations are conducted in the PRC. Accordingly, the
         Company's business, financial condition and results of operations may
         be influenced by the political, economic and legal environment in the
         PRC, and by the general state of the PRC economy.

         The Company's operations in the PRC are subject to special
         considerations and significant risks not typically associated with
         companies in North America and Western Europe. These include risks
         associated with, among others, the political, economic and legal
         environment and foreign currency exchange. The Company's results may be
         adversely affected by changes in the political and social conditions in
         the PRC, and by changes in governmental policies with respect to laws
         and regulations, anti-inflationary measures, currency conversion,
         remittances abroad, and rates and methods of taxation, among other
         things.

    (b)  Land Use Rights

         According to the law of China, the government owns all the land in
         China. Companies or individuals are authorized to possess and use the
         land only through land use rights granted by the Chinese government.
         Land use rights are being amortized using the straight-line method over
         the lease term of 40 to 50 years.

    (c)  Plant and Equipment

         Plant and equipment are carried at cost less accumulated depreciation.
         Depreciation is provided over their estimated useful lives, using the
         straight-line method. Estimated useful lives of the plant and equipment
         are as follows:

               Building                                      40 years
               Machinery and equipment                       10 years
               Leasehold improvement                         10 years
               Motor vehicles                                 5 years
               Office equipment and furnishings               5 years
               Other equipment                                5 years

                                        59



<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    (c)  Plant and Equipment (continued)

         The cost and related accumulated depreciation of assets sold or
         otherwise retired are eliminated from the accounts and any gain or loss
         is included in the statement of income. The cost of maintenance and
         repairs is charged to the statement of income as incurred, whereas
         significant renewals and betterments are capitalized.

    (d)  Accounting for the Impairment of Long-Lived Assets

         The long-lived assets held and used by the Company are reviewed for
         impairment whenever events or changes in circumstances indicate that
         the carrying amount of assets may not be recoverable. It is reasonably
         possible that these assets could become impaired as a result of
         technology or other industry changes. Determination of recoverability
         of assets to be held and used is by comparing the carrying amount of an
         asset to future net undiscounted cash flows to be generated by the
         assets. If such assets are considered to be impaired, the impairment to
         be recognized is measured by the amount by which the carrying amount of
         the assets exceeds the fair value of the assets. Assets to be disposed
         of are reported at the lower of the carrying amount or fair value less
         costs to sell.

         There were no impairments of long-lived assets in 2005 and 2004.

    (e)  Construction In Progress

         Construction in progress represents direct costs of construction or
         acquisition and design fees incurred. Capitalization of these costs
         ceases and the construction in progress is transferred to plant and
         equipment when substantially all the activities necessary to prepare
         the assets for their intended use are completed. No depreciation is
         provided until it is completed and ready for intended use.

    (f)  Inventories

         Inventories consisting of raw materials, work-in-progress and finished
         goods are stated at the lower of weighted average cost or market value.
         Finished goods are comprised of direct materials, direct labor and an
         appropriate proportion of overhead.

    (g)  Accounts Receivable

         Trade receivables are recognized and carried at the original invoice
         amount less allowance for any uncollectible amounts. An estimate for
         doubtful accounts is made when collection of the full amount is no
         longer probable. Bad debts are written off as incurred. The allowance
         on the doubtful accounts was $266,248 and $0 in 2005 and 2004,
         respectively.



                                       60


<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    (h)  Research and Development

         Research and development costs are expensed as incurred. Engineers and
         technical staff are involved in the production of our products as well
         as on-going research, with no segregation of the portion of their
         salaries relating to research and development from the portion of their
         salaries relating to production. The total salaries are included in
         cost of sales. Other research is performed on a future profit sharing
         basis conducted by universities and research institutions.

    (i)  Cash and Cash Equivalents

         The Company considers all highly liquid investments purchased with
         original maturities of three months or less to be cash equivalents.

    (j)  Advances to Suppliers

         Advances to suppliers represent the cash paid in advance for purchasing
         raw materials.

    (k)  Deferred Consulting Expenses

         The deferred consulting expenses are amortized over their service term
         of one to three years respectively.

    (l)  License

         The license represents the ownership of new drugs, which is amortized
         over the estimated useful life of twelve years.

    (m)  Fair Value of Financial Instruments

         The Company's financial instruments include cash and cash equivalents,
         accounts receivable, advances to suppliers, other receivables, due from
         employees, taxes payable, accounts payable, accrued expenses,
         short-term bank loans, customer deposits, other payables and due to
         related parties. Management has estimated that the carrying amount
         approximates their fair value due to their short-term nature.



                                       61


<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    (n)  Revenue Recognition

         Revenue represents the invoiced value of goods sold recognized upon the
         shipment of goods to customers. Revenue is recognized when all of the
         following criteria are met:

         -Persuasive evidence of an arrangement exists,
         -Delivery has occurred or services have been rendered,
         -The seller's price to the buyer is fixed or determinable, and
         -Collectibility is reasonably assured.

         The Company established a subsidiary in Hong Kong with a specialty
         retail store to sell its products. The retail store sells certain
         products to certain customers on consignment. The Company records
         revenue for consignment transactions when the consignee sells the
         product to the end user.

    (o)  Shipping and Handling

         All shipping and handling are expensed as incurred and outbound freight
         is not billed to customers. Shipping and handling expenses included in
         selling and distribution expenses were $925,982 and $615,808 for the
         years ended December 31, 2005 and 2004, respectively.

    (p)  Advertising Costs

         The Company expenses advertising costs as incurred or the first time
         advertising takes place. Point of sale materials are accounted for as
         inventory and charged to expense as utilized.

    (q)  Foreign Currency Translation

         The accompanying consolidated financial statements are presented in
         United States dollars. The functional currency of the Company is the
         Renminbi (RMB). Capital accounts of the consolidated financial
         statements are translated into United States dollars from RMB at their
         historical exchange rates when the capital transactions occurred.
         Assets and liabilities are translated at the exchange rates as of
         balance sheet date. Income and expenditures are translated at the
         average exchange rate of the year.


                                       62



<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    (r)  Foreign Currency Translation (Continued)

                                                            2005         2004
                                                         ----------   ----------
         Year end RMB : US$ exchange rate                  8.0702         8.3
         Average yearly RMB : US$ exchange rate            8.1734         8.3

         The RMB is not freely convertible into foreign currency and all foreign
         exchange transactions must take place through authorized institutions.
         No representation is made that the RMB amounts could have been, or
         could be, converted into US$ at the rates used in translation.

    (s)  Retirement Benefits

         Retirement benefits in the form of contributions under defined
         contribution retirement plans to the relevant authorities are charged
         to the consolidated statements of income as incurred. The retirement
         benefit expenses for 2005 and 2004 are $28,678 and $22,551,
         respectively and are included in general and administrative expenses.

    (t)  Use of Estimates

         The preparation of the financial statements in conformity with
         generally accepted accounting principles in the United States of
         America requires management to make estimates and assumptions that
         affect the reported amounts of assets and liabilities and disclosure of
         contingent assets and liabilities at the date of the financial
         statements and the reported amounts of revenues and expenses during the
         reporting periods. Management makes these estimates using the best
         information available at the time the estimates are made; however
         actual results could differ materially from those estimates.

    (u)  Income Taxes

         The Company accounts for income tax using an asset and liability
         approach and allows for recognition of deferred tax benefits in future
         years. Under the asset and liability approach, deferred taxes are
         provided for the net tax effects of temporary differences between the
         carrying amounts of assets and liabilities for financial reporting
         purposes and the amounts used for income tax purposes. A valuation
         allowance is provided for deferred tax assets if it is more likely than
         not these items will either expire before the Company is able to
         realize their benefits, or that future realization is uncertain.

         In accordance with the relevant tax laws and regulations of PRC and US,
         the corporation income tax rate applicable ranges from 15% to 34%. The
         Company's income tax expense for 2005 and 2004 was $4,400,870 and
         $2,216,626, respectively.


                                       63



<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    (v)  Comprehensive Income

         Comprehensive income is defined to include all changes in equity except
         those resulting from investments by owners and distributions to owners.
         Among other disclosures, all items that are required to be recognized
         under current accounting standards as components of comprehensive
         income are required to be reported in a financial statement that is
         presented with the same prominence as other financial statements.
         Comprehensive income includes net income and the foreign currency
         translation gain, net of tax.

    (w)  Stock-Based Compensation

         Statement of Financial Accounting Standards ("SFAS") No. 123,
         "Accounting for Stock-Based Compensation" encourages the use of the
         fair value based method of accounting for stock-based employee
         compensation. Alternatively, SFAS No. 123 allows entities to continue
         to apply the intrinsic value method prescribed by Accounting Principles
         Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees,"
         and related interpretations and provide pro forma disclosures of net
         income (loss) and earnings (loss) per share, as if the fair value-based
         method of accounting had been applied to employee awards. The Company
         has elected to continue to apply the provisions of APB Opinion 25 and
         provide the disclosures required by SFAS No. 123 and SFAS No. 148,
         "Accounting for Stock-Based Compensation - Transition and Disclosure."

         Stock-based compensation for service, for other than employees is
         accounted for in accordance with the provision of SFAS 123, Accounting
         For Stock - Based Compensation. Accordingly, all transactions in which
         goods or services are the consideration received for the issuance of
         equity instruments are accounted for based on the fair value of the
         consideration received or the fair value of the equity instruments
         issued, whichever is more reliably measurable. The fair value is then
         generally amortized over the term of the services. If the service
         period is not defined as an earlier or shorter period, the service
         period is presumed to be the vesting period.

         The following table illustrates the effect on net income attributable
         to common stockholders per share if the fair value based method had
         been applied to all awards:



                                       64



<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    (w) Stock-Based Compensation (continued)

                                                           DECEMBER 31,
                                                   ----------------------------
                                                       2005            2004
                                                   ------------    ------------
        Net income, as reported                    $ 13,426,381    $  7,771,382
        Add:
        Stock-based employee compensation
          expense included in the reported
          income, net of related tax effects
                                                         64,000          32,000
        Less:
        Total stock-based employee compensation
          expense determined under fair value
          based methods for all awards, net of
          related tax effects                           (91,481)        (70,345)
                                                   ------------    ------------

        Pro forma net income                       $ 13,398,900    $  7,733,037
                                                   ============    ============

        Basic earnings per share
        As reported                                $       0.31    $       0.23
        Pro forma                                  $       0.31    $       0.23

        Diluted earnings per share
        As reported                                $       0.31    $       0.23
        Pro forma                                  $       0.31    $       0.23

    (x)  Segments

         The Company operates in two business segments: the development,
         production, and sale of plant based pharmaceutical ("PBP") products and
         plant based nutraceutical ("PBN") products, and retails of PBP and PBN
         products in Hong Kong. However, no segment reporting is included in the
         Company's footnotes to the financial statements since the revenues and
         expenses relating to the Hong Kong retail operations are insignificant.



                                       65



<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


    (y)  Earnings Per Share

         Basic earnings per share is computed by dividing income available to
         common shareholders by the weighted-average number of common shares
         outstanding during the period. Diluted earnings per share is computed
         similar to basic earnings per share except that the denominator is
         increased to include the number of additional common shares that would
         have been outstanding if the potential common shares had been issued
         and if the additional common shares were dilutive. Outstanding warrants
         at December 31, 2005 and December 31, 2004 to purchase 2,726,600 shares
         and 3,000,000 shares, respectively of common stock were not included in
         the computation of diluted earnings per share because the exercise
         prices were greater than the average market price of the Company's
         common stock.

         Following is a reconciliation of the denominator and numerator used in
         the computation of basic and diluted earnings per share for the years
         ended December 31, 2005 and 2004:

                                                            2005         2004
                                                         ----------   ----------

         Basic weighted average shares of
           common stock outstanding                      43,827,725   33,595,685
         Assumed exercise of warrants and options, net       12,738      357,822
                                                         ----------   ----------

         Diluted weighted average shares of
           common stock outstanding                      43,840,463   33,953,507
                                                         ==========   ==========



                                       66



<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    (z)  Recent Accounting Pronouncements

         In December 2004, the Financial Accounting Standards Board ("FASB")
         issued a revised SFAS No. 123, Accounting for Stock-Based Compensation,
         which supersedes APB opinion No. 25, Accounting for Stock Issued to
         Employees, and its related implementation guidance. This statement
         requires a public entity to recognize and measure the cost of employee
         services it receives in exchange for an award of equity instruments
         based on the grant-date fair value of the award (with limited
         exceptions). These costs will be recognized over the period during
         which an employee is required to provide service in exchange for the
         award - the requisite service period (usually the vesting period). This
         statement also establishes the standards for the accounting treatment
         of these share-based payment transactions in which an entity exchanges
         its equity instruments for goods or services. It addresses transactions
         in which an entity incurs liabilities in exchange for goods or services
         that are based on the fair value of the entity's equity instruments or
         that may be settled by the issuance of those equity instruments. This
         statement shall be effective the first interim or annual reporting
         period that begins after December 15, 2005 for small business public
         entities and nonpublic companies.

         The Company believes that the implementation of this new pronouncement
         will not have any affect on the 2006 consolidated financial statements.



                                       67



<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


4. BUSINESS COMBINATION

         The Company signed a purchase agreement relating to the acquisition of
         Heilongjiang Songhuajiang Pharmaceutical Co., Ltd. ("HSPL") on
         September 8, 2004, and the acquisition was completed on October 12,
         2004. The Company acquired 100% of the equity interest of HSPL for
         $7,228,916 cash. The transaction was a triangular merger with Goware
         Holding International, Ltd, a British Virgin Island corporation. The
         acquisition date for accounting purpose was September 30, 2004. The
         operations of HSPL from October 1, 2004 to December 31, 2004 are
         included in the consolidated income statement for the year ended
         December 31, 2004.

         The following summarizes the acquisition:

         Total cash consideration                               $     7,228,916
         Fair value of assets acquired                              (11,991,341)
         Fair value of liabilities assumed                            4,449,832
                                                                ---------------
         Negative goodwill                                      $      (312,593)
                                                                ===============

         Negative goodwill proportionally applied
           to land use right                                    $       241,562
         Negative goodwill proportionally applied
           to plant and equipment                                        71,031
                                                                ---------------
         Total                                                  $       312,593
                                                                ===============

         The following is the pro forma net income, basic net income per share
         and diluted net income per share of the Company for the year ended
         December 31, 2004 assuming the acquisition was completed on January 1,
         2004:

         Net income                                             $     8,218,306

         Basic net income per share                             $          0.24
         Diluted net income per share                           $          0.24



                                       68



<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


5. ACCOUNTS RECEIVABLE

                                                         2005          2004
                                                      -----------   -----------

         Accounts receivable                          $ 8,434,668   $ 4,736,901
         Less: Allowance for doubtful accounts           (266,248)           --
                                                      -----------   -----------

         Accounts receivable, net                     $ 8,168,420   $ 4,736,901
                                                      ===========   ===========


6. INVENTORIES

         Inventories consist of the following as of December 31, 2005 and 2004:

                                                         2005          2004
                                                      -----------   -----------

         Raw materials                                $ 4,563,588   $ 4,503,845
         Work in progress                                 607,835       511,761
         Finished goods                                   587,189       657,453
                                                      -----------   -----------
                                                        5,758,612     5,673,059

         Less: Provision for obsolete inventories        (842,112)           --
                                                      -----------   -----------
         Inventories, net                             $ 4,916,500   $ 5,673,059
                                                      ===========   ===========


7. DUE FROM/TO EMPLOYEES

         All the amounts due from/to employees are unsecured, interest free, and
         have no fixed repayment terms.


8. LICENSE

                                                         2005          2004
                                                      -----------   -----------

         Cost of licensing agreement                  $ 1,098,603   $ 1,084,337
         Less: Accumulated amortization                  (633,930)     (542,169)
                                                      -----------   -----------
         License, net                                 $   464,673   $   542,168
                                                      ===========   ===========

         Amortization expense for the years ended 2005 and 2004 was $91,761 and
         $90,362, respectively.



                                       69


<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


8. LICENSE (CONTINUED)

         Amortization expense for the next five years and thereafter is as
         follows:

         2006                                                     $    91,761
         2007                                                          91,761
         2008                                                          91,761
         2009                                                          91,761
         2010                                                          91,761
         Thereafter                                                     6,318
                                                                  -----------
         Total                                                    $   464,673
                                                                  ===========


9. LAND USE RIGHTS

                                                         2005           2004
                                                      -----------   -----------

         Cost of land use rights                      $ 8,254,749   $ 8,032,752
         Less: Accumulated amortization                  (328,986)     (161,255)
                                                      -----------   -----------
         Land use rights, net                         $ 7,925,763   $ 7,871,497
                                                      ===========   ===========

         Amortization expense for the years ended 2005 and 2004 was $167,731 and
         $58,864, respectively.

         Amortization expense for the next five years and thereafter is as
         follows:

             2006                                                     167,731
             2007                                                     167,731
             2008                                                     167,731
             2009                                                     167,731
             Thereafter                                             7,254,839
                                                                  -----------
             Total                                                $ 7,925,763
                                                                  ===========




                                       70


<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


10. PLANT AND EQUIPMENT

         Plant and equipment consist of the following as of December 31:


                                                        2005           2004
                                                    ------------   ------------
         At cost:
           Buildings                                $ 10,309,221   $  5,591,534
           Machinery and equipment                     8,947,241      7,527,745
           Leasehold improvement                          73,439         71,406
           Motor vehicles                                534,854        392,084
           Office equipment and furnishings              445,292        264,451
           Other equipment                               114,526         85,020
                                                    ------------   ------------
                                                      20,424,573     13,932,240
                                                    ------------   ------------
         Less: Accumulated depreciation
           Buildings                                  (1,274,135)    (1,096,180)
           Machinery and equipment                    (5,050,858)    (4,150,720)
           Leasehold improvement                         (49,111)       (40,610)
           Motor vehicles                               (308,984)      (249,534)
           Office equipment and furnishings             (266,476)      (243,667)
           Other equipment                               (88,570)       (82,753)
                                                    ------------   ------------
                                                      (7,038,134)    (5,863,464)
                                                    ------------   ------------

              Plant and equipment, net              $ 13,386,439   $  8,068,776
                                                    ============   ============

      Depreciation expense for the years ended 2005 and 2004 was $995,006 and
      $572,218, respectively. The motor vehicles totalling $34,360 were
      registered in the name of a director as at December 31, 2005, and they
      were encumbered with a debt under a finance lease at December 31, 2005.

11. INCOME TAXES

    (a)  Corporation Income Tax ("CIT")

         In accordance with the relevant tax laws and regulations of PRC, the
         corporate income tax rate is 15% and 33%. The corporate income tax for
         Harbin Bioengineering was 15% for 2005 and 2004 because the company is
         considered a high technology company by the Chinese government. When
         the Chinese government considers that Harbin Bioengineering is no
         longer a high technology company, they will be taxed at the 33%
         corporate income tax rate. No determination can be made at this point
         how long Harbin Bioengineering will be taxed at the 15% corporate
         income tax rate.

         The Company's tax expense differs from the "expected" tax expense for
         the years ended December 31, 2005 and 2004 (computed by applying the
         CIT rate of 15% to net profit of Harbin Bioengineering, and 33% to net
         profit of HSPL):



                                       71


<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


11. INCOME TAXES (CONTINUE)

    (a)  Corporation Income Tax ("CIT")

                                                        2005           2004
                                                    ------------   ------------

         Computed "expected" expense                $  4,336,260   $  2,216,626
         Permanent difference                             64,610             --
                                                    ------------   ------------
         Income tax expense                         $  4,400,870   $  2,216,626
                                                    ============   ============

         The provisions for income taxes for each of the two years ended
         December 31 are summarized as follows:

                                                        2005           2004
                                                    ------------   ------------

         Current                                    $  4,729,945   $  2,190,944
         Deferred                                       (329,075)        25,682
                                                    ------------   ------------
                                                    $  4,400,870   $  2,216,626
                                                    ============   ============

         The tax effects of temporary differences that give rise to the
         Company's net deferred tax assets as of December 31, 2005 and 2004 are
         as follows:

                                                        2005           2004
                                                    ------------   ------------
         Deferred tax assets:
         Allowance on doubtful accounts             $    137,043   $     52,548
         Amortization                                     26,583         29,050
         Depreciation                                    106,915         20,746
         Expenses not yet deducted for tax purposes       81,917         57,614
         Inventory provision                             261,878             --
         Net operating loss carried forward              133,649             --
                                                    ------------   ------------
         Total deferred tax assets                       747,985        159,958
         Valuation allowance                            (133,649)            --
                                                    ------------   ------------
         Net deferred tax assets:                   $    614,336  $     159,958
                                                    ------------   ------------

         Deferred tax liabilities:
         Welfare expense                                  98,638         66,547
         Depreciation                                     38,053         40,654
         Amortization                                     95,814             --
                                                    ------------   ------------
         Total deferred tax liabilities                  232,505        107,201
                                                    ------------   ------------
         Net deferred tax assets:                   $    381,831   $     52,757
                                                    ============   ============



                                       72


<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


11. INCOME TAXES (CONTINUED)

    (b)  Value Added Tax ("VAT")

         In accordance with the relevant taxation laws in the PRC, the VAT rate
         for export sales is 0% and domestic sales is 17%. VAT is levied at 17%
         on the invoiced value of sales and is payable by the purchaser. The
         Company is required to remit the VAT it collects to the tax authority,
         but may deduct therefrom the VAT it has paid on eligible purchases.

         The VAT payable balance of $712,836 and $471,595 at December 31, 2005
         and 2004, respectively are included in other payables and accrued
         expenses in the accompanying consolidated balance sheets.


12. SHORT-TERM BANK LOANS

         Short-term bank loans are summarized as follows:

                                                        2005           2004
                                                    ------------   ------------

         Loans from Bank of China, Harbin
           Nangang Branch, interest rate at
             6.435% per annum                      $               $
               Due August 18, 2005                            --        481,928
               Due November 17, 2005                          --        963,855
                                                    ------------   ------------
                                                              --      1,445,783
         Loan from ICBC-Dongzhi Branch,
            interest rate at 7.254% per annum
                Due December 31,2006                   3,717,380      3,614,458
                                                    ------------   ------------
                                                       3,717,380      3,614,458
                                                    ------------   ------------
                                                    $  3,717,380   $  5,060,241
                                                    ============   ============

       All of the short-term bank loans due in 2005 were paid on their due
       dates. Interest expense, which was paid quarterly, was $313,537 and
       $130,601 in 2005 and 2004, respectively and is included in interest
       expense, net.

       The short-term bank loans from Bank of China in the amount of $481,928
       and $963,855 were secured by Harbin Three Happiness Group, a company
       affiliated with the Company through common ownership.



                                       73


<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


13. DUE TO SHAREHOLDERS

         Due to shareholders were unsecured, interest free, and were paid in
         2005.


14. COMMITMENTS AND CONTINGENCIES

         Capital Commitment
         ------------------

         The Company entered into an unconditional purchase commitment during
         2005 for construction. The Company disbursed $1,750,886 of construction
         costs during 2005. The future obligations of the Company under this
         commitment are as follows:

             2006                                                  $    284,999
             Thereafter                                                      --
                                                                   ------------
             Total                                                 $    284,999
                                                                   ============

         Lease Commitment
         ----------------

         As of December 31, 2005, the Company had remaining outstanding
         commitments in respect to its non-cancelable operating leases for its
         office in New York, retail operations in Hong Kong and regional
         representative offices in China of $314,986 which is due in 2006.

         Rental expense for the year ended December 31, 2005 and 2004 was
         $184,570 and $23,758, respectively.

         Purchase Commitment
         -------------------

         The Company entered into an unconditional purchase commitment during
         2005 for raw materials and packing materials. The future obligations of
         the Company under this commitment are as follows:

             2006                                                  $  2,039,569
             Thereafter                                                      --
                                                                   ------------
             Total                                                 $  2,039,569
                                                                   ============



                                       74




<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


15. SHAREHOLDERS' EQUITY

      A. Preferred stock
      ------------------

         The Company authorized 2,000,000 shares $.001 par value Class A
         Preferred Stock. The Class A Preferred Stock provides the holder(s)
         with aggregate voting rights constituting 25% of total voting rights as
         well as a liquidation preference. In February 2003, the Company issued
         1,000,000 shares of Class A preferred stock for the acquisition of the
         protein peptide project.

      B. Private Placements
      ---------------------

         Issuance of Restricted Common Stock In November 28, 2005 Private
         ----------------------------------------------------------------
         Placement
         ---------

         On November 28, 2005, the Company entered into a stock purchase and
         warrant agreement, ("Purchase Agreement"), with thirty-one (31)
         accredited investors. Pursuant to the Purchase Agreement, the investors
         purchased 12,500,000 units, each unit consisting of (a) one share of
         common stock and (b) three-tenths of one common stock purchase warrant,
         at a purchase price of $4.80 per unit. The units were issued in two
         tranches, the first tranche consisted of 6,973,400 units issued on
         December 8, 2005. The second tranche consisted of 5,526,600 units
         issued on January 23, 2006, following the expiration of the waiting
         period under Rule 14c-2 of the Exchange Act and the amendment of our
         articles of incorporation.

         The exercise price of the warrants issued to the investors is $6.50 per
         share. Pursuant to these warrants, the investors are entitled to
         purchase an aggregate of 3,750,000 shares of common stock. The warrants
         expire on December 8, 2008.

         In consideration for their services, the Company paid 5% of the gross
         proceeds in cash to placement agents and issued to them warrants
         representing the right to purchase up to 1,137,500 shares of the
         Company's common stock, of which 634,580 were issued in 2005 and
         502,920 were issued in 2006, at an exercise price of $4.80 per share.
         These warrants expire on December 8, 2008.

         As of December 31, 2005, the Company received net proceeds of
         $31,470,487 and 6,973,400 shares were issued in conjunction to the
         first tranche of the November 28, 2005 private placement. On January
         23, 2006, the Company received net proceeds of $25,036,290 and issued a
         total of 5,526,600 shares in connection with the second tranche of the
         private placement.




                                       75




<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


15. SHAREHOLDERS' EQUITY (CONTINUED)

      B. Private Placements (Continued)
      ---------------------------------

         Issuance of Restricted Common Stock In $6.0 Million Private Placement
         ---------------------------------------------------------------------

         The Company completed a private placement of its securities to
         "accredited investors" pursuant to Regulation D under the Securities
         Act of 1933, as amended on November 23, 2004. The Company entered into
         a stock subscription agreement ("Subscription Agreement"), with
         eighty-five (85) accredited investors ("Subscribers"). Pursuant to the
         Subscription Agreement, the Subscribers purchased six million
         (6,000,000) shares of the Company's common stock at a per share
         purchase price of $1.00 in a private placement, resulting in $6,000,000
         of gross proceeds to the Company. The offering consisted of investment
         units, each comprised of one share of the Company's common stock sold
         at a purchase price per share of $1.00, a 3-year Class A stock purchase
         warrant to purchase 1 share of common stock exercisable at $0.85, and a
         3-year Class B stock purchase warrant to purchase 1/2 share of common
         stock exercisable at $1.60. The Company paid fees and commissions in
         the aggregate amount of $561,386 in connection with this offering.

         Upon the execution of the Subscription Agreement, the Company issued to
         the Subscribers (i) ten (10) Class A warrants and (ii) five (5) Class B
         warrants for every ten (10) Shares purchased by them under the
         Subscription Agreement. The warrants will expire three (3) years from
         the effectiveness of the registration statement and contain a cashless
         exercise provision.

         As of December 31, 2005, all Class A Warrants and Class B Warrants were
         exercised by the Investors, for total net proceeds of $10,951,500.






                                       76




<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


15. SHAREHOLDERS' EQUITY (CONTINUED)

    C. Warrants
    -----------

         Pursuant to the Purchase Agreement that related to the Company's
         November 28, 2005 private placement, the Company issued 2,092,020
         warrants in connection with the first tranche and 634,580 warrants to
         placement agents as of December 31, 2005. The exercise price of the
         warrants issued is $6.50 per share for investors and $4.80 per share
         for the placement agents. All the warrants will expire on December 8,
         2008.

         The following table summarizes the warrant activities of the Company
         for the years ended December 31, 2005 and 2004:

<TABLE>

                                                              Warrants        Weighted Average
                                                               Granted         Exercise Price
                                                           ----------------   ----------------
<S>                                                        <C>
      Outstanding January 1, 2004...................                930,000        $0.73
      Granted.......................................             10,500,000        $1.06
      Exercised.....................................                     --           --
      Cancelled.....................................               (919,000)       $0.73
                                                           ----------------   ----------------
      Outstanding at December 31, 2004..............             10,511,000        $1.06
                                                           ================   ================
      Granted.......................................              2,726,600        $6.10
      Exercised.....................................             10,511,000        $1.06
      Cancelled.....................................                     --           --
                                                           ================   ================
      Outstanding at December 31, 2005..............              2,726,600        $6.10
                                                           ================   ================
      Exercisable at December 31, 2005..............              2,726,600        $6.10
                                                           ================   ================
</TABLE>



                                       77




<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


15. SHAREHOLDERS' EQUITY (CONTINUED)

      C. Warrants (Continued)
      -----------------------

         On January 23, 2006, the Company further issued 1,657,980 warrants in
         connection with the second tranche and 502,920 warrants to placement
         agents. These warrants contain the same terms as the warrants issued in
         the first tranche.

      D. Stock Options
      ----------------

         In March 2004, the Company's Board of Directors formally adopted a
         stock option plan (the "Plan"), which was considered by the directors
         in late 2003. That Plan provides for the grant of options to employees,
         officers, directors and consultants. Options may be either "incentive
         stock options" within the meaning of Section 422 of the United States
         Internal Revenue Code of 1986, as amended, or non-qualified options.
         The Plan is presently administered directly by the Company's board of
         directors. Subject to the provisions of the Plan, the Company's board
         of directors determines who receives stock options, the number of
         shares of common stock that may be covered by the option grants, the
         time and manner of the exercise of the options and exercise prices, as
         well as any other pertinent terms of the options. The Company entered
         into employment agreements with four of the Company's executives,
         officers and directors in March 2004 effective October 1, 2003. Under
         the four employment agreements, the Company shall pay an aggregate of
         $32,000 of value of stock options per quarter to four of the Company's
         officers and directors under the agreements. The stock options issued
         are exercisable within 5 years from date of grant and with an exercise
         price of $2.00.

         In June 2004, employment agreements for certain executive employees of
         the Company were amended to include a provision that if the Company's
         closing stock price was less than $2.00 on the last day of the quarter,
         the employees would not be entitled to their quarterly stock options.
         At the quarters ended December 31 and September 30, 2005, according to
         the employment agreements as amended, the Company granted a total of
         25,827 stock options to four of the Company's officers and directors
         under the agreements.





                                       78




<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


15. SHAREHOLDERS' EQUITY (CONTINUED)

      C. Stock Options (Continued)
      ----------------------------

         The following table summarizes the stock option activity:

<TABLE>
                                                        Options        Weighted Average
                                                        Granted         Exercise Price
                                                    ----------------   ----------------
<S>                                                 <C>                <C>
         Outstanding January 1, 2004.............             19,393              $2.00
            Granted..............................             23,704              $2.00
            Exercised............................                 --                 --
            Cancelled............................                 --                 --
                                                    ----------------   ----------------
         Outstanding December 31, 2004...........             43,097              $2.00
            Granted..............................             25,827              $2.00
            Exercised............................                 --                 --
            Cancelled............................                 --                 --
                                                    ----------------   ----------------
         Outstanding at December 31, 2005........             68,924              $2.00
                                                    ================   ================
         Exercisable at December 31, 2005........             68,924              $2.00
                                                    ================   ================

         The following table summarizes information about stock options
         outstanding as of December 31, 2005:

                                            Options Outstanding                                Options Exercisable
                       --------------------------------------------------------------- ------------------------------------
  Range of Exercise     Number of     Weighted Average    Weighted Average Remaining      Number of      Weighted Average
       Prices             Shares       Exercise Price    Contractual Life (in years)       Shares         Exercise Price
---------------------- ------------- ------------------- ----------------------------- ---------------- -------------------

        $2.00             68,924           $2.00                     3.79                  68,924             $2.00
                       -------------                                                   ----------------
                          68,924                                                           68,924
                       =============                                                   ================
</TABLE>

         The weighted average fair value per share of the 68,924 options issued
         under the Plan is $3.09 per share.



                                       79




<PAGE>
             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2005 AND 2004
                        --------------------------------


15. SHAREHOLDERS' EQUITY (CONTINUED)

         Cancellation of shares
         ----------------------

         On July 24, 2005, the Company cancelled 152,000 shares owned by Shujun
         Liu, the chairman and the chief executive officer of the Company. These
         152,000 restricted shares of the Company were issued to Shujun Liu as
         part of the consideration of 8,538,943 shares of restricted common
         stock issued to Shujun Liu conjunction with the acquisition of 100%
         interest of Harbin Three Happiness Bioengineering Co., Ltd. on December
         18, 2001. The Company discovered and concluded that 152,000 shares were
         wrongly issued to Shujun Liu as part of the consideration for the
         transaction and therefore were cancelled on July 24, 2005. Shujun Liu
         agreed to the cancellation. The cancellation was recorded as an
         adjustment to stockholders' equity of the Company.

         Issuance of shares for redemption of warrants
         ---------------------------------------------

         On August 25, 2005, the Company issued 5,518 and 4,599 shares of
         restricted common stock of the Company to RADA Advisors Inc. and DSF
         Capital Inc., upon their cashless exercise of warrants. RADA Advisors
         Inc. and DSF Capital Inc. obtained their warrants in an equity line
         arrangement and a related investment agreement that was entered into by
         the Company on July 18, 2003.

         Issuance of shares for services
         -------------------------------

         During 2005, the Company issued 22,026 shares of restricted common
         stock to one of the Company's independent directors for his service in
         2005 according to the agreement between the Company and independent
         director. The Company recorded expenses of $122,465 in connection with
         the issuance.

         In 2005, the Company also accrued general and administrative expenses
         of $141,043 for shares compensation in connection with the services
         rendered by two of the Company's independent directors for their
         services in 2005 according to the agreement between the Company and
         independent directors. However, the shares related to such services,
         which amounted to 30,011 shares, were not issued as of March 13, 2006.

16. ACQUISITION

         On May 1, 2005, the Company signed a legally-binding letter of intent
         ("Letter of Intent") to acquire Heilongjiang Qitai Pharmaceutical
         Limited ("HQPL"), a leading Chinese distributor of pharmaceuticals. The
         Company plans to use $4 million to acquire approximately $4.5 million
         (unaudited) worth of HQPL's net assets, a HQPL pharmaceutical wholesale
         and retail network that covers the entire country of China, a HQPL
         pharmaceutical retail distribution license and a HQPL Chinese herbal
         and medicinal material wholesale exchange which was GSP certified as
         well as certified by the Chinese government. As of the date of March
         13, 2006, the Company has not enter into any definitive agreement with
         HQPL and the acquisition has not been completed.

                                       80