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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K







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

For the fiscal year ended December 31, 2008

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.

(Exact name of registrant as specified
in its charter)







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

25th Floor, Great China International Exchange Square, No. 1 Fuhua 1 Rd, Futian District,

Shenzhen, 518034, Peoples Republic of China

(Address of principal executive offices) (Zip Code)

86-451-8666-6601

(Registrants telephone number, including area code)





Securities Registered
Pursuant to Section 12(b) of the Act:



|                                         |  |                                       
|---------------------------------------- |  | --------------------------------------
|Common Stock, Par Value $0.001 Per Share |  | New York Stock Exchange               
|(Title of Class)                         |  | (Name of exchange on which registered)

Securities Registered Pursuant to Section 12(g) of the Act: None.





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ̈    No  x

Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ̈    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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   ̈

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K.   ̈

Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the Exchange Act.



|                                                                          |  |                              |  |  |  | 
|------------------------------------------------------------------------- |  | ---------------------------- |  |  |  | 
|Large accelerated filer   ̈                                                |  | Accelerated filer  x        
|                                                                          | 
|Non-accelerated filer    (Do not check if a smaller reporting company)   ̈ |  | Smaller reporting company   ̈

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 aggregate market value of the voting stock held on June 30, 2008 by non-affiliates of the registrant was $610,730,086 based on the closing price of $9.87 per share as reported on the New York Stock Exchange on June 30, 2008,
the last business day of the registrants most recently completed second fiscal quarter (calculated by excluding all shares held by executive officers, directors and holders known to the registrant of five percent or more of the voting power of
the registrants common stock, without conceding that such persons are affiliates of the registrant for purposes of the federal securities laws).

At March 6, 2009, 78,249,264 shares of the registrants Class A Common Stock, $0.001 par value and 1,000,000 shares of the registrants Preferred Stock, $0.001 par value were outstanding.









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TABLE OF CONTENTS



|         |  |          |  |                                                                                                              |  |     
|-------- |  | -------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|         |  |          |  |                                                                                                              |  | Page
|PART I   |  | 3       
|         |  |          | 
|         |  | ITEM 1.  |  | Business                                                                                                     |  | 3   
|         |  | ITEM 1A. |  | Risk Factors                                                                                                 |  | 17  
|         |  | ITEM 1B. |  | Unresolved Staff Comments                                                                                    |  | 24  
|         |  | ITEM 2.  |  | Properties                                                                                                   |  | 25  
|         |  | ITEM 3.  |  | Legal Proceedings                                                                                            |  | 25  
|         |  | ITEM 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 25  
|         | 
|PART II  |  | 26      
|         |  |          | 
|         |  | ITEM 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 26  
|         |  | ITEM 6.  |  | Selected Financial Data                                                                                      |  | 28  
|         |  | ITEM 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 29  
|         |  | ITEM 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 42  
|         |  | ITEM 8.  |  | Financial Statements and Supplementary Data.                                                                 |  | 42  
|         |  | ITEM 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 42  
|         |  | ITEM 9A. |  | Controls and Procedures                                                                                      |  | 42  
|         |  | ITEM 9B. |  | Other Information.                                                                                           |  | 43  
|         | 
|PART III |  | 43      
|         |  |          | 
|         |  | ITEM 10. |  | Directors, Executive Officers and Corporate Governance                                                       |  | 43  
|         |  | ITEM 11. |  | Executive Compensation                                                                                       |  | 47  
|         |  | ITEM 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 53  
|         |  | ITEM 13. |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 53  
|         |  | ITEM 14. |  | Principal Accounting Fees and Services                                                                       |  | 54  
|         | 
|PART IV  |  | 56      
|         |  |          | 
|         |  | ITEM 15. |  | Exhibits, Financial Statement Schedules                                                                      |  | 56  



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report includes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding our future financial position, business strategy and
plans and objectives of management for future operations. When used in this prospectus, the words believe, may, will, estimate, continue, anticipate, intend,
expect and similar expressions are intended to identify forward-looking statements.

We have based these forward-looking statements largely on
our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and
financial needs. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute
to such differences include, but are not limited to the risks discussed under the heading Risk Factors. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons
actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report may not occur and actual results could differ materially and adversely from those anticipated or implied in
the forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on such forward-looking statements.



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PART I.

ITEM 1. BUSINESS

Overview

We are a leading, fully integrated, pharmaceutical company dedicated to improving health through the development, manufacture and commercialization of a broad range of
pharmaceutical and healthcare products. A majority of our current products are offered and derived from Chinese based traditional medicines and are manufactured using plant based materials. Our profitable and diversified business is comprised of
prescription pharmaceutical products, over-the-counter pharmaceutical products and nutraceutical products. Our pharmaceutical products are well recognized brands in China and have been approved by the Chinese State Food and Drug Administration, or
SFDA, based on demonstrated safety and efficacy. We sell our products primarily to hospitals, clinics, pharmacies and retail outlets at over 100,000 locations in all provinces, including rural areas and major cities in China, through the efforts of
our approximately 2,133 sales and marketing professionals. We leverage our relationships with over 320 distributors to distribute our products to both urban and rural areas of China. We have experienced substantial growth in recent years and intend
to use our established business as a platform for continued growth both organically and through strategic acquisitions.

According to a recent ISI Emerging
Markets report, the pharmaceutical industry in China was approximately $27.7 billion in 2005. We estimate the pharmaceutical market size was around $47.8 billion in 2008 assuming a compound annual growth rate of 20% since 2005. China is forecast to
become the worlds fifth largest pharmaceutical market by 2010, which includes both western medicine and Traditional Chinese Medicine, or TCM. Our pharmaceutical products are modernized versions of TCM. Plant based TCM products have been widely
used in China for thousands of years and are deeply ingrained in the Chinese culture. The market for TCM pharmaceutical products in China was approximately $5.8 billion in 2005, accounting for approximately 20.9% of all expenditures on medicine in
China. According to a 2006 Frost & Sullivan report, the market for nutraceutical products in China was approximately $12.5 billion in 2005. Currently, the TCM market in China is highly fragmented, and we believe there are over 1,200
companies currently engaged in the development, manufacture and sale of TCM products, providing significant opportunities to acquire additional businesses, products and technologies.

Our revenues increased from $160.5 million in 2007 to $264.6 million in 2008, representing an increase of 64.90% year over year. The following table represents the manufacturing revenues realized from the sale of our
Pharmaceutical and Nutraceutical products, as well as our distribution revenue from our newly acquired distribution business for the periods indicated:



|                        |  |                                |             |               |   |             |  |       |  
|----------------------- |  | ------------------------------ | ----------- | ------------- | - | ----------- |  | ----- | -
|                        |  | For the Year EndedDecember 31, |             | PercentChange |  
|                        |  | 2008                           |             | 2007          |  
|Manufacturing revenue   |  | $                              | 259,171,087 |               | $ | 160,482,383 |  | 61.50 | %
|Pharmaceutical products |  |                                | 224,904,348 |               |   | 127,823,297 |  | 75.95 | %
|Nutraceutical products  |  |                                | 34,266,739  |               |   | 32,659,086  |  | 4.92  | %
|Distribution revenue    |  |                                | 5,471,971   |               |   |            |  |      |  
|                        |  |                                |             |               |   |             |  |       |  
|Total sales             |  | $                              | 264,643,058 |               | $ | 160,482,383 |  | 64.90 | %
|                        |  |                                |             |               |   |             |  |       |  

Each of our Pharmaceutical products has certain medicinal functions and has demonstrated safety and efficacy in
accordance with SFDA requirements for the treatment of at least one or more therapeutic indications. A majority of our pharmaceutical products are based on non-synthetic medicinal compounds that are extracted from various parts of one or more
plants. We apply modern production techniques to TCM to produce a variety of pharmaceutical products in different formulations, such as tablets, capsules and powders.

We currently market over 60 pharmaceutical products in China. Two flagship prescription pharmaceutical products currently marketed in China are Shuanghuanglian Lyophilized Injection Powder, or SHL Injection Powder,
and Cease Enuresis Soft Gel, or CE Gel. SHL Injection Power is an anti-viral injection effective in treating respiratory infections, bronchitis and tonsillitis, and CE Gel is indicated to alleviate bedwetting. We market our SHL Injection Powder
through our brand name SHJ, and our CE Gel through Harbin Three Happiness Bioengineering Co., Ltd, or Three Happiness, which are both well-recognized brand names in China. These products are detailed to physicians at hospitals and clinics through
the efforts of our sales force and through educational physician conferences and seminars.

Over-the-counter pharmaceutical products are similar to our
prescription pharmaceutical products in that they are approved by the SFDA, but are sold over-the-counter direct to consumers in pharmacies and other retail outlets. We currently market over 30 over-the-counter pharmaceutical products including our
Jinji Series, Cease Enuresis Patch, or CE Patch, and Boke Series. Jinji Series is a line of products approved for the treatment of various womens health indications including endometritis, annexitis, pelvic inflammation, premenstrual and
menopausal symptoms. CE Patch is a product indicated to alleviate bedwetting and for the treatment of incontinence. Boke Series is a line of nasal products indicated to alleviate sinus infections and nasal congestions. Our Jinji line of



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products, our CE Patch and our Boke Series are proprietary branded products and have leading market positions in the over-the-counter segments in which they
compete and are marketed through our extensive direct-to-consumer advertising campaign. We highlight the quality and benefits of these products through television, newspaper and print advertisements.

Nutraceutical products, also frequently referred to as functional foods, functional beverages, dietary supplements and general nutritional supplements, are intended to
be used to improve overall health and well-being. We market several nutraceutical products as general nutritional supplements in China, including our popular soybean peptide based drinks, tablets, powder and instant coffee. General nutritional
supplements are generally not regulated by the SFDA; however, local government agencies may impose certain manufacturing requirements on those products aimed at protecting their hygiene. We promote our nutraceutical products through print
advertising campaigns in magazines and newspapers, and distribute these products to supermarkets, fitness centers, healthcare specialty stores and other retail outlets in China.

In October 2008, through the acquisition of Nuo Hua Investment Company Ltd. (Nuo Hua), distribution form part of our businesses. Nuo Hua is a holding company with a subsidiary and affiliated company that
maintain a significant presence in pharmaceutical wholesale and retail distribution in China. We now distribute more than 6,000 pharmaceutical products.

In addition to our marketed products, we have a portfolio of over 400 prescription and over-the-counter pharmaceutical products that are approved by SFDA, but have not been commercially launched.

We own and operate five manufacturing facilities through which we manufacture all of our products. Each facility is Good Manufacturing Practices, or GMP, International
Organization for Standardization, or ISO, and Export Product certified.

Industry Background and Market Opportunities

The Chinese pharmaceutical and nutraceutical markets are highly fragmented, comprising a large number of small enterprises. We believe that this fragmentation provides
opportunities for better managed and more financially sound companies to gain market share by using comparatively strong technical, manufacturing and marketing abilities. Moreover, Chinas regulatory agencies have introduced a series of new
regulations to control the standards and quality of manufacture and distribution in the pharmaceutical industry. These new regulations require companies to obtain government recognized manufacturing and distribution licenses, GMP and good sales
practice certificates, and have resulted in the elimination of many small or poorly managed companies. We believe that this new legislation will precipitate consolidation opportunities and a generally more favorable competitive environment.

Pharmaceutical Market

The pharmaceutical
industry in China was approximately $27.7 billion in 2005 and China is expected to become the worlds fifth largest pharmaceutical market by 2010, which includes western medicine and TCM. This growth is being driven by several factors including
improving standards of living and an increase in disposable income fueled by the growing economy, the aging population, the increasing participation in the State Basic Medical Insurance System and the increase in government spending on public health
care. In January 2009, the Chinese government approved a healthcare reform plan and has budgeted for RMB850 billion, or $124 billion, over the next three years to make medical services and products more affordable and accessible to the whole
population.

Traditional Chinese Medicine Market

The TCM market for pharmaceutical products in China was approximately $5.8 billion in 2005, accounting for approximately 20.9% of all expenditures on medicine in China. TCM, including prescription and over-the-counter pharmaceuticals, have
been widely used in China for thousands of years and are deeply ingrained in the Chinese culture. Historically, TCM consisted primarily of mixtures of dried herbs and, in some cases, animal parts and minerals. These mixtures would be boiled and
simmered at home to create a medicinal tea or soup. These liquid concoctions were inconvenient to prepare and take, and their dosage and quality were inconsistent due to varied methods of preparation and differences in the quality of ingredients.
Despite these characteristics, we believe that consumers perceive TCM products to have a superior safety profile compared to western pharmaceuticals and TCM are more effective in treating chronic and frequently occurred illnesses. In recent decades,
Chinese pharmaceutical manufacturers have applied modern production technologies to produce TCM with consistent quality and a variety of formulations, such as tablets, capsules and powders, which we refer to as modernized TCM.

We believe the Peoples Republic of China (PRC) is committed to supporting and promoting the development of modernized TCM, as evidenced by the
government formulating an industry development plan for the modernized TCM sector and adding more modernized TCMs to the national medicine catalog of the National Medical Insurance Program. We believe TCMs will be a major component, in the national
medicine catalog. Additionally, in the PRC pharmaceutical industry five-year plan released in June 2006 by



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the National Development and Reform Commission, or the NDRC, the NDRC identified TCMs, particularly TCMs used for the treatment of diseases prevalent among
middle-aged and elderly people, as a priority area that will receive governmental support. The State Administration of Traditional Chinese Medicine, a national government agency, formulates TCM industry policies for the development of TCM and
provides research grants for TCM research and development.

We believe that TCM will remain mainstream medicines in China and will continue to grow as a
result of:



| |  |  | Chinas longstanding preference for TCM remedies;
| | - |  | -------------------------------------------------



| |  |  | government support for modernized TCM as a key component of increasing quality of healthcare;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | existence of well-recognized brands supported by a long history;
| | - |  | ----------------------------------------------------------------



| |  |  | the rapidly growing over-the-counter market, in which TCM makes up more than half; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | lower pricing as compared to western medicine.
| | - |  | ----------------------------------------------

Nutraceutical Market

According to a 2006 Frost & Sullivan report, the market size of the Chinese nutraceutical market,
comprised of functional foods, functional beverages and dietary supplements, was $12.5 billion in 2005. While there are no official definitions of the functional food and beverage categories in China, this is generally accepted to mean conventional
food and beverages with added ingredients beneficial to the human body. Functional foods are most commonly fortified with nutritional ingredients such as calcium, soy products or dairy products. Functional beverages are typified by sports drinks,
energy drinks, vitamin-enhanced water and other similar nutritional drinks. Dietary supplements are products that are intended to supplement the diet with vitamins, minerals, herbs, amino acids or other plant-based products. These types of
supplements are typically ingested in the form of a pill, capsule, tablet or in liquid form. The main channels for distributing nutraceutical products, including health foods, in China are supermarkets and retail outlets. According to the 2006
Frost & Sullivan report, in 2005, the functional beverage market was estimated to be $5.0 billion and the dietary supplement market was estimated to be $4.5 billion.

The nutraceutical market in China has been growing rapidly over the past decade. This growth is driven primarily by the convenience associated with taking these products and the marketing investments that early
entrants have made. As Chinas population is increasingly influenced by western culture, Chinese men and women have begun to pay more attention to body image and weight.

Some nutraceuticals may be registered as health foods in China and are subject to approval by the SFDA. Health foods are generally defined as products that are suitable for a specific group of people and that are able
to adjust body functions while not aiming at curing a disease. These substances, however, only need to demonstrate safety rather than meet clinical endpoints for efficacy. The SFDA has a list of 27 approved health and beauty benefits that health
foods may claim on their packaging or in advertisements. These direct-to-consumer advertisements typically highlight one or more of the approved benefits while focusing on the style and fashion of healthy living. General nutritional supplements are
generally not regulated by the SFDA; however, local government agencies may impose certain manufacturing requirements on these products aimed at protecting their hygiene.

Financial Information about Industry Segments

Since October 2008, we have two operating segments based on our major
lines of businesses: manufacturing and distribution. For additional information please refer to Note 3 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Our Strengths

We believe we have the following competitive strengths
that could enable us to capitalize on the large, fragmented and growing market for our pharmaceutical and nutraceutical products.



| |  |  | Fully Integrated Platform for Sustainable Growth. We are a vertically integrated pharmaceutical and nutraceutical company with our own
development, manufacturing, commercialization and distribution capabilities for the prescription pharmaceutical, over-the-counter pharmaceutical and nutraceutical markets. Our nationally recognized branded products are distributed to over 100,000
locations in all provinces, including rural areas and major cities in China. We believe these capabilities can be leveraged to provide substantial organic growth across all of our product categories and can serve as a platform for integrating
additional acquisitions.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Diverse Product Categories That Provide Operating Flexibility. Our business consists of three product categories including prescription
pharmaceutical products, over-the-counter pharmaceutical products and nutraceutical products. Our pharmaceutical products treat different therapeutic areas including womens health, nasal, bedwetting and anti viral. Each of these competes in a
market segment with differentiated regulatory, economic and general market characteristics. We believe this diversification reduces our dependence on any one market segment and enables us to react quickly to evolving market conditions in China in
order to optimize our business operations.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Well-Recognized Brand Names That Can be Leveraged for Additional Growth. We have nationally recognized brand names in China, including, Jinji,
SHJ, Boke and Three Happiness. We believe these brand names will allow continued sales growth for our existing products and can be leveraged further with product line extensions and by establishing brand families for related products.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For instance, our Jinji product line enjoys particularly strong brand recognition in the womens health market. We
believe we can significantly capitalize on this strength for future product introductions to treat other womens health indications and as we expand into other therapeutic categories.



| |  |  | Demonstrated Ability to Identify and Integrate Acquisitions. We have completed and integrated seven acquisitions in the last five years, each of
which has contributed to our revenue and earnings growth. These acquisitions also added value to our brands, enhanced our products development capabilities, expanded our distribution networks and broadened our products offering. Our disciplined
approach to acquisitions is based on well-defined criteria and is supported by a 14-person multi-disciplinary team dedicated to these business development activities, which we believe positions us well to participate in further consolidation in our
industries.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Experienced and Results-Oriented Management Team. Several members of our senior management team have worked together for over 15 years and
have contributed significantly to the growth of our business. Our revenues have grown at a CAGR of 69% over the past five years from $32.0 million in 2004 to $264.6 million in 2008. Our management team has extensive experience with the Peoples
Republic of China, or PRC, government and the market for pharmaceutical and nutraceutical products. Our management team encourages a strong corporate culture, which we believe contributes to our overall results.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our Strategy

Our objective is to become the market leader for the
development, manufacture and commercialization of pharmaceutical products. We intend to achieve this objective by:



| |  |  | Promoting Our Existing Brands to Maintain National Recognition. We intend to support and grow the existing recognition and reputation of our
brands and to maintain our branded pricing strategy through continued sales and marketing efforts. To achieve this goal, we plan to:
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | detail the efficacy and safety profile of our established prescription pharmaceutical products to physicians at hospitals and clinics in all provinces in China
through the efforts of our sales force and through educational physician conferences and seminars;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | expand our extensive direct-to-consumer advertising campaign highlighting the quality and benefits of our fast growing over-the-counter pharmaceutical products
through television, newspaper and print advertisements; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Developing and Introducing Additional Products to Expand or Strengthen Our Existing Portfolio. We plan to focus our research and development
capabilities towards expanding our existing portfolio of approved products. We have over 400 prescription and over-the-counter pharmaceutical products in our portfolio that are currently approved but have not been commercially launched. In addition,
we intend to conduct clinical trials for new modernized products and product line extensions for our existing products. We plan to introduce new modernized products to leverage our branded market leadership position, particularly in the therapeutic
areas we already have an establishment to develop product line extensions for our existing products.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expanding Our Distribution Network For Further Market Penetration. We intend to expand our reach beyond the current approximately 100,000
distribution points in China to drive additional growth of our existing and future products. We currently contract with over 320 distributors in China and plan to expand upon these relationships to target new markets. In addition, we plan to
continue to broaden our marketing efforts outside of major cities in China and increase our market penetration in cities and rural areas where we already have a presence.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We also intend to expand our presence beyond China to international markets. We plan to work with other international pharmaceutical companies in cross
selling of our products.



| |  |  | Acquiring Complementary Products Lines, Technologies, Distribution Networks and Companies. We intend to selectively pursue strategic
acquisition opportunities that we believe would grow our customer base, expand our product lines and distribution network, enhance our manufacturing and technical expertise or otherwise complement our business or further our strategic goals.
Pursuing additional acquisitions is a significant component of our growth strategy.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Our Products

Our
business consists of three main product categories, including prescription pharmaceutical products, over-the-counter pharmaceutical products and nutraceutical products. Majority of our pharmaceutical products are based on non-synthetic medicinal
compounds that are extracted from leaves and roots of one or more plants. All of our pharmaceutical products have demonstrated safety and efficacy in clinical trials that has been sufficient to obtain approval by the SFDA. Nutraceutical products,
also frequently referred to as functional foods, functional beverages, dietary supplements or general nutritional supplements, are intended to promote overall health and well-being. Our nutraceutical products are generally considered general
nutritional supplements and are not subject to regulatory approval by the SFDA.



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We currently manufacture and sell over 60 products. The following table summarizes our principal marketed pharmaceutical
and nutraceutical products that comprised the majority of our revenue in the year of 2008.



|                                             |  |                    |  |                                                                             |  |                              
|-------------------------------------------- |  | ------------------ |  | --------------------------------------------------------------------------- |  | -----------------------------
|Product                                      |  | Distribution Point |  | Indication                                                                  |  | Year of AOB Commercial Launch
|Pharmaceutical Products                      |  |                    |  |                                                                             |  |                              
|                                             |  |                    | 
|Shuanghuanglian Lyophilized Injection Powder |  | Rx                 |  | Respiratory infections, bronchitis and tonsillitis                          |  | 2004                         
|                                             |  |                    | 
|Cease Enuresis Soft Gel                      |  | Rx                 |  | Bedwetting                                                                  |  | 2004                         
|                                             |  |                    | 
|Cease Enuresis Patch                         |  | OTC                |  | Bedwetting and incontinence                                                 |  | 2005                         
|                                             |  |                    | 
|Jinji Capsule                                |  | OTC                |  | Endometritis, annexitis and pelvic inflammations                            |  | 2006                         
|                                             |  |                    | 
|Jinji Yimucao                                |  | OTC                |  | Premenstrual syndrome, or PMS, and other PMS and menopause-related symptoms |  | 2007                         
|                                             |  |                    | 
|Boke Nasal Spray                             |  | OTC                |  | Nasal congestion and sinus infection                                        |  | 2007                         
|                                             |  |                    | 
|Nutraceutical Products                       |  |                    |  |                                                                             |  |                              
|                                             |  |                    | 
|Soy Peptide Series                           |  | OTC                |  | Nutritional products for overall health and well-being                      |  | 2003                         

Prescription Pharmaceutical Products

Shuanghuanglian Lyophilized Injection Powder

Our SHL Injection Powder is a prescription pharmaceutical product
approved and marketed for the treatment of flu symptoms, including high fever, cough and sore throat, as well as upper respiratory infections, mild pneumonia and tonsillitis. Our SHL Injection Powder, marketed under the brand name SHJ, is one of the
only two injection formulations of SHL approved by the SFDA. The approved dosage for our SHL Injection Powder is 60 mg for every kilogram of a patients body weight. In practice, a medical doctor will decide exactly how much SHL injection
powder to use for each patient. This product consists of two plant based ingredients isolated from flowers and leaves.

Our SHL Injection Powder was
commercially launched in China in 1997 by HSPL, which we acquired in 2004. We detail the safety and efficacy of this product to physicians in hospitals and clinics primarily in rural China. We believe that injectables are of higher quality and offer
better bioavailability and efficacy than oral formulations. We are one of the two companies approved by the Ministry of Health to manufacture and commercialize SHL injection powder. This product is manufactured at our Heilongjiang Songhuajiang
Pharmaceutical, or HSPL, facility in Harbin.

Phase 3 clinical trials for SHL Injection Powder were conducted on 489 patients at Harbin University of
Medical Sciences First Affiliated Hospital, Heilongjiang TCM Research Institute and Harbin TCM Hospital. These trials demonstrated safety and efficacy in accordance with SFDA requirements.

Cease Enuresis Soft Gel

Our CE Gel is a prescription pharmaceutical
product approved and marketed to alleviate pediatric bedwetting. This product consists of a formulation that is isolated from the seed of a plant. Our CE Gel is the only SFDA approved Category 1 new pharmaceutical product for this indication.
Category 1 approval provides a product with 12 year protection from other companies replicating the product and can be granted when the product is considered to be the first product for a specific indication.

Our CE Gel was commercially launched in China in April 2004. We detail the clinical benefits of this product to physicians in hospitals and clinics throughout China. As
prescription medications cannot be commercially advertised in China, we rely on physicians to recommend the use of our CE Gel to patients. The Cease Enuresis brand name, however, is well recognized by many patients as our CE Patch is an
over-the-counter pharmaceutical product that we promote through direct-to-consumer advertising. This product is manufactured at our Three Happiness facility in Harbin.

Phase 3 clinical trials for CE Gel were conducted on 437 pediatric patients at Beijing Childrens Hospital, China University of Medical Sciences No. 2 Clinical Hospital, Liaoning TCM Institute Affiliated
Hospital and Liaoning TCM Research Institute. These trials demonstrated safety and efficacy in accordance with SFDA requirements.



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Over-the-Counter Pharmaceutical Products

Cease Enuresis Patch

Our CE Patch is an over-the-counter pharmaceutical product approved and marketed for the
treatment of bedwetting and incontinence. Our CE Patch is formulated for delivery by a patch and can be used in combination with our CE Gel. This product consists of the same plant based ingredients as our CE Gel. Our CE Patch was commercially
launched in China in 2005. We promote our CE Patch through direct-to-consumer advertising on television and in print media in China. This product is manufactured at our Three Happiness facility.

Our CE Patch was approved by the Food and Drug Administration Bureau of the Heilongjiang Province, under the medical device regulatory pathway.

Jinji Capsule

Our Jinji Capsule is an over-the-counter
pharmaceutical product approved and marketed for the treatment of endometritis, annexitis and pelvic inflammations. This is our companys proprietary product with well recognized brand name. This product consists of a combination of many parts
of TCM plants, including roots, vines, flowers and stems. We source the majority of our raw materials for our Jinji product line from the Guangxi province, which we believe has a unique natural environment to cultivate high quality plants. We
believe the combination of these quality ingredients, our manufacturing processes and our well-recognized brand name position our Jinji products well to compete in the marketplace. A course of treatment requires a dose of four capsules taken three
times a day.

Our Jinji Capsule was commercially launched approximately 30 years ago in China by GLP, which we acquired in April 2006. With its long
history, the Jinji brand name is well-recognized in the womens health market in China. We promote our Jinji Capsule through direct-to-consumer advertising, including an extensive television commercial campaign featuring popular Chinese
celebrity Ms. Ni Ping. These commercials are televised nationally in China. We believe that these advertisements continue to strengthen our brand loyalty, a major driver of the historical popularity of the drug. This product is manufactured at
our Guangxi Lingfeng Pharmaceutical Co., or GLP, facility in Hezhou in the Guangxi Province in Southwestern China.

Phase 3 clinical trials for Jinji
Capsule were conducted on 421 female patients at Wuzhou City Peoples Hospital, Wuzhou City Workers Hospital and Hezhou TCM Hospital. These trials demonstrated safety and efficacy in accordance with SFDA requirements.

Jinji Yimucao

Our Jinji Yimucao is an over-the-counter
pharmaceutical product approved and marketed for the treatment of premenstrual syndrome, or PMS, and other PMS and menopause-related symptoms. Jinji Yimucao is approved by the SFDA in China and marketed as a branded generic drug. This product
consists of a combination of many parts of TCM plants, including roots, vines, flowers and stems. We source the majority of our raw materials for our Jinji product line from the Guangxi province, which we believe has a unique natural environment to
cultivate high quality plants. We believe the combination of these quality ingredients, our manufacturing processes and our well-recognized brand name position our product well to compete in the marketplace. Each treatment requires a dose of two
packets of powder for oral suspension taken two times a day.

In early 2007 we commercially launched Jinji Yimucao. We own this product as a result of the
acquisition of GLP, which we completed in April 2006. We promote Jinji Yimucao through direct-to-consumer advertising, including an extensive television commercial campaign. We believe that these advertisements continue to strengthen our brand
loyalty, a major driver of the historical popularity of the drug. This product is manufactured at our GLP facility in Hezhou.

Boke Nasal Spray

Our Boke nasal spray is an over-the-counter pharmaceutical product approved and marketed for the treatment of sinus congestion from common cold, stuffy
nose, chronic rhinitis, allergic rhinitis and nasosinusitis. The spray is marketed under the product name of Ditong Biyanshui Penwuji (Ditong). Ditong is approved by the SFDA in China and marketed as a branded drug. This product consists
of a combination of many parts of TCM plants, including roots, vines, flowers and stems. Treatment dosage is three to four times a day and two sprays into each nostril.

Ditong was commercially launched by Boke in China approximately 10 years ago. We own this product as a result of the acquisition of Boke, which we completed in October 2007. We promote Boke nasal spray through
direct-to-consumer advertising, including an extensive television commercial campaign. We believe that these advertisements continue to strengthen our brand loyalty, a major driver of the historical popularity of the drug. This product is
manufactured at our Boke facility in Nanning.



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Principal Nutraceutical Products

Soy Peptide Series

Our Soy Peptide Series is our primary line of nutraceutical products, all of which are available
in supermarkets, fitness centers, specialty nutraceutical stores and other retail outlets. These products include tablets, powders, drinks and instant coffee that are non-genetically modified and derived from soybeans through a biochemical process
involving decomposition, conversion and synthesis of soybean protein. They are used as food and beverage supplements and are easily digested, increase metabolism and can replenish body strength. We have four distinct formulations: anti-fatigue,
menopause, immunoenhancer and balanced formula. The benefit of our peptide formulation compared with the soybean itself is that our formulation is more readily absorbable by the human body. We manufacture these products at our Three Happiness
facility in Harbin.

Our Soy Peptide Series was commercially launched in China in 2002. We do not have any exclusivity under Chinese law for these products
but we own trademarks and market all of our nutraceutical products through print advertising campaigns. While the nutraceutical market is highly fragmented with many competitors, we believe that our product branding and multiple forms for delivery
of the peptide will continue to support additional growth.

Product Pipeline

We have our own research, development and laboratory facilities and retain our own professional research and development team. We have also entered into joint research and development agreements with outside research
institutes in China. We have a portfolio of over 400 approved prescription and over-the-counter pharmaceutical products that have not been commercially launched. We continue to strengthen our research and development efforts and we intend to
continue introducing new modernized products to leverage our branded market leadership position, and to develop line extensions for our existing products.

We are also exploring opportunities for acquisitions that may complement our existing product lines and leverage our significant sales and distribution capabilities.

Marketing and Sales

In China, we manufacture and market more than 60 products, consisting of prescription and
over-the-counter pharmaceuticals and nutraceutical. Our pharmaceutical and nutraceutical products are marketed to hospitals, clinics, pharmacies and retail stores at over 100,000 distribution points. We maintain 28 regional representative offices
throughout China and employ approximately 2,133 sales and marketing professionals. Where appropriate, we leverage the synergies between complementary products and distribution channels to accelerate the market penetration of our new products. Our
sales force markets to all provinces, including rural areas and major cities in China.

Distributors and Customers

We have an extensive third-party distribution network with over 300 distributors that provide us with widespread access to sell our products in all provinces, including
rural areas and major cities in China. The breadth of our distribution channel allows us to target approximately 100,000 distribution points comprising hospitals, clinics, pharmacies and retail stores. We select our distributors based on their
reputation and market coverage. Because we have our own extensive sales and marketing team we rely on our distributors solely for the transportation of our products to our distribution points and not for sales and marketing services. As a result, we
do not enter into exclusive distribution agreements with these third party distributors. We review our distribution agreements on an annual basis to specify designated distribution points, the location and method for delivery of our products to
certain distribution points and targets for annual sales volume and receivable collections.

The distribution industry in China is fragmented with over
2,000 distributors. Due to the number of distributors, we do not rely on any one distributor for our distribution needs. We estimate that our top 10 distributors account for only approximately 15% of our total sales.

In October 2008, through the acquisition of Nuo Hua, distribution form part of our business. Through Nuo Huas subsidiary and affiliated company, we now distribute
more than 6,000 pharmaceutical products through an extensive sales network covering major urban and rural areas in China.



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Manufacturing

We
have five manufacturing facilities in China dedicated exclusively to the manufacture of our products. Each facility is GMP certified. We have fully integrated manufacturing support systems including quality assurance, quality control and regulatory
compliance. We have developed our own independent quality control systems in accordance with SFDA regulations. Our quality assurance team devotes significant attention to quality control for designing, manufacturing and testing our products, and is
also responsible for ensuring that we are in compliance with all applicable national and local regulations and standards, as well as our internal policies. Our senior management team is also actively involved in setting quality assurance policies
and managing internal and external quality performance. These support systems enable us to maintain high standards of quality for our products and deliver reliable products to our customers on a timely basis.

The details of our facilities are as follows:



| |  |  | Three Happiness. Our Three Happiness facility is located in Harbin, the capital of Heilongjiang Province in northeast China. It is approximately
1,532,775 square feet and manufactures both pharmaceutical and nutraceutical products. The Three Happiness facility consists of one pharmaceutical and one nutraceutical manufacturing plant, including a dedicated building for soybean peptide
products.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | HSPL. Our HSPL facility is also located in Harbin. It is approximately 532,339 square feet and manufactures our SHL Injection Powder.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | GLP. Our GLP facility is located in Hezhou, in the Guangxi Province in southwest China. It is approximately 1,485,055 square feet and
manufactures our Jinji series of womens health products.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | CCXA. Our CCXA facility is located in ChangChun, the capital of Jilin Province in northeast China. It is approximately 1,077,467 square feet and
manufactures a variety of generic pharmaceutical products including Zhitongfengshi tablets for the treatment of osteophyte and Yakangling capsule for the treatment of gingivitis.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Boke. Our Boke facility is located in Nanning, the capital of Guangxi Province in southwest China. It is approximately 174,280 square feet and
manufactures our Boke series of nasal products.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We have land use rights to the land on which our manufacturing facilities are located
that are granted and allocated to us by the government. 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 or allocated by, or leased
from, the PRC government.

We currently have adequate manufacturing capacity for our marketed products.

Raw Materials

We require a supply of quality raw materials to
manufacture our products. Historically, we have not had difficulty obtaining raw materials from suppliers. Currently, we rely on numerous suppliers to deliver our required raw materials. Our products are mainly plant based and derived from flowers,
plants and roots which are locally grown by farmers in China. We enter into arrangements with numerous suppliers in China to hedge against the risk of short supply due to irregularities in seasonal temperatures. If we anticipate a shortage, we have
the capability and warehouse capacity to store such materials.

Intellectual Property

We regard our packaging designs, service marks, trademarks, trade secrets, patents and similar intellectual property as part of our core competence that is critical to our success. We rely on patent, trademark and
trade secret law, as well as confidentiality agreements with certain of our employees, distributors and others to protect our intellectual property rights.

There are three types of patents under the PRC patent law. The first type, an external design patent, refers to a new design of a products shape, pattern or a combination of shape and pattern and the combination of a products
color and its shape and pattern, where such a design is aesthetically appealing and suitable for industrial application. The second type of patent is called an invention patent and the third type of patent is referred to as a new model or utility
patent. Invention patents and utility patents are similar in that both of them relate to scientific or technological inventions. A utility patent, compared to an invention patent, requires a lower level of creativity and covers a narrower scope. In
addition, an invention patent can be a new technology introduced in respect of an existing product, method or their improvements, while a utility patent is restricted to a products shape, constitutions or a combination of these two. Invention
patents are valid for 20 years, whereas utility patents and external design patents are each valid for 10 years.

To a large extent, we rely on such State
Protection law to protect our intellectual property rights with respect to some of our products. As of February 28, 2009, we owned a total of 40 patents and have registered a total of 86 trademarks and the number of trademarks in the process of
application is 161.



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Competition

We
believe that we are well positioned to compete in the fast-developing Chinese pharmaceutical and nutraceutical market with our strong brand, diverse product portfolio, research and development capabilities, established sales and marketing network
and favorable cost structure. We believe that competition and leadership in our industry are based on managerial and technological expertise, and the ability to identify and exploit commercially viable products. Other factors affecting our
competitive position include time to market, patent position, product efficacy, safety, convenience, reliability, availability and pricing.

Our SHL
Injection Powder primarily competes with a similar injection powder product produced by Harbin Pharmaceutical Group. Our marketing strategy with respect to this product is broader than our competitor by focusing on rural markets as well as major
cities and continues to maintain high products quality. We believe this strategy has been successful for us against our competition.

Our CE Gel competes
with several other products having similar functionality. Some of these products include the Jianpizhiyi Tablet produced by Shangdong Zhiling Pharmaceutical Company, Yeniaoying produced by Tianjin Zhongxin Company, Shengjiyiniaokang produced by
Shanxi Dingxing Healthcare Scientific Limited and Suoquan Pill produced by Jilin Tianguang Pharmaceutical Limited. Despite the similar products in the market, we believe our CE Gel is the leading product, as currently it is the only SFDA approved
first grade medicine for bedwetting.

Our Jinji Capsule competes with Huahong Pill produced by Huahong Pharmaceutical Group and Qianjin Pill produced by
Qianjin Pharmaceutical Group.

Our Boke nasal spray competes with Dezhong Biyankang produced by Guangdong Foshan Dezhong Pharmaceutical Co., Ltd; Zhonglian
Rhinitis Tablets produced by Wuhan Zhonglian Pharmaceutical Co., Ltd; and Qianbai Rhinitis Tablet produced by Guangzhou Qixing Pharmaceutical Co., Ltd.

Our Soy Peptide Series competes with Leneng Peptide Powder, produced by Leneng Bioengineering Company and Soybean Protein Peptide, produced by Harbin High-Tech Company Limited.

Environmental Matters

We comply with the Environmental Protection Law of China as well as the applicable local
regulations. In addition to statutory and regulatory compliance, we actively ensure the environmental sustainability of our operations. 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.

Employees

We had 4,076 employees as of December 31, 2008. Approximately 1,238 of these employees are principally engaged in manufacturing and services
activities, 2,133 in sales and marketing, 122 in research and development and 583 in management and administration. In 2008 we increased our number of employees through hiring and acquisition and retained the best talent during the process of
integration and performance review. We continue to monitor our headcount and may add additional employees for sales and marketing, customer service and manufacturing and assembly as our business grows. In general, we consider our relationship with
our employees to be good.

Insurance

We currently
carry insurance policies which are customary for enterprises in China providing for total coverage of approximately $37.23 million. We have property coverage of approximately $19.5 million, transport vehicle coverage of approximately $0.75 million
and workers medical and accident coverage of approximately $1.98 million. We also maintain Director and Officer Insurance coverage of $15 million. We paid aggregate insurance premiums of $1,164,742 in the year of 2008.



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Our History

Three
Happiness had been conducting business in China since 1994. In June 2002, through a share exchange with the stockholders of Three Happiness, Three Happiness became our wholly-owned subsidiary and continued its business operations in China. Prior to
the share exchange we did not have any business operations. At the time of the share exchange we changed our name to American Oriental Bioengineering, Inc.

In February 2003, we acquired the rights to a soybean protein peptide biochemical engineering project, which provided us with the rights to manufacture and commercialize our Soy Peptide Series of nutraceutical products. Also, since the
share exchange in 2002, we acquired seven companies in China. In November 2004, we acquired HSPL, which manufactures and commercializes our SHL Injection Powder. In April 2006, we acquired GLP, which manufactures and commercializes our Jinji series.
In July 2006, we acquired HQPL, a pharmaceutical distributor that owns a license to distribute pharmaceutical products in China. In August 2007, we acquired CCXA, which manufactures and commercializes a board range of generic pharmaceutical
products. In October 2007, we acquired BOKE, which manufactures and commercializes our Boke series of nasal products. In October 2008, we acquired Nuo Hua, a pharmaceutical wholesale and retail distribution company, and GuangXi HuiKe Pharmaceutical
Research and Development Co., Ltd. (GHK), a company engaged in pharmaceutical research and product development leading to SFDA approval to expedient product launches in China.

On July 18, 2005, our common stock commenced trading on the American Stock Exchange, or AMEX, under the ticker symbol AOB. On November 14, 2005, our common
stock commenced trading on the Archipelago Exchange, or ArcaEx, a facility of the Pacific Exchange.

On December 18, 2006, we voluntary elected to delist
our common stock from the AMEX and ArcaEx. Our common stock commenced trading on the New York Stock Exchange under the ticker symbol AOB on the same day.

Regulations of Our Industry

Regulations Relating to the Pharmaceutical Industry

The pharmaceutical industry in China, including the TCM sector, is highly regulated. The primary regulatory authority is the SFDA, including its provincial and local
branches. As a developer, producer and distributor of medicinal products, we are subject to regulation and oversight by the SFDA and its provincial and local branches. The Law of the PRC on the Administration of Pharmaceuticals provides the basic
legal framework for the administration of the production and sale of pharmaceuticals in China and covers the manufacturing, distributing, packaging, pricing and advertising of pharmaceutical products. Its implementing regulations set forth detailed
rules with respect to the administration of pharmaceuticals in China. We are also subject to other PRC laws and regulations that are applicable to business operators, manufacturers and distributors in general.



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Registration and Approval of Medicine. A medicine must be registered and approved by the SFDA before
it can be manufactured. The registration and approval process requires the manufacturer to submit to the SFDA a registration application containing detailed information concerning the efficacy and quality of the medicine and the manufacturing
process and the production facilities the manufacturer expects to use. To obtain the SFDA registration and approval necessary for commencing production, the manufacturer is also required to conduct pre-clinical trials, apply to the SFDA for
permission to conduct clinical trials, and, after clinical trials are completed, file clinical data with the SFDA for approval. Our pharmaceutical products are approved by the SFDA and are being sold both as prescription and over-the-counter
medicines.

New Medicine. If a medicine is approved by the SFDA as a new medicine, the SFDA will issue a new medicine certificate to the
manufacturer and impose a monitoring period which shall be calculated starting from the day of approval for manufacturing of the new medicine and may not exceed five years. The length of the monitoring period is specified in the new medicine
certificate. During the monitoring period, the SFDA will monitor the safety of the new medicine, and will neither accept new medicine certificate applications for an identical medicine by another pharmaceutical company, nor approve the production or
import of an identical medicine by other pharmaceutical companies. For new medicines approved prior to September 2002, the monitoring period could be longer than five years. As a result of these regulations, the holder of a new medicine certificate
effectively has the exclusive right to manufacture the new medicine during the monitoring period.

Provisional National Production
Standard. In connection with the SFDAs approval of a new medicine, the SFDA will normally direct the manufacturer to produce the medicine according to a provisional national production standard, or a provisional standard. A
provisional standard is valid for two years, during which the SFDA closely monitors the production process and quality consistency of the medicine to develop a national final production standard for the medicine, or a final standard. Three months
before the expiration of the two-year period, the manufacturer is required to apply to the SFDA to convert the provisional standard to a final standard. Upon approval, the SFDA will publish the final standard for the production of this medicine. In
practice, the approval for conversion to a final standard is a time-consuming process. However, during the SFDAs review period, the manufacturer may continue to produce the medicine according to the provisional standard.

Transitional Period. Prior to the latter of (1) the expiration of a new medicines monitoring period or (2) the date when the
SFDA grants a final standard for a new medicine after the expiration of the provisional standard, the SFDA will not accept applications for an identical medicine nor will it approve the production of an identical medicine by other pharmaceutical
companies. Accordingly, the manufacturer will continue to have an exclusive production right for the new medicine during this transitional period.

Continuing SFDA Regulation. Pharmaceutical manufacturers in China are subject to continuing regulation by the SFDA. If the labeling or manufacturing process of an approved medicine is significantly modified, a new
pre-market approval or pre-market approval supplement will be required by the SFDA. A pharmaceutical manufacturer is subject to periodic inspection and safety monitoring by the SFDA to determine compliance with regulatory requirements. The SFDA has
a variety of enforcement actions available to enforce its regulations and rules, including fines and injunctions, recall or seizure of products, the imposition of operating restrictions, partial suspension or complete shutdown of production and
criminal prosecution.

Pharmaceutical Product Manufacturing

Permits and Licenses for Pharmaceutical Manufacturers. A pharmaceutical manufacturer must obtain a pharmaceutical manufacturing permit from the SFDAs relevant provincial branch. This permit is valid for five
years and is renewable upon its expiration. Each of our manufacturing facilities has a pharmaceutical manufacturing permit. We do not anticipate any difficulty in renewing our pharmaceutical manufacturing permits upon expiration.

Good Manufacturing Practice. A pharmaceutical manufacturer must meet Good Manufacturing Practice standards, or GMP standards, for each of its
production facilities in China in respect of each form of pharmaceutical products it produces. GMP standards include staff qualifications, production premises and facilities, equipment, raw materials, environmental hygiene, production management,
quality control and customer complaint administration. If a manufacturer meets the GMP standards, the SFDA will issue to the manufacturer a Good Manufacturing Practice certificate, or a GMP certificate, with a five-year validity period. However, for
a newly established pharmaceutical manufacturer that meets the GMP standards, the SFDA will issue a GMP certificate with only a one-year validity period. We have obtained a GMP certificate for all of our production facilities covering all of the
products that we produce.

Pharmaceutical Distribution. A distributor of pharmaceutical products in China must obtain a pharmaceutical
distribution permit from the relevant provincial or local SFDA branches. The distribution permit is granted if the relevant SFDA provincial branch receives satisfactory inspection results of the distributors facilities, warehouse, hygiene
environment, quality control systems, personnel and equipment. A pharmaceutical distribution permit is valid for five years.

Restrictions on Foreign
Ownership of Pharmaceutical Wholesale and Retail Businesses in China. Chinese regulations on foreign investment currently permit foreign companies to establish or invest in wholly foreign-owned companies or joint ventures that
engage



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in wholesale or retail sales of pharmaceuticals in China. For retail sales, these regulations restrict the number and size of retail pharmacy outlets that a
foreign investor may establish. Retail pharmacy chains with more than 30 outlets that sell a variety of branded pharmaceutical products sourced from different suppliers are limited to less than 50.0% foreign ownership unless the outlets are owned by
a third party and operated under a foreign franchise.

Good Supply Practice Standards. The SFDA applies Good Supply Practice
standards, or GSP standards, to all pharmaceutical wholesale and retail distributors to ensure the quality of distribution in China. The currently applicable GSP standards require pharmaceutical distributors to implement controls on the distribution
of medicine, including standards regarding staff qualifications, distribution premises, warehouses, inspection equipment and facilities, management and quality control. A certificate for GSP standards, or GSP certificate, is valid for five years,
except for a newly established pharmaceutical distribution company, for which the GSP certificate is valid for only one year.

Price
Controls. The retail prices of prescription and over-the-counter medicines that are included in the national medicine catalog are subject to price controls administered by the Price Control Office under the National Development and
Reform Commission, or the NDRC, and provincial price control authorities, either in the form of fixed prices or price ceilings. The controls over the retail price of a medicine effectively set the limits for the wholesale price of that medicine.
From time to time, the NDRC publishes and updates a national list of medicines that are subject to price control. Fixed prices and price ceilings on medicines are determined based on profit margins that the NDRC deems reasonable, the type and
quality of the medicine, its production costs, the prices of substitute medicines and the extent of the manufacturers compliance with the applicable GMP standards. The NDRC directly regulates the price of some of the medicines on the list, and
delegates the power to provincial price control authorities to regulate the remainder on the list. For those medicines under the authority of provincial price control authorities, each provincial price control authority regulates medicines
manufactured by manufacturers registered in that province. Provincial price control authorities have the discretion to authorize price adjustments based on the local conditions and the level of local economic development. Only the manufacturer of a
medicine may apply for an increase in the retail price of the medicine and it must apply either to the NDRC, if the price of the medicine is nationally regulated, or to the provincial price control authorities in the province where it is registered,
if the price of the medicine is provincially regulated. For a provincially regulated medicine, when provincial price control authorities approve an application, they will file the new approved price with the NDRC for confirmation and thereafter the
newly approved price will become binding and enforceable across China.

Tendering Requirement for Hospital Purchases of
Medicines. Provincial and municipal government agencies such as provincial or municipal health departments also operate a mandatory tendering process for purchases by state-owned hospitals of a medicine included in provincial medicine
catalogs. These government agencies organize a tendering process once every year in their province or city and typically invite manufacturers of provincial catalog medicines that are on the hospitals formularies and are in demand by these
hospitals to participate in the tendering process. A government-approved committee consisting of physicians, experts and officials is delegated by these government agencies the power to review bids and select one or more medicines for the treatment
of a particular medical condition. The selection is based on a number of factors, including bid price, quality and manufacturers reputation and service. The bidding price of a winning medicine will become the price required for purchases of
that medicine by all state-owned hospitals in that province or city. The tendering requirement was first introduced in 2001 and has since been implemented across China. We understand that the level of present implementation of the tendering
requirement varies among different provinces in China.

Reimbursement under the National Medical Insurance Program. As of the end of
2006, approximately 157.4 million people were enrolled into the National Medical Insurance Program. The Ministry of Labor and Social Security, together with other government authorities, determines which medicines are to be included in or
removed from the national medicine catalog for the National Medical Insurance Program, and under which tier a medicine should fall, both of which affect the amounts reimbursable to program participants for their purchases of those medicines. These
determinations are based on a number of factors, including price and efficacy. A National Medical Insurance Program participant can be reimbursed for the full cost of a Tier 1 medicine and 80 to 90% of the cost of a Tier 2 medicine. Although it is
designated as a national program, the implementation of the National Medical Insurance Program is delegated to various provincial governments, each of which has established its own medicine catalog. A provincial government must include all Tier 1
medicines listed in the national medicine catalog in its provincial medicine catalog, but may use its discretion based on its own selection criteria to add other medicines to, or exclude Tier 2 medicines listed in the national medicine catalog from,
its provincial medicine catalog, so long as the combined numbers of the medicines added and excluded do not exceed 15% of the number of the Tier 2 medicines listed in the national catalog. In addition, provincial governments may use their discretion
to upgrade a nationally classified Tier 2 medicine to Tier 1 in their provincial medicine catalogs, but may not downgrade a nationally classified Tier 1 medicine to Tier 2. The total amount of reimbursement for the cost of prescription and
over-the-counter medicines, in addition to other medical expenses, for an individual program participant in a calendar year is capped at the amount in that participants individual account. The amount in a participants account varies,
depending upon the amount of contributions from the participant and his or her employer. Generally, program participants who are from relatively wealthier eastern parts of China and relatively wealthier metropolitan centers have greater amounts in
their individual accounts than those from less developed provinces.



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Regulation Relating to the Nutraceutical Industry

Some nutraceuticals produced in China can be labeled as health food, which means the product is aimed at a specific group of people and is able to adjust bodily function but is not aimed at curing disease. Health
foods are required to be approved by the SFDA and are subject to its regulation. We currently have only one product approved as a health food by the SFDA.

Registration of Health Products

The approval of nutraceuticals as health products requires (i) an applicant to perform product
research prior to submitting an application for registration of health food; (ii) an applicant to submit the sample and relevant product research materials to the examination institute appointed by the SFDA for required trial and examination;
and (iii) the issuance of a report by the examination institute.

Provincial food and drug authorities review the product research materials and
sample and, if found satisfactory, the food and drug authorities at the provincial level conduct site inspections and sample examinations and thereafter submit their opinion along with the application materials to the SFDA, and in the meantime, send
inspection notice together with the sample to be examined to the appointed examination institute. The examination institute conducts examinations and inspections and submits its report to the SFDA. If all the regulatory requirements are satisfied,
the SFDA will grant an Approval Certificate of Homemade Health Food to the applicant. The Approval Certificate of Health Food is effective for a period of five years.

Any changes to the items stated in the Approval Certificate of Health Food as well as its appendices must be approved by the SFDA. However, pursuant to the Administration Rules for Registration of Health Food (Trial),
the product name, raw materials, manufacturing process, usage methods and other items stated in the Approval Certificate of Health Food, which may affect the safety and function of the health food, shall not be alternated.

In the case of transfer of technology of the registered health products to be manufactured in PRC, the transferee shall apply for new approval certificate of homemade
health food in accordance with the relevant provisions of the Administration Rules for Registration of Health Food (Trial).

Permits and Licenses for
manufacturing of Health Foods

Those enterprises engaging in manufacturing and operation of health food business must also comply with the PRC Food
Hygiene Law and the Administration Rules of Food Hygiene Permit. Under the PRC Food Hygiene Law, enterprises engaging in manufacturing and operation of food products in PRC are required to obtain Hygiene Permit from the relevant PRC hygiene
administrative authorities. In order to manufacture health food in the PRC, the manufacturing enterprise shall apply to the hygiene administration authorities at the provincial level for approval. If it is qualified, the hygiene administrative
authorities at the provincial level will issue a Hygiene Permit with the approved health food specified. Each Hygiene Permit issued to a food manufacturing enterprise is effective for a period of four years. The enterprise is required to apply for
renewal of such permit within sixty days prior to its expiry.

Manufacturing enterprise of health food shall organize its manufacture in accordance with
the approval and shall not change the ingredient, manufacturing process, quality standard, name of the products, label, illustration and so on. The manufacturing procedures and conditions shall be in compliance with hygiene requirements that are
applicable to the food manufacturing enterprise.

Compliance with GMP

Pursuant to the Notice of Circulating the Examination Methods and Assessment Guidelines of Good Manufacturing Practices of Health Food promulgated by the MOH, the Hygiene Permit shall only be issued to those
enterprises in compliance with the GMP upon examination of the hygiene administrative authorities at the provincial level. For those enterprises failing to meet the GMP, the Hygiene Permit will be revoked.

Label of Health Food

The Regulation for Label of Health Food
as promulgated by the MOH provides for requirements of the label of health food. According to this regulation, the name, function, functional ingredient, applicable scope and file number of approval of the health food labeled shall be consistent
with those corresponding items stated in the Approval Certificate of Health Food issued by the hygiene administrative authorities at the provincial level.

Other Regulations

In addition to the regulations relating to pharmaceutical industry in China, our operating subsidiaries are also subject
to the regulations applicable to a foreign invested enterprise, or FIE, in China.



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Foreign Currency Exchange. Pursuant to the Foreign Currency Administration Rules promulgated in 1996
and amended in 1997 and various regulations issued by State Administration of Foreign Exchange, or the SAFE, and other relevant PRC government authorities, the Renminbi is freely convertible only to the extent of current account items, such as
trade-related receipts and payments, interests and dividends. Capital account items, such as direct equity investments, loans and repatriation of investment, require the prior approval from the SAFE or its local counterpart for conversion of
Renminbi into a foreign currency, such as U.S. dollars, and remittance of the foreign currency outside the PRC. Payments for transactions that take place within the PRC must be made in Renminbi. Unless otherwise approved, PRC companies other than
FIEs must convert foreign currency payments they receive from abroad into Renminbi. On the other hand, FIEs may retain foreign exchange in accounts with designated foreign exchange banks, subject to a cap set by the SAFE or its local counterpart.

Dividend Distribution. The principal regulations governing dividend distributions by wholly foreign-owned enterprises and Sino-foreign
equity joint ventures include:



| |  | Wholly Foreign-Owned Enterprise Law (1986), as amended;
|- |  | -------------------------------------------------------



| |  | Wholly Foreign-Owned Enterprise Law Implementing Rules (1990), as amended;
|- |  | --------------------------------------------------------------------------



| |  | Sino-Foreign Equity Joint Venture Enterprise Law (1979), as amended;
|- |  | --------------------------------------------------------------------



| |  | Sino-Foreign Equity Joint Venture Enterprise Law Implementing Rules (1983), as amended; and
|- |  | -------------------------------------------------------------------------------------------



| |  | Regulations on the Administration of Foreign Exchange Settlement, Sale and Payment.
|- |  | -----------------------------------------------------------------------------------

Under these regulations, wholly foreign-owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. Additionally, these foreign-invested enterprises are required to set aside certain amounts of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash
dividends.

Additional Available Information

We can make available free of charge on or through our Internet website, www.bioaobo.com, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, if
any, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. We also can
make available free of charge on at www.bioaobo.com our website our Business Code of Conduct and Ethics, Nominating and Corporate Governance Committee Charter, Compensation Committee Charter and Audit Committee Charter. The information contained on
our website is not intended to be incorporated into this Annual Report on Form 10-K.

Item 1A. Risk Factors

Our business, financial condition, operating results and prospects are subject to the risks listed below. Additional risks and uncertainties not
presently foreseeable to us may also impair our business operations. If any of the following risks actually occurs, our business, financial condition or operating results could be materially 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 the shares of our common stock.

Risks Related to Our
Business and Industry

A disproportionate amount of our sales revenue is derived from six of our products and a disruption in, or a compromise of,
our manufacturing or sales operations, or distribution channels related to any of these six products could materially and adversely affect our financial condition and results of operations.

Our top six products, which comprise Shuanghuanglian Lyophilized Injection Powder, or SHL Injection Powder, CE Gel, Jinji Capsule, Jinji Yimucao, Soybean Peptide Tablets
and Boke Nose Spray, constituted approximately 71% of our total revenues in 2008 and 81.1% of our total revenues in 2007. We expect that these six products will continue to account for a majority of our sales in the near future. Because of our
dependence on a few products, any disruption in, or compromise of, our manufacturing operations, sales operations or distribution channels, relating to any of these products 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.

A general economic downturn, a recession in China or sudden disruption in business conditions may affect consumer purchases of
discretionary items, including pharmaceutical and nutraceutical products, which could adversely affect our business.

Consumer spending is generally
affected by a number of factors, including general economic conditions, the level of unemployment, inflation, interest rates, energy costs, gasoline prices and consumer confidence generally, all of which are beyond our control. Consumer purchases of
discretionary items tend to decline during recessionary periods, when disposable income is lower, and may impact sales of our products. In addition, sudden disruptions in business conditions as a result of a terrorist attack, retaliation and the
threat of further attacks or retaliation, war, adverse weather conditions and climate changes or other natural disasters, pandemic situations or large scale power outages can have a short or, sometimes, long-term impact on consumer spending. A
downturn in the economy in China, including any recession or a sudden disruption of business conditions in those economies, could adversely affect our business, financial condition, and results of operation.



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Intense competition from existing and new companies 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. Some of our competitors are more
established than we are, have greater brand recognition of products that compete with ours, have more financial, technical, marketing and other resources than we presently possess and a larger customer base. These competitors may be able to respond
more 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 or adopt more aggressive pricing policies. Our commercial
opportunity will be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer side effects, are less expensive or have more attractive product characteristics than our current products or
products that we may develop in the future. 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.

We depend on our key management personnel and the loss of their services could adversely affect our business.

Our success depends in part on our continued ability to attract, retain and motivate highly qualified management. We place substantial reliance upon the efforts and
abilities of our executive officers, including Tony Liu, Yanchun Li, Jun Min and Binsheng Li. The loss of services of any of these individuals or one or more other members of our senior management could delay or prevent the successful execution of
our business objectives and could have a material adverse effect on our operations.

Replacing key employees may be difficult and costly and may take an
extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop and commercialize products successfully. We do not maintain key person insurance policies
on the lives of these individuals or the lives of any of our other employees. We have entered into employment agreements with these individuals. We may need to hire additional personnel as we expand our commercial activities. We may not be able to
attract or retain qualified management on acceptable terms in the future due to the intense competition for qualified personnel in our industry. If we are not able to attract and retain the necessary personnel to accomplish our business objectives,
we may experience constraints that will impede these objectives.

We cannot assure you that we will be able to complete acquisitions or successfully
integrate new businesses into our own.

We intend to pursue opportunities to grow our business by acquiring businesses, products and technologies that
are complementary or related to our existing product lines. Successful completion of an acquisition depends on a number of factors that are not entirely within our control, including our ability to negotiate acceptable terms, conclude satisfactory
agreements and obtain all necessary regulatory approvals. We may not be able to locate suitable acquisition candidates at prices that we consider appropriate. If we do identify an appropriate acquisition candidate, we may face competition from other
companies interested in acquiring the target company that have greater financial and other resources than we have. Acquisitions of businesses, products, technologies or other material operations may require debt financing or additional equity
financing, resulting in leverage or dilution of ownership.

Even if we complete one or more strategic transactions, we may be unable to integrate or
coordinate successfully the personnel and operations of a business. 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 incur non-recurring severance expenses, restructuring charges and change of control payments and 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 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 PRC, to the extent applicable. There can be no assurance that any proposed acquisition will be able to comply with PRC requirements, rules and/or regulations, or that we will successfully obtain governmental approvals to the extent
required, which may be necessary to consummate such acquisitions.

We may face difficulties in implementing our organic growth strategy.

Many obstacles to entering new markets exist, such as the costs associated with entering new markets, recruiting and retaining adequate numbers of effective sales and
marketing personnel, developing and implementing effective marketing efforts abroad, establishing and maintaining the appropriate regulatory compliance and maintaining attractive foreign exchange ratios. 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. Our business plan and growth strategy is based on currently prevailing circumstances and



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the assumption that certain circumstances will or will not occur, as well as the inherent risks and uncertainties involved in various stages of development.
We cannot, therefore, assure you that we will be able to successfully overcome such difficulties and continue to grow our business.

If we fail to
manage our growth and current operations, we may not achieve future growth or 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. To this end, we are and expect to continue to substantially increase our employee headcount which will place a significant strain on our
management and on our operational, accounting, and information systems. Our need to manage our operations and growth effectively requires us to continue to expend funds to improve our financial controls, operating procedures, management information
systems, reporting systems and procedures to manage our increased operations. If we are unable to implement improvements to our management information and control systems successfully in an efficient or timely manner, or if we encounter deficiencies
in our existing systems and controls, then management may receive inadequate information to manage our day-to-day operations. 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 may have difficulty defending our intellectual property rights from
infringement which may undermine our competitive position.

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 agreements to protect our proprietary rights. Certain of our products have received trademark and patent protection in China and Hong
Kong. No assurance can be given that such patents and licenses will not be challenged, invalidated, infringed or circumvented, or that such intellectual property rights will provide a competitive advantage to us. Our trade secrets may otherwise
become known or be independently discovered by our competitors. Policing the unauthorized use of proprietary technology can be difficult and expensive. Also, litigation may be necessary to enforce our intellectual property rights, protect our trade
secrets or determine the validity and scope of the proprietary rights of others. The outcome of such potential litigation may not be in our favor and any success in litigation may not be able to adequately protect our rights. Such litigation may be
costly and divert management attention away from our business. An adverse determination in any such litigation would impair our intellectual property rights and may harm our business, prospects and reputation. Enforcement of judgments in China and
Hong Kong is uncertain and even if we are successful in such litigation it may not provide us with an effective remedy. In addition, we have no insurance coverage against litigation costs and would have to bear all costs arising from such litigation
to the extent we are unable to recover them from other parties. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. In addition, there can be no assurance that
we will be able to obtain licenses from third-parties that we may need to conduct our business or that such licenses can be obtained at a reasonable cost.

In addition, third parties may file infringement claims against us asserting that we are infringing on their patents or trademarks. In the event that such claims are filed, regardless of the merit of such a claim, we may incur substantial
costs and diversion of management as a result of our involvement in such proceedings.

We currently sell our products mainly in China. China will remain
our primary market for the foreseeable future. If we expand into additional countries, our risk of intellectual property infringement may be heightened. Laws and enforcement mechanisms in other countries may not protect proprietary rights to the
same extent as China and Hong Kong. To date, no trademark or patent filings have been made other than in China and Hong Kong.

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.

If we cannot procure our raw materials from our current sources we may be forced to seek alternative sources of supply, which may disrupt our
operations or may result in the supply of lesser quality products.

The loss of any of our primary supply sources, or delays, disruptions or other
difficulties in procuring these raw materials from our primary supply sources could have a material adverse effect on our business and results of operations. Additionally, due to the nature of the raw materials, mainly plants, the supply of these
raw materials can be adversely affected by any material change in the climatic or environmental conditions in China, which may, in turn, result in increased costs to purchase these raw materials. If we are required to procure alternative sources of
supply, our ability to maintain high quality products, lower costs and to provide our products to customers when needed could be impaired, and as a result we could lose business and our results of operations could be materially and adversely
affected.



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We do not have product liability insurance and we could be exposed 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.
Adverse side effects, marketing or manufacturing problems pertaining to any of our products could result in:



| |  |  | decreased demand for our products;
| | - |  | ----------------------------------



| |  |  | adverse publicity resulting in injury to our reputation;
| | - |  | --------------------------------------------------------



| |  |  | product liability claims and significant litigation costs;
| | - |  | ----------------------------------------------------------



| |  |  | substantial monetary awards to or costly settlements with consumers;
| | - |  | --------------------------------------------------------------------



| |  |  | product recalls;
| | - |  | ----------------



| |  |  | loss of revenues; or
| | - |  | --------------------



| |  |  | the inability to commercialize future products.
| | - |  | -----------------------------------------------

These risks will exist for those products in clinical development and with respect to those products that have received regulatory approval for commercial sale or any product we may acquire. 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 do not carry product liability insurance. The lack of product liability insurance exposes us to risks associated with
potential product liability claims, which can be significant.

Our international operations require us to comply with a number of U.S. and international
regulations.

We need 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 or restrictions on 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 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 applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, and other rules implemented by the Securities and
Exchange Commission and the New York Stock Exchange, or NYSE. 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, on committees of our board of directors or as executive officers.

As a public company, we are required to comply with Sarbanes-Oxley and the related rules and regulations of the SEC, including expanded disclosure, accelerated
reporting requirements and more complex accounting rules. Compliance with Section 404 of Sarbanes-Oxley and other requirements resulted in increased compliance costs and will continue to require additional management resources. We upgraded our
finance and accounting systems, procedures and controls and will need to continue to implement additional finance and accounting systems, procedures and controls as we grow to satisfy these reporting requirements. In addition, we may need to hire
additional legal and accounting staff with appropriate experience and technical knowledge, and we cannot assure you that if additional staffing is necessary that we will be able to do so in a timely fashion. If we are unable to complete the required
annual assessment as to the adequacy of our internal reporting or if our independent registered public accounting firm is unable to provide us with an unqualified report as to the effectiveness of our internal controls over financial reporting in
the future, we could incur significant costs to become compliant.

We continuously evaluate and monitor developments with respect to Section 404 of
Sarbanes-Oxley and other applicable rules, however, we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.



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Risks Related to China

There could be changes in government regulations toward the pharmaceutical and nutraceutical industries that may adversely affect our business.

The manufacture and sale of pharmaceutical products in China is heavily regulated by many state, provincial and local authorities. These regulations significantly increase 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. Additionally, the law could change so as to prohibit the use of certain
pharmaceuticals. If one of our products becomes prohibited, this change would cease the productivity of that product. The China National Development and Reform Commission, or CNDRC, has recently implemented price adjustments on many marketed
pharmaceutical products. We have no control over such governmental policies, which may impact the pricing and profitability of our products.

The State
Food and Drug Administration of China requires pharmaceutical manufacturers to obtain Good Manufacturing Practices, or GMP, certifications. We have received our GMP certifications. However, should we fail to receive or maintain the GMP
certifications in the future, we would no longer be able to manufacture pharmaceuticals in China, and our businesses would be materially and adversely affected.

Moreover, the laws and regulations regarding acquisitions in the pharmaceutical industry in China may change, which could significantly impact our ability to grow through acquisitions.

Certain political and economic considerations relating to China could adversely affect our company.

China 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 Chinese 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 development. Our operating results may be adversely
affected by changes in China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, 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.

Accordingly,
government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a
significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

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 government 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
China 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 and the value of our common stock.

The PRC government imposes control over the conversion of Renminbi, or RMB,
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



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effect on July 1, 1996, regarding foreign exchange control, conversion of RMB 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 China. Conversion of RMB 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 China, including FIEs, which require foreign exchange for transactions relating to current account items, if within a
certain limited amount 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.

Our wholly owned subsidiaries, Three Happiness, HSPL, GLP,
HQPL, CCXA, BOKE, Nuo Hua and GHK 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.

Between 1994 and 2004, the exchange rate for RMB against the U.S. dollar 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 RMB against a number of currencies, rather than just the U.S. dollar. As our operations are primarily
in China, any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues, financial condition and the value of our common stock. For example, to the extent that we need to convert U.S. dollars into RMB for our
operations, appreciation of this currency against the U.S. dollar could have a material adverse effect on our business, financial condition, results of operations and the value of our common stock. Conversely, if we decide to convert our Renminbi
into U.S. dollars for the purpose of declaring dividends on our common stock or for other business purposes and the U.S. dollar appreciates against the RMB, the U.S. dollar equivalent of our earnings from our subsidiaries in China would be reduced.

Future inflation in China may inhibit our ability to conduct business in China.

In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. During the past ten years, the rate of inflation in China has been as high as 20.7% and as low as 2.2%.
These factors have led to the adoption by the PRC government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. While inflation has been more moderate since
1995, high inflation may in the future cause the PRC government to impose controls on credit or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.

It may be difficult to effect service of process and enforcement of legal judgments upon us and our officers and certain of our directors because they reside outside
the United States.

As our operations are presently based in China and our officers and certain of our directors reside in China, service of process on
us and our officers and certain directors 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 operations. 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



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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 tariffs and taxes that may make it difficult for us to import our products to certain countries and regions, such as Japan, South Korea and Hong Kong, which would limit our international expansion.

Most of our assets are located in China, any dividends or proceeds from liquidation are subject to the approval of the relevant Chinese government
agencies.

Our assets are predominantly located inside China. Under the laws governing FIEs 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 the foreign exchange control. This may generate additional risk for our investors in case of dividend payment or liquidation.

There have been recent incidents in which patients have experienced severe adverse reactions following the use of pharmaceutical products manufactured in China.

There have been recent incidents reported in the Chinese media of a significant number of patients experiencing severe adverse health consequences
following their use of pharmaceutical products manufactured by certain pharmaceutical companies in China. A number of patients have become ill and a number of fatalities have been reported. For example, several deaths were caused by drugs sold by
the Second Pharmaceutical Factory of Qiqihaer, a Chinese drug manufacturer, in May 2006. Concerns over the safety of pharmaceutical products manufactured in China could have an adverse effect on the sale of such products, including products
manufactured by us. If in the future we become involved in incidents of the type described above, such problems could severely and adversely impact our product sales and reputation.

Anti-corruption measures taken by the government to correct corruptive practices in the pharmaceutical industry could adversely affect our sales and reputation.

The government has recently taken anti-corruption measures to correct corrupt practices. In the pharmaceutical industry, such practices include, among others, acceptance
of kickbacks, bribery or other illegal gains or benefits by the hospitals and medical practitioners from pharmaceutical distributors in connection with the prescription of a certain drug. Substantially all of our sales to our ultimate customers are
conducted through third-party distributors. We have no control over our third-party distributors, who may engage in corrupt practices to promote our products. While we maintain strict anti-corruption policies applicable to our internal sales force
and third-party distributors, these policies may not be effective. If any of our third-party distributors engage in such practices and the government takes enforcement action, our products may be seized and our own practices, and involvement in the
distributors practices may be investigated. If this occurs, our sales and reputation may be materially and adversely affected.

Risks Related to
Our Common Stock

Our common stock price may be extremely volatile, and you may not be able to resell your shares at or above the price you paid for
the stock.

Our common stock price has experienced large fluctuations. In addition, the trading prices of stocks for companies in our industry in
general have experienced extreme price fluctuations in recent years. Any negative change in the publics perception of the prospects of companies in our industry could depress our stock price regardless of our results of operations. Other broad
market and industry factors may decrease the trading price of our common stock, regardless of our performance. Market fluctuations, as well as general political and economic conditions such as terrorism, military conflict, recession or interest rate
or currency rate fluctuations, may also decrease the trading price of our common stock. In addition, our stock price could be subject to wide fluctuations in response to various factors, including:



| |  |  | changes in laws or regulations applicable to our products;
| | - |  | ----------------------------------------------------------



| |  |  | period to period fluctuations in our operating results;
| | - |  | -------------------------------------------------------



| |  |  | announcements of new technological innovations or new products by us or our competitors;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | changes in financial estimates or recommendations by securities analysts;
| | - |  | -------------------------------------------------------------------------



| |  |  | conditions or trends in our industry;
| | - |  | -------------------------------------



| |  |  | changes in the market valuations of other companies in our industry;
| | - |  | --------------------------------------------------------------------



| |  |  | developments in domestic and international governmental policy or regulations;
| | - |  | ------------------------------------------------------------------------------



| |  |  | announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | additions or departures of key personnel;
| | - |  | -----------------------------------------



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| |  |  | disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our
technologies;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | additional sales of our common stock by us; and
| | - |  | -----------------------------------------------



| |  |  | sales and distributions of our common stock by our stockholders.
| | - |  | ----------------------------------------------------------------

In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a companys securities. If a stockholder files a securities class action suit
against us, we would incur substantial legal fees and our managements attention and resources would be diverted from operating our business in order to respond to the litigation.

Some of our existing stockholders can exert control over us and may not make decisions that are in the best interest of all the stockholders.

Our officers, directors and holders of more than five percent of our outstanding shares of common stock, together control approximately 46.0% of the voting power of our stock, of which approximately 43.4% is
controlled by Tony Liu, our Chairman and Chief Executive Officer. In particular, Mr. Liu owns 1,000,000 shares of Series A preferred stock, which shares by their terms have aggregate voting power equal to 25.0% of the combined voting power of
our common and preferred stock. Moreover, this voting power cannot be diluted or reduced by the issuance of additional shares of common stock, meaning that the holder or holders of our Series A preferred stock will always possess 25.0% of the
aggregate voting power of our common and preferred stock. As a result, Mr. Liu, or these stockholders acting together, will be able to exert a significant degree of influence over our management and over matters requiring stockholder approval,
including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of our company and might affect the market price of our common stock, even
when a change may be in the best interests of all stockholders. In addition, the interests of our officers, directors and principal stockholders may not always coincide with our interests or the interests of other stockholders and, accordingly,
these control persons could cause us to enter into transactions or agreements that we would not otherwise consider.

Provisions of the Nevada Revised
Statutes may discourage a change of control.

We are incorporated in Nevada. Certain provisions of the Nevada Revised Statutes, or NRS, could delay or
make more difficult a change of control transaction or other business combination that may be beneficial to stockholders. We are subject to Nevadas Combinations With Interested Stockholders statutes (NRS Sections 78.411 through
78.444), which provide that specified persons who, together with affiliates and associates, own, or within three years did own, 10% or more of the outstanding voting stock of a Nevada corporation with at least 200 stockholders cannot engage in
specified business combinations with the corporation for a period of three years after the date on which the person became an interested stockholder, unless the combination or the transaction by which the person first became an interested
stockholder is approved by the corporations Board of Directors before the person first became an interested stockholder.

Nevadas
Acquisition of Controlling Interest statutes (NRS Sections 78.37878.3793) apply only to Nevada Corporations with at least 200 stockholders, including at least 100 stockholders of record who are Nevada residents, and which conduct
business directly or indirectly in Nevada. As of the date of this prospectus, we do not believe we have 100 stockholders of record who are residents of Nevada, although there can be no assurance that in the future the Acquisition of
Controlling Interest statutes will not apply to us. The Acquisition of Controlling Interest statutes provide that persons who acquire a controlling interest, as defined in NRS Section 78.3785, in a company may only
be given full voting rights in their shares if such rights are conferred by the disinterested stockholders of the company at an annual or special meeting. However, any disinterested stockholder that does not vote in favor of granting such voting
rights is entitled to demand that the company pay fair value for their shares, if the acquiring person has acquired at least a majority of all of the voting power of the company. As such, persons acquiring a controlling interest may not be able to
vote their shares.

We may never pay any dividends to our stockholders.

We have not paid any cash dividends on shares of our common stock. We currently intend to retain all available funds and future earnings, if any, to support our operations and finance the growth and development of our
business. Our board of directors does not intend to distribute dividends in the foreseeable future. The declaration, payment and amount of any future dividends, if any, 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 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.

Item 1B. Unresolved Staff
Comments

None.



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##### Table of Contents

ITEM 2. Properties

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. Our facilities are located at each of our operating subsidiaries summarized as follow:



|                |  |                                         |  |                    |  |                      
|--------------- |  | --------------------------------------- |  | ------------------ |  | ---------------------
|Subsidiary      |  | Facilities                              |  | Size of Land       |  | Land Use RightExpires
|Three Happiness |  | GMP Manufacturing, warehouse and office |  | 1,532,775 sq. feet |  | 2052-2056            
|HSPL            |  | GMP Manufacturing, warehouse and office |  | 532,339 sq. feet   |  | 2052                 
|GLP             |  | GMP Manufacturing, warehouse and office |  | 1,485,055 sq. feet |  | 2052-2077            
|CCXA            |  | GMP Manufacturing, warehouse and office |  | 1,077,467 sq. feet |  | 2058                 
|BOKE            |  | GMP Manufacturing, warehouse and office |  | 174,280 sq. feet   |  | 2052                 

We also invested and purchased land and properties in Beijing Economic-Technological Development
Area during 2008. The size of land is 551,715 sq. feet with land use right expiring in year 2054. We intend to utilize the facilities as our multi-functional headquarters for purposes including administration, research and development, convention
and training.

In addition to the above, we own a 2,450 square feet office in Hong Kong. We lease 98 sales representative offices
throughout China and we lease offices in Shenzhen and New York. All leases are for a term of one year and are renewable.

ITEM 3. Legal Proceedings

We are not involved in any litigation that we believe could have a
material adverse effect on our financial position 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

On December 5, 2008 the Company held its annual meeting of stockholders. There were two proposals
presented to the stockholders at the meeting.

Proposal 1 was the election of the following nine directors to serve for a one year term or
until their respective successors have been duly elected and qualified.



|                  |  |            |  |         |  |          
|----------------- |  | ---------- |  | ------- |  | ---------
|DIRECTOR NOMINEE  |  | FOR        |  | AGAINST |  | WITHHELD 
|Tony Liu          |  | 65,014,276 |  | 0       |  | 1,367,929
|Jun Min           |  | 64,957,784 |  | 0       |  | 1,424,421
|Yanchun Li        |  | 63,564,176 |  | 0       |  | 2,818,029
|Binsheng Li       |  | 64,959,442 |  | 0       |  | 1,422,763
|Cosimo Patti      |  | 65,139,544 |  | 0       |  | 1,242,661
|Xianmin Wang      |  | 63,740,052 |  | 0       |  | 2,642,153
|Eileen Brody      |  | 65,139,478 |  | 0       |  | 1,242,726
|Lawrence S. Wizel |  | 65,140,093 |  | 0       |  | 1,242,112
|Baiqing Zhang     |  | 65,134,761 |  | 0       |  | 1,247,444

Proposal 2 was the ratification of the appointment of Weinberg & Company, P.A. as the
Companys independent registered public accounting firm for the 2008. There were 65,480,259 votes FOR, 768,778 votes AGAINST and 133,167 votes ABSTAINED.



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##### Table of Contents

PART II

ITEM 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock has been listed for trading on the New York Stock Exchange, or NYSE, under the ticker symbol AOB since December 18,
2006. The following table shows the high and low closing sales price for our common stock reported by the NYSE from January 1, 2007 to February 28, 2009.



|     |  |                                                           |  |        |                        |     |        |                    
|---- |  | --------------------------------------------------------- |  | ------ | ---------------------- | --- | ------ | -------------------
|Year |  | Period                                                    |  | High   |                        | Low
|2007 |  | First Quarter Second Quarter Third Quarter Fourth Quarter |  | $$ $ $ | 13.9011.53 11.59 13.79 |     | $$ $ $ | 8.528.39 7.11 10.55
|     |  |                                                           | 
|2008 |  | First Quarter Second Quarter Third Quarter Fourth Quarter |  | $$ $ $ | 10.7912.13 9.92 6.79   |     | $$ $ $ | 7.468.20 6.36 4.49 
|     |  |                                                           | 
|2009 |  | First Quarter (January 1  February 28)                   |  | $      | 7.39                   |     | $      | 3.69               

Stockholders and Dividends

As of March 6, 2009, there were approximately 650 record holders of our common stock. We have not paid any cash dividends on shares of our common stock and do not plan to do so in the near future. We currently
plan to retain future earnings to fund the development and growth of our business. Any future determination related to our dividend policy will be made at the discretion of our Board of Directors.

Equity Compensation Plan Information

The following table sets forth
aggregate information regarding our equity compensation plans in effect as of December 31, 2008:



|                                                              |     |                                                                                       |     |                                                                         |      |                                                                                                                                    |          
|------------------------------------------------------------- | --- | ------------------------------------------------------------------------------------- | --- | ----------------------------------------------------------------------- | ---- | ---------------------------------------------------------------------------------------------------------------------------------- | ---------
|Plan category                                                 |     | Number ofsecurities to beissued uponexercise ofoutstanding options,warrantsand rights |     | Weighted-averageexercise price ofoutstandingoptions, warrantsand rights |      | Number ofsecuritiesremainingavailable forfuture issuanceunder
equitycompensationplans (excludingsecurities reflectedin column (a))
|                                                              | (a) |                                                                                       | (b) |                                                                         | (c) 
|Equity compensation plans approved by security holders        |     | 2,421,257                                                                             |     | $                                                                       | 8.58 |                                                                                                                                    | 2,578,743
|Equity compensation plans not approved by security holders(1) |     | -0-                                                                                   |     |                                                                         | -0-  |                                                                                                                                    | -0-      
|                                                              |     |                                                                                       |     |                                                                         |      |                                                                                                                                    |          
|Total                                                         |     | 2,421,257                                                                             |     | $                                                                       | 8.58 |                                                                                                                                    | 2,578,743
|                                                              |     |                                                                                       |     |                                                                         |      |                                                                                                                                    |          



|(1) | Includes shares issuable pursuant to the Companys 2006 Equity Incentive Plan (the 2006 Plan), which was approved by the Companys stockholders.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------



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Stock Price Performance Graph

The following chart compares the cumulative total stockholder return on the Companys shares of common stock with the cumulative total stockholder return of (i) the New York Stock Exchange Market Index and (ii) a peer group
index consisting of companies reporting under the Standard Industrial Classification Code 2834 (Pharmaceutical Preparations):

COMPARISON OF
CUMULATIVE TOTAL RETURN

AMONG AMERICAN ORIENTAL BIOENGINEERING, INC.,

NEW YORK STOCK EXCHANGE INDEX AND SIC CODE INDEX

LOGO



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COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE

COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS



|                                 |  |             |  |            |  |            |  |            |  |            |  |           
|-------------------------------- |  | ----------- |  | ---------- |  | ---------- |  | ---------- |  | ---------- |  | ----------
|                                 |  | YEAR ENDING
|COMPANY/INDEX/MARKET             |  | 12/31/2003  |  | 12/31/2004 |  | 12/30/2005 |  | 12/29/2006 |  | 12/31/2007 |  | 12/31/2008
|American Oriental Bioengineering |  | 100.00      |  | 42.47      |  | 120.82     |  | 319.73     |  | 303.56     |  | 186.03    
|Pharmaceutical Preparations      |  | 100.00      |  | 98.99      |  | 105.25     |  | 117.74     |  | 119.33     |  | 99.51     
|NYSE Market Index                |  | 100.00      |  | 112.92     |  | 122.25     |  | 143.23     |  | 150.88     |  | 94.76     

The material in this chart is not soliciting material, is not deemed filed with the SEC and is not incorporated by
reference in any filing of the Company under the Securities Act of 1933, as amended or the Exchange Act, whether made before or after the date of this proxy statement and irrespective of any general incorporation language in such filing.

Issuance of Unregistered Shares

On March 31,
2008, the Company issued 26,580 shares of restricted common stock to five of its independent directors. The shares issued were part of the total compensation for their services rendered in 2007. In June 2008, the Company issued 26,748 shares of
restricted common stock to consultants firm for advisory services rendered and to be rendered in 2009. The issuance of the foregoing shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

Equity Repurchases

In connection with
the private placement pursuant to Section 4(2) of the Securities Act of $115,000,000 principal amount of 5% Convertible Senior Notes due 2015 (the Notes) at a purchase price of $1,000 per Note to several qualified
institutional buyers, as defined in Rule 144A under the Securities Act, the Company purchase shares of its common stock in the approximate value of $30.0 million.

Issuer Purchases of Equity Securities



|          |  |                                                |  |                                             |      |                                                                                  |           |                                                                                                                  |   |           
|--------- |  | ---------------------------------------------- |  | ------------------------------------------- | ---- | -------------------------------------------------------------------------------- | --------- | ---------------------------------------------------------------------------------------------------------------- | - | ----------
|Period    |  | Total Number of Sharesof Common StockPurchased |  | Average Price Paid perShare of Common Stock |      | Total Number of Sharesof Common StockPurchased as Part ofPublicly AnnouncedPlans |           | Maximum Number (orApproximate DollarValue) of of CommonStock that May Yet BePurchased Under
thePlans or Programs
|7/15/2008 |  | 3,712,700                                      |  | $                                           | 8.08 |                                                                                  | 3,712,700 |                                                                                                                  | $ | 45,000,000

ITEM 6. Selected Financial Data

The following table sets forth selected historical financial information as of the dates and for the periods indicated.

The selected financial information for each of the three years ended December 31, 2008, 2007 and 2006 has been derived from, and should be read in conjunction with,
the audited consolidated financial statements and other financial information presented elsewhere herein. The selected financial information for each of the two years ended December 31, 2005 and 2004 has been derived from the Companys
Annual Report on Form 10-KSB for the years ended December 31, 2005 and 2004 and are not included herein. Capitalized terms are as defined and described in the consolidated financial statements or elsewhere herein.

The selected financial information for the year ended December 31, 2008 reflects the acquisition of Nuo Hua on October 18, 2008 and the acquisition of GHK on
October 20, 2008. The selected financial information for the year ended December 31, 2007 reflects the acquisition of CCXA on September 6, 2007 and the acquisition of Boke on October 18, 2007. The selected financial information
for the year ended December 31, 2006 reflects the acquisition of the GLP effective in May 2006 and the acquisition of HQPL effective in July 2006. The selected financial information for the year ended December 31, 2004 reflects the
acquisition of HSPL effective in September 2004.



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##### Table of Contents

|                                                       |  |                         |              |   |      |   |             |      |  |   |             |   |  |      |            |   |  |   |            |  
|------------------------------------------------------ |  | ----------------------- | ------------ | - | ---- | - | ----------- | ---- |  | - | ----------- | - |  | ---- | ---------- | - |  | - | ---------- | -
|                                                       |  | Year Ended December 31, |             
|                                                       |  | 2008                    |              |   | 2007 |   |             | 2006 |  |   | 2005        |   |  | 2004 |           
|Statement of Operations Data:                          |  |                         |              |   |      |   |             |      |  |   |             |   |  |      |            |   |  |   |            |  
|                                                       |  |                         |              |   |     
|REVENUES                                               |  | $                       | 264,643,058  |   |      | $ | 160,482,383 |      |  | $ | 110,182,092 |   |  | $    | 54,732,557 |   |  | $ | 31,966,927 |  
|COST OF GOODS SOLD                                     |  |                         | 91,031,274   |   |      |   | 49,364,486  |      |  |   | 38,318,223  |   |  |      | 20,524,201 |   |  |   | 11,775,366 |  
|                                                       |  |                         |              |   |      |   |             |      |  |   |             |   |  |      |            |   |  |   |            |  
|GROSS PROFIT                                           |  |                         | 173,611,784  |   |      |   | 111,117,897 |      |  |   | 71,863,869  |   |  |      | 34,208,356 |   |  |   | 20,191,561 |  
|Selling and marketing                                  |  |                         | 39,774,330   |   |      |   | 20,669,303  |      |  |   | 8,876,829   |   |  |      | 3,216,545  |   |  |   | 2,387,805  |  
|Advertising                                            |  |                         | 34,102,538   |   |      |   | 22,865,903  |      |  |   | 15,174,125  |   |  |      | 5,238,186  |   |  |   | 2,926,629  |  
|General and administrative                             |  |                         | 18,765,757   |   |      |   | 13,365,156  |      |  |   | 10,446,740  |   |  |      | 7,076,139  |   |  |   | 4,582,388  |  
|Depreciation and amortization                          |  |                         | 4,383,215    |   |      |   | 1,989,425   |      |  |   | 988,488     |   |  |      | 337,537    |   |  |   | 250,001    |  
|Purchased in-process research and development          |  |                         | 12,255,248   |   |      |   |            |      |  |   |            |   |  |      |           |   |  |   |           |  
|                                                       |  |                         |              |   |      |   |             |      |  |   |             |   |  |      |            |   |  |   |            |  
|INCOME FROM OPERATIONS                                 |  |                         | 64,330,696   |   |      |   | 52,228,110  |      |  |   | 36,377,687  |   |  |      | 18,339,949 |   |  |   | 10,044,738 |  
|Equity in earnings (loss) from unconsolidated entities |  |                         | (1,132,986   | ) |      |   | 23,711      |      |  |   | (3,811      | ) |  |      |           |   |  |   |           |  
|Interest income (expense), net                         |  |                         | (2,571,015   | ) |      |   | 617,524     |      |  |   | 574,172     |   |  |      | (505,822   | ) |  |   | (100,765   | )
|Other income (expense), net                            |  |                         | (65,843      | ) |      |   | (525,065    | )    |  |   | (329,987    | ) |  |      | (6,876     | ) |  |   | 44,035     |  
|Minority interests                                     |  |                         | (27,575      | ) |      |   |            |      |  |   |            |   |  |      |           |   |  |   |           |  
|                                                       |  |                         |              |   |      |   |             |      |  |   |             |   |  |      |            |   |  |   |            |  
|INCOME BEFORE INCOME TAXES                             |  |                         | 60,533,277   |   |      |   | 52,344,280  |      |  |   | 36,618,061  |   |  |      | 17,827,251 |   |  |   | 9,988,008  |  
|Income taxes                                           |  |                         | 12,727,388   |   |      |   | 9,053,399   |      |  |   | 7,416,915   |   |  |      | 4,400,870  |   |  |   | 2,216,626  |  
|                                                       |  |                         |              |   |      |   |             |      |  |   |             |   |  |      |            |   |  |   |            |  
|NET INCOME                                             |  | $                       | 47,805,889   |   |      | $ | 43,290,881  |      |  | $ | 29,201,146  |   |  | $    | 13,426,381 |   |  | $ | 7,771,382  |  
|                                                       |  |                         |              |   |      |   |             |      |  |   |             |   |  |      |            |   |  |   |            |  
|NET INCOME PER SHARE                                   |  |                         |              |   |      |   |             |      |  |   |             |   |  |      |            |   |  |   |            |  
|BASIC                                                  |  | $                       | 0.62         |   |      | $ | 0.62        |      |  | $ | 0.47        |   |  | $    | 0.31       |   |  | $ | 0.23       |  
|DILUTED                                                |  | $                       | 0.61         |   |      | $ | 0.61        |      |  | $ | 0.46        |   |  | $    | 0.31       |   |  | $ | 0.23       |  
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING          |  |                         |              |   |      |   |             |      |  |   |             |   |  |      |            |   |  |   |            |  
|BASIC                                                  |  |                         | 76,504,035   |   |      |   | 69,870,775  |      |  |   | 62,679,996  |   |  |      | 43,827,725 |   |  |   | 33,595,685 |  
|DILUTED                                                |  |                         | 82,254,185   |   |      |   | 71,364,244  |      |  |   | 62,913,961  |   |  |      | 43,840,463 |   |  |   | 33,953,507 |  
|                                                       | 
|                                                       |  | December 31,            |             
|                                                       |  | 2008                    |              |   | 2007 |   |             | 2006 |  |   | 2005        |   |  | 2004 |           
|Balance Sheet Data:                                    |  |                         |              |   |      |   |             |      |  |   |             |   |  |      |            |   |  |   |            |  
|Cash and cash equivalents                              |  | $                       | 70,636,510   |   |      | $ | 166,410,075 |      |  | $ | 87,784,419  |   |  | $    | 57,532,049 |   |  | $ | 11,404,149 |  
|Working capital                                        |  |                         | 86,415,610   |   |      |   | 180,411,538 |      |  |   | 92,252,071  |   |  |      | 66,813,509 |   |  |   | 14,700,456 |  
|Total assets                                           |  |                         | 524,054,837  |   |      |   | 353,714,896 |      |  |   | 185,273,946 |   |  |      | 99,422,239 |   |  |   | 42,836,624 |  
|Total debt (including current maturities of debt)      |  |                         | 8,003,328    |   |      |   | 9,927,270   |      |  |   | 10,681,493  |   |  |      | 3,717,380  |   |  |   | 5,060,241  |  
|Shareholders equity                                   |  | $                       | 345,208,199  |   |      | $ | 313,083,090 |      |  | $ | 156,177,242 |   |  | $    | 90,604,546 |   |  | $ | 33,037,820 |  
|                                                       | 
|                                                       |  | Year Ended December 31  |             
|                                                       |  | 2008                    |              |   | 2007 |   |             | 2006 |  |   | 2005        |   |  | 2004 |           
|Cash Flow Data:                                        |  |                         |              |   |      |   |             |      |  |   |             |   |  |      |            |   |  |   |            |  
|Net cash provided by operating activities              |  | $                       | 77,758,717   |   |      | $ | 45,099,379  |      |  | $ | 29,093,464  |   |  | $    | 11,402,350 |   |  | $ | 8,236,258  |  
|Net cash used in investing activities                  |  |                         | (257,374,093 | ) |      |   | (69,845,702 | )    |  |   | (26,386,564 | ) |  |      | (5,861,945 | ) |  |   | (8,961,529 | )
|Net cash provided by financing activities              |  | $                       | 80,948,164   |   |      | $ | 96,833,706  |      |  | $ | 26,158,514  |   |  | $    | 39,663,836 |   |  | $ | 6,762,563  |  

ITEM 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations

The following discussion should be read in conjunction with the information contained in the consolidated financial statements of
the Company and the notes thereto appearing elsewhere herein and in conjunction with the Managements Discussion and Analysis of Financial Condition and Results of Operations set forth in (1) the Companys Annual Report on Form 10-K
for the year ended December 31, 2007. Readers should carefully review the risk factors disclosed in this Form 10-K and other documents filed by the Company with the SEC.



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As used in this report, the terms Company, we, our, us and
AOB refer to American Oriental Bioengineering, Inc., a Nevada corporation.



30



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PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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
Managements Discussion and Analysis of Financial Condition and Results of Operations in this report. 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.

Investors are also advised to refer to the information in
our previous filings with the Securities and Exchange Commission (SEC), especially on Forms 10-K, 10-Q, and 8-K, in which we discuss in more detail various important factors that could cause actual results to differ from expected or historic
results. It is not possible to foresee or identify all such factors. As such, investors should not consider any list of such factors to be an exhaustive statement of all risks and uncertainties or potentially inaccurate assumptions.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This
section should be read together with the Summary of Significant Accounting Policies included as Note 3 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Estimates affecting accounts receivable and inventories

The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect our reporting of assets and liabilities (and contingent assets and liabilities). These
estimates are particularly significant where they affect the reported net realizable value of the Companys accounts receivable and inventories.

At December 31, 2008, the Company provided a $226,330 reserve against accounts receivable. Managements estimate of the appropriate reserve on accounts receivable at December 31, 2008 was based on the
aged nature of these accounts receivable. In making its judgment, management assessed its customers ability to continue to pay their outstanding invoices on a timely basis, and whether their financial position might deteriorate significantly
in the future, which would result in their inability to pay their debts to the Company.

At December 31, 2008, the Company provided an
allowance against its inventories amounting to $167,429. Management determination of this allowance was based on potential impairments to the current carrying value of the inventories due to potential obsolescence of aged inventories. In making its
estimate, management considered the probable demand for our products in the future and historical trends in the turnover of our inventories.

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

Policy affecting recognition of revenue

Among the most important accounting policies affecting our consolidated financial statements is our policy of recognizing revenue in accordance with the SECs Staff Accounting Bulletin (SAB) No. 104. Under this policy,
all of the following criteria must be met 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. | Collectability is reasonably assured.
| | -- | -------------------------------------

The majority of
the Companys revenue results from sales contracts with distributors and revenue is recorded upon the shipment of goods. Management conducts credit background checks for new customers as a means to reduce the subjectivity of assuring
collectability. Based on these factors, the Company believes that it can apply the provisions of SAB 104 with minimal subjectivity.



31



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##### Table of Contents

Estimates affecting purchase price allocated to in-process research and development

Approximately $12.2 million of the purchase price of GuangXi HuiKe Pharmaceutical Research and Development Co., Ltd. (GHK) represents the
estimated fair value of acquired in-process R&D projects that had no alternative future use. Accordingly, this amount was immediately expensed on the acquisition date. The value assigned to purchase in-process R&D comprises seven projects.
The estimated fair value of these projects was determined by using estimated future net cash flows expected and then discounting these estimated future net cash flows to their present value using an appropriate discount rate that reflects the stage
of risk of the project. This risk adjustment reflected the probability of success of each project based upon the nature of the product, the current patent situation and the stage of completion of the project. In estimating the forecast of future
cash flows, we also made the assumptions on:



| | 1. | Revenue that is likely to result from specific in-process research and development projects, including estimated number of units to be sold, estimated selling prices, estimated
market penetration and estimated market share and year over year growth rates over the product life cycles;
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Cost of sales related to the potential products using historical data, industry data or other sources of market data;
| | -- | ---------------------------------------------------------------------------------------------------------------------



| | 3. | Sales and marketing expense using historical financial data, industry data or other market data;
| | -- | ------------------------------------------------------------------------------------------------



| | 4. | General and administrative expense.
| | -- | -----------------------------------

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standard Board (FASB) issued SFAS No. 157, Fair Value
Measurements, which provides enhanced guidance for using fair value to measure assets and liabilities. SFAS No. 157 provides a common definition of fair value and establishes a framework to make the measurement of fair value in generally
accepted accounting principles more consistent and comparable. SFAS No. 157 also requires expanded disclosures to provide information about the extent to which fair value is used to measure assets and liabilities, the methods and assumptions
used to measure fair value, and the effect of fair value measures on earnings. SFAS No. 157 is effective for financial statements issued in fiscal years beginning after November 15, 2007 and to interim periods within those fiscal years.
The Company is currently in the process of evaluating the effect, if any, the adoption of SFAS No. 157 will have on its consolidated results of operations, financial position, or cash flows.

In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities 
including an amendment of FASB Statement No. 115 (FAS 159). FAS 159 will became effective for the Company on January 1, 2008. This standard permits companies to choose to measure many financial instruments and certain other items at
fair value and report unrealized gains and losses in earnings. Such accounting is optional and is generally to be applied instrument by instrument. The Company does not anticipate that the election, if any, of this fair-value option will have a
material effect on results or operations or consolidated financial position.

In December 2007, the FASB issued SFAS No. 141 (R),
Business Combinations, and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 141 (R) requires an acquirer to measure the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No.160 clarifies that a noncontrolling interest in a
subsidiary should be reported as equity in the consolidated financial statements. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No. 141 (R) and SFAS No. 160 are
effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. We have not yet determined the effect on our consolidated financial statements, if any, upon adoption of SFAS
No. 141 (R) or SFAS No. 160. We are aware that our accounting for minority interest will change and we are considering those effects now but believe we will only be a reclassification of minority interest from mezzanine equity to our
stockholders equity section in the balance sheet, in any case we do not believe the implementation of SFAS 160 will be material to our financial position. SFAS 141 (R) will significantly affect the accounting for future business
combinations and we will determine the accounting as new combinations are determined.



32



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##### Table of Contents

RESULTS OF OPERATIONS  YEAR ENDED DECEMBER 31, 2008 AS COMPARED TO YEAR ENDED DECEMBER 31, 2007

The following table sets forth the amounts and the percentage relationship to revenues of certain items in our consolidated statements of income for the years ended
December 31, 2008 and 2007:



|                                                       |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  
|------------------------------------------------------ |  | ----------------------- | ----------- | - | ----------------------- | - | ----------- | ---- |  | ----- | ---- |  | ----- | -
|                                                       |  | Year Ended December 31, |             |   | Year Ended December 31, |  
|                                                       |  | 2008                    |             |   | 2007                    |   |             | 2008 |  |       | 2007 | 
|REVENUES                                               |  | $                       | 264,643,058 |   |                         | $ | 160,482,383 |      |  | 100   | %    |  | 100   | %
|COST OF GOODS SOLD                                     |  |                         | 91,031,274  |   |                         |   | 49,364,486  |      |  | 34.40 |      |  | 30.76 |  
|                                                       |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  
|GROSS PROFIT                                           |  |                         | 173,611,784 |   |                         |   | 111,117,897 |      |  | 65.60 |      |  | 69.24 |  
|Selling and marketing                                  |  |                         | 39,774,330  |   |                         |   | 20,669,303  |      |  | 15.03 |      |  | 12.88 |  
|Advertising                                            |  |                         | 34,102,538  |   |                         |   | 22,865,903  |      |  | 12.89 |      |  | 14.25 |  
|General and administrative                             |  |                         | 18,765,757  |   |                         |   | 13,365,156  |      |  | 7.09  |      |  | 8.33  |  
|Depreciation and amortization                          |  |                         | 4,383,215   |   |                         |   | 1,989,425   |      |  | 1.66  |      |  | 1.24  |  
|Purchased in-process research and development          |  |                         | 12,255,248  |   |                         |   |            |      |  | 4.63  |      |  |      |  
|                                                       |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  
|Total operating expenses                               |  |                         | 109,281,088 |   |                         |   | 58,889,787  |      |  | 41.30 |      |  | 36.70 |  
|                                                       |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  
|INCOME FROM OPERATIONS                                 |  |                         | 64,330,696  |   |                         |   | 52,228,110  |      |  | 24.30 |      |  | 32.54 |  
|Equity in earnings (loss) from unconsolidated entities |  |                         | (1,132,986  | ) |                         |   | 23,712      |      |  | (0.43 | )    |  | 0.01  |  
|Interest income (expense), net                         |  |                         | (2,571,015  | ) |                         |   | 617,524     |      |  | (0.97 | )    |  | 0.38  |  
|Other income (expense), net                            |  |                         | (65,843     | ) |                         |   | (525,066    | )    |  | (0.02 | )    |  | (0.33 | )
|Minority interests                                     |  |                         | (27,575     | ) |                         |   |            |      |  | (0.01 | )    |  |      |  
|                                                       |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  
|INCOME BEFORE INCOME TAXES                             |  |                         | 60,533,277  |   |                         |   | 52,344,280  |      |  | 22.87 |      |  | 32.62 |  
|Income taxes                                           |  |                         | 12,727,388  |   |                         |   | 9,053,399   |      |  | 4.81  |      |  | 5.64  |  
|                                                       |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  
|NET INCOME                                             |  | $                       | 47,805,889  |   |                         | $ | 43,290,881  |      |  | 18.06 | %    |  | 26.98 | %
|                                                       |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  
|NET INCOME PER SHARE                                   |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  
|BASIC                                                  |  | $                       | 0.62        |   |                         | $ | 0.62        |      |  |       |      |  |       |  
|                                                       |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  
|DILUTED                                                |  | $                       | 0.61        |   |                         | $ | 0.61        |      |  |       |      |  |       |  
|                                                       |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  

Revenues

Revenues for the year ended December 31, 2008 were $264,643,058, an increase of $104,160,675 over revenues for the year ended December 31, 2007. Revenues by segments and product categories were as follows:



|                        |  |                         |             |                     |   |                     |  |   |             |  |       |  
|----------------------- |  | ----------------------- | ----------- | ------------------- | - | ------------------- |  | - | ----------- |  | ----- | -
|                        |  | Year Ended December 31, |             | Increase/(Decrease) |   | Increase/(Decrease) | 
|                        |  | 2008                    |             | 2007                |   |                    
|Manufacturing revenue   |  | $                       | 259,171,087 |                     | $ | 160,482,383         |  | $ | 98,688,704  |  | 61.50 | %
|Pharmaceutical products |  |                         | 224,904,348 |                     |   | 127,823,297         |  |   | 97,081,051  |  | 75.95 | %
|Nutraceutical products  |  |                         | 34,266,739  |                     |   | 32,659,086          |  |   | 1,607,653   |  | 4.92  | %
|Distribution revenue    |  |                         | 5,471,971   |                     |   |                    |  |   | 5,471,971   |  |      |  
|                        |  |                         |             |                     |   |                     |  |   |             |  |       |  
|Total sales             |  | $                       | 264,643,058 |                     | $ | 160,482,383         |  | $ | 104,160,675 |  | 64.90 | %
|                        |  |                         |             |                     |   |                     |  |   |             |  |       |  

Sales of our pharmaceutical products increased by $97,081,051, or 76%, as compared to the year of 2007 primarily
due to the following factors:



| |  |  | The sales of our prescription pharmaceutical products increased from $59,015,481 in 2007 to $87,423,056 in 2008, or 48% increase. This is primarily due to
contributions from the Companys diversifying product portfolio, including recently launched CCXA prescription products, in addition to existing products. Expanding rural market coverage also drove prescription pharmaceutical revenue
performance during 2008.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The sales of our OTC pharmaceutical products increased from $68,807,816 to $137,481,292, or 99.8 % increase. This was attributable to the continuous increase
in sales of our Jinji series , Jinji Yimucao product that was launched in early 2007 and as a result of our marketing campaigns to enhance recognition of such products; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The contribution by our newly acquired subsidiaries, CCXA and Boke, of $24,759,539 and $38,182,006, to our revenue for the year ended December 31, 2008,
respectively. Boke was consolidated starting October 2007, and CCXA was consolidated starting September 2007, and had contributed $5,402,877 and $3,246,125 to our revenue for the year ended December 31, 2007, respectively.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Sales from our nutraceutical products increased from $32,659,086 in the year of 2007 to $34,266,739 in the year of 2008, representing a
growth of 5% and it is primarily due to the following factors:



| |  |  | Sales of our Protein Peptide series of products increased by 1.8%, from $31,560,609 in 2007 to $32,136,951 in 2008. This increase was mainly attributed to the
increase in sales of peptide coffee and peptide powder through our expanded distribution network; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



33



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##### Table of Contents

| |  |  | Sales of our nutraceutical beverage series increased from $583,830 in the year of 2007 to $1,935,402 in the year of 2008.
| | - |  | -------------------------------------------------------------------------------------------------------------------------

The Company has recorded $5,471,971 distribution revenue from Nuo Hua since its acquisition on October 18, 2008. The Company had no distribution revenue for the
years ended December 31, 2007.

Cost of Goods Sold and Gross Profit

Cost of goods sold was $91,031,274 for the year ended December 31, 2008, compared to $49,364,486 for the year ended December 31, 2007. Expressed as a percentage of revenues, cost of goods sold was 34.40% for
the year ended December 31, 2008, compared to 30.76% for the year ended December 31, 2007. The increase in cost of goods sold as a percentage of revenues reflected sales of more lower margin products by CCXA, increase of raw material
prices and lower margin distribution business from Nuo Hua.

Cost of goods sold for the years ended December 31, 2008 and 2007 by segments and product
categories were as follows:



|                        |  |                         |            |                     |   |                     |  |   |            |  |       |  
|----------------------- |  | ----------------------- | ---------- | ------------------- | - | ------------------- |  | - | ---------- |  | ----- | -
|                        |  | Year Ended December 31, |            | Increase/(Decrease) |   | Increase/(Decrease) | 
|                        |  | 2008                    |            | 2007                |   |                    
|Manufacturing cost      |  | $                       | 85,787,460 |                     | $ | 49,364,486          |  | $ | 36,422,974 |  | 73.78 | %
|Pharmaceutical products |  |                         | 72,244,010 |                     |   | 37,089,204          |  |   | 35,154,806 |  | 94.78 | %
|Nutraceutical products  |  |                         | 13,543,450 |                     |   | 12,275,282          |  |   | 1,268,168  |  | 10.33 | %
|Distribution cost       |  |                         | 5,243,814  |                     |   |                    |  |   | 5,243,814  |  |      |  
|                        |  |                         |            |                     |   |                     |  |   |            |  |       |  
|Total cost              |  | $                       | 91,031,274 |                     | $ | 49,364,486          |  | $ | 41,666,788 |  | 84.41 | %
|                        |  |                         |            |                     |   |                     |  |   |            |  |       |  

The cost of goods sold of pharmaceutical and nutraceutical products increased by 95% and 10%, respectively, in the
year ended December 31, 2008 compared to the year ended December 31, 2007. These increases are attributed to our increase in sales. The Company had no distribution revenue and thus the corresponding cost of goods sold for the years ended
December 31, 2007.

Gross profit increased by $62,493,887, or 56.24%, for the year ended December 31, 2008 over the year ended December 31,
2007. This increase reflected higher net sales. Gross profit as a percentage of net revenues decreased from 69.24% in the prior year to 65.60% in the year of 2008 due to lower margin distribution business and CCXA sold lower gross margin products
than 2007.

Selling and Marketing

Selling and marketing expenses, including distribution expenses, increased from $20,669,303 in the year ended December 31, 2007 to $39,774,330 in the year ended December 31, 2008, representing a 92% increase. The details of our
sales and marketing expenses were as follows:



|                               |  |                         |            |                     |   |            |                     |   |            |   |  |     |   
|------------------------------ |  | ----------------------- | ---------- | ------------------- | - | ---------- | ------------------- | - | ---------- | - |  | --- | --
|                               |  | Year Ended December 31, |            | Increase/(Decrease) |   |            | Increase/(Decrease) |  
|                               |  | 2008                    |            | 2007                |   |           
|Promotional materials and fees |  | $                       | 24,062,209 |                     | $ | 7,249,854  |                     | $ | 16,812,355 |   |  | 232 | % 
|Payroll                        |  |                         | 5,714,423  |                     |   | 3,866,200  |                     |   | 1,848,223  |   |  | 48  | % 
|Shipping                       |  |                         | 3,501,453  |                     |   | 2,796,100  |                     |   | 705,353    |   |  | 25  | % 
|Trips and traveling            |  |                         | 2,378,241  |                     |   | 1,875,526  |                     |   | 502,715    |   |  | 27  | % 
|Sales conferences              |  |                         | 2,545,735  |                     |   | 1,854,883  |                     |   | 690,852    |   |  | 37  | % 
|Office supplies                |  |                         | 756,544    |                     |   | 553,844    |                     |   | 202,700    |   |  | 37  | % 
|Other                          |  |                         | 815,725    |                     |   | 2,472,896  |                     |   | (1,657,171 | ) |  | (67 | )%
|                               |  |                         |            |                     |   |            |                     |   |            |   |  |     |   
|TOTAL                          |  | $                       | 39,774,330 |                     | $ | 20,669,303 |                     | $ | 19,105,027 |   |  | 92  | % 
|                               |  |                         |            |                     |   |            |                     |   |            |   |  |     |   

Our increase in selling and marketing expenses in the year ended December 31, 2008 compared
to the year of 2007 was primarily due to the following factors:



| |  |  | Our promotional materials and fees increased by 232% in 2008 as compared to 2007. This was due primarily to our increased promotional activities to support the
sales of our SHL injection power, Jinji series, Jinji Yimucao product and Boke Nose Spray in 2008;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our payroll expense increased by $1,848,223, or 48% in 2008 as compared to 2007. The increase in the payroll expenses was due to the increase in hiring of sales and
marketing professionals in 2008 to support future growth of our businesses as well as the integration of CCXA and Boke. Boke was consolidated starting October 2007, and CCXA was consolidated starting September 2007. The new labor law which became
effective starting January 1, 2008 also contributed to the increase:
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | Shipping expense increased by 25% in 2008. This increase resulted primarily from the growth of our sales and the increase in fuel cost; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in traveling and sales conferences expenses reflects increased spending in organizing promotional activities to increase market awareness of our brand
and products.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Advertising

Advertising expense increased by $11,236,635, from $22,865,903 in 2007 to $34,102,538 in 2008. The increase in advertising expense resulted from an increase in promotional efforts and media advertisement in 2008 to promote the
Companys Jinji series, Boke Nose Spray and Protein Peptide series of products

General and Administrative

General and administrative expenses increased from $13,365,156 in 2007 to $18,765,757 in 2008, or a 40% increase. The details of general and
administrative expenses were as follows:



|                                 |  |                         |            |                     |      |   |                     |  |   |           |   |  |      |  
|-------------------------------- |  | ----------------------- | ---------- | ------------------- | ---- | - | ------------------- |  | - | --------- | - |  | ---- | -
|                                 |  | Year Ended December 31, |            | Increase/(Decrease) |      |   | Increase/(Decrease) | 
|                                 |  | 2008                    |            |                     | 2007 |   |                    
|Payroll                          |  | $                       | 3,666,734  |                     |      | $ | 2,152,039           |  | $ | 1,514,695 |   |  | 70   | %
|Professional fees                |  |                         | 2,755,215  |                     |      |   | 1,395,826           |  |   | 1,359,389 |   |  | 97   | %
|Directors remuneration          |  |                         | 903,333    |                     |      |   | 865,344             |  |   | 37,989    |   |  | 4    | %
|Research                         |  |                         | 1,528,991  |                     |      |   | 870,219             |  |   | 658,772   |   |  | 76   | %
|Stock compensation  directors   |  |                         | 1,238,813  |                     |      |   | 596,175             |  |   | 642,638   |   |  | 108  | %
|Office supplies                  |  |                         | 726,629    |                     |      |   | 492,884             |  |   | 233,745   |   |  | 47   | %
|Stock compensation  consultants |  |                         | 200,500    |                     |      |   | 394,100             |  |   | (193,600  | ) |  | -49  | %
|Business entertainment           |  |                         | 346,436    |                     |      |   | 348,265             |  |   | (1,829    | ) |  | -1   | %
|Office rental                    |  |                         | 231,056    |                     |      |   | 321,735             |  |   | (90,679   | ) |  | -28  | %
|Utilities & Vehicles             |  |                         | 583,252    |                     |      |   | 415,463             |  |   | 167,789   |   |  | 40   | %
|Provision for bad debts          |  |                         | (94,258    | )                   |      |   | 76,322              |  |   | (170,580  | ) |  | -224 | %
|Miscellaneous                    |  |                         | 6,679,056  |                     |      |   | 5,436,784           |  |   | 1,242,272 |   |  | 23   | %
|                                 |  |                         |            |                     |      |   |                     |  |   |           |   |  |      |  
|TOTAL                            |  | $                       | 18,765,757 |                     |      | $ | 13,365,156          |  | $ | 5,400,601 |   |  | 40   | %
|                                 |  |                         |            |                     |      |   |                     |  |   |           |   |  |      |  

Our increase in general and administrative expenses in the year ended December 31, 2008
compared to the year ended December 31, 2007 was primarily due to the following factors:



| |  |  | Payroll expenses increased by $1,514,695, or 70% compared with 2007, as a result of the increased average salary for administrative employees and the integration of
Boke. Boke was consolidated starting October 2007;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Accounting related professional fees for 2008 increased by $1,359,389, or 97% as compared to 2007, due primarily to the increase in accounting fees relating to our
fund raising activities during the second quarter of 2008 and the increase in audit fees relating to our increased number of subsidiaries being audited;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Directors remuneration and stock compensation increased by $37,989 and $642,638, or 4% and 108%, respectively, as compared to 2007. This was a result of
accrued performance bonus, continuous vesting of 2007 granted stock options and new stock options granted in 2008;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Research expenses increased by 76% compared to 2007. This reflected our increased spending on research and development of new products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expenses for office supplies increased by $233,745, or 47% compared to 2007, this was a result of the new office building put into use in 2008;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company made specific provision for bad debts based on the age of its accounts receivable. We have been implementing a tight credit control policy and making
consistent efforts in collecting long outstanding debts inherited from acquired subsidiaries. The Company reversed $94,258 provision for bad debts during 2008 based on the aging analysis; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Miscellaneous expenses increased by $1,242,272, or 28% in 2008 compared to 2007. This increase was due to increases in conference fees cost of $1,107,884.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



35



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##### Table of Contents

Depreciation and Amortization

Depreciation and amortization expense increased by $2,393,790, or 120%, in the year ended December 31, 2008 compared to the year ended December 31, 2007.

Purchased in-process research and development

Acquisition-related in-process research and development charge of $12,255,248 is related to the acquisition of GuangXi HuiKe Pharmaceutical Research and Development Co., Ltd. (GHK). On the date of acquisition, GHK was
working on at least seven in progress R&D projects. The Company intends to continue and invest in all the projects leading to either obtaining production licenses for new products or proprietary technology patents of future economic value. We
estimate fair value of the IPR&D and recognized them as acquired intangible assets apart from goodwill. However, according to US GAAP applicable at the time or the acquisition, the IPR&D project that have no alternative future use was
charged to expense at the acquisition date. The acquired IPR&D charge was a non-recurring expense deducted from operating income.

Interest Income
(Expense), Net

Net interest expense was $ 2,571,015 for the year ended December 31, 2008, compared to net interest income of
$617,524 for the year ended December 31, 2007. The increase was mainly caused by convertible notes interest expense from July 2008.

Other Income
(Expense), Net

Other income (expenses), net, was a net expense of $65,843 for the year ended December 31, 2008, compared to a net
expense of $525,066 for the year ended December 31, 2007.

Income Taxes

Income tax expense for the year ended December 31, 2008 was $ 12,727,388 as compared to $9,053,399 for the year ended December 31, 2007. The
increase was due to the increase in pre-tax income of Three Happiness and HSPL. The Companys effective tax rate for the year was 21.02%. During this period, income tax was provided for at 15% of pre-tax income for Three Happiness, Boke, HSPL,
CCXA and GLP under applicable Chinese law. All these subsidiaries were granted high-tech enterprise status.

RESULTS OF OPERATIONS  YEAR ENDED
DECEMBER 31, 2007 AS COMPARED TO YEAR ENDED DECEMBER 31, 2006

The following table sets forth the amounts and the percentage relationship to revenues of
certain items in our consolidated statements of income for the years ended December 31, 2007 and 2006:



|                               |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  
|------------------------------ |  | ----------------------- | ----------- | - | ----------------------- | - | ----------- | ---- |  | ----- | ---- |  | ----- | -
|                               |  | Year Ended December 31, |             |   | Year Ended December 31, |  
|                               |  | 2007                    |             |   | 2006                    |   |             | 2007 |  |       | 2006 | 
|REVENUES                       |  | $                       | 160,482,383 |   |                         | $ | 110,182,092 |      |  | 100   | %    |  | 100   | %
|COST OF GOODS SOLD             |  |                         | 49,364,486  |   |                         |   | 38,318,223  |      |  | 30.76 |      |  | 34.78 |  
|                               |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  
|GROSS PROFIT                   |  |                         | 111,117,897 |   |                         |   | 71,863,869  |      |  | 69.24 |      |  | 65.22 |  
|Selling and marketing          |  |                         | 20,669,303  |   |                         |   | 8,876,829   |      |  | 12.88 |      |  | 8.06  |  
|Advertising                    |  |                         | 22,865,903  |   |                         |   | 15,174,125  |      |  | 14.25 |      |  | 13.77 |  
|General and administrative     |  |                         | 13,365,156  |   |                         |   | 10,446,740  |      |  | 8.33  |      |  | 9.48  |  
|Depreciation and amortization  |  |                         | 1,989,425   |   |                         |   | 988,488     |      |  | 1.24  |      |  | 0.90  |  
|                               |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  
|Total operating expenses       |  |                         | 58,889,787  |   |                         |   | 35,486,182  |      |  | 36.70 |      |  | 32.21 |  
|                               |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  
|INCOME FROM OPERATIONS         |  |                         | 52,228,110  |   |                         |   | 36,377,687  |      |  | 32.54 |      |  | 33.02 |  
|Interest income (expense), net |  |                         | 617,524     |   |                         |   | 574,172     |      |  | 0.38  |      |  | 0.52  |  
|Other income (expense), net    |  |                         | (501,354    | ) |                         |   | (333,798    | )    |  | (0.31 | )    |  | (0.30 | )
|                               |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  
|INCOME BEFORE INCOME TAXES     |  |                         | 52,344,280  |   |                         |   | 36,618,061  |      |  | 32.62 |      |  | 33.23 |  
|Income taxes                   |  |                         | 9,053,399   |   |                         |   | 7,416,915   |      |  | 5.64  |      |  | 6.73  |  
|                               |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  
|NET INCOME                     |  | $                       | 43,290,881  |   |                         | $ | 29,201,146  |      |  | 26.98 | %    |  | 26.50 | %
|                               |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  
|NET INCOME PER SHARE           |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  
|BASIC                          |  | $                       | 0.62        |   |                         | $ | 0.47        |      |  |       |      |  |       |  
|                               |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  
|DILUTED                        |  | $                       | 0.61        |   |                         | $ | 0.46        |      |  |       |      |  |       |  
|                               |  |                         |             |   |                         |   |             |      |  |       |      |  |       |  



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##### Table of Contents

Revenues

Revenues
for the year ended December 31, 2007 were $160,482,383, an increase of $50,300,291 over revenues for the year ended December 31, 2006. Revenues by product categories were as follows:



|                        |  |                         |             |                     |   |                     |  |   |            |  |    |  
|----------------------- |  | ----------------------- | ----------- | ------------------- | - | ------------------- |  | - | ---------- |  | -- | -
|                        |  | Year Ended December 31, |             | Increase/(Decrease) |   | Increase/(Decrease) | 
|Product                 |  | 2007                    |             | 2006                |   |                    
|Pharmaceutical products |  | $                       | 127,823,297 |                     | $ | 79,367,161          |  | $ | 48,456,136 |  | 61 | %
|Nutraceutical products  |  |                         | 32,659,086  |                     |   | 30,814,931          |  |   | 1,844,155  |  | 6  | %
|                        |  |                         |             |                     |   |                     |  |   |            |  |    |  
|TOTAL                   |  | $                       | 160,482,383 |                     | $ | 110,182,092         |  | $ | 50,300,291 |  | 46 | %
|                        |  |                         |             |                     |   |                     |  |   |            |  |    |  

Sales of our pharmaceutical products increased by $48,456,136, or 61%, as compared to the year of 2006 primarily
due to the following factors:



| |  |  | The sales of our prescription pharmaceutical products increased from $45,385,970 in 2006 to $59,015,481 in 2007, or 30% increase. This is primarily due to the
increase in sales of our Shuanghuanglian Injection Powder and Cease Enuresis Soft Gel supported by our continuous marketing efforts, increasing brand recognition and effective pricing strategy as well as expanding coverage to the previously
unaddressed rural market;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The sales of our OTC pharmaceutical products increased from $33,981,191 to $68,807,816, or 102% increase. This was attributable to the increase in sales of our
Jinji series and Jinji Yimucao product that was launched early 2007 as a result of improved recognition of our new product supported by our marketing campaigns. Our Jini Yimucao product contributed $11,290,257 to our revenue in 2007; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our newly acquired CCXA and Boke have contributed $5,402,877 and $3,246,125 to our revenue for the year ended December 31, 2007, respectively. CCXA and Boke
were not our subsidiaries last year.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Sales from our nutraceutical products increased from $30,814,931 in the year of 2006 to $32,659,086
in the year of 2007, representing a growth of 6% and it is primarily due to the following factors:



| |  |  | Sales of our Protein Peptide series of products increased by 15%, from $27,356,572 in 2006 to $31,560,609 in 2007. This increase was mainly attributed to the
increase in sales of peptide coffee and peptide powder through our expanded distribution network; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | However, the increase of our nutraceutical product sales were offset by the decrease in the sales of our Compound Bio-functional beverage series from $1,693,752 in
the year of 2006 to $583,830 in the year of 2007 and our Vitamate nutritional oral liquid product from $1,743,513 in 2006 to $514,647 during 2007. These products are our old products and they are at the end of their product life cycle. We reduced
our marketing efforts on promoting those products during the year.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cost of Goods Sold and Gross Profit

Cost of goods sold was $49,364,486 for the year ended December 31, 2007, compared to $38,318,223 for the year ended December 31, 2006. Expressed as a percentage
of revenues, cost of goods sold was 30.76% for the year ended December 31, 2007, compared to 34.78% for the year ended December 31, 2006. The reduction in cost of goods sold as a percentage of revenues reflected a continued focus on
operating cost management, sourcing efficiencies and operation efficiencies.

Cost of goods sold for the years ended December 31, 2007 and 2006 by
product categories were as follows:



|                        |  |                         |            |                     |   |                     |  |   |            |  |    |  
|----------------------- |  | ----------------------- | ---------- | ------------------- | - | ------------------- |  | - | ---------- |  | -- | -
|                        |  | Year Ended December 31, |            | Increase/(Decrease) |   | Increase/(Decrease) | 
|Product                 |  | 2007                    |            | 2006                |   |                    
|Pharmaceutical products |  | $                       | 37,089,204 |                     | $ | 26,913,846          |  | $ | 10,175,358 |  | 38 | %
|Nutraceutical products  |  |                         | 12,275,282 |                     |   | 11,404,377          |  |   | 870,905    |  | 8  | %
|                        |  |                         |            |                     |   |                     |  |   |            |  |    |  
|TOTAL                   |  | $                       | 49,364,486 |                     | $ | 38,318,223          |  | $ | 11,046,263 |  | 29 | %
|                        |  |                         |            |                     |   |                     |  |   |            |  |    |  

The cost of goods sold of pharmaceutical and nutraceutical products increased by 38% and 8%, respectively, in the
year ended December 31, 2007 compared to the year ended December 31, 2006. These increases are attributed to our increase in sales.

Gross profit
increased by $39,254,028, or 55%, for the year ended December 31, 2007 over the year ended December 31, 2006. This increase reflected higher net sales, improved margins and operating efficiencies generally across our pharmaceutical and
nutraceutical businesses.



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##### Table of Contents

Gross profit as a percentage of net revenues increased from 65.22% in the prior year to 69.24% in the year of 2007 due to
the reductions in cost of goods sold as a percentage of revenues discussed above and improved operational efficiency.



38



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##### Table of Contents

Selling and Marketing

Selling and marketing expenses, including distribution expense, increased from $8,876,829 in the year ended December 31, 2006 to $20,669,303 in the year ended December 31, 2007, representing a 133% increase.
The details of our sales and marketing expenses were as follows:



|                               |  |                         |            |                     |   |           |                     |   |            |   |  |     |   
|------------------------------ |  | ----------------------- | ---------- | ------------------- | - | --------- | ------------------- | - | ---------- | - |  | --- | --
|                               |  | Year Ended December 31, |            | Increase/(Decrease) |   |           | Increase/(Decrease) |  
|                               |  | 2007                    |            | 2006                |   |          
|Promotional materials and fees |  | $                       | 7,249,854  |                     | $ | 2,048,710 |                     | $ | 5,201,144  |   |  | 254 | % 
|Shipping                       |  |                         | 3,866,200  |                     |   | 1,856,743 |                     |   | 2,009,457  |   |  | 108 | % 
|Payroll                        |  |                         | 2,796,100  |                     |   | 1,923,384 |                     |   | 872,716    |   |  | 45  | % 
|Offices supplies               |  |                         | 553,844    |                     |   | 704,657   |                     |   | (150,813   | ) |  | (21 | )%
|AOB Hong Kong marketing        |  |                         | 90,141     |                     |   | 176,079   |                     |   | (85,938    | ) |  | (49 | )%
|Other                          |  |                         | 6,113,164  |                     |   | 2,167,256 |                     |   | 3,945,908  |   |  | 182 | % 
|                               |  |                         |            |                     |   |           |                     |   |            |   |  |     |   
|TOTAL                          |  | $                       | 20,669,303 |                     | $ | 8,876,829 |                     | $ | 11,792,474 |   |  | 133 | % 
|                               |  |                         |            |                     |   |           |                     |   |            |   |  |     |   

Our increase in selling and marketing expenses in the year ended December 31, 2007 compared
to the year of 2006 was primarily due to the following factors:



| |  |  | Our promotional materials and fees increased by 254% in 2007 as compared to 2006. This was due primarily to our increased promotional activities to support the
sales of our Jinji series and Jinji Yimucao product in 2007. The increase was also due to additional pharmacies and stores decoration as a new marketing initiative launched by the Company in 2007 to help establish and enforce relationships with
retailers by providing decorative posters and print ads for store windows;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our payroll expense increased $2,009,457, or 108% in 2007 as compared to 2006. This was a result of our increased average salaries and increase in number of sales
and marketing employees;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Shipping expense increased by 45% in 2007. This increase resulted primarily from the growth of our sales and the increase of fuel cost;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Selling and marketing expenses in our Hong Kong branch decreased during 2007 as we integrated our showroom from our specialty store to our administrative office. In
2007 we focused on sales to chain stores;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other expenses increased by $3,945,908 in 2007 compared to 2006, primarily due to increases in traveling expenses business expense and sales conference fee by
$1,120,602, $1,013,026 and $1,649,108, respectively. This reflects increased spending in marketing communications to increase market awareness of our brand and products. More sales conferences in more cities were held in 2007 compared to 2006; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our newly acquired subsidiaries CCXA and Boke also incurred $216,491 and $910,782 in selling and marketing expenses in 2007 respectively.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------

Advertising

Advertising expense increased by $7,691,778, from $15,174,125 in 2006 to $22,865,903 in 2007. The increase in advertising expense resulted from an increase in promotional efforts in 2007 to promote the Companys Shuanghuanglian
Injection Powder and Cease Enuresis Soft Gel and media advertisement in Protein Peptide product series as well as our CE Patch. Our Hong Kong branch also increased advertisement on brand building and name recognition in the Hong Kong market in the
year of 2007 compared to the year of 2006. GLP incurred $12,933,727 in advertising expense during the year of 2007, which accounts for 57% of the total advertising expense. CCXA, our newly acquired subsidiary, also incurred $380,501 in advertising
expense during 2007.



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##### Table of Contents

General and Administrative

General and administrative expenses increased from $10,446,740 in 2006 to $13,632,145 in 2007, or a 30% increase. The details of general and administrative expenses were as follows:



|                                 |  |                         |            |      |                     |            |   |                     |   |           |   |  |     |   
|-------------------------------- |  | ----------------------- | ---------- | ---- | ------------------- | ---------- | - | ------------------- | - | --------- | - |  | --- | --
|                                 |  | Year Ended December 31, |            |      | Increase/(Decrease) |            |   | Increase/(Decrease) |  
|                                 |  | 2007                    |            | 2006 |                     |            |  
|Payroll                          |  | $                       | 2,152,039  |      | $                   | 1,618,032  |   |                     | $ | 534,007   |   |  | 33  | % 
|Professional fees                |  |                         | 1,395,826  |      |                     | 2,177,874  |   |                     |   | (782,048  | ) |  | (36 | )%
|Directors remuneration          |  |                         | 865,344    |      |                     | 526,167    |   |                     |   | 339,177   |   |  | 64  | % 
|Research                         |  |                         | 870,219    |      |                     | 742,705    |   |                     |   | 127,514   |   |  | 17  | % 
|Stock compensation  directors   |  |                         | 596,175    |      |                     | 225,644    |   |                     |   | 370,531   |   |  | 164 | % 
|Office supplies                  |  |                         | 492,884    |      |                     | 691,370    |   |                     |   | (198,486  | ) |  | (29 | )%
|Stock compensation  consultants |  |                         | 394,100    |      |                     | 596,885    |   |                     |   | (202,785  | ) |  | (34 | )%
|Business entertainment           |  |                         | 348,265    |      |                     | 361,940    |   |                     |   | (13,675   | ) |  | (4  | )%
|Office rental                    |  |                         | 321,735    |      |                     | 317,828    |   |                     |   | 3,907     |   |  | 1   | % 
|Utilities                        |  |                         | 208,314    |      |                     | 226,361    |   |                     |   | (18,047   | ) |  | (8  | )%
|Vehicles                         |  |                         | 207,149    |      |                     | 223,446    |   |                     |   | (16,297   | ) |  | (7  | )%
|Transportation                   |  |                         | 77,167     |      |                     | 51,619     |   |                     |   | 25,548    |   |  | 49  | % 
|Provision for bad debts          |  |                         | 76,322     |      |                     | (234,772   | ) |                     |   | 311,094   |   |  | 133 | % 
|Miscellaneous                    |  |                         | 5,359,617  |      |                     | 2,921,641  |   |                     |   | 2,437,976 |   |  | 83  | % 
|                                 |  |                         |            |      |                     |            |   |                     |   |           |   |  |     |   
|TOTAL                            |  | $                       | 13,365,156 |      | $                   | 10,446,740 |   |                     | $ | 2,918,416 |   |  | 28  | % 
|                                 |  |                         |            |      |                     |            |   |                     |   |           |   |  |     |   

Our increase in general and administrative expenses in the year ended December 31, 2007
compared to the year ended December 31, 2006 was primarily due to the following factors:



| |  |  | Payroll expense increased by $534,007, or 33% compared with 2006, as a result of increase of average salary as well as increase in the number of new employees;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Professional fees for 2007 decreased by $782,048, or 36% as compared to 2006 as a result of a decrease in our use of legal and accounting services in connection
with the listing of our stock on the New York Stock Exchange, such additional services were not used during 2007;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Directors remuneration and stock compensation increased by $339,177 and $370,531, or 64% and 164% respectively, as compared to 2006. This was a result of
accrued performance bonus during 2007 and new stock options granted in April 2007;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Research expense increased by 17% compared to 2006, reflecting the devotion of additional resources to research on our existing and new product development;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expense for office supplies decreased by $198,486, or 29% compared to 2006, This was a result of increased cost control on general and administrative activities as
well as reallocation of some administrative functions in 2007;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company made specific provision for bad debts based on the age of its accounts receivable. We have been implementing a tight credit control policy and making
consistent efforts in collecting long outstanding debts inherited from acquired subsidiaries. The Company increased its provision by $311,094 for bad debts during 2007 based on the aging analysis;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Miscellaneous expenses increased by $2,437,976, or 83% in 2007 compared to 2006. This increase was due to increases in sales tax, trip and traveling and insurance
cost of $778,592, $408,245 and $408,921, respectively; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our newly acquired subsidiaries CCXA and Boke also incurred $334,058 and $311,613 in general and administrative expenses in 2007.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------

Depreciation and Amortization

Depreciation and amortization expense
increased by $1,000,937, or 101%, in the year ended December 31, 2007 compared to the year ended December 31, 2006. The increase was mainly due to (i) the integration of GLP with the net book value of $9,661,731 in fixed assets and
$24,702,995 in intangible assets from May 2006; (ii) the integration of CCXA with the net book value of $9,051,130 in fixed assets and $16,524,939 in intangible assets from September 2007; and (iii) the integration of Boke with the net
book value of $4,018,429 in fixed assets and $22,214,455 in intangible assets from October 2007. The depreciation and amortization expense at GLP, CCXA and Boke amounted to $691,056, $123,166 and $491,981during 2007, respectively.



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##### Table of Contents

Interest Income (Expense), Net

Net interest income was $617,524 for the year ended December 31, 2007, compared to net interest income of $574,172 for the year ended December 31, 2006. This was because of the cash proceeds received from
our public offering in 2007 as well as the proceeds from the exercise of warrants during 2007. There were no significant fluctuations in interest expense incurred by us.

Other Income (Expense), Net

Other income (expense), net, was a net expense of $501,354 for the year
ended December 31, 2007, compared to a net expense of $333,798 for the year ended December 31, 2006. This was resulted primarily from the exchange loss of $680,311 offset by government subsidies of $102,669 in GLP during 2007.

Income Taxes

Income tax expense for the year
ended December 31, 2007 was $9,053,399 as compared to $7,416,915 for the year ended December 31, 2006. The increase was due to the increase in pre-tax income of Three Happiness and HSPL as well as the integration of CCXA and Boke. The
Companys effective tax rate for the year was 17.4%. During this period, income tax was provided for at 15% of pre-tax income for Three Happiness and Boke and 33% of pre-tax income for HSPL and CCXA under applicable Chinese law. GLP enjoys a
tax exemption according to applicable Chinese tax laws.

LIQUIDITY AND CAPITAL RESOURCES

Cash

Our cash balance at December 31, 2008 was
$70,636,510, representing a decrease of $95,773,565, or 58%, compared with our cash balance of $166,410,075 at December 31, 2007. The decrease was mainly attributable to the investing activities in acquisitions and the purchases of construction in
progress, property, plant and land for $248,117,301, offset by net proceeds from the issuance of our convertible notes and prepaid forward repurchase contract, which amounted to $80,359,934 and net cash provided by operating activities of
$77,758,717.

Cash Flow

2008 Compared to 2007

Cash flows from operations during 2008 amounted to $77,758,717, representing an increase of approximately 72% compared with cash flows from
operations of $45,099,379 in 2007. The increased cash flow was due primarily to the increase of our income from operations by 23%, to $64,330,696 in the year of 2008, compared with operation income of $52,228,110 in the year of 2007.

Our cash flows used in investing activities amounted to $257,374,093 in the year ended December 31, 2008. We also used $172,682,150 for the purchase
of construction in progress, property, plant and equipment and land use right in PRC. Compared to 2007, our cash flows used in investing activities increased by $187,528,391, which resulted primarily from the acquisition payments and investments in
long term assets.

Our cash flows from financing activities amounted to $80,948,164 in the year of 2008. During that period, the Company
received net proceeds of $110 million from the issuance of our convertible notes and paid $29,998,616 for our prepaid forward stock repurchase contract.

2007 Compared to 2006

Cash flows from operations during 2007 amounted to $45,099,379, representing an increase of
approximately 55% compared with cash flows from operations of $29,093,464 in 2006. The increased cash flow was due primarily to the increase of our net income by 48%, to $43,290,881 in the year of 2007, compared with net income of $29,201,146 in the
year of 2006. The increased cash flow was also due in part to an increase in other payables and accrued expenses by $2,856,936 during 2007, due primarily to our increased accrual on advertisement. These increases were partly offset by an increase in
our accounts receivable of $4,142,308, other current assets of $2,755,757 and advances to suppliers and prepaid expenses of $2,205,730 during 2007, which resulted from our expanded scale of operations, which required support of increased sales and
production activities and additional demands on working capital.

Our cash flows used in investing activities amounted to $69,845,702 in
the year ended December 31, 2007. During that period, we paid $29,397,657 for the acquisition of CCXA and $36,475,090 for the acquisition of Boke. We also used $1,507,017 for the purchase of plant and equipment. Compared to 2006, our cash flows
used in investing activities increased by $43,459,138, which resulted primarily from the acquisition payments.



41



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##### Table of Contents

Our cash flows from financing activities amounted to $96,833,706 in the year of 2007. We received
$72,984,358 from our secondary offering and we repaid $10,750,915 of bank loans.

Working Capital

Our working capital decreased by 93,995,928 to 86,415,610, at December 31, 2008, as compared to $180,411,538, at December 31, 2007, primarily
due to our decrease in cash of 95,773,565.

We currently generate our cash flow through operations. We believe that our cash flow generated
from operations will be sufficient to sustain operations for at least the next twelve months. From time to time, we may identify new expansion opportunities for which there will be a need for use of cash.

As of December 31, 2008, the Company entered into unconditional capital commitments for the purchase of land use rights and construction of manufacturing
facilities in the PRC for $7,666,839 within one year and $11,734,773 after one year. The Company has no material unconditional purchase commitments for raw materials, packing materials and advertising.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Issuance of Common Stock

See PART II Item 5 for issuance of unregistered common stock during
the year ended 2007.

Inflation

Inflation has not had a material impact on our business.

Currency Exchange Fluctuations

All of Companys revenues and majority of the expenses in 2008 were denominated primarily in Renminbi (RMB), the currency of China, and
was converted into US dollars at the exchange rate of 7.0842 to 1. In the third quarter of 2005, the Renminbi began to rise against the US dollar. As a result of the appreciation of RMB we recognized a foreign currency translation gain of $
12,819,020. There could be no assurance that RMB-to-U.S. dollar exchange rates will remain stable. A devaluation of RMB relative to the U.S. dollar would adversely affect our business, financial condition and results of operations. We do not engage
in currency hedging.

ITEM 8. Financial Statements and Supplementary Data

The information required by Item 8 appears after the signature page to this report.

ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures

None.

ITEM 9 A. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

AOB maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed by AOB under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and form and that such information is accumulated and communicated to AOBs management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer evaluated, with the participation of other members of management, the effectiveness of AOBs
disclosure controls and procedures (as defined in Exchange Act Rule s 13a-15(e) and 15d-15(e)), as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures were effective.



Although the management of our Company, including the Chief Executive Officer and the Chief Financial Officer, believes that our disclosure controls and internal controls currently provide reasonable assurance that
our desired control objectives have been met, management does not expect that our disclosure controls or internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to
their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of
two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.



42



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##### Table of Contents

(b) Managements Report on Internal Control over Financial Reporting

The management of AOB is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in
Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles and includes those policies and procedures that:

1. Pertain to the maintenance
of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

2. Provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with
authorization of our management and directors; and

3. Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisitions, use or disposition of our assets that could have a material effect on the financial statements.

Because of its
inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with
the participation of the Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2008. The framework on which such
evaluation was based is contained in the report entitled Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Report). The scope of the
assessment on internal control over financial reporting did not include controls of all consolidated entities. The management excluded from its assessment the internal control over financial reporting at Nuo Hua Investment Company Ltd., which was
acquired October 18, 2008, and GuangXi HuiKe Pharmaceutical Research and Development Co., Ltd., which was acquired October 20, 2008, and whose combined financial statements constitute 11% and 10% of net and total assets, respectively, and
2% of revenues and (25)% of net income of the consolidated financial statements as of and for the year ended December 31, 2008. There were no material changes to our internal control over financial reporting due to the above acquisitions.

Based on that evaluation and the criteria set forth in the COSO Report, management concluded that its internal control over financial
reporting was effective as of December 31, 2008.

Our independent registered public accounting firm, Weinberg & Company,
P.A., who also audited our consolidated financial statements, independently assessed the effectiveness of our internal control over financial reporting as of December 31, 2008, as stated in their report which is included in this Annual Report.

(c) Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the fourth fiscal quarter of the fiscal year covered by this Annual Report on Form 10-K that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. Other Information.

Not applicable.

PART III

ITEM 10. Directors, Executive Officers and Corporate Governance

The following table sets forth the names and ages of our current directors and executive officers, their 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 or her office until his or her successor is elected and qualified or his or her earlier resignation or removal.



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The following persons are the directors and executive officers of our company:



|                            |  |     |  |                                                                |  |                           
|--------------------------- |  | --- |  | -------------------------------------------------------------- |  | --------------------------
|Name                        |  | Age |  | Position                                                       |  | Date Of InitialAppointment
|Tony Liu                    |  | 56  |  | Chief Executive Officer and Chairman of the Board              |  | December 18, 2001         
|Jun Min                     |  | 50  |  | Director and Vice President                                    |  | May 8, 2002               
|Yanchun Li                  |  | 40  |  | Director, Chief Financial Officer and Chief Operations Officer |  | May 8, 2002               
|Binsheng Li                 |  | 45  |  | Director and Chief Accounting Officer                          |  | May 8, 2002               
|Cosimo J. Patti (1)(2)(3)   |  | 59  |  | Independent Director                                           |  | September 27, 2004        
|Xianmin Wang (1)(2)(3)      |  | 66  |  | Independent Director                                           |  | January 1, 2005           
|Eileen Brody (1)(2)(3)      |  | 47  |  | Independent Director                                           |  | June 22, 2005             
|Lawrence S. Wizel (1)(2)(3) |  | 65  |  | Independent Director                                           |  | August 21, 2006           
|Baiqing Zhang (3)           |  | 56  |  | Independent Director                                           |  | December 15, 2006         



|(1) | Serves as a member of the Audit Committee.
|--- | ------------------------------------------

|(2) | Serves as a member of the Compensation Committee.
|--- | -------------------------------------------------

|(3) | Serves as a member of the Nominating Committee.
|--- | -----------------------------------------------

There
are no family relationships between or among any of the executive officers or directors of the Company. Below are brief descriptions of the backgrounds and experiences of the officers and directors:

Tony Liuis the principal founder of our Company and has served as our Chief Executive Officer and the Chairman of our Board of Directors since
2001. He served in the army for over 19 years. After Mr. Liu left the army, he began working for the government in the Heilongjiang province in northeastern China. In addition to serving as a representative to the National Peoples
Congress in China, with his practical work experience in the Chinese community for many years, Mr. Liu has witnessed and participated in the massive macro economic changes for the past thirty years. He has many years of experience in managing
the army, government agencies and pharmaceutical companies. Mr. Liu graduated with a major in Communications & Commands from Wuhan Communication College in 1986 and studied Integrated Marketing and Media at the University of Hong Kong
in 2004. Mr. Liu studied in the Program of Sustainable Growth of Large Corporations sponsored by the School of Engineering and the School of Business at Stanford University.

Jun Minis one of our founders and has served as our Vice President and as a member of our Board of Directors since 2002. Mr. Min worked at
the Price Checking Department Bureau of Heilongjiang Province from 1987 to 1992. Subsequently, he worked for Harbin Three-Happiness Bioengineering, Co. Ltd. from 1994. He has over 20 years of experience in operations management and has an extensive
knowledge of the consumer and pharmaceutical products industries in China. Mr. Min received a BA in Business Management from Harbin Broadcast & TV University in 1986.

Yanchun Liis one of our partner founders and has served as Chief Financial Officer since May 2007. Prior to her appointment as Chief Financial
Officer, she had been the Acting Chief Financial Officer since May 2002, Chief Operating Officer and Secretary since October 2003 and has worked at the Company and served as a member of the Board since 2002. Ms. Li has fifteen years of
experience in management in the food industry and the pharmaceutical industry in China. In particular, she has extensive experience and innovative insight in marketing, management, brand building, corporate strategy, human resource and financial
capital management. Before joining us, Ms. Li worked for China Ruida Food Limited Company and successfully established the Ruida brand as the number one brand in the instant frozen food industry. Ms. Li joined Three-Happiness
Bioengineering, Co. Ltd. in 1994 and was in charge of the marketing and sales. Under her leadership, the functional drink of the Three-Happiness brand has reached stunning achievement nationwide across China. The Three-Happiness brand was later
awarded the Top Ten Well-known Brands in China. Ms. Li won the China Golden Award in Marketing of Year 2005 and was elected into the Whos Who of Chinese Origin Worldwide. Ms. Li received her BA in English from
Beijing University of Industry and Commerce in 1993 and completed the Owner/President Management Program in 2008, an advanced program, at Harvard Business School.

Binsheng Liis one of our partner founders and has served as our Chief Accounting Officer and as a member of our Board of Directors since 2002. Mr. Li began his career at Three-Happiness Bioengineering,
Co. Ltd. in 1994 in the accounting department. Mr. Li is in charge of all financial management and accounting work for the Company. Mr. Li graduated from Dalian Financial School in 1986 with a major in Finance and Economics.

Cosimo J. Patti has served on our Board of Directors since 2004. Before joining us, Mr. Patti was an
arbitrator for the National Association of Securities Dealers and the New York Stock Exchange for 18 years. Since August 1999, Mr. Patti has been the President and Chairman of Technology Integration Group, Inc. In June 2007, Mr. Patti
joined the board of directors of Advanced Battery Technologies, Inc. (NASDAQ:ABAT), a company engaged in the business of designing, manufacturing and marketing rechargeable polymer lithium-ion batteries. From 2002 to 2004, Mr. Patti was the
Senior Director of Applications Planning with iCi/ADP. He was the Director of Strategic Cross-border Business with Cedel Bank from 1996 to 1999, and President and Founder of FSI Advisors Group from 1998 to 2002. Mr. Patti attended Brooklyn
College from 1968 to 1970.



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Xianmin Wanghas served on our Board of Directors since 2005. He was the Vice Governor of
Heilongjiang Province from 1998 to 2003, where he was in charge of Financial and Economic affairs. Mr. Wang was Secretary of Daqing Municipal Party Committee from 1996 to 1998, and Vice Secretary of Harbin Municipal Party Committee from 1991 to
1992. Mr. Wang received a post graduate degree in Philosophy from Renmin University of China in 1964. He also holds a bachelors degree in Economics from Northeast Forest University and postgraduate degrees in Philosophy from Heilongjiang
University and Renmin University of China.

Eileen Brodyhas served on our Board of Directors since 2005. Since August 2005,
Ms. Brody has been President of Dawson-Forte Cashmere, an apparel trading company. Since June 2007 Ms. Brody has been a member of the board of directors of Fuqi International, Inc. (NASDAQ:FUQI), a company specializing in designing,
developing, promoting, and selling a range of precious metal jewelry products in the Chinese luxury goods market. From 1997 to 2004, she was Vice President of Merchandising and Planning for Carters Retail division of The William Carter
Company. From 1992 to 1997, she held various management positions for Melville Corporation, a multi-billion dollar retailer. From 1983 to 1990, Ms. Brody worked for KPMG Peat Marwick as a Senior Manager. Ms. Brody is a Certified Public
Accountant. She received her Undergraduate and MBA degrees from Pace University and a second MBA from the Harvard Graduate School of Business.

Lawrence S. Wizelhas served on our Board of Directors since 2006. Prior to joining our Board of Directors, he served as Deputy Professional Practice Director at Deloitte Touche USA LLP, or Deloitte, in Deloittes New York
office. Mr. Wizel began his career at Deloitte in 1965 and was a partner from 1980 until he retired in June 2006. Mr. Wizel was responsible for serving a diverse client base of publicly held and private companies in a variety of capacities
including, SEC filings, initial public offerings, mergers and acquisition transactions and periodic reporting. Since September 2006, Mr. Wizel has been a member of the board of directors of 3SBio Inc. (NASDAQ:SSRX), a biotechnology company
focused on researching, developing, manufacturing and marketing biopharmaceutical products primarily in China. Since August 2007, Mr. Wizel has been a member of the board of directors of Puda Coal, Inc. (OTC:PUDC), a supplier of metallurgical
coking coal to the industrial sector in China. He received his BA in 1965 in accounting from Michigan State University and is a Certified Public Accountant.

Baiqing Zhang has served on our Board of Directors since 2006. Mr. Zhang brings to us two decades of experience in the Chinese governments regulatory and supervisory divisions. From 1997 until
Mr. Zhang retired in 2005, Mr. Zhang served as Deputy Director, Division Chief of the Heilongjiang Regulatory Bureau of the China Securities Regulatory Commission, or CSRC, where he managed and imposed regulatory compliance for all
Heilongjiang-based securities issuances, as well as supervised securities trading, investment funds and legal affairs. The CSRC is Chinas primary regulatory body overseeing the countrys financial markets. Prior to this, he spent ten
years as a member of the Discipline Inspection Committee in the Department of Supervision of the Heilongjiang Province, and previously was the Vice Principal of Hebei Institute of Mechanical and Electrical Technology, where he taught college
courses. Since 2005, Mr. Zhang has been a consultant in the fields of law and economics, public policy, and business strategy. He also consults and lectures about regulatory issues in the Chinese securities markets, based on his significant
experience at the CSRC. Mr. Zhang received a degree in Management of Economics from the Tianjin Normal University and a degree in Accounting from the Heilongjiang Economics Management Academy.

CORPORATE GOVERNANCE

Board of Directors

We have nine members serving on our Board of Directors. Each board member is nominated for election at our annual meeting to serve until the next annual
meeting of stockholders and until their successors are duly elected and qualified.

Board Committees

The Board of Directors has an Audit Committee, Nominating and Corporate Governance Committee and a Compensation Committee.

Nominating and Corporate Governance Committee

The purpose of the Nominating and Corporate Governance Committee is to assist the Board of Directors in identifying qualified individuals to become board members, in determining the composition of the Board of Directors and in monitoring
the process to assess Board effectiveness. Ms. Brody and Messrs. Patti, Wang and Wizel are members of the Nominating and Corporate Governance Committee. There have been no changes to the procedures by which the stockholders of the Company may
recommend nominees to



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the Board of Directors since the filing of the Companys Definitive Proxy Statement on October 17, 2008 for its Annual Meeting of Stockholders,
which was held on December 5, 2008. The Nominating and Corporate Governance Committee operates under a written charter. The Amended and Restated Nominating and Corporate Governance Committee Charter can be found on our website at
www.bioaobo.com and can be made available in print free of charge to any shareholder who requests it.

Compensation Committee

The Compensation Committee is responsible for (a) reviewing and recommending to the Board of Directors on matters relating to
employee compensation and benefit plans, and (b) assisting the Board in determining the compensation of the Chief Executive Officer and make recommendations to the Board with respect to the compensation of the Chief Financial Officer, other
executive officers of the Company and independent directors. Ms. Brody and Messrs. Patti, Wang and Wizel are members of the Compensation Committee. Our Compensation Committee Charter was amended on February 25, 2008, in connection with our
listing on the New York Stock Exchange. The Compensation Committee operates under a written charter. The Amended and Restated Compensation Committee Charter can be found on our website at www.bioaobo.com and can be made available in print
free of charge to any shareholder who requests it.

Compensation Committee Interlocks and Insider Participation

Members of our Compensation Committee of the Board of Directors during 2008 were Ms. Brody and Messrs. Patti, Wizel and Wang. No member of our
Compensation Committee was, or has been, an officer or employee of the Company or any of our subsidiaries. No member of the Compensation Committee has a relationship that would constitute an interlocking relationship with executive officers or
directors of the Company or another entity.

Compensation Committee Report (1)

The Compensation Committee has reviewed and discussed the discussion and analysis of the Companys compensation which appears below above with
management, and, based on such review and discussion, the Compensation Committee recommended to the Companys Board of Directors that the above disclosure be included in this Annual Report on Form 10-K.

The members of the Compensation Committee are:

Eileen Brody, Chair

Cosimo J. Patti

Xianmin Wang

Lawrence S. Wizel



|(1) | The material in the above Compensation Committee reports is not soliciting material, is not deemed filed with the SEC and is not incorporated by reference in any filing of the
Company under the Securities Act of 1933, or the Securities Exchange Act of 1934, whether made before or after the date of this Form 10-K and irrespective of any general incorporation language in such filing.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Audit Committee

The Company has a separately
designated standing audit committee in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The audit committee members for the year ended December 31, 2008 consisted of Lawrence S. Wizel, Cosimo J.
Patti, Xianmin Wang and Eileen Brody. Each of these members are considered independent under Section 303A.02 of the listing standards of New York 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. The Audit Committee Charter can be found on our website at www.bioaobo.com and can be made available in print free of charge to any shareholder who requests it.

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. Lawrence S. Wizel is the audit committee financial expert and is an independent member of our board of directors.

Pursuant to its charter, the audit committee meets at least quarterly with the Companys internal auditors. The Company does not limit the number of audit committees on which its audit committee members can serve.

EXECUTIVE SESSIONS

Under the New York Stock Exchange
Rules, our non-management directors are required to hold regular executive sessions without management. The chairperson of the executive session will rotate at each session so that each non-management director shall



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have an opportunity to serve as chairperson. Interested parties may communicate directly with the presiding director of the executive session or with
the non-management directors as a group, by directing such written communication to Mr. Cosimo Patti at American Oriental Bioengineering, Inc., 330 Madison Avenue 9th Floor, New York NY 10017

CHIEF EXECUTIVE OFFICER CERTIFICATIONS

In connection
with our listing on the New York Stock Exchange, Mr. Tony Liu, our Chief Executive Officer, submitted an Annual CEO Certification, without qualification, to the New York Stock Exchange certifying that he is not aware of any violation by the
Company of New York Stock Exchange corporate governance listing standards during 2008. Mr. Liu has executed a Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act and a Certification pursuant to 18 U.S.C. 1350, which are
filed as Exhibits 31.1 and 32, respectively, to this Annual Report on Form 10-K.

COMPLIANCE WITH SECTION 16(a) OF EXCHANGE ACT

Section 16(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act), requires the executive officers and directors of the
Company and every person who is directly or indirectly the beneficial owner of more than 10% of any class of security of the Company to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Such persons also
are required to furnish our company with copies of all Section 16(a) forms they file. Based solely on our review of copies of such forms received by us, we believe that during the fiscal year 2008, the executive officers and directors of the
Company and every person who is directly or indirectly the beneficial owner of more than 10% of any class of security of the Company complied with the filing requirements of Section 16(a) of the Exchange Act, except the following individuals
who did not timely file Form 4s: Tony Liu, Yanchun Li, Binsheng Li and Jun Min. Each of these individuals did not timely file one Form 4 disclosing one reportable transaction, which they later timely reported on Form 5s.

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. Our Code of Ethics was amended on February 25, 2008 in connection with our
listing on the New York Stock Exchange. A copy of our Code of Ethics is available on our website www.bioaobo.comand can be made available in print to any shareholder upon request at no charge by writing to our Chief Financial Officer, c/o
American Oriental Bioengineering, Inc. at 330 Madison Avenue, 9th Floor, New York, NY 10017. Our Code of Ethics can be made available in print free of charge to any shareholders who requests it. 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. Any waiver of the Code of Ethics will be promptly disclosed on our website at www.bioaobo.com and in a
Current Report on 8-K.

ITEM 11. Executive Compensation

The Companys executive compensation program for the named executive officers (NEOs) is administered by the Compensation Committee of the Board of
Directors.

Compensation Objectives

We believe that the compensation programs for the Companys NEOs should reflect the Companys performance and the value created for the Companys stockholders. In addition, the compensation programs
should support the short-term and long-term strategic goals and values of the Company, and should reward individual contributions to the Companys success. Our compensation plans are consequently designed to link individual rewards with
Companys performance by applying objective, quantitative factors including the Companys own business performance and general economic factors. We also rely upon subjective, qualitative factors such as technical expertise, leadership and
management skills, when structuring executive compensation in a manner consistent with our compensation philosophy.

Process for
Determining Compensation for Executives

The Compensation Committee makes independent decisions about all aspects of NEO
compensation, and takes into account (i) recommendations from our CEO with respect to the compensation of NEOs other than himself, and (ii) information that our Human Resources department provides regarding compensation data and benchmarks
for comparable positions and companies in different applicable geographical area.

The Compensation Committee regularly reviews the design
and structure of the Companys compensation programs to ensure that managements interests are closely aligned with stockholders interests and that the compensation programs are designed to further the Companys strategic
priorities.



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Elements of Compensation

Base Salary. Base salaries for the named executive officers are set forth in their respective employment agreements. Periodically, however, the
Compensation Committee considers proposals from the Companys management to approve increases to the base salaries for named executive officers other than our CEO. When considering whether to approve these adjustments, the Compensation
Committee takes into account a number of factors, including:



| |  |  | the Companys performance;
| | - |  | --------------------------



| |  |  | the individuals current and historical performance and contribution to the Company;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | and the individuals role and unique skills.
| | - |  | --------------------------------------------

We tried to set executives base salaries near the median of the range of salaries for executives in similar positions with similar responsibilities at comparable companies, in line with our compensation
philosophy. Base salaries are reviewed annually, and may be increased to align salaries with market levels after taking into account the subjective evaluation described previously.

Annual Cash Incentive Bonuses. The Company has a cash incentive bonus plans for NEO. The plan is designed to promote executive decision
making and achievement that supports the realization of key overall Company financial goals. For the year 2008, the participants in the Companys cash incentives program consisted of each of the Companys five named executive officers.

In 2008, executives had target bonus opportunities ranging from 0% to 75% of salary earnings, depending on position level and
responsibility, with larger bonus opportunities provided to those with greater responsibility. The Compensation Committee establishes the guidelines under which the plan is administered, including financial performance goals and payout schedules.
The goals reflect the Companys performance using performance measures of net income.

The plan provides payouts based on different
levels of achievement:



| |  |  | Threshold:the minimum level of performance for which a bonus is paid and set at 90% of the Target level. No bonuses will be earned if the
Threshold level of the Companys performance is not achieved;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Minimum: 70% of bonus is paid for achievement of 90% to 99.9% of financial goals.
| | - |  | ---------------------------------------------------------------------------------



| |  |  | Target:100% of bonus is paid for achievement of financial goals.
| | - |  | ----------------------------------------------------------------



| |  |  | Maximum:achievement at a superior level of performance for 300% payout of the Target bonus.
| | - |  | -------------------------------------------------------------------------------------------

For achievement between Target and Maximum, bonus payouts are interpolated to reflect the level of results achieved.

Equity Incentive Compensation. We believe that long-term performance is achieved through an ownership culture participated in by our executive
officers through the use of stock-based awards. Currently, we do not maintain any incentive compensation plans based on pre-defined performance criteria. The Compensation Committee has the general authority, however, to award equity incentive
compensation, i.e. stock options, to our executive officers in such amounts and on such terms as the committee determines in its sole discretion. The Committee does not have a determined formula for determining the number of options available to be
granted. The Compensation Committee will review each executives individual performance and his or her contribution to our strategic goals periodically. With the exception of stock options automatically granted at the end of each fiscal quarter
in accordance with the terms of the employment agreement with our executive officers, our Compensation Committee grants equity incentive compensation at times when we do not have material non-public information to avoid timing issues and the
appearance that such awards are made based on any such information.

The Compensation Committee is carefully monitoring our executive
compensation programs. It is our general objective to provide our NEOs with total annual compensation near the median of the range of salaries for executives in similar positions with similar responsibilities at comparable companies. To accomplish
this objective, we anticipate increasing levels of executive compensation over time. The Compensation Committee has reviewed the Compensation Discussion & Analysis (CD & A) prepared by management and recommended it for
inclusion in this Annual Report on Form 10-K.

Summary Compensation Table

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



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|                                                |  |               |  |                        |  |                     |  |                |  |                       |  |                                        |  |                                                                       |  |                          |  |                       
|----------------------------------------------- |  | ------------- |  | ---------------------- |  | ------------------- |  | -------------- |  | --------------------- |  | -------------------------------------- |  | --------------------------------------------------------------------- |  | ------------------------ |  | ----------------------
|Name and Principal Position                     |  | Year          |  | Salary($) (1)          |  | Bonus($) (2)        |  | StockAwards($) |  | OptionAwards($) (3)   |  | Non-EquityIncentivePlanCompensation($) |  | Change inPension ValueandNonqualifiedDeferredCompensationEarnings ($) |  | All OtherCompensation($) |  | Total($)              
|Tony Liu, CEO and Chairman                      |  | 20082007 2006 |  | 200,000200,000 150,000 |  | 40,26753,253       |  |             |  | 538,000594,000 53,923 |  |                                     |  |                                                                    |  |                       |  | 778,267847,253 203,923
|                                                |  |               |  |                        |  |                     |  |                | 
|Yanchun Li, CFO, COO, Director                  |  | 20082007 2006 |  | 160,000160,000 90,000  |  | 30,20139,940       |  |             |  | 475,200475,200 32,355 |  |                                      |  |                                                                    |  |                       |  | 665,401675,140 122,355
|                                                |  |               |  |                        |  |                     |  |                | 
|Jun Min, VP, Director                           |  | 20082007 2006 |  | 120,000120,000 70,000  |  | 30,20139,940       |  |             |  | 356,400356,400 15,000 |  |                                     |  |                                                                    |  |                       |  | 506,601516,340 85,000 
|                                                |  |               |  |                        |  |                     |  |                | 
|Binsheng Li, Chief Accounting officer, Director |  | 20082007 2006 |  | 80,00080,000 57,000    |  | 20,13426,626       |  |             |  | 293,600237,600 19,413 |  |                                     |  |                                                                    |  |                       |  | 393,734344,226 76,413 
|                                                |  |               |  |                        |  |                     |  |                | 
|Wilfred Chow, SVP of Finance                    |  | 20082007 2006 |  | 190,000160,000 100,000 |  | 40,26753,253 26,666 |  |             |  | 327,000297,000       |  |                                     |  |                                                                    |  |                       |  | 557,267510,253 126,666



|(1) | The amounts reported in this column represent base salaries paid to each of the named executive officers for 2008 as provided for in their respective employment agreements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The named executive officers did not receive any discretionary bonuses, sign-on bonuses, or other annual bonus payments that are not contingent on the achievement of stipulated
performance goals. Cash bonus payments that are contingent on achieving pre-established and communicated goals.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Option award amounts in this table relate to the accounting expense for options granted in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment, (SFAS 123(R)), which requires the expensing of equity stock awards.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Employee Stock Option Plan

In March 2004, our board of directors formally adopted a Stock Option Plan (the 2004 Plan). Under the 2004 Plan, we were 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 2004 Plan was administered directly by our Compensation Committee. Subject to the provisions of the 2004 Plan,
the Compensation Committee determined who would 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. The Company replaced the 2004 Plan with a new Equity Incentive Plan that was adopted by the Board and approved by the Stockholders in 2006 (2006 Plan). The 2006 Plan provides a maximum of 5,000,000 shares for future
grants but the Company is not intended to grant more than 1,000,000 shares in one calendar year. The Company will not grant any additional awards under the 2004 Plan. All Awards starting from 2007 would be granted under the 2006 Plan. Those
individuals with awards outstanding under the 2004 Plan will continue to hold such awards in accordance with the terms of their respective grant agreements.

As of December 31, 2008, the Company granted an aggregate of 2,421,257 options under the 2006 Plan. For the year ended December 31, 2008, options to purchase a total of 1,137,257 shares of common stock were
granted to the executive officers. In 2008, the Company granted the following options to the NEOs pursuant to the 2006 Plan:

2008 Grants of
plan-based awards table



|             |  |           |  |                                                                         |  |                                                 |  |                                 |  |                                           
|------------ |  | --------- |  | ----------------------------------------------------------------------- |  | ----------------------------------------------- |  | ------------------------------- |  | ------------------------------------------
|Name         |  | GrantDate |  | Estimated FuturePayouts UnderEquity IncentivePlan Awards(Target) (#)(1) |  | Exercise orBase Priceof OptionAwards($ /Sh) (2) |  | ClosingPrice onGrantDate($ /Sh) |  | Grant DateFair Valueof OptionAwards($ /Sh)
|Tony Liu     |  | 4/20/08   |  | 307,428                                                                 |  | 8.35                                            |  | 8.35                            |  | 538,000                                   
|Yanchun Li,  |  | 4/20/08   |  | 271,543                                                                 |  | 8.35                                            |  | 8.35                            |  | 475,200                                   
|Jun Min      |  | 4/20/08   |  | 203,657                                                                 |  | 8.35                                            |  | 8.35                            |  | 356,400                                   
|Binsheng Li  |  | 4/20/08   |  | 167,771                                                                 |  | 8.35                                            |  | 8.35                            |  | 293,600                                   
|Wilfred Chow |  | 4/20/08   |  | 186,857                                                                 |  | 8.35                                            |  | 8.35                            |  | 327,000                                   



|(1) | Represents the number of stock options granted in 2008 under the Companys 2006 Plan. These options vest and become exercisable ratably in five equal annual installments
beginning one year after the grant date.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents the exercise price for the stock options granted, which was the five days average closing stock prices on the NYSE of the Companys Common Stock preceding the grant
date.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Employment Agreements

In April 20, 2008, we entered into employment agreements with Tony Liu, our Chairman and Chief Executive Officer, Yanchun Li, our Chief Financial Officer and Chief Operations Officer, Jun Min, our Vice President,
and Binsheng Li, our Chief Accounting Officer, all of whom are also directors of the Company. We also entered into employment agreement with Wilfred Chow, our Senior Vice President of Finance.

Tony Lius employment agreement has a term of one year, effective as of April 20, 2008, and provides for an annual base salary of $200,000,
subject to subsequent annual review by the Companys Compensation Committee. The term of his agreement shall be automatically renewed for another year, unless a written notice is given by either party of an intention not to renew the agreement
no later than 90 days prior to the expiration of the term. The agreement also provides for the grant of options to purchase 307,428 shares of common stock with an exercise price of $8.35 per share. The stock options are granted under the
Companys 2006 Equity Incentive Plan and will vest ratably over a five year period, subject to Mr. Lius continued employment with the Company on each vesting date. Mr. Liu is also entitled to an annual performance based bonus of
up to US$40,000 based upon the Companys performance. Such amount may be increased if the Company exceeds certain net income targets for the year, or may be decreased if the net income targets are not met. 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 the employment.

Lily Lis employment agreement has a term of one
year, effective as of April 20, 2008, and provides for an annual base salary of $160,000, subject to subsequent annual review by the Companys Compensation Committee. The term of her agreement shall be automatically renewed for another
year, unless a written notice is given by either party of an intention not to renew the agreement no later than 90 days prior to the expiration of the term. The agreement also provides for the grant of options to purchase 271,543 shares of common
stock with an exercise price of $8.35 per share. The stock options are granted under the Companys 2006 Equity Incentive Plan and will vest ratably over a five year period, subject to Ms. Lis continued employment with the Company on
each vesting date. Ms. Li is also entitled to an annual performance based bonus of up to US$30,000 based upon the Companys performance and such amount may be increased if the Company exceeds certain net income targets for the year, or may
be decreased if the net income targets are not met. We can terminate Ms. Lis employment with cause or without cause pursuant to a decision by our board of directors. 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 one year, effective as of April 20, 2008, and provides for an annual base salary of $120,000, subject to subsequent annual review by our board of directors. The
term of his agreement shall be automatically renewed for another year, unless a written notice is given by either party of an intention not to renew the agreement no later than 90 days prior to the expiration of the term. The agreement also provides
for the grant of options to purchase 203,657shares of common stock with an exercise price of $8.35 per share. The stock options are granted under the Companys 2006 Equity Incentive Plan and will vest ratably over a five year period, subject to
Mr. Mins continued employment with the Company on each vesting date. Mr. Min is also entitled to an annual performance based bonus of up to US$30,000 based upon the Companys performance and such amount may be increased if the
Company exceeds certain net income targets for the year, or may be decreased if the net income targets are not met. We can terminate Mr. Mins employment with cause or without cause pursuant to a decision by 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 the employment.

Binsheng Lis employment agreement has a term of one year, effective as of April 20, 2008, and provides for an annual base salary of $80,000,
subject to subsequent annual review by our board of directors. The term of his agreement shall be automatically renewed for another year, unless a written notice is given by either party of an intention not to renew the agreement no later than 90
days prior to the expiration of the term. The agreement also provides for the grant of options to purchase 167,771 shares of common stock with an exercise price of $8.35 per share. The stock options are granted under the Companys 2006 Equity
Incentive Plan and will vest ratably over a five year period, subject to Mr. Lis continued employment with the Company on each vesting date. Mr. Li is also entitled to an



50



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annual performance based bonus of up to US$20,000 based upon the Companys performance and such amount may be increased if the Company exceeds certain
net income targets for the year, or may be decreased if the net income targets are not met. We can terminate Mr. Lis employment with cause or without cause pursuant to a decision by 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 the employment.

Wilfred Chows employment agreement has a term of one year, effective as of April 20, 2008, and provides for an annual base salary of $190,000,
subject to subsequent annual review by our board of directors. The term of his agreement shall be automatically renewed for another year, unless a written notice is given by either party of an intention not to renew the agreement no later than 90
days prior to the expiration of the term. The agreement also provides for the grant of options to purchase 186,857shares of common stock with an exercise price of $8.35 per share. The stock options are granted under the Companys 2006 Equity
Incentive Plan and will vest ratably over a five year period, subject to Mr. Chows continued employment with the Company on each vesting date. Mr. Chow is also entitled to an annual performance based bonus of up to US$40,000 based
upon the Companys performance and such amount may be increased if the Company exceeds certain net income targets for the year, or may be decreased if the net income targets are not met. We can terminate Mr. Chows employment with
cause or without cause pursuant to a decision by our Chief Executive Officer. In the event Mr. Chow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 the employment.

Potential Payments Upon Termination or Change in Control

Assuming the employment of our named executive officers were to be terminated without cause or for good reason, as of December 31, 2008, the
following individuals would have been entitled to payments in the amounts set forth opposite to their name in the below table through April 20, 2009:



|              |  |   |       
|------------- |  | - | ------
|Cash Payments |  |   |       
|Tony Liu      |  | $ | 66,667
|Yanchun Li    |  |   | 53,333
|JunMin        |  |   | 40,000
|Binsheng Li   |  |   | 26,667
|Wilfred Chow  |  |   | 63,333

2008 Outstanding Equity Awards at Year-end



|             |  |                                                    |  |                                                    |  |                                                                                       |  |                        |  |                     
|------------ |  | -------------------------------------------------- |  | -------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ---------------------- |  | --------------------
|             |  | Option Awards                                     
|             |  | Number ofSecuritiesUnderlyingUnexercisedOptions(#) |  | Number ofSecuritiesUnderlyingUnexercisedOptions(#) |  | EquityIncentivePlan Awards:Number ofSecuritiesUnderlyingUnexercisedUnearnedOptions(#) |  | OptionExercisePrice($) |  | OptionExpirationDate
|Name         |  | Exercisable                                        |  | Unexercisable                                      |  |                                                                                       | 
|Tony Liu     |  | 40,000                                             |  | 160,000                                            |  | 200,000                                                                               |  | 10.74                  |  | 4/20/2017           
|Tony Liu     |  |                                                   |  | 307,428                                            |  | 307,428                                                                               |  | 8.35                   |  | 4/20/2018           
|Yanchun Li   |  | 32,000                                             |  | 128,000                                            |  | 160,000                                                                               |  | 10.74                  |  | 4/20/2017           
|Yanchun Li   |  |                                                   |  | 271,543                                            |  | 271,543                                                                               |  | 8.35                   |  | 4/20/2018           
|Jun Min      |  | 24,000                                             |  | 96,000                                             |  | 120,000                                                                               |  | 10.74                  |  | 4/20/2017           
|Jun Min      |  |                                                   |  | 203,657                                            |  | 203,657                                                                               |  | 8.35                   |  | 4/20/2018           
|Binsheng Li  |  | 16,000                                             |  | 64,000                                             |  | 80,000                                                                                |  | 10.74                  |  | 4/20/2017           
|Binsheng Li  |  |                                                   |  | 167,771                                            |  | 167,771                                                                               |  | 8.35                   |  | 4/20/2018           
|Wilfred Chow |  | 20,000                                             |  | 80,000                                             |  | 100,000                                                                               |  | 10.74                  |  | 4/20/2017           
|Wilfred Chow |  |                                                   |  | 186,857                                            |  | 186,857                                                                               |  | 8.35                   |  | 4/20/2018           



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Option Exercises and Stock Vested During 2008



|             |  |                                         |  |                              
|------------ |  | --------------------------------------- |  | -----------------------------
|             |  | Option Awards                          
|             |  | Number ofShares Acquired onExercise (#) |  | Value Realized onExercise ($)
|Tony Liu     |  |                                        |  |                             
|Yanchun Li   |  |                                        |  |                             
|Jun Min      |  |                                        |  |                             
|Binsheng Li  |  |                                        |  |                             
|Wilfred Chow |  |                                        |  |                             

Compensation of Independent Directors for the 2008

On April 9, 2008, Compensation Committee of the Company, after the annual compensation review meeting, approved changes to the annual compensation
provided to independent directors. The changes were made upon the ratification by the Board of Directors. The fee changes for annual retainers and the changes for annual equity awards become effective as of April 20, 2008. The changes in
compensation for independent directors are as follows:



| |  |  | increased the annual retainer fee for each independent director from $40,000 to $50,000;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | increased the annual stock award for each independent director from $60,000 to $65,000, and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | additional annual stock award of $5,000 for Compensation Committee Chair and $8,000 for Audit Committee Chair.
| | - |  | --------------------------------------------------------------------------------------------------------------

The annual retainer is paid to the independent directors in monthly installments in arrears. Independent director shall be entitled to receive each year
shares of common stock of the Company with an aggregate value range from $65,000 to $73,000 per annum, calculated based on the average closing price per share for the five (5) trading days preceding and including the date of the signing of each
such independent directors service agreement. The equity award to independent directors is awarded at the beginning of each year for service rendered for the preceding year. The Company reimburses its independent directors for reasonable
travel expenses to attend Board and Committee meetings.

The following table sets forth all compensation paid or to be paid by AOB, as well as certain
other compensation paid or accrued, for each of the independent directors for the year 2008.



|                 |  |                               |  |                 |     |  |                  |  |                                         |  |                                                                       |  |                          |  |         
|---------------- |  | ----------------------------- |  | --------------- | --- |  | ---------------- |  | --------------------------------------- |  | --------------------------------------------------------------------- |  | ------------------------ |  | --------
|Name             |  | Fees Earned orPaid in Cash($) |  | Stock Awards($) |     |  | Option Awards($) |  | Non-EquityIncentive PlanCompensation($) |  | Change inPensionValue
andNonqualifiedDeferredCompensationEarnings ($) |  | All OtherCompensation($) |  | Total($)
|Cosimo J. Patti  |  | 46,667                        |  | 63,333          | (1) |  |                 |  |                                        |  |                                                                      |  |                         |  | 110,000 
|Xianmin Wang     |  | 46,667                        |  | 63,333          | (1) |  |                 |  |                                        |  |                                                                      |  |                         |  | 110,000 
|Eileen Brody     |  |                              |  | 115,000         | (2) |  |                 |  |                                        |  |                                                                      |  |                         |  | 115,000 
|Lawrence S Wizel |  | 46,667                        |  | 71,333          | (3) |  |                 |  |                                        |  |                                                                      |  |                         |  | 118,000 
|Baiqing Zhang    |  | 46,667                        |  | 63,333          | (1) |  |                 |  |                                        |  |                                                                      |  |                         |  | 110,000 



|(1) | 7,085 shares of common stock to be issued were outstanding for each of the independent directors as of January 1, 2009.
|--- | -----------------------------------------------------------------------------------------------------------------------

|(2) | 13,239 shares of common stock to be issued were outstanding as of January 1, 2009.
|--- | ----------------------------------------------------------------------------------

|(3) | 7,977 shares of common stock to be issued were outstanding as of January 1, 2009.
|--- | ---------------------------------------------------------------------------------



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ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters

The following table sets forth certain information regarding beneficial ownership of common stock as of
February 28, 2008 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.



|                                                                         |  |                         |  |                                          |      |  |                     |  
|------------------------------------------------------------------------ |  | ----------------------- |  | ---------------------------------------- | ---- |  | ------------------- | -
|Name (1)                                                                 |  | Title of Class          |  | Amount and Nature ofBeneficial Owner (2) |      |  | Percent of Class(3) |  
|Tony Liu                                                                 |  | Series A PreferredStock |  | 1,000,000                                | (4)  |  | 100.00              | %
|Tony Liu                                                                 |  | Common Stock            |  | 14,437,648                               | (5)  |  | 18.45               | %
|Yanchun Li                                                               |  | Common Stock            |  | 795,716                                  | (6)  |  | 1.02                | %
|Jun Min                                                                  |  | Common Stock            |  | 933,494                                  | (7)  |  | 1.19                | %
|Binsheng Li                                                              |  | Common Stock            |  | 308,906                                  | (8)  |  | *                   |  
|Cosimo J. Patti                                                          |  | Common Stock            |  | 16,213                                   | (9)  |  | *                   |  
|Xianmin Wang                                                             |  | Common Stock            |  | 34,018                                   | (10) |  | *                   |  
|Eileen Brody                                                             |  | Common Stock            |  | 59,998                                   | (11) |  | *                   |  
|Lawrence S. Wizel                                                        |  | Common Stock            |  | 18,099                                   | (12) |  | *                   |  
|Baiqing Zhang                                                            |  | Common Stock            |  | 11,702                                   | (13) |  | *                   |  
|Total Ownership of Common Stock by All Directors and Officers as a Group |  |                         |  | 16,615,795                               |      |  | 21.23               | %



|(1) | Unless otherwise indicated, the address for all named executive officers, directors and stockholders is c/o American Oriental Bioengineering, Inc., 25th FloorMid Section,
Great China International Exchange Square, No. 1 Fuhua 1 Rd, Futian District, Shenzhen, 518034, Peoples Republic of China.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The amount of beneficial ownership includes the number of shares of common stock and/or preferred stock, 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, 2008 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 SEC, 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Based upon 78,249,264 shares outstanding as of February 28, 2009.
|--- | -----------------------------------------------------------------

|(4) | Through his common and preferred stock ownership, currently Mr. Liu has voting power equal to approximately 43.5% of our voting securities.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes 40,000 shares of common stock issuable upon exercise of options.
|--- | -------------------------------------------------------------------------

|(6) | Includes 32,000 shares of common stock issuable upon exercise of options.
|--- | -------------------------------------------------------------------------

|(7) | Includes 24,000 shares of common stock issuable upon exercise of options.
|--- | -------------------------------------------------------------------------

|(8) | Includes 16,000 shares of common stock issuable upon exercise of options.
|--- | -------------------------------------------------------------------------

|(9) | Includes 7,085 shares of common stock issuable for service rendered in 2008.
|--- | ----------------------------------------------------------------------------

|(10) | Includes 7,085 shares of common stock issuable for service rendered in 2008.
|---- | ----------------------------------------------------------------------------

|(11) | Includes 13,239 shares of common stock issuable for service rendered in 2008.
|---- | -----------------------------------------------------------------------------

|(12) | Includes 7,977 shares of common stock issuable for service rendered in 2008.
|---- | ----------------------------------------------------------------------------

|(13) | Includes 7,085 shares of common stock issuable for service rendered in 2008.
|---- | ----------------------------------------------------------------------------

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

There were
no transactions, since January 1, 2008, the beginning of the Companys last year in which the Company was or is to be a participant and in which any related person had or will have a direct or indirect material interest. It is the
Companys policy that the Company will not enter into any related party transactions unless the Audit Committee or another independent body of the Board of Directors first reviews and approves the transactions.

Director Independence

A majority of the
directors must be independent directors under Section 303A.01 of the listing standard of NYSE. Section 303A.02 of the NYSE listing standards provide that no director can qualify as independent unless the Board affirmatively determines that
the director has no material relationship with the listed company. The Board has adopted the following standards in determining whether or not a director has a material relationship with the Company and these standards are:



| |  |  | No director who is an employee or a former employee of the Company can be independent until three years after termination of such employment.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | No director who is, or in the past three years has been, affiliated with or employed by the Companys present or former independent auditor can be independent
until three years after the end of the affiliation, employment or auditing relationship.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | No director can be independent if he or she is, or in the past three years has been, part of an interlocking directorship in which an executive officer of the
Company serves on the compensation committee of another company that employs the director.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | No director can be independent if he or she is receiving, or in the last three years has received, more than $120,000 during any 12-month period in direct
compensation from the Company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Directors with immediate family members in the foregoing categories are subject to the same three-year restriction.
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | No director can be independent if he or she is a current employee, or an immediate family member is a current executive officer, of a company that has made payments
to, or received payments from, AOB for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2% of such other companys consolidated gross revenues.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Based on these independence standards and all of the relevant facts and circumstances, the Board determined that none of the following directors had
any material relationship with the Company and, thus, are independent under Section 303A.02 of the listing standards of NYSE: Ms. Brody, and Messrs. Patti, Wang, Wizel and Zhang. In accordance with New York Stock Exchange rules a majority
of our Board of Directors is independent.

ITEM 14. Principal Accounting Fees and Services

Audit Fees

The aggregate fees for each of the last
two fiscal 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 fillings with Securities and Exchange Commission on
Form 10-Ks and 10-Qs services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those years were approximately:



| |  |       |  |            |  |                         
| |  | ----- |  | ---------- |  | ------------------------
| |  | 2008: |  | $1,581,498 |  | Weinberg & Company, P.A.
| |  |       | 
| |  | 2007: |  | $1,241,000 |  | Weinberg & Company, P.A.

Audit Related Fees

The aggregate fees 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:



| |  |       |  |    |  |                         
| |  | ----- |  | -- |  | ------------------------
| |  | 2008: |  | $0 |  | Weinberg & Company, P.A.
| |  |       | 
| |  | 2007: |  | $0 |  | Weinberg & Company, P.A.

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

Tax Fees

The aggregate fees 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:



| |  |       |  |        |  |                         
| |  | ----- |  | ------ |  | ------------------------
| |  | 2008: |  | $4,500 |  | Weinberg & Company, P.A.
| |  |       | 
| |  | 2007: |  | $4,500 |  | Weinberg & Company, P.A.

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



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##### Table of Contents

All Other Fees

The aggregate fees in each of the last two fiscal years for the products and services provided by the principal accountant, other than the services reported in paragraph (1) through (3) were approximately:



| |  |       |  |           |  |                         
| |  | ----- |  | --------- |  | ------------------------
| |  | 2008: |  | $  85,811 |  | Weinberg & Company, P.A.
| |  |       | 
| |  | 2007: |  | $162,700  |  | Weinberg & Company, P.A.





Audit Committee Approval

Our Audit Committee must pre-approve all audit and permissible non-audit
services performed by the independent registered public accounting firm. 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.



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##### Table of Contents

PART IV

ITEM 15. Exhibits and Financial Statement Schedules



|           |  |                                                                                                                                                                                                                                                                                                                                                                                           
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No |  | Description                                                                                                                                                                                                                                                                                                                                                                               
|2.1        |  | 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).                                         
|           | 
|2.2        |  | Acquisition Agreement, dated September 6, 2007, by and between American Oriental Bioengineering, Inc. and Renson Holdings Limited for the purchase of all of the outstanding capital stock of
Changchun Xinan Pharmaceutical Group Company Limited (incorporated by reference from the Report on Form 10-Q, Commission File No. 001-32569, filed with the Commission on November 5, 2007).
|           | 
|2.3        |  | Acquisition Agreement, dated October 18, 2007, by and between American Oriental Bioengineering, Inc. and Renson Holdings Limited for the purchase of all of the outstanding capital stock of
Guangxi Boke Pharmaceutical Limited (incorporated by reference from the Report on Form 10-Q, Commission File No. 001-32569, filed with the Commission on November 5, 2007).                  
|           | 
|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        |  | Amended and Restated Bylaws of American Oriental Bioengineering, Inc. (incorporated by reference from the Report on Form 10-Q, Commission File No. 001-32569, filed with the Commission on August
11, 2008).                                                                                                                                                                              
|           | 
|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).                                                                                                                                                                                     
|           | 
|4.3        |  | Indenture, dated as of July 15, 2008, by and between Wells Fargo Bank, National Association, as Trustee and American Oriental Bioengineering, Inc. (incorporated by reference from the Current
Report on Form 8-K, Commission File No. 001-32569, filed with the Commission on July 15, 2008).                                                                                            
|           | 
|4.4        |  | Registration Rights Agreement, dated as of July 15, 2008, by and among the investors specified therein and American Oriental Bioengineering, Inc. (incorporated by reference from the Current
Report on Form 8-K, Commission File No. 001-32569, filed with the Commission on July 15, 2008).                                                                                             
|           | 
|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       |  | 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).                             
|           | 
|10.4       |  | Purchase Agreement, dated as of August 18, 2002, by and between American Oriental Bioengineering, Inc. and Tony Liu (incorporated by reference from the Schedule 14C Commission File No.
000-29785, filed with the Commission on October 15, 2002).                                                                                                                                       
|           | 
|10.5       |  | 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).                                                                                                          
|           | 
|10.6(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).                                                                                                                         



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|         |  |                                                                                                                                                                                                                                                                                             
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.6(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).                          
|         | 
|10.6(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).                         
|         | 
|10.6(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).                         
|         | 
|10.6(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).                         
|         | 
|10.6(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).                        
|         | 
|10.6(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).                  
|         | 
|10.6(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).                   
|         | 
|10.6(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).                 
|         | 
|10.7(a)  |  | Independent Director Agreement, dated July 1, 2006, by and between American Oriental Bioengineering, Inc. and Cosimo J. Patti (incorporated by reference to the Quarterly Report on Form 10-Q,
filed with the Commission on August 14, 2006).                                               
|         | 
|10.7(b)  |  | Independent Director Agreement, dated July 1, 2006, by and between American Oriental Bioengineering, Inc. and Xianmin Wang (incorporated by reference to the Quarterly Report on Form 10-Q, filed
with the Commission on August 14, 2006).                                                  
|         | 
|10.7(c)  |  | Independent Director Agreement, dated July 1, 2006, by and between American Oriental Bioengineering, Inc. and Eileen B. Brody (incorporated by reference to the Quarterly Report on Form 10-Q,
filed with the Commission on August 14, 2006).                                               
|         | 
|10.7(d)  |  | Independent Director Agreement, dated August 21, 2006, by and between American Oriental Bioengineering, Inc. and Lawrence S. Wizel, (incorporated by reference to the Annual Report on Form 10-K,
filed with the Commission on March 13, 2007).                                             
|         | 
|10.7(e)  |  | Independent Director Agreement, dated December 15, 2006, by and between American Oriental Bioengineering, Inc. and Baiqing Zhang, (incorporated by reference to the Annual Report on Form 10-K,
filed with the Commission on March 13, 2007).                                               
|         | 
|10.8     |  | Securities Purchase Agreement, dated as of July 9, 2008, by and among the investors specified therein and American Oriental Bioengineering, Inc. (incorporated by reference from the Current
Report on Form 8-K, Commission File No. 001-32569, filed with the Commission on July 15, 2008).
|         | 
|10.9     |  | Form of Prepaid Forward Share Repurchase Contract Confirmation, dated as of July 15, 2009 (incorporated by reference from the Current Report on Form 8-K, Commission File No. 001-32569, filed
with the Commission on July 15, 2008).                                                       
|         | 
|10.10(a) |  | Employment Agreement, dated April 20, 2008, by and between American Oriental Bioengineering, Inc. and Tony Liu, filed herewith.                                                                                                                                                             
|         | 
|10.10(b) |  | Employment Agreement, dated April 20, 2008, by and between American Oriental Bioengineering, Inc. and Yanchun Li, filed herewith.                                                                                                                                                           



57



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|         |  |                                                                                                                                                                                                                   
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.10(c) |  | Employment Agreement, dated April 20, 2008, by and between American Oriental Bioengineering, Inc. and Jun Min, filed herewith.                                                                                    
|         | 
|10.10(d) |  | Employment Agreement, dated April 20, 2008, by and between American Oriental Bioengineering, Inc. and Binsheng Li, filed herewith.                                                                                
|         | 
|10.10(e) |  | Employment Agreement, dated April 20, 2008, by and between American Oriental Bioengineering, Inc. and Wilfred Chow, filed herewith.                                                                               
|         | 
|14       |  | Amended and Restated Code of Ethics of American Oriental Bioengineering, Inc., dated November 9, 2006, (incorporated by reference to the Annual Report on Form 10-K, filed with the Commission on
March 13, 2007).
|         | 
|21       |  | Subsidiaries of the Registrant, (incorporated by reference to the Annual Report on Form 10-K, 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.                                           



58



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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 9, 2009 |  | By:    |  | /s/ Tony Liu                        
|                    |  | By:    |  | Tony 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/ Tony Liu Tony Liu                   |  | Chief Executive Officer and Chairman of the Board of Directors           |  | March 9, 2009
|                                        | 
|                                        |  |                                                                         
|/s/ Yanchun Li Yanchun Li               |  | Chief Financial Officer, Chief Operating Officer, Secretary and Director |  | March 9, 2009
|                                        | 
|                                        |  |                                                                         
|/s/ Jun Min Jun Min                     |  | Vice President and Director                                              |  | March 9, 2009
|                                        | 
|                                        |  |                                                                         
|/s/ Binsheng Li Binsheng Li             |  | Chief Accounting Officer and Director                                    |  | March 9, 2009
|                                        | 
|                                        |  |                                                                         
|/s/ Cosimo J. Patti Cosimo J. Patti     |  | Independent Director                                                     |  | March 9, 2009
|                                        | 
|                                        |  |                                                                         
|/s/ Xianmin Wang Xianmin Wang           |  | Independent Director                                                     |  | March 9, 2009
|                                        | 
|                                        |  |                                                                         
|/s/ Eileen Brody Eileen Brody           |  | Independent Director                                                     |  | March 9, 2009
|                                        | 
|                                        |  |                                                                         
|/s/ Lawrence S. Wizel Lawrence S. Wizel |  | Independent Director                                                     |  | March 9, 2009
|                                        | 
|                                        |  |                                                                         
|/s/ Baiqing Zhang Baiqing Zhang         |  | Independent Director                                                     |  | March 9, 2009
|                                        | 



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AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

CONTENTS



|     |  |      |  |                                                                                                                
|---- |  | ---- |  | ---------------------------------------------------------------------------------------------------------------
|PAGE |  | 2    |  | REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                                        
|     |  |     
|PAGE |  | 3-4  |  | CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2008 AND 2007                                                   
|     |  |     
|PAGE |  | 5    |  | CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
|     |  |     
|PAGE |  | 6    |  | CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
|     |  |     
|PAGE |  | 7-8  |  | CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006                     
|     |  |     
|PAGE |  | 9-26 |  | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006                



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

American Oriental
Bioengineering, Inc.:

We have audited the accompanying consolidated balance sheets of American Oriental Bioengineering, Inc. and Subsidiaries (the
Company) as of December 31, 2008 and 2007, and the related consolidated statements of income and comprehensive income, changes in shareholders equity and cash flows for each of the three years in the period ended December 31, 2008.
We have also audited the Companys internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organization of the
Treadway Commission. As described in Managements Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Nuo Hua Investment Company Ltd., which was acquired
October 18, 2008, and Guangxi HuiKe Pharmaceutical Research and Development Co., ltd., which was acquired October 20, 2008, and whose combined financial statements constitute 11% and 10% of net and total assets, respectively, and 2% of revenues and
(25%) of net income of the consolidated financial statements as of and for the year ended December 31, 2008. Accordingly, our audit did not include the internal control over financial reporting at Nuo Hua Investment Company Ltd. and GuangXi HuiKe
Pharmaceutical Research and Development Co., Ltd.. The Companys management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements
and an opinion on the Companys internal control over financial reporting based on our audits.

We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all material respects. An audit of the consolidated financial statements includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive an principal financial officers, or persons performing similar
functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of the inherent
limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be detected on a timely basis. Also, projections of
any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of American Oriental Bioengineering, Inc. and Subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/  Weinberg & Company, P.A.

Boca Raton, Florida

February 27, 2009



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##### Table of Contents

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS



|                                                  |  |              |             |      |   |            
|------------------------------------------------- |  | ------------ | ----------- | ---- | - | -----------
|                                                  |  | DECEMBER 31,
|                                                  |  | 2008         |             | 2007
|CURRENT ASSETS                                    |  |              |             |      |   |            
|Cash and cash equivalents                         |  | $            | 70,636,510  |      | $ | 166,410,075
|Accounts receivable, net                          |  |              | 36,982,167  |      |   | 16,494,619 
|Inventories, net                                  |  |              | 13,042,123  |      |   | 12,264,536 
|Advances to suppliers and prepaid expenses        |  |              | 3,593,979   |      |   | 4,309,352  
|Notes receivable                                  |  |              | 708,076     |      |   | 2,259,616  
|Refundable deposit                                |  |              | 6,396,996   |      |   | 3,479,262  
|Deferred tax assets                               |  |              | 347,216     |      |   |           
|Other current assets                              |  |              | 744,903     |      |   | 1,654,856  
|                                                  |  |              |             |      |   |            
|Total Current Assets                              |  |              | 132,451,970 |      |   | 206,872,316
|                                                  |  |              |             |      |   |            
|LONG-TERM ASSETS                                  |  |              |             |      |   |            
|Property, plant and equipment, net                |  |              | 98,154,443  |      |   | 48,496,760 
|Land use rights, net                              |  |              | 148,988,870 |      |   | 46,310,240 
|Deposit for long-term assets                      |  |              | 6,347,174   |      |   |           
|Construction in progress                          |  |              | 25,385,835  |      |   | 755,614    
|Other intangible assets, net                      |  |              | 23,690,440  |      |   | 26,972,166 
|Goodwill                                          |  |              | 28,543,226  |      |   | 22,566,768 
|Investments in and advances to equity investments |  |              | 54,963,064  |      |   | 242,551    
|Deferred tax assets                               |  |              | 1,313,832   |      |   | 1,498,481  
|Unamortized financing cost                        |  |              | 4,215,983   |      |   |           
|                                                  |  |              |             |      |   |            
|Total Long-Term Assets                            |  |              | 391,602,867 |      |   | 146,842,580
|                                                  |  |              |             |      |   |            
|TOTAL ASSETS                                      |  | $            | 524,054,837 |      | $ | 353,714,896
|                                                  |  |              |             |      |   |            

See accompanying notes to the consolidated financial statements



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##### Table of Contents

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS EQUITY



|                                                                                                                                                                                |  |              |             |   |      |   |            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----------- | - | ---- | - | -----------
|                                                                                                                                                                                |  | DECEMBER 31,
|                                                                                                                                                                                |  | 2008         |             |   | 2007
|CURRENT LIABILITIES                                                                                                                                                             |  |              |             |   |      |   |            
|                                                                                                                                                                                |  |             
|Accounts payable                                                                                                                                                                |  | $            | 12,287,887  |   |      | $ | 3,436,352  
|Notes payables                                                                                                                                                                  |  |              | 3,262,877   |   |      |   | 72,254     
|Other payables and accrued expenses                                                                                                                                             |  |              | 19,766,652  |   |      |   | 7,786,157  
|Taxes payable                                                                                                                                                                   |  |              | 420,671     |   |      |   | 2,843,719  
|Short-term bank loans                                                                                                                                                           |  |              | 7,140,148   |   |      |   | 6,289,222  
|Current portion of long-term bank loans                                                                                                                                         |  |              | 58,659      |   |      |   | 2,374,565  
|Other liabilities                                                                                                                                                               |  |              | 2,253,440   |   |      |   | 3,548,776  
|Deferred tax liabilities                                                                                                                                                        |  |              | 846,026     |   |      |   | 109,733    
|                                                                                                                                                                                |  |              |             |   |      |   |            
|Total Current Liabilities                                                                                                                                                       |  |              | 46,036,360  |   |      |   | 26,460,778 
|                                                                                                                                                                                |  |              |             |   |      |   |            
|LONG-TERM LIABILITIES                                                                                                                                                           |  |              |             |   |      |   |            
|                                                                                                                                                                                |  |             
|Long-term bank loans, net of current portion                                                                                                                                    |  |              | 804,521     |   |      |   | 1,263,483  
|Long-term notes payable                                                                                                                                                         |  |              | 269,908     |   |      |   | 286,365    
|Deferred tax liabilities                                                                                                                                                        |  |              | 16,083,768  |   |      |   | 12,621,180 
|Convertible notes                                                                                                                                                               |  |              | 115,000,000 |   |      |   |           
|                                                                                                                                                                                |  |              |             |   |      |   |            
|Total Long-Term Liabilities                                                                                                                                                     |  |              | 132,158,197 |   |      |   | 14,171,028 
|                                                                                                                                                                                |  |              |             |   |      |   |            
|TOTAL LIABILITIES                                                                                                                                                               |  |              | 178,194,557 |   |      |   | 40,631,806 
|                                                                                                                                                                                |  |              |             |   |      |   |            
|                                                                                                                                                                                |  |             
|COMMITMENTS                                                                                                                                                                     |  |              |             |   |      |   |            
|                                                                                                                                                                                |  |             
|MINORITY INTERESTS                                                                                                                                                              |  |              | 652,081     |   |      |   |           
|                                                                                                                                                                                |  |             
|SHAREHOLDERS EQUITY                                                                                                                                                            |  |              |             |   |      |   |            
|                                                                                                                                                                                |  |             
|Preferred stock, $0.001 par value; 2,000,000 shares authorized; 1,000,000 shares issued and outstanding at December 31, 2008 and
December 31, 2007, respectively                |  |              | 1,000       |   |      |   | 1,000      
|Common stock, $0.001 par value; 150,000,000 shares authorized; 78,249,264 and 77,991,935 shares issued and outstanding at December 31,
2008 and December 31, 2007, respectively |  |              | 78,249      |   |      |   | 77,992     
|Common stock to be issued                                                                                                                                                       |  |              | 376,335     |   |      |   | 1,611,333  
|Prepaid forward repurchase contract                                                                                                                                             |  |              | (29,998,616 | ) |      |   |           
|Additional paid-in capital                                                                                                                                                      |  |              | 195,741,544 |   |      |   | 193,007,987
|Retained earnings (the restricted portion of retained earnings is $29,532,699 and $15,910,685 at December 31, 2008 and December 31,
2007, respectively)                         |  |              | 149,923,681 |   |      |   | 102,117,792
|Accumulated other comprehensive income                                                                                                                                          |  |              | 29,086,006  |   |      |   | 16,266,986 
|                                                                                                                                                                                |  |              |             |   |      |   |            
|Total Shareholders Equity                                                                                                                                                      |  |              | 345,208,199 |   |      |   | 313,083,090
|                                                                                                                                                                                |  |              |             |   |      |   |            
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                      |  | $            | 524,054,837 |   |      | $ | 353,714,896
|                                                                                                                                                                                |  |              |             |   |      |   |            

See accompanying notes to the consolidated financial statements



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##### Table of Contents

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME



|                                                       |  |                         |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------------ |  | ----------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                       |  | YEAR ENDED DECEMBER 31, |            
|                                                       |  | 2008                    |             |   | 2007 |   |             | 2006 | 
|REVENUES                                               |  | $                       | 264,643,058 |   |      | $ | 160,482,383 |      |  | $ | 110,182,092 |  
|COST OF GOODS SOLD                                     |  |                         | 91,031,274  |   |      |   | 49,364,486  |      |  |   | 38,318,223  |  
|                                                       |  |                         |             |   |      |   |             |      |  |   |             |  
|GROSS PROFIT                                           |  |                         | 173,611,784 |   |      |   | 111,117,897 |      |  |   | 71,863,869  |  
|                                                       |  |                         |             |   |      |   |             |      |  |   |             |  
|Selling and marketing                                  |  |                         | 39,774,330  |   |      |   | 20,669,303  |      |  |   | 8,876,829   |  
|Advertising                                            |  |                         | 34,102,538  |   |      |   | 22,865,903  |      |  |   | 15,174,125  |  
|General and administrative                             |  |                         | 18,765,757  |   |      |   | 13,365,156  |      |  |   | 10,446,740  |  
|Depreciation and amortization                          |  |                         | 4,383,215   |   |      |   | 1,989,425   |      |  |   | 988,488     |  
|Purchased in-process research and development          |  |                         | 12,255,248  |   |      |   |            |      |  |   |            |  
|                                                       |  |                         |             |   |      |   |             |      |  |   |             |  
|Total operating expenses                               |  |                         | 109,281,088 |   |      |   | 58,889,787  |      |  |   | 35,486,182  |  
|                                                       |  |                         |             |   |      |   |             |      |  |   |             |  
|                                                       |  |                         |            
|EQUITY IN EARNINGS (LOSS) FROM UNCONSOLIDATED ENTITIES |  |                         | (1,132,986  | ) |      |   | 23,711      |      |  |   | (3,811      | )
|INTEREST (EXPENSE), NET                                |  |                         | (2,571,015  | ) |      |   | 617,524     |      |  |   | 574,172     |  
|OTHER EXPENSE, NET                                     |  |                         | (65,843     | ) |      |   | (525,065    | )    |  |   | (329,987    | )
|MINORITY INTERESTS                                     |  |                         | (27,575     | ) |      |   |            |      |  |   |            |  
|                                                       |  |                         |             |   |      |   |             |      |  |   |             |  
|INCOME BEFORE INCOME TAXES                             |  |                         | 60,533,277  |   |      |   | 52,344,280  |      |  |   | 36,618,061  |  
|INCOME TAXES                                           |  |                         | 12,727,388  |   |      |   | 9,053,399   |      |  |   | 7,416,915   |  
|                                                       |  |                         |             |   |      |   |             |      |  |   |             |  
|NET INCOME                                             |  |                         | 47,805,889  |   |      |   | 43,290,881  |      |  |   | 29,201,146  |  
|                                                       |  |                         |             |   |      |   |             |      |  |   |             |  
|OTHER COMPREHENSIVE INCOME                             |  |                         |             |   |      |   |             |      |  |   |             |  
|Foreign currency translation gain, net of tax          |  |                         | 12,819,020  |   |      |   | 10,105,577  |      |  |   | 2,506,474   |  
|                                                       |  |                         |             |   |      |   |             |      |  |   |             |  
|OTHER COMPREHENSIVE INCOME, NET OF TAX                 |  |                         | 12,819,020  |   |      |   | 10,105,577  |      |  |   | 2,506,474   |  
|                                                       |  |                         |             |   |      |   |             |      |  |   |             |  
|COMPREHENSIVE INCOME                                   |  | $                       | 60,624,909  |   |      | $ | 53,396,458  |      |  | $ | 31,707,620  |  
|                                                       |  |                         |             |   |      |   |             |      |  |   |             |  
|NET INCOME PER COMMON SHARE                            |  |                         |             |   |      |   |             |      |  |   |             |  
|BASIC                                                  |  | $                       | 0.62        |   |      | $ | 0.62        |      |  | $ | 0.47        |  
|DILUTED                                                |  | $                       | 0.61        |   |      | $ | 0.61        |      |  | $ | 0.46        |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING   |  |                         |             |   |      |   |             |      |  |   |             |  
|BASIC                                                  |  |                         | 76,504,035  |   |      |   | 69,870,775  |      |  |   | 62,679,996  |  
|DILUTED                                                |  |                         | 82,254,185  |   |      |   | 71,364,244  |      |  |   | 62,913,961  |  

See accompanying notes to the consolidated financial statements



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##### Table of Contents

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006



|                                                            |  |                 |  |              |       |                   |            |          |                                  |        |  |                          |            |   |                  |   |                                     |   |  |   |             |   |  |   |             |  |   |            |  |   |             |  
|----------------------------------------------------------- |  | --------------- |  | ------------ | ----- | ----------------- | ---------- | -------- | -------------------------------- | ------ |  | ------------------------ | ---------- | - | ---------------- | - | ----------------------------------- | - |  | - | ----------- | - |  | - | ----------- |  | - | ---------- |  | - | ----------- | -
|                                                            |  | Preferred Stock |  | Common Stock |       | Stock ToBe Issued |            |          | Prepaidforwardrepurchasecontract |        |  | AdditionalPaid-inCapital |            |   | RetainedEarnings |   | AccumulatedOtherComprehensiveIncome |   |  |  
|                                                            |  | Shares          |  | StatedValue  |       | Shares            |            | ParValue |                                  |        |  |                          |            |   | Total            |  
|BALANCE AT                                                  |  |                 |  |              |       |                   |            |          |                                  |        |  |                          |            |   |                  |   |                                     |   |  |   |             |   |  |   |             |  |   |            |  |   |             |  
|JANUARY 1, 2006                                             |  | 1,000,000       |  | $            | 1,000 |                   | 57,109,188 |          | $                                | 57,109 |  | $                        | 141,044    |   |                  | $ |                                    |   |  | $ | 59,491,393  |   |  | $ | 29,625,765  |  | $ | 1,429,279  |  | $ | 90,745,590  |  
|                                                            |  |                 |  |              |       |                   |            |          |                                  |        |  |                          |            |   |                  |   |                                     |   |  |   |             |   |  |   |             |  |   |            |  |   |             |  
|Common stock and warrants issued in private placement, net  |  |                |  |              |      |                   | 5,526,600  |          |                                  | 5,527  |  |                          |           |   |                  |   |                                    |   |  |   | 26,522,153  |   |  |   |            |  |   |           |  |   | 26,527,680  |  
|Common stock to be issued for director services             |  |                |  |              |      |                   |           |          |                                  |       |  |                          | 87,598     |   |                  |   |                                    |   |  |   |            |   |  |   |            |  |   |           |  |   | 87,598      |  
|Common stock to be issued for warrant exercise              |  |                |  |              |      |                   |           |          |                                  |       |  |                          | 370,427    |   |                  |   |                                    |   |  |   |            |   |  |   |            |  |   |           |  |   | 370,427     |  
|Common stock issued for consulting services                 |  |                |  |              |      |                   | 30,000     |          |                                  | 30     |  |                          |           |   |                  |   |                                    |   |  |   | 142,170     |   |  |   |            |  |   |           |  |   | 142,200     |  
|Common stock issued for acquisition                         |  |                |  |              |      |                   | 1,200,000  |          |                                  | 1,200  |  |                          |           |   |                  |   |                                    |   |  |   | 5,638,800   |   |  |   |            |  |   |           |  |   | 5,640,000   |  
|Stock option granted to executives                          |  |                |  |              |      |                   |           |          |                                  |       |  |                          |           |   |                  |   |                                    |   |  |   | 138,046     |   |  |   |            |  |   |           |  |   | 138,046     |  
|Exercise of warrants                                        |  |                |  |              |      |                   | 364,581    |          |                                  | 364    |  |                          |           |   |                  |   |                                    |   |  |   | 1,928,121   |   |  |   |            |  |   |           |  |   | 1,928,485   |  
|Finance expenses related to private placement               |  |                |  |              |      |                   |           |          |                                  |       |  |                          |           |   |                  |   |                                    |   |  |   | (1,552,723  | ) |  |   |            |  |   |           |  |   | (1,552,723  | )
|Foreign currency translation                                |  |                |  |              |      |                   |           |          |                                  |       |  |                          |           |   |                  |   |                                    |   |  |   |            |   |  |   |            |  |   | 2,948,793  |  |   | 2,948,793   |  
|Net income                                                  |  |                |  |              |      |                   |           |          |                                  |       |  |                          |           |   |                  |   |                                    |   |  |   |            |   |  |   | 29,201,146  |  |   |           |  |   | 29,201,146  |  
|                                                            |  |                 |  |              |       |                   |            |          |                                  |        |  |                          |            |   |                  |   |                                     |   |  |   |             |   |  |   |             |  |   |            |  |   |             |  
|BALANCE AT                                                  |  |                 |  |              |       |                   |            |          |                                  |        |  |                          |            |   |                  |   |                                     |   |  |   |             |   |  |   |             |  |   |            |  |   |             |  
|DECEMBER 31, 2006                                           |  | 1,000,000       |  | $            | 1,000 |                   | 64,230,369 |          | $                                | 64,230 |  | $                        | 599,069    |   |                  | $ |                                    |   |  | $ | 92,307,960  |   |  | $ | 58,826,911  |  | $ | 4,378,072  |  | $ | 156,177,242 |  
|                                                            |  |                 |  |              |       |                   |            |          |                                  |        |  |                          |            |   |                  |   |                                     |   |  |   |             |   |  |   |             |  |   |            |  |   |             |  
|Common stock and warrants issued in secondary offering, net |  |                |  |              |      |                   | 9,275,000  |          |                                  | 9,275  |  |                          |            |   |                  |   |                                    |   |  |   | 72,975,083  |   |  |   |            |  |   |           |  |   | 72,984,358  |  
|Common stock issued for director services                   |  |                |  |              |      |                   | 48,379     |          |                                  | 49     |  |                          | (228,642   | ) |                  |   |                                    |   |  |   | 228,593     |   |  |   |            |  |   |           |  |   |            |  
|Common stock issued for warrant exercises                   |  |                |  |              |      |                   |           |          |                                  |       |  |                          | (370,427   | ) |                  |   |                                    |   |  |   |            |   |  |   |            |  |   |           |  |   | (370,427    | )
|Common stock to be issued for director services             |  |                |  |              |      |                   |           |          |                                  |       |  |                          | 285,333    |   |                  |   |                                    |   |  |   |            |   |  |   |            |  |   |           |  |   | 285,333     |  
|Common stock to be issued for warrant exercises             |  |                |  |              |      |                   |           |          |                                  |       |  |                          | 1,326,000  |   |                  |   |                                    |   |  |   |            |   |  |   |            |  |   |           |  |   | 1,326,000   |  
|Common stock issued for consulting services                 |  |                |  |              |      |                   | 20,000     |          |                                  | 20     |  |                          |           |   |                  |   |                                    |   |  |   | 259,980     |   |  |   |            |  |   |           |  |   | 260,000     |  
|Stock options granted to executives                         |  |                |  |              |      |                   |           |          |                                  |        |  |                          |           |   |                  |   |                                    |   |  |   | 310,841     |   |  |   |            |  |   |           |  |   | 310,841     |  
|Exercise of warrants                                        |  |                |  |              |      |                   | 4,318,918  |          |                                  | 4,319  |  |                          |           |   |                  |   |                                    |   |  |   | 26,576,191  |   |  |   |            |  |   |           |  |   | 26,580,510  |  
|Exercise of option                                          |  |                |  |              |      |                   | 99,269     |          |                                  | 99     |  |                          |           |   |                  |   |                                    |   |  |   | 198,439     |   |  |   |            |  |   |           |  |   | 198,538     |  
|Contribution from shareholder                               |  |                |  |              |      |                   |           |          |                                  |       |  |                          |           |   |                  |   |                                    |   |  |   | 150,900     |   |  |   |            |  |   |           |  |   | 150,900     |  
|Foreign currency translation                                |  |                |  |              |      |                   |           |          |                                  |       |  |                          |           |   |                  |   |                                    |   |  |   |            |   |  |   |            |  |   | 11,888,914 |  |   | 11,888,914  |  
|Net income                                                  |  |                |  |              |      |                   |           |          |                                  |       |  |                          |           |   |                  |   |                                    |   |  |   |            |   |  |   | 43,290,881  |  |   |           |  |   | 43,290,881  |  
|                                                            |  |                 |  |              |       |                   |            |          |                                  |        |  |                          |            |   |                  |   |                                     |   |  |   |             |   |  |   |             |  |   |            |  |   |             |  
|BALANCE AT                                                  |  |                 |  |              |       |                   |            |          |                                  |        |  |                          |            |   |                  |   |                                     |   |  |   |             |   |  |   |             |  |   |            |  |   |             |  
|DECEMBER 31, 2007                                           |  | 1,000,000       |  | $            | 1,000 |                   | 77,991,935 |          | $                                | 77,992 |  | $                        | 1,611,333  |   |                  | $ |                                    |   |  | $ | 193,007,987 |   |  | $ | 102,117,792 |  | $ | 16,266,986 |  | $ | 313,083,090 |  
|                                                            |  |                 |  |              |       |                   |            |          |                                  |        |  |                          |            |   |                  |   |                                     |   |  |   |             |   |  |   |             |  |   |            |  |   |             |  
|Common stock issued for director services                   |  |                |  |              |      |                   | 26,581     |          |                                  | 26     |  |                          | (285,333   | ) |                  |   |                                    |   |  |   | 285,307     |   |  |   |            |  |   |           |  |   |            |  
|Common stock to be issued for director services             |  |                |  |              |      |                   |           |          |                                  |       |  |                          | 376,335    |   |                  |   |                                    |   |  |   |            |   |  |   |            |  |   |           |  |   | 376,335     |  
|Common stock issued for consulting services                 |  |                |  |              |      |                   | 26,748     |          |                                  | 27     |  |                          |           |   |                  |   |                                    |   |  |   | 259,973     |   |  |   |            |  |   |           |  |   | 260,000     |  
|Stock options granted to executives                         |  |                |  |              |      |                   |           |          |                                  |        |  |                          |           |   |                  |   |                                    |   |  |   | 862,481     |   |  |   |            |  |   |           |  |   | 862,481     |  
|Prepaid forward repurchase contract                         |  |                 |  |              |       |                   |            |          |                                  |        |  |                          |            |   |                  |   | (29,998,616                         | ) |  |   |             |   |  |   |             |  |   |            |  |   | (29,998,616 | )
|Exercise of warrants                                        |  |                |  |              |      |                   | 204,000    |          |                                  | 204    |  |                          | (1,326,000 | ) |                  |   |                                    |   |  |   | 1,325,796   |   |  |   |            |  |   |           |  |   |            |  
|Foreign currency translation                                |  |                |  |              |      |                   |           |          |                                  |       |  |                          |           |   |                  |   |                                    |   |  |   |            |   |  |   |            |  |   | 12,819,020 |  |   | 12,819,020  |  
|Net income                                                  |  |                |  |              |      |                   |           |          |                                  |       |  |                          |           |   |                  |   |                                    |   |  |   |            |   |  |   | 47,805,889  |  |   |            |  |   | 47,805,889  |  
|                                                            |  |                 |  |              |       |                   |            |          |                                  |        |  |                          |            |   |                  |   |                                     |   |  |   |             |   |  |   |             |  |   |            |  |   |             |  
|BALANCE AT                                                  |  |                 |  |              |       |                   |            |          |                                  |        |  |                          |            |   |                  |   |                                     |   |  |   |             |   |  |   |             |  |   |            |  |   |             |  
|DECEMBER 31, 2008                                           |  | 1,000,000       |  | $            | 1,000 |                   | 78,249,264 |          | $                                | 78,249 |  | $                        | 376,335    |   |                  | $ | (29,998,616                         | ) |  | $ | 195,741,544 |   |  | $ | 149,923,681 |  | $ | 29,086,006 |  | $ | 345,208,199 |  
|                                                            |  |                 |  |              |       |                   |            |          |                                  |        |  |                          |            |   |                  |   |                                     |   |  |   |             |   |  |   |             |  |   |            |  |   |             |  

See accompanying notes to the consolidated financial statements



F-6



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##### Table of Contents

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW



|                                                                                  |  |                         |              |   |      |   |             |      |  |   |             |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ------------ | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                  |  | YEAR ENDED DECEMBER 31, |             
|                                                                                  |  | 2008                    |              |   | 2007 |   |             | 2006 | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                         |              |   |      |   |             |      |  |   |             |  
|                                                                                  |  |                         |             
|Net income                                                                        |  | $                       | 47,805,889   |   |      | $ | 43,290,881  |      |  | $ | 29,201,146  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |              |   |      |   |             |      |  |   |             |  
|Depreciation and amortization                                                     |  |                         | 9,919,809    |   |      |   | 4,627,607   |      |  |   | 2,479,955   |  
|Amortization of deferred insurance cost                                           |  |                         | 425,466      |   |      |   |             |      |  |   |             |  
|Loss on disposal of plant and equipment                                           |  |                         | 29,890       |   |      |   | 427         |      |  |   | 124,015     |  
|Amortization of deferred consulting expenses                                      |  |                         | 200,500      |   |      |   | 394,100     |      |  |   | 728,220     |  
|Purchased in-process research and development                                     |  |                         | 12,255,248   |   |      |   |            |      |  |   |            |  
|Provision (reversal) for doubtful accounts and slow moving inventories            |  |                         | (200,683     | ) |      |   | (194,363    | )    |  |   | 548,753     |  
|Deferred taxes                                                                    |  |                         | 4,246,499    |   |      |   | 930,932     |      |  |   | 49,307      |  
|Common stock to be issued for services                                            |  |                         | 68,000       |   |      |   | 285,333     |      |  |   | 87,598      |  
|Stock based compensation expense                                                  |  |                         | 862,481      |   |      |   | 310,841     |      |  |   | 138,046     |  
|Equity (income) loss of unconsolidated entity                                     |  |                         | 1,580,344    |   |      |   | (23,711     | )    |  |   | 3,811       |  
|Independent director stock compensation                                           |  |                         | 376,335      |   |      |   |             |      |  |   |             |  
|Minority interests                                                                |  |                         | 27,575       |   |      |   |             |      |  |   |             |  
|Acquisition from Nuohua investment income                                         |  |                         | (448,697     | ) |      |   |            |      |  |   |            |  
|                                                                                  |  |                         |             
|Changes in operating assets and liabilities, net of effects of acquisitions:      |  |                         |              |   |      |   |             |      |  |   |             |  
|(Increase) Decrease In:                                                           |  |                         |              |   |      |   |             |      |  |   |             |  
|Accounts receivable                                                               |  |                         | (16,093,721  | ) |      |   | (4,142,308  | )    |  |   | (2,814,800  | )
|Notes receivable                                                                  |  |                         | 1,551,540    |   |      |   | 978,545     |      |  |   | (2,640,593  | )
|Inventories                                                                       |  |                         | 745,267      |   |      |   | 433,341     |      |  |   | (3,814,766  | )
|Advances to suppliers and prepaid expenses                                        |  |                         | 939,249      |   |      |   | (2,205,730  | )    |  |   | 1,824,318   |  
|Other current assets                                                              |  |                         | 1,185,707    |   |      |   | (2,755,757  | )    |  |   | 121,761     |  
|Increase (Decrease) In:                                                           |  |                         |              |   |      |   |             |      |  |   |             |  
|Accounts payable                                                                  |  |                         | 4,854,620    |   |      |   | 628,638     |      |  |   | (1,310,363  | )
|Other payables and accrued expenses                                               |  |                         | 11,927,197   |   |      |   | 2,856,936   |      |  |   | 1,471,912   |  
|Taxes payable                                                                     |  |                         | (2,427,886   | ) |      |   | 428,879     |      |  |   | 725,671     |  
|Customer deposits                                                                 |  |                         |             |   |      |   | (29,738     | )    |  |   | 550,461     |  
|Other liabilities                                                                 |  |                         | (2,071,912   | ) |      |   | (715,474    | )    |  |   | 1,619,012   |  
|                                                                                  |  |                         |              |   |      |   |             |      |  |   |             |  
|Net cash provided by operating activities                                         |  |                         | 77,758,717   |   |      |   | 45,099,379  |      |  |   | 29,093,464  |  
|                                                                                  |  |                         |              |   |      |   |             |      |  |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                         |              |   |      |   |             |      |  |   |             |  
|                                                                                  |  |                         |             
|Purchases of construction in progress                                             |  |                         | (24,574,369  | ) |      |   | (2,478,601  | )    |  |   | (2,010,869  | )
|Purchases of property, plant and equipment                                        |  |                         | (48,561,170  | ) |      |   | (1,507,017  | )    |  |   | (2,326,932  | )
|Purchase of land use rights and other intangible assets                           |  |                         | (99,546,611  | ) |      |   |             |      |  |   |             |  
|Purchases of subsidiary, net of cash acquired                                     |  |                         | (53,055,492  | ) |      |   | (65,872,747 | )    |  |   | (22,060,687 | )
|Refundable deposit                                                                |  |                         | (2,917,734   | ) |      |   |            |      |  |   |            |  
|Deposit for long-term assets                                                      |  |                         | (6,347,174   | ) |      |   |            |      |  |   |            |  
|Investments in and advances to equity investments                                 |  |                         | (22,379,659  | ) |      |   |            |      |  |   |            |  
|Proceeds from sales of marketable securities                                      |  |                         |             |   |      |   |            |      |  |   | 2,768       |  
|Proceeds from disposal of plant and equipment                                     |  |                         | 8,116        |   |      |   | 12,663      |      |  |   | 9,156       |  
|                                                                                  |  |                         |              |   |      |   |             |      |  |   |             |  
|Net cash used in investing activities                                             |  |                         | (257,374,093 | ) |      |   | (69,845,702 | )    |  |   | (26,386,564 | )
|                                                                                  |  |                         |              |   |      |   |             |      |  |   |             |  



F-7



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##### Table of Contents

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW



|                                                     |  |                         |             |   |      |   |             |      |  |   |            |  
|---------------------------------------------------- |  | ----------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ---------- | -
|                                                     |  | YEAR ENDED DECEMBER 31, |            
|                                                     |  | 2008                    |             |   | 2007 |   |             | 2006 | 
|CASH FLOWS FROM FINANCING ACTIVITIES                 |  |                         |             |   |      |   |             |      |  |   |            |  
|Proceeds from short-term bank loans                  |  |                         | 9,480,315   |   |      |   | 6,740,860   |      |  |   | 4,732,971  |  
|Repayment of short-term bank loans                   |  |                         | (8,834,575  | ) |      |   | (10,750,915 | )    |  |   | (4,489,926 | )
|Proceeds from long-term bank loans                   |  |                         |            |   |      |   |            |      |  |   | 973,960    |  
|Repayment of long-term bank loans                    |  |                         |            |   |      |   |            |      |  |   | (653,836   | )
|Repayment of short-term notes payable                |  |                         | (57,510     | ) |      |   |            |      |  |   | (1,664,587 | )
|Repayments of capital lease and notes payable        |  |                         |            |   |      |   | (26,118     | )    |  |   | (13,935    | )
|Cash proceeds from sales of common stock, net        |  |                         |            |   |      |   | 72,984,358  |      |  |   | 24,974,955 |  
|Proceeds from exercise of warrants                   |  |                         |            |   |      |   | 27,536,083  |      |  |   | 2,298,912  |  
|Proceeds from exercise of option                     |  |                         |            |   |      |   | 198,538     |      |  |   |           |  
|Contribution from shareholder                        |  |                         |            |   |      |   | 150,900     |      |  |   |           |  
|Net proceeds from convertible notes                  |  |                         | 110,358,550 |   |      |   |            |      |  |   |           |  
|Prepaid forward repurchase contract                  |  |                         | (29,998,616 | ) |      |   |            |      |  |   |           |  
|                                                     |  |                         |             |   |      |   |             |      |  |   |            |  
|Net cash provided by financing activities            |  |                         | 80,948,164  |   |      |   | 96,833,706  |      |  |   | 26,158,514 |  
|                                                     |  |                         |             |   |      |   |             |      |  |   |            |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |  |                         | (98,667,212 | ) |      |   | 72,087,383  |      |  |   | 28,865,414 |  
|Effect of exchange rate changes on cash              |  |                         | 2,893,647   |   |      |   | 6,538,273   |      |  |   | 1,386,956  |  
|Cash and cash equivalents, beginning of year         |  |                         | 166,410,075 |   |      |   | 87,784,419  |      |  |   | 57,532,049 |  
|                                                     |  |                         |             |   |      |   |             |      |  |   |            |  
|CASH AND CASH EQUIVALENTS, END OF YEAR               |  | $                       | 70,636,510  |   |      | $ | 166,410,075 |      |  | $ | 87,784,419 |  
|                                                     |  |                         |             |   |      |   |             |      |  |   |            |  
|SUPPLEMENTARY CASH FLOW INFORMATION                  |  |                         |             |   |      |   |             |      |  |   |            |  
|                                                     |  |                         |            
|Interest paid                                        |  | $                       | 778,013     |   |      | $ | 855,715     |      |  | $ | 571,892    |  
|Income taxes paid                                    |  | $                       | 14,909,132  |   |      | $ | 8,381,205   |      |  | $ | 6,573,840  |  

Also see Note 20.

See accompanying notes to the consolidated financial statements



F-8



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##### Table of Contents

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007

NOTE 1 - PRINCIPAL ACTIVITIES AND ORGANIZATION

American Oriental Bioengineering Inc. (AOB) is a fully integrated pharmaceutical company dedicated to improving health through the development, manufacture,
commercialization and distribution of a broad range of pharmaceutical and healthcare products in China. AOB and its subsidiaries are collectively referred to herein as the Company, we, us, our and
ourselves, unless the context indicates otherwise. The following list contains the particulars of its operating subsidiaries and major affiliate companies:



|                                                                    |  |                                                                                                                |  |           |  |                                       
|------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | --------- |  | --------------------------------------
|Name of Subsidiary                                                  |  | Principal activities                                                                                           |  | Acquired  |  | Percentage ofownershipDecember 31,2008
|Harbin Three Happiness Bioengineering Co., Ltd. (Three Happiness) |  | Manufacture and commercialize a board range of branded pharmaceutical and nutraceutical products               |  | Jun 2002  |  | 100%                                  
|                                                                    |  |                                                                                                                | 
|Heilongjiang Songhuajiang Pharmaceutical Co., Ltd. (HSPL)         |  | Manufacture and commercialize an anti-viral injection powder, a prescription pharmaceutical product            |  | Sept 2004 |  | 100%                                  
|                                                                    |  |                                                                                                                | 
|Guangxi Lingfeng Pharmaceutical Co., Ltd. (GLP)                   |  | Manufacture and commercialize a series of pharmaceutical products that focus on womens health                 |  | Apr 2006  |  | 100%                                  
|                                                                    |  |                                                                                                                | 
|Heilongjiang Qitai Pharmaceutical Co.,Ltd. (HQPL)                 |  | Wholesale of pharmaceutical and nutraceutical products                                                         |  | Jul 2006  |  | 100%                                  
|                                                                    |  |                                                                                                                | 
|Changchun Xinan Pharmaceutical Co.Ltd., (CCXA)                    |  | Manufacture and distribute a broad range of generic pharmaceutical products                                    |  | Sept 2007 |  | 100%                                  
|                                                                    |  |                                                                                                                | 
|Guangxi Boke Pharmaceutical Co., Ltd. (Boke)                      |  | Manufacture and commercialize pharmaceutical products that alleviate nasal congestion and provide sinus relief |  | Oct 2007  |  | 100%                                  
|                                                                    |  |                                                                                                                | 
|China Aoxing Pharmaceutical Company, Inc. (CAXG)                  |  | Manufacture and commercialize pain management pharmaceutical products                                          |  | Mar 2008  |  | 38%                                   
|                                                                    |  |                                                                                                                | 
|Nuo Hua Investment Co., Ltd. (Nuo Hua)                            |  | Wholesale and retail of pharmaceutical and nutraceutical products                                              |  | Oct 2008  |  | 100%                                  
|                                                                    |  |                                                                                                                | 
|GuangXi HuiKe Research and Development Co., Ltd. (GHK)            |  | Pharmaceutical research and products development                                                               |  | Oct 2008  |  | 100%                                  

Also see Note 11 for acquisitions.

NOTE 2 - BASIS OF PRESENTATION

Basis of Consolidation

The consolidated financial statements include the accounts of American Oriental Bioengineering, Inc. and its wholly owned subsidiaries. All of the Companys
subsidiaries are included in the consolidated financial statements. All significant inter-company accounts and transactions have been eliminated in consolidation.



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AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States 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 revenue and expenses during the reporting period. Management makes these estimates using the best information available
at the time the estimates are made; however actual results when ultimately realized could differ from those estimates.

NOTE 3 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

Revenue Recognition

Revenues
represent the invoiced value of goods sold recognized upon the shipment of goods to customers. Revenues are 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
| | - |  | -------------------------------------------------------------



| |  |  | Collectability is reasonably assured.
| | - |  | -------------------------------------

Selling
and Marketing Expenses

Selling and marketing expenses include the costs of selling merchandise, including preparing the merchandise for sale, such as
picking, packing, warehousing and order charges. All shipping and handling are expensed as incurred and outbound freight is not billed to customers. Shipping and handling expenses included in selling expenses were $3,501,453, $2,796,100 and
$1,921,318 for the years ended December 31, 2008, 2007 and 2006, respectively.

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. Advertising costs were $34,102,538, $22,865,903 and $15,174,125 for the years ended December 31, 2008, 2007 and 2006, respectively.

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
goods sold. Research and development expense for the years ended December 31, 2008, 2007 and 2006 is $ 1,528,992, $870,219 and $742,705, respectively. The increased investment in research and development demonstrates the Companys focus on
knowledge-based products.

Purchased In-Process Research and Development

In a business combination, assets acquired to be used in R&D activities are separately identifiable assets and each one is allocated a portion of the cost of the acquired company based on its fair value. The value
assigned to acquisition related in-process technology was determined by identifying those acquired specific in-process research and development projects that would be continued and for which (a) technological feasibility had not been
established at the acquisition date, (b) there was no alternative future use, and (c) the fair value was not determinable with reasonable reliability. In-process research and development is that did not meet the criteria above were charged
to expense as of the date of the combination. The Company recorded a charge for in-process research and development of $12.2 million related to the acquisition of GHK.

Retirement Benefits

Retirement benefits in the form of contributions under defined contribution retirement plans to
the relevant authorities are charged to expense as incurred. The retirement benefits expense for 2008, 2007 and 2006 is $457,432, $237,363 and $43,506, respectively and is included in general and administrative expenses.



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AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



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.



|                                       |  |        |  |        |  |       
|-------------------------------------- |  | ------ |  | ------ |  | ------
|                                       |  | 2008   |  | 2007   |  | 2006  
|Year end RMB : US$ exchange rate       |  | 6.8542 |  | 7.3141 |  | 7.8175
|Average yearly RMB : US$ exchange rate |  | 7.0842 |  | 7.5658 |  | 7.9439

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 USD at the rates used in translation.

Comprehensive Income

Comprehensive income is defined to include changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, 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.

Stock-Based
Compensation

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R in the first quarter of 2006, at which
time the Company began recognizing an expense for unvested share-based compensation that has been issued or will be issued after that date. The Company adopted SFAS No. 123R on a prospective basis.

The Company estimates fair value of restricted stock based on the number of shares granted and the quoted price of the Companys common stock on the date of grant.
The fair value of stock options is estimated using the Black-Scholes model. The Companys expected volatility assumption is based on the historical volatility of Companys stock. The expected life assumption is primarily based on
historical exercise patterns and post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

Stock compensation expense recognized is based on awards expected to vest, and there were no estimated forfeitures as the current options outstanding were only issued to
founders and senior executives of the Company, which have very low turnover. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those
estimates.

The fair value of the stock based compensation expense for year ended December 31, 2008, 2007 and 2006 was $862,481, $310,841 and
$138,046, respectively.

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 expire
before either the Company is able to realize their benefits, or that future realization is uncertain. The Company had adopted FIN 48 January 1, 2007. See Note 16

Segmental Reporting

Prior to the acquisition of Nuo Hua and the consolidation of its business in October 2008, the
Company operated in one significant business segment: manufacturing and commercialization of pharmaceutical and nutraceutical products. Since October 2008, the Company has two operating segments based on its major lines of businesses: manufacturing
and distribution. Each operating segment derives its revenues from the sale of products or services, respectively and each is the



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AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



responsibility of a group of senior management of the Company who has knowledge of product and service specific operational risks and opportunities. The
Companys chief operating decision maker reviews and evaluates two sets of financial information deciding how to allocate resources and in assessing performance.

For the years ended December 31, 2008, 2007 and 2006 the Companys manufacturing and distribution revenue, are as follows:



|                        |  |                         |             |      |   |             |  |   |            
|----------------------- |  | ----------------------- | ----------- | ---- | - | ----------- |  | - | -----------
|                        |  | Year Ended December 31,
|                        |  | 2008                    |             | 2007 |   | 2006       
|Manufacturing revenue   |  | $                       | 259,171,087 |      | $ | 160,482,383 |  | $ | 110,182,092
|Pharmaceutical products |  |                         | 224,904,348 |      |   | 127,823,297 |  |   | 79,367,161 
|Nutraceutical products  |  |                         | 34,266,739  |      |   | 32,659,086  |  |   | 30,814,931 
|Distribution revenue    |  |                         | 5,471,971   |      |   |            |  |   |           
|                        |  |                         |             |      |   |             |  |   |            
|Total sales             |  | $                       | 264,643,058 |      | $ | 160,482,383 |  | $ | 110,182,092
|                        |  |                         |             |      |   |             |  |   |            

The Company has recorded $5,471,971 distribution revenue from Nuo Hua since its acquisition on October 18,
2008. The Company had no distribution revenue for the years ended December 31, 2007 and 2006.

For the years ended December 31, 2008, 2007 and
2006 the Companys segments are as follows:



|                        |  |                         |            |      |   |            |  |   |           
|----------------------- |  | ----------------------- | ---------- | ---- | - | ---------- |  | - | ----------
|                        |  | Year Ended December 31,
|                        |  | 2008                    |            | 2007 |   | 2006      
|Manufacturing           |  | $                       | 64,254,931 |      | $ | 52,228,110 |  | $ | 36,377,687
|Pharmaceutical products |  |                         | 50,712,670 |      |   | 38,173,115 |  |   | 24,190,975
|Nutraceutical products  |  |                         | 13,542,261 |      |   | 14,054,995 |  |   | 12,186,712
|Distribution            |  |                         | 75,765     |      |   |           |  |   |          
|                        |  |                         |            |      |   |            |  |   |           
|Total operating income  |  | $                       | 64,330,696 |      | $ | 52,228,110 |  | $ | 36,377,687
|                        |  |                         |            |      |   |            |  |   |           

The Companys manufacturing operating income from manufacturing segment included the purchased in-process
research and development amounting to $12,255,248.

At December 31, 2008 and 2007 total assets for the manufacturing and distribution segments are as
follows:



|              |  |              |             |      |   |            
|------------- |  | ------------ | ----------- | ---- | - | -----------
|              |  | December 31,
|              |  | 2008         |             | 2007
|Manufacturing |  | $            | 454,418,832 |      | $ | 307,601,252
|Distribution  |  |              | 52,466,119  |      |   |           
|Corporate     |  |              | 17,169,886  |      |   | 46,113,644 
|              |  |              |             |      |   |            
|Total assets  |  | $            | 524,054,837 |      | $ | 353,714,896
|              |  |              |             |      |   |            

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The majority of the Companys cash as of December 31, 2008 is in our
current working capital account, among which, $39,589,261 was the US Dollar equivalent in Renminbi (RMB) held in China and $31,047,249 was outside China in US Dollars and HK Dollars. Included in the cash balance as of December 31,
2008 was $2,575,741 restricted cash for the issuance of bank acceptance notes.

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 for doubtful accounts was $226,330 and $302,270 as of December 31, 2008 and 2007, respectively.



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AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



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.

Fair Value of Financial Instruments

The
Companys financial instruments include cash and cash equivalents, accounts receivable, advances to suppliers, notes receivable, other current assets, taxes payable, accounts payable, accrued expenses, debt, customer deposits and other
payables. Management has estimated that the carrying amount approximates their fair value due to their short-term nature or long-term debt interest rates approximate the current market rates.

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.

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.

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:



|                        |  |         
|----------------------- |  | --------
|Buildings               |  | 40 years
|Machinery and equipment |  | 10 years
|Motor vehicles          |  | 5 years 
|Office equipment        |  | 5 years 
|Other equipment         |  | 5 years 
|Leasehold improvements  |  | 10 years

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.

Other Intangible Assets

Other intangible assets include product
licenses, trademarks, patents and proprietary technology. The cost of the product licenses are amortized over their licensed period of 2 to 12 years; the cost of trademarks are amortized over their registered period of 2 to 10 years; the cost of
patents are amortized over their protection period of 7 to 20 years and the cost of proprietary technology is amortized over its protection period of 10 years.

Goodwill

Goodwill and other intangible assets are accounted for in accordance with the provisions of SFAS No. 142, Goodwill and
Other Intangible Assets. Under SFAS 142, goodwill, including any goodwill included in the carrying value of investments accounted for using the equity method of accounting, and certain other intangible assets deemed to have indefinite
useful lives are not amortized. Rather, goodwill and such indefinite-lived intangible assets are assessed for impairment at least annually based on comparisons of their respective fair values to their carrying values. Finite-lived intangible assets
are amortized over their respective useful lives and, along with other long-lived assets, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts may not be recoverable in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.



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AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



In evaluating long-lived assets for recoverability, including finite-lived intangibles and property and equipment,
the Company uses its best estimate of future cash flows expected to result from the use of the asset and eventual disposition in accordance with SFAS No.144. To the extent that estimated future, undiscounted cash inflows attributable to the
asset, less estimated future, undiscounted cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount equal to the difference between the carrying value of such asset and its fair value. Assets to be disposed of
and for which there is a committed plan of disposal, whether through sale or abandonment, are reported at the lower of carrying value or fair value less costs to sell.

There were no impairment losses recognized for the periods presented.

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.

New Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations. SFAS No. 141 (R) requires an acquirer to measure the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 141 (R) is effective
for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. SFAS 141 (R) will significantly affect the accounting for future business combinations and we will determine the accounting
as new combinations occur.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements.
This Statement establishes accounting and reporting standards that require the ownership interests in subsidiaries non-parent owners be clearly presented in the equity section of the balance sheet; requires the amount of consolidated net
income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; requires that changes in a parents ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted for consistently; requires that when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value and the
gain or loss on the deconsolidation of the subsidiary be measured using the fair value of any noncontrolling equity; requires that entities provide disclosures that clearly identify the interests of the parent and the interests of the noncontrolling
owners. This Statement is effective as of the beginning of an entitys first fiscal year that begins after December 15, 2008. We are aware that our accounting for minority interest will change and we are considering those effects now but
believe the effects will only be a reclassification of minority interest from mezzanine equity to our shareholders equity section in the balance sheet. The Company has not determined the impact, if any, SFAS No. 160 will have on its
financial statements.

In March 2008, the FASB issued FAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an
amendment of FASB Statement No. 133. FAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide disclosures about (a) how and why derivative instruments are
used, (b) how derivative instruments and related hedged items are accounted for under FAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and (c) how derivative
instruments and related hedged items affect the entitys financial position, financial performance, and cash flows. FAS No. 161 is effective January 1, 2009. We are currently evaluating the impact of adopting this statement.



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AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



NOTE 4 - EARNINGS PER SHARE

Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding, excluding common shares to be delivered under a prepaid forward
repurchase contract (3,712,700 shares), 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.

The following is a reconciliation of the
numerator and denominator used in the calculation of basic and diluted earnings per share available to common shareholders.



|                                                         |  |                         |            |      |   |            |  |   |           
|-------------------------------------------------------- |  | ----------------------- | ---------- | ---- | - | ---------- |  | - | ----------
|                                                         |  | Year Ended December 31,
|                                                         |  | 2008                    |            | 2007 |   | 2006      
|Numerator:                                               |  |                         |            |      |   |            |  |   |           
|Net income                                               |  | $                       | 47,805,889 |      | $ | 43,290,881 |  | $ | 29,201,146
|Interest expense on convertible securities, net of taxes |  |                         | 2,635,417  |      |   |           |  |   |          
|                                                         |  |                         |            |      |   |            |  |   |           
|                                                         |  |                         |           
|Net income, as adjusted                                  |  | $                       | 50,441,306 |      | $ | 43,290,881 |  | $ | 29,201,146
|                                                         |  |                         |            |      |   |            |  |   |           
|Denominator:                                             |  |                         |            |      |   |            |  |   |           
|Weighted average shares outstanding - Basic              |  |                         | 76,504,035 |      |   | 69,870,775 |  |   | 62,679,996
|Effect of dilutive instruments:                          |  |                         |            |      |   |            |  |   |           
|Stock options                                            |  |                         |           |      |   | 54,295     |  |   | 56,111    
|Convertible notes                                        |  |                         | 5,749,763  |      |   |           |  |   |          
|Warrants                                                 |  |                         | 387        |      |   | 1,439,174  |  |   | 177,854   
|                                                         |  |                         |            |      |   |            |  |   |           
|Weighted average shares outstanding - Diluted            |  |                         | 82,254,185 |      |   | 71,364,244 |  |   | 62,913,961
|                                                         |  |                         |            |      |   |            |  |   |           

The calculation of diluted earnings per share for the year December 31, 2008 excludes the potential exercise
of options to purchase approximately 193,900 common shares, because their effect would be anti-dilutive.

As more fully discussed in Notes 15, the
Company had certain convertible notes outstanding during the years presented. The aggregate number of shares of common stock that could be issued in the future to settle these notes is deemed outstanding for the purposes of the calculation of
diluted earnings per share. This approach, referred to as the if-converted method, requires that such shares be deemed outstanding regardless of whether the notes are then contractually convertible into the Companys common stock. For this
if-converted calculation, the interest expense (net of tax) attributable to these notes is added back to Net Income, reflecting the assumption that the notes have been converted.

NOTE 5 - INVENTORIES

Inventories are summarized as follows:



|                                            |  |              |            |   |      |   |            |  
|------------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                            |  | December 31, |           
|                                            |  | 2008         |            |   | 2007 |  
|Raw materials                               |  | $            | 5,569,981  |   |      | $ | 7,509,497  |  
|Work in progress                            |  |              | 2,350,291  |   |      |   | 2,685,053  |  
|Finished goods                              |  |              | 5,289,280  |   |      |   | 2,307,413  |  
|                                            |  |              |            |   |      |   |            |  
|                                            |  |              | 13,209,552 |   |      |   | 12,501,963 |  
|Less: provision for slow moving inventories |  |              | (167,429   | ) |      |   | (237,427   | )
|                                            |  |              |            |   |      |   |            |  
|Inventories, net                            |  | $            | 13,042,123 |   |      | $ | 12,264,536 |  
|                                            |  |              |            |   |      |   |            |  

NOTE 6 - NOTES RECEIVABLE

Notes receivable are bank acceptance notes collected from customers. All the notes do not bear interest and are to be received within one year.



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AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



NOTE 7 - LAND USE RIGHTS

Land use rights consist of the following:



|                               |  |              |             |   |      |   |            |  
|------------------------------ |  | ------------ | ----------- | - | ---- | - | ---------- | -
|                               |  | December 31, |            
|                               |  | 2008         |             |   | 2007 |  
|Cost of land use rights        |  | $            | 152,297,695 |   |      | $ | 48,177,647 |  
|Less: Accumulated amortization |  |              | (3,308,825  | ) |      |   | (1,867,407 | )
|                               |  |              |             |   |      |   |            |  
|Land use rights, net           |  | $            | 148,988,870 |   |      | $ | 46,310,240 |  
|                               |  |              |             |   |      |   |            |  

During 2008, the Company acquired land use rights located close to its operating subsidiaries for the expansion of
manufacturing facilities and is summarized as follows:



|                |  |                    |  |                       |  |                         |           
|--------------- |  | ------------------ |  | --------------------- |  | ----------------------- | ----------
|Subsidiary      |  | Size of Land       |  | Land Use RightExpires |  | Cost of land use rights
|Three Happiness |  | 1,317,497 sq. feet |  | 2056                  |  | $                       | 28,527,502
|CCXA            |  | 905,243 sq. feet   |  | 2058                  |  |                         | 14,965,904
|                |  |                    |  |                       |  |                         |           
|Total           |  | 2,222,740 sq. feet |  |                       |  | $                       | 43,493,406
|                |  |                    |  |                       |  |                         |           

We also invested and purchased land use rights in Beijing Economic-Technological Development Area during 2008 for
$57,394,040. The size of the land is 551,715 sq. feet with the land use right expiring in 2054. We intend to utilize the facilities as our multi-functional headquarters for purposes including administration, research and development, convention and
training.

As of December 31, 2008, the net book value of land use rights pledged as collateral was $21,170,021. See Note 13.

Amortization expense for the years ended December 31, 2008, 2007 and 2006 was $1,357,929, $835,562 and $585,243, respectively.

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



|           |  |   |            
|---------- |  | - | -----------
|2009       |  | $ | 2,947,091  
|2010       |  | $ | 2,947,091  
|2011       |  | $ | 2,947,091  
|2012       |  | $ | 2,947,091  
|2013       |  | $ | 2,947,091  
|Thereafter |  | $ | 134,253,415
|           |  |   |            
|Total      |  | $ | 148,988,870
|           |  |   |            



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AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



NOTE 8 - CONSTRUCTION IN PROGRESS

Construction in progress as of December 31, 2008 and 2007 was $25,385,835 and $755,614, respectively. During 2008, the Company acquired land use rights located close to its operating subsidiaries and started
construction projects for the expansion of manufacturing facilities.

NOTE 9 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:



|                                   |  |              |             |   |      |   |             |  
|---------------------------------- |  | ------------ | ----------- | - | ---- | - | ----------- | -
|                                   |  | December 31, |            
|                                   |  | 2008         |             |   | 2007 |  
|At cost:                           |  |              |             |   |      |   |             |  
|Buildings                          |  | $            | 91,261,579  |   |      | $ | 41,017,380  |  
|Machinery and equipment            |  |              | 20,665,315  |   |      |   | 17,949,890  |  
|Motor vehicles                     |  |              | 1,568,059   |   |      |   | 1,320,091   |  
|Office equipment                   |  |              | 1,543,300   |   |      |   | 1,137,140   |  
|Other equipment                    |  |              | 482,097     |   |      |   | 446,326     |  
|Leasehold improvements             |  |              | 29,150      |   |      |   | 108,348     |  
|                                   |  |              |             |   |      |   |             |  
|                                   |  |              | 115,549,500 |   |      |   | 61,979,175  |  
|                                   |  |              |             |   |      |   |             |  
|Less : Accumulated depreciation    |  |              |             |   |      |   |             |  
|Buildings                          |  |              | (4,732,906  | ) |      |   | (3,305,219  | )
|Machinery and equipment            |  |              | (10,782,285 | ) |      |   | (8,774,745  | )
|Motor vehicles                     |  |              | (998,535    | ) |      |   | (694,256    | )
|Office equipment                   |  |              | (771,630    | ) |      |   | (510,926    | )
|Other equipment                    |  |              | (91,078     | ) |      |   | (118,528    | )
|Leasehold improvements             |  |              | (18,623     | ) |      |   | (78,741     | )
|                                   |  |              |             |   |      |   |             |  
|                                   |  |              | (17,395,057 | ) |      |   | (13,482,415 | )
|                                   |  |              |             |   |      |   |             |  
|Property, plant and equipment, net |  | $            | 98,154,443  |   |      | $ | 48,496,760  |  
|                                   |  |              |             |   |      |   |             |  

In 2008, we invested and purchased buildings in Beijing Economic-Technological Development Area for $47,545,960.

As of December 31, 2008, the net book value of property, plant and equipment pledged as collateral for bank loans was $19,650,294. See Note 13.

Depreciation expense for the years ended December 31, 2008, 2007 and 2006 was $3,396,747, $2,470,923 and $1,796,691, respectively.



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AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



NOTE 10 - OTHER INTANGIBLE ASSETS

Other intangible assets include product licenses, trademarks, patents, proprietary technology and software. The cost of the product licenses are amortized over their estimated useful lives of 10 to 12 years; the cost
of trademarks are amortized over their registered useful lives of 4 to 10 years; the cost of patents are amortized over their protection period of 7 to 8 years; the cost of proprietary technology are amortized over their protection period of 10
years and the cost of software are amortized over their estimated useful life of 10 years. Other intangible assets are summarized as follows:



|                               |  |              |            |   |      |   |            |  
|------------------------------ |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                               |  | December 31, |           
|                               |  | 2008         |            |   | 2007 |  
|At cost:                       |  |              |            |   |      |   |            |  
|Product licenses               |  | $            | 15,485,939 |   |      | $ | 15,742,705 |  
|Trademarks                     |  |              | 10,558,660 |   |      |   | 9,894,747  |  
|Patents                        |  |              | 4,796,179  |   |      |   | 3,264,102  |  
|Proprietary technology         |  |              | 281,664    |   |      |   | 263,954    |  
|Software                       |  |              | 73,640     |   |      |   |           |  
|                               |  |              |            |   |      |   |            |  
|                               |  |              | 31,196,082 |   |      |   | 29,165,508 |  
|Less: Accumulated amortization |  |              | (7,505,642 | ) |      |   | (2,193,342 | )
|                               |  |              |            |   |      |   |            |  
|Other intangible assets, net   |  | $            | 23,690,440 |   |      | $ | 26,972,166 |  
|                               |  |              |            |   |      |   |            |  

Amortization expense for the years ended December 31, 2008, 2007 and 2006 was $5,165,133, $1,351,288 and
$94,413, respectively.

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



|           |  |   |           
|---------- |  | - | ----------
|2009       |  | $ | 5,168,020 
|2010       |  | $ | 5,168,020 
|2011       |  | $ | 5,058,598 
|2012       |  | $ | 3,516,430 
|2013       |  | $ | 1,117,567 
|Thereafter |  | $ | 3,661,805 
|           |  |   |           
|Total      |  | $ | 23,690,440
|           |  |   |           

NOTE 11 - ACQUISITIONS

2008 Acquisitions

1. Nuo Hua Acquisition

On October 18, 2008, the Company acquired from the Nuo Hua Investment Company Limited (Nuo Hua) shareholders all of the issued and outstanding shares of capital stock of Nuo Hua. Nuo Hua owns 55% equity of Yushuntang
Pharmaceutical Co., Ltd. in Jilin province, and 30% equity of a wholesale and distribution company in Shandong province, (Nuo Hua Affiliate). Nuo Hua, through its subsidiary and affiliated company, distributes pharmaceutical products
through sales network covering major urban and rural areas in China.

The acquisition cost was $39,500,000 in cash and the amount was paid in full as of
December 31, 2008.



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AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



The accompanying consolidated financial statements include the following allocation of the acquisition cost to the
net assets acquired based on their respective fair values.



|                         |  |   |           
|------------------------ |  | - | ----------
|Cash                     |  | $ | 5,129     
|Long term investment     |  |   | 38,399,147
|Fixed assets             |  |   | 26,133    
|                         |  |   |           
|Total assets purchased   |  |   | 38,430,409
|                         |  |   |           
|Net assets acquired      |  | $ | 38,430,409
|Total consideration paid |  |   | 39,500,000
|                         |  |   |           
|Goodwill                 |  |   | 1,069,591 
|                         |  |   |           

If the final valuation, which is expected to be completed within 12 months from the closing of the acquisition,
derives different amounts from our estimate, we will adjust these amounts to goodwill.

2. GHK Acquisition

On October 20, 2008, the Company acquired from the GuangXi HuiKe Pharmaceutical Research and Development Co., Ltd. (GHK) shareholders all of the issued
and outstanding shares of capital stock of GHK. GHK is engaged in pharmaceutical research and product development leading to SFDA approval and expedient product launches in China. The Company provides research and development through innovative
technology, raw material selection, extraction and production of pharmaceutical products.

The acquisition cost was $13,605,844 (including $5,844 in
transaction cost) in cash and the amount was paid in full as of December 31, 2008. Certain assets acquired from GHK qualify for recognition as intangible assets apart from goodwill, a portion of the purchase price allocation, $12,255,248
million, representing in-process research and development was charged to expense as of the date of the acquisition because it did not meet one of the following criteria (a) technological feasibility had not been established at the acquisition
date, (b) there was no alternative future use, and (c) the fair value was not determinable with reasonable reliability.

The accompanying
consolidated financial statements include the following allocation of the acquisition cost to the net assets acquired and liabilities assumed based on their respective fair values.



|                                    |  |   |           
|----------------------------------- |  | - | ----------
|IPR&D                               |  | $ | 12,255,248
|Fixed assets                        |  |   | 492,129   
|Cash                                |  |   | 38,441    
|Other receivables and prepayments   |  |   | 14,238    
|                                    |  |   |           
|Total assets purchased              |  |   | 12,800,056
|                                    |  |   |           
|Other payables and accrued expenses |  |   | 33,836    
|                                    |  |   |           
|Total liabilities assumed           |  |   | 33,836    
|                                    |  |   |           
|Net assets acquired                 |  |   | 12,766,220
|Total consideration paid            |  |   | 13,605,844
|                                    |  |   |           
|Goodwill                            |  | $ | 839,624   
|                                    |  |   |           

The amount of the purchase price allocated to the acquired in-process research and development represents the
estimated value based on risk-adjusted cash flows related to in-process projects that have not yet reached technological feasibility and have no alternative future uses as of the date of the acquisition. The primary basis for determining the
technological feasibility of these projects is obtaining regulatory approval to market the underlying products.

The value assigned to the acquired
IPR&D was determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. The revenue
projections used to value the acquired IPR&D was based on estimates of relevant market sizes and growth factors and the nature and expected timing of new product introductions by us and our competitors. The resulting net cash flows from such
projects were based on our estimates of cost of sales, operating expenses, and income taxes from such projects.



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AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



The rate of 10 percent utilized to discount the net cash flows to their present value was based on estimated
cost of capital plus a risk premium. Due to the nature of the forecasts and the risks associated with the developmental projects, appropriate risk-adjusted discount rates were used for the IPR&D projects. The discount rates are based on the
stage of completion and uncertainties surrounding the successful development of the purchased in-process technology projects.

GHK was working on seven
R&D project at the time of acquisition. The purchased in-process technology of GHK relates to research and development projects in both pharmaceutical and nutraceutical product families. The Company continues to evaluate certain of these
projects for their feasibility and alignment with the Companys core strategic objectives.

If the final valuation, which is expected to be completed
within 12 months from the closing of the acquisition, derives different amounts from our estimate, we will adjust these amounts

The results of operations
for Nuo Hua and GHK are included in the consolidated results of operations commencing October 18, 2008 and October 20, 2008, respectively.

The
following unaudited pro forma combined condensed statements of income for the year ended December 31, 2008 and 2007 have been prepared as if the acquisitions of Nuo Hua and GHK occurred on January 1, 2008 and 2007. The statements are based
on accounting for the business acquisitions under purchase accounting. The pro forma information may not be indicative of the results that actually would have occurred if the acquisition had been in effect from and on the dates indicated or which
may be obtained in the future.



|                                              |  |                                                    |             |      |   |            
|--------------------------------------------- |  | -------------------------------------------------- | ----------- | ---- | - | -----------
|                                              |  | UnauditedPro Forma CombinedYear Ended December 31,
|                                              |  | 2008                                               |             | 2007
|Revenues                                      |  | $                                                  | 322,081,293 |      | $ | 218,444,959
|Income from Operations                        |  |                                                    | 64,359,458  |      |   | 52,594,071 
|Net Income                                    |  |                                                    | 48,438,219  |      |   | 43,913,430 
|Net Income Per Share                          |  |                                                    |             |      |   |            
|Basic                                         |  | $                                                  | 0.63        |      | $ | 0.63       
|Diluted                                       |  | $                                                  | 0.62        |      | $ | 0.62       
|Weighted Average number of shares outstanding |  |                                                    |             |      |   |            
|Basic                                         |  |                                                    | 76,504,035  |      |   | 69,870,775 
|Diluted                                       |  |                                                    | 82,254,185  |      |   | 71,364,244 

2007 Acquisitions

1. Boke Acquisition

On October 18, 2007, the Company acquired from Guangxi Boke Pharmaceutical Limited (Boke) shareholders
all of the issued and outstanding shares of capital stock of Boke. Boke is a pharmaceutical company located in the city of Nanning in Guangxi Province of the PRC and it manufactures and distributes plant-based pharmaceutical, nutraceutical and
personal care products, marketed primarily in China.

The acquisition cost was $36,966,471 (including $466,741 in transaction cost) in cash and the amount
was paid in full as of December 31, 2007.



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AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



The accompanying consolidated financial statements include the following allocation of the acquisition cost to the
net assets acquired and liabilities assumed based on their respective fair values.



|                                    |  |   |           
|----------------------------------- |  | - | ----------
|Land use right                      |  | $ | 4,772,779 
|Other intangible assets             |  |   | 17,441,676
|Fixed assets                        |  |   | 4,018,429 
|Cash                                |  |   | 491,381   
|Accounts receivable                 |  |   | 1,116,711 
|Inventories                         |  |   | 877,974   
|Other receivables and prepayments   |  |   | 1,779,502 
|                                    |  |   |           
|Total assets purchased              |  |   | 30,498,452
|                                    |  |   |           
|Other payables and accrued expenses |  |   | 1,124,639 
|Deferred taxes payable              |  |   | 3,330,719 
|                                    |  |   |           
|Total liabilities assumed           |  |   | 4,455,358 
|                                    |  |   |           
|Net assets acquired                 |  |   | 26,043,094
|Total consideration paid            |  |   | 36,966,471
|                                    |  |   |           
|Goodwill                            |  | $ | 10,923,377
|                                    |  |   |           

2. CCXA Acquisition

On September 5, 2007, the Company acquired from Changchun Xinan Pharmaceutical Group Company Limited (CCXA) shareholders all of the issued and outstanding shares of capital stock of CCXA. CCXA is a pharmaceutical company
specializing in manufacturing and distribution of plant-based medicines and is based in Changchun, Jilin Province, China. CCXAs products cover both the prescription and OTC markets.

The acquisition cost was $29,398,358 in cash (including $898,358 of transaction costs) and the amount was paid in full as of December 31, 2007.

The accompanying consolidated financial statements include the following allocation of the acquisition cost to the net assets acquired and liabilities assumed based on
their respective fair values.



|                                    |  |   |           
|----------------------------------- |  | - | ----------
|Land use right                      |  | $ | 6,836,912 
|Other intangible assets             |  |   | 9,688,027 
|Fixed assets                        |  |   | 9,051,130 
|Cash                                |  |   | 700       
|Accounts receivable                 |  |   | 345,657   
|Inventories                         |  |   | 690,109   
|Other receivables and prepayments   |  |   | 55,640    
|Other current assets                |  |   | 41,643    
|                                    |  |   |           
|Total assets purchased              |  |   | 26,709,818
|                                    |  |   |           
|Other payables and accrued expenses |  |   | 195,475   
|Long term bank loans                |  |   | 2,639,039 
|Deferred taxes payable              |  |   | 3,977,058 
|                                    |  |   |           
|Total liabilities assumed           |  |   | 6,811,572 
|                                    |  |   |           
|Net assets acquired                 |  |   | 19,898,246
|Total consideration paid            |  |   | 29,398,358
|                                    |  |   |           
|Goodwill                            |  | $ | 9,500,112 
|                                    |  |   |           

The results of operations for Boke and CCXA are included in the consolidated results of operations commencing
October 19, 2007 and September 6, 2007, respectively.



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AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



The following unaudited pro forma combined condensed statements of income for the year ended December 31, 2007
and 2006 have been prepared as if the acquisitions of Boke and CCXA had occurred on January 1, 2007 and 2006. The statements are based on accounting for the business acquisition under purchase accounting. The pro forma information may not be
indicative of the results that actually would have occurred if the acquisition had been in effect from and on the dates indicated or which may be obtained in the future.



|                                              |  |                                                    |             |      |   |            
|--------------------------------------------- |  | -------------------------------------------------- | ----------- | ---- | - | -----------
|                                              |  | UnauditedPro Forma CombinedYear Ended December 31,
|                                              |  | 2007                                               |             | 2006
|Revenues                                      |  | $                                                  | 175,561,278 |      | $ | 130,789,447
|Income from Operations                        |  |                                                    | 54,232,619  |      |   | 40,094,533 
|Net Income                                    |  |                                                    | 44,721,567  |      |   | 32,040,287 
|Net Income Per Share                          |  |                                                    |             |      |   |            
|Basic                                         |  | $                                                  | 0.64        |      | $ | 0.51       
|Diluted                                       |  | $                                                  | 0.63        |      | $ | 0.51       
|Weighted Average number of shares outstanding |  |                                                    |             |      |   |            
|Basic                                         |  |                                                    | 69,870,775  |      |   | 62,679,996 
|Diluted                                       |  |                                                    | 71,364,244  |      |   | 62,913,961 

NOTE 12 - INVESTMENTS AND ADVANCES IN UNCONSOLIDATED ENTITIES

Long-term investments and advances include our equity investment in CAXG, Nuo Hua Affiliate and Hezhou Jinji Color Printing Co Ltd. (Jinji). CAXG is a
China-based pharmaceutical company specializing in research, development, manufacturing and distribution of narcotic and pain-management products in China. Nuo Hua Affiliate maintains a significant presence in pharmaceutical wholesale and retail
distribution in China. Jinji is a color printing company focusing on the printing of external packaging materials.

The Company owns 38% equity interest in
CAXG through an $18 million direct investment of its common stock in April 2008. The cost of investment in excess of our estimate of the underlying equity in net assets at the time of the investments was $1,369,799. The Company owns 30% equity
interest in Nuo Hua Affiliate through the acquisition of Nuo Hua in October 2008 and the Company owns 40% equity interest in Jinji through the acquisition of GLP in April 2006. Long-term investments are accounted for using the equity accounting
method.

The following table summarizes the long-term investments and advances as of December 31, 2008 and 2007:



|                                  |  |                   |            |   |                   |   |        
|--------------------------------- |  | ----------------- | ---------- | - | ----------------- | - | -------
|                                  |  | December 31, 2008 |            |   | December 31, 2007
|Cost of investments:              |  |                   |            |   |                   |   |        
|CAXG                              |  | $                 | 18,000,000 |   |                   | $ |       
|Nuo Hua Affiliate                 |  |                   | 32,999,023 |   |                   |   |       
|Jinji                             |  |                   | 86,067     |   |                   |   | 86,067 
|Share of equity income (loss):    |  |                   |            |   |                   |   |        
|CAXG                              |  |                   | (1,580,344 | ) |                   |   |       
|Nuo Hua Affiliate                 |  |                   | 773,415    |   |                   |   |       
|Jinji                             |  |                   | 42,303     |   |                   |   | 28,672 
|Advances:                         |  |                   |            |   |                   |   |        
|CAXG                              |  |                   | 4,520,209  |   |                   |   |       
|Jinji                             |  |                   | 122,391    |   |                   |   | 127,812
|                                  |  |                   |            |   |                   |   |        
|Long-term investment and advances |  | $                 | 54,963,064 |   |                   | $ | 242,551
|                                  |  |                   |            |   |                   |   |        

Included in the advance to CAXG is a RMB30 million, or approximately US$4.3 million, convertible promissory note.
The note bears interest at a rate of 8% payable quarterly in arrears and matures in one year. CAXG may elect to make the quarterly loan payments in cash or to convert the payments into shares of its common stock. The Company also has the option to
receive payment in shares of CAXGs common stock if CAXG is either unable to repay the loan in cash or consents to the conversion of its payment obligations into shares of its common stock.



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AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



NOTE 13 - DEBT

Short-term bank loans are obtained from local banks with interest rates 7.47% per annum. All the short-term bank loans are repayable within one year and are secured by plant and equipment and land use rights owned by the Company. See
Notes 7 and 9.

Short-term loans are summarized as follows:



|    |  |                    |  |                        |   |  |                  |          
|--- |  | ------------------ |  | ---------------------- | - |  | ---------------- | ---------
|No. |  | Due Date           |  | Interest RatePer Annum |   |  | December 31,2008
|1   |  | March 14, 2009     |  | 7.470                  | % |  | $                | 729,480  
|2   |  | March 28, 2009     |  | 8.541                  | % |  |                  | 428,934  
|3   |  | April 16, 2009     |  | 7.470                  | % |  |                  | 1,458,959
|4   |  | May 9, 2009        |  | 7.470                  | % |  |                  | 729,480  
|5   |  | May 22, 2009       |  | 7.470                  | % |  |                  | 729,480  
|6   |  | August 11, 2009    |  | 7.470                  | % |  |                  | 875,376  
|7   |  | August 14, 2009    |  | 7.470                  | % |  |                  | 1,458,959
|8   |  | September 9, 2009  |  | 7.470                  | % |  |                  | 729,480  
|    |  |                    |  |                        |   |  |                  |          
|    |  |                    |  |                        |   |  | $                | 7,140,148
|    |  |                    |  |                        |   |  |                  |          
|    |  |                    | 
|No. |  | Due Date           |  | Interest RatePer Annum |   |  | December 31,2007
|1   |  | March 30, 2008     |  | 6.438                  | % |  | $                | 683,611  
|2   |  | April 19, 2008     |  | 6.482                  | % |  |                  | 1,367,222
|3   |  | May 8, 2008        |  | 6.570                  | % |  |                  | 683,611  
|4   |  | June 3, 2008       |  | 6.570                  | % |  |                  | 683,611  
|5   |  | September 20, 2008 |  | 7.290                  | % |  |                  | 820,333  
|6   |  | September 5, 2008  |  | 7.020                  | % |  |                  | 1,367,222
|7   |  | October 11, 2008   |  | 7.290                  | % |  |                  | 683,612  
|    |  |                    |  |                        |   |  |                  |          
|    |  |                    |  |                        |   |  | $                | 6,289,222
|    |  |                    |  |                        |   |  |                  |          

Long-term loans include a mortgage loan that bears 4.25% interest per annum and is repayable over 15 years. The
principal amount of long-term loans is not payable until the end of the term. Long-term loans are summarized as follows:



|                                                                                                                                    |  |                  |         |                  |   |          
|----------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | ---------------- | - | ---------
|                                                                                                                                    |  | December 31,2008 |         | December 31,2007
|Loan from HSBC, due December 31, 2021, bearing a 4.250% interest rate per annum, secured by the office in CNT Tower.                |  | $                | 863,180 |                  | $ | 911,807  
|Loan from Jilin Bank Changchun Heping Branch, due March 28, 2009, bearing an 8.541% interest rate per annum, secured by
building.   |  |                  |        |                  |   | 401,963  
|Loan from Jilin Bank Changchun Heping Branch, due November 1, 2008, bearing an 8.190% interest rate per annum, secured by
building. |  |                  |        |                  |   | 1,367,222
|Loan from Jilin Bank Changchun Heping Branch, due June 18, 2008, bearing a 7.839% interest rate per annum, secured by
building.     |  |                  |        |                  |   | 957,056  
|                                                                                                                                    |  |                  |         |                  |   |          
|Total long-term loan                                                                                                                |  |                  | 863,180 |                  |   | 3,638,048
|Less: current portion of long-term loan                                                                                             |  |                  | 58,659  |                  |   | 2,374,565
|                                                                                                                                    |  |                  |         |                  |   |          
|Long-term portion                                                                                                                   |  | $                | 804,521 |                  | $ | 1,263,483
|                                                                                                                                    |  |                  |         |                  |   |          



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AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



The repayment schedule is as below:



|                                   |  |                                    |  |                        |   |         |                  |        
|---------------------------------- |  | ---------------------------------- |  | ---------------------- | - | ------- | ---------------- | -------
|No.                                |  | Due Date                           |  | Interest RatePer Annum |   |         | December 31,2008
|1                                  |  | December 31, 2009                  |  | 4.250                  | % |         | $                | 58,659 
|                                   |  |                                    |  |                        |   |         |                  |        
|Current portion of long-term loans |  |                                    |  |                        |   | 58,659 
|                                   |  |                                    |  |                        |   |         |                  |        
|2                                  |  | December 31, 2010                  |  | 4.250                  | % |         |                  | 60,141 
|3                                  |  | December 31, 2011                  |  | 4.250                  | % |         |                  | 61,663 
|4                                  |  | December 31, 2012                  |  | 4.250                  | % |         |                  | 63,220 
|5                                  |  | December 31, 2013                  |  | 4.250                  | % |         |                  | 64,821 
|6                                  |  | December 31, 2014                  |  | 4.250                  | % |         |                  | 66,460 
|                                   |  | Thereafter (Due December 31, 2021) |  | 4.250                  | % |         |                  | 488,216
|                                   |  |                                    |  |                        |   |         |                  |        
|Long-term portion                  |  |                                    |  |                        |   | 804,521
|                                   |  |                                    |  |                        |   |         |                  |        
|                                   |  |                                    |  |                        |   |         | $                | 863,180
|                                   |  |                                    |  |                        |   |         |                  |        

Current notes payable was $3,262,877 as of December 31, 2008 with an annual interest rate of 1.98% and is
repayable on demand. The long-term notes payable was $269,908 as of December 31, 2008 with an annual interest rate of 11.73%. Long-term notes payable will be fully repaid by January 2010.

Interest expense for all outstanding debt was $1,244,411, $855,715 and $571,892 for the years ended December 31, 2008, 2007 and 2006 respectively.

NOTE 14 - DEPOSIT FOR LONG-TERM ASSETS

Deposits for long term assets
are refundable deposits to acquire land use rights located in the PRC. The long-lived assets to be acquired will be for use in the expansion of some of the Company's current manufacturing facilities and are not intended for resale by the
Company. The deposits will be reclassified to the respective accounts under the long lived assets upon the transfers of legal title.



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AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



NOTE 15 - CONVERTIBLE NOTES AND PREPAID FORWARD CONTRACT

On July 15, 2008, the Company closed a private offering and issued $115 million aggregate principal amount of 5.00% Convertible Senior Notes due 2015 (the
Notes). The Notes were sold to qualified institutional buyers in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. The net proceeds from the sale of the Notes was approximately
$110.0 million, after deducting the placement agents commission and estimated offering expenses payable by the Company.

The following is a brief
summary of certain terms of this offering.



| |  |  | Total offering is $115,000,000 aggregate principal amount of 5.00% Convertible Senior Notes due on July 15, 2015.
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | Interest at 5.00% per year, payable semiannually in arrears in cash.
| | - |  | --------------------------------------------------------------------



| |  |  | The notes are convertible, at the option of the holder, at any time prior to the close of business on the second business day preceding the maturity date based on
an initial conversion rate of 107.6195 shares per $1,000 principal amount of notes, which represents an initial conversion price of approximately $9.29 per share. (See blow)
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The conversion rate is subject to certain adjustments. In particular, holders who convert their notes in connection with certain fundamental changes may be entitled
to a make whole premium in the form of additional shares of our common stock.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The initial conversion rate may be adjusted on January 15, 2009 if the volume weighted average price (VWAP) of our common stock for each of the 30
consecutive trading days ending on January 15, 2009 is less than $8.08 per share, then the conversion rate will be increased as a one-time purchase price adjustment such that the conversion price as adjusted would represent the greater of
(1) 115.0% of such arithmetic average of the daily VWAP and (2) $8.08. (See blow)
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Holders may require the Company to purchase all or a portion of their notes on July 15, 2013 for cash at a price equal to 100% of the principal amount of the
notes to be purchased, plus accrued and unpaid interest, if any, to, but excluding, the purchase date.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If a fundamental change occurs, holders will have the right to require the Company to purchase for cash all or any portion of their notes. The fundamental change
purchase price will be 100% of the principal amount of the notes to be purchased plus accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The notes will be direct unsecured, unsubordinated obligations and will rank equal in right of payment to all of the Companys existing and future unsecured
and unsubordinated indebtedness. The notes will be effectively subordinated to all of the Companys existing and future secured indebtedness.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Convertible notes issuance costs incurred by the Company that were directly attributable to the issuance of convertible notes were deferred and are charged to the consolidated statements of income using the
straight-line method over the term of the convertible notes, the results of which approximate the effective interest rate method.

The Company has
determined that the conversion feature embedded in the Convertible Notes is not required to be bifurcated and accounted for as a derivative pursuant to SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, since
the embedded conversion feature is indexed to the Companys own stock and would be classified in shareholders equity if it was a free-standing instrument. Further, since the conversion price of the Convertible Notes exceeded the market
price of the Companys ordinary shares on the date of issuance of Convertible Notes, no portion of the proceeds from the issuance was accounted for as attributable to the conversion feature.

Subsequent to year end, as the VWAP of our common stock for each of the 30 consecutive trading days ending on January 15, 2009 was $6.02 per share and 115% of the
VWAP is $6.9183, the initial conversion price of $9.29 per share was adjusted to $8.08 on January 15, 2009.

NOTE 16 - PREPAID FORWARD SHARES
REPURCHASE TRANSACTION

In connection with the offering of the Notes, the Company entered into a prepaid forward shares repurchase contract with an
affiliate of the lead placement agent (Merrill affiliate). Pursuant to the prepaid forward shares repurchase contract, the Company paid approximately $30 million to the Merrill affiliate to fund the purchase of 3.7 million shares of
common stock for settlement at or about maturity of the notes. The forward shares purchase transaction was also intended to reduce the potential dilution of our common stock that would result from the conversion of the Convertible Notes into shares
of our common stock.

The company accounted for the forward shares purchase transaction pursuant to guidance in EITF 00-19, Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock. Accordingly, the $30.0 million cost of the forward stock purchase transaction was recorded as a reduction to additional paid in capital in the Balance
Sheet as of December 31, 2008 and will not recognize subsequent changes in fair value.



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##### Table of Contents

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



The Company is potentially subject to significant concentration of credit risk with respect to the prepaid forward
repurchase contract. The fact that Merrill affiliate has merged with Bank of America reduced the bankruptcy and default risk. We will closely monitor the third depositary and may request early settlement of the contract prior to the maturity of the
convertible notes.

NOTE 17 - SHAREHOLDERS EQUITY

Preferred Stock

The Company had 1,000,000 shares of Series A preferred stock (Series A) issued and outstanding. Pursuant to the terms
of the Series A, the holder holds aggregate voting power equal to 25% of the combined voting power of our common stock and preferred stock. The percentage of voting power represented by the Series A cannot be diluted by the issuance of additional
shares of common stock. The Series A has a liquidation preference equal to its initial issue price that will be paid to the holders of the Series A upon liquidation, dissolution or winding up and prior to any distributions being made to holders of
our common stock.

Common Stock

A. Issuance of Common
Stock

The Company entered into two consulting agreements during 2008 and issued 26,748 shares of common stock as part of the consulting fees. The
Company recorded a total of deferred consulting expenses of $260,000, based on the market value of the common stock at the date of grants, which has been and will be amortized over a one-year service period. Of the total value, $236,000 was
amortized through December 31, 2008.

B. Stock Options

As part of the 2008 Compensation review and analysis, on April 9, 2008 the Compensation Committee of the Board of Directors of the Company approved grant of stock options to the Companys principal executive officer, principal
financial officer and certain other executives. Stock options for 1,137,257 shares of common stock at a per share exercise price of $8.35 were granted under the Companys 2006 Equity Incentive Plan (the 2006 Plan) and will vest
ratably over a five year period. The Company valued the stock options at $1,990,200. The value of the options was estimated using the Black Scholes Model with an expected volatility of 18.9%, expected life of 5 years and risk-free interest rate of
1.95 %.

On May 23, 2008, the Company granted stock options for 100,000 shares of common stock at a per share exercise price of $11.20 to a
Companys senior member of the management under the 2006 Plan and will vest ratably over a five year period. The Company valued the stock options at $256,000. The value of the options was estimated using the Black Scholes Model with an expected
volatility of 18.9%, expected life of 5 years and risk-free interest rate of 2.7 %. This granted stock options was subsequently cancelled in November 2008.

On November 25, 2008, the Company granted stock options for 314,500 shares of common stock at a per share exercise price of $4.95 to a group of senior management under the 2006 Plan and will vest ratably over a five year period. The
Company valued the stock options at $352,240. The value of the options was estimated using the Black Scholes Model with an expected volatility of 20.6%, expected life of 5 years and risk-free interest rate of 2.1 %.

The Company recorded total stock option compensation expenses $862,481 for 2008. Of the total value of the old and new option grants, $3,886,351 has not yet been
recognized and will be amortized over the requisite service periods.

The following table summarizes the stock option activities of the Company:



|                                    |  |           |   |  |                                |      
|----------------------------------- |  | --------- | - |  | ------------------------------ | -----
|                                    |  | Activity  |   |  | Weighted AverageExercise Price
|Outstanding as of January 1, 2008   |  | 974,500   |   |  | $                              | 10.03
|Granted                             |  | 1,551,757 |   |  | $                              | 7.84 
|Exercised                           |  |          |   |  | $                              |     
|Cancelled                           |  | (105,000  | ) |  | $                              | 11.07
|                                    |  |           |   |  |                                |      
|Outstanding as of December 31, 2008 |  | 2,421,257 |   |  | $                              | 8.58 
|                                    |  |           |   |  |                                |      



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##### Table of Contents

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



The following table summarizes information about stock options outstanding as of December 31, 2008:



|                         |  |                     |  |                              |       |                                                     |   |                 |         |                              |   |      
|------------------------ |  | ------------------- |  | ---------------------------- | ----- | --------------------------------------------------- | - | --------------- | ------- | ---------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable         
|Range of Exercise Prices |  | Number ofShares     |  | WeightedAverageExercisePrice |       | Weighted AverageRemainingContractual Life(in years) |   | Number ofShares |         | WeightedAverageExercisePrice
|$8.54-$10.74             |  | 969,500             |  | $                            | 10.04 |                                                     | 4 |                 | 193,900 |                              | $ | 10.04
|$4.95-$8.35              |  | 1,451,757           |  | $                            | 7.61  |                                                     | 5 |                 |        |                              |   |     
|                         |  |                     |  |                              |       |                                                     |   |                 |         |                              |   |      
|                         |  | 2,421,257           |  |                              |       |                                                     |   |                 | 193,900 |                              |   |      
|                         |  |                     |  |                              |       |                                                     |   |                 |         |                              |   |      

All the options granted have exercise price equal to the market price and they have no intrinsic value at the
grant date. The weighted average fair value per share of the 2,421,257 options issued under the Plan is $2.08 per share. As of December 31, 2008, the Company has 193,900 outstanding vested stock options, with an exercise price above the average
market price, are excluded from the Companys diluted computation.

C. Common Stock to be Issued

For the year ended December 31, 2008, the Company recorded general and administrative expenses $376,332, respectively, for the stock compensation in connection with
the services rendered by the Companys independent directors. A total of 42,472 shares of common stock are issuable to independent directors as of December 31, 2008.

NOTE 18 - COMMITMENTS

As of December 31, 2008, the Company entered into unconditional capital commitments for
the purchase of land use rights and construction of manufacturing facilities in the PRC for $7,666,839 within one year and $11,734,773 after one year.

As
of December 31, 2008, the Company has no material unconditional purchase commitments for raw materials, packing materials and advertising.

NOTE 19 -
INCOME TAX

(a) Corporation Income Tax (CIT)

The Company has not recorded a provision for U.S. federal income tax for the year ended December 31, 2008 due to the net operating loss carry forward in the United States. Net operating loss carry forward in the United States as of
December 31, 2008 was $11,737,378 and it will expire in year 2024 and will end in 2027.

On March 16, 2007, the National Peoples Congress
of China approved the new Corporate Income Tax Law of the Peoples Republic of China (the New CIT Law), which is effective from January 1, 2008.

Prior to January 1, 2008, CIT rate applicable to our subsidiaries in the PRC range from 0% to 33%. GLP is entitled to a full exemption from CIT in year 2006 and 2007. Three Happiness, on the other hand, enjoys a
favorable tax rate of 15% as it is located in a special economic development zone and is considered a high technology company by the Chinese government. Boke also enjoys a favorable tax rate of 15% as it is located in a Western province of China.
HSPL, HQPL and CCXA do not qualify for any tax concession and have a 33% tax rate.



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##### Table of Contents

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



After January 1, 2008, under the new CIT Law, the corporate income tax rate applicable to most companies is 25%
instead of the old tax rate of 33%. The new CIT Law also provides certain tax concession to selective eligible companies based on their location and enterprise status. GLP and Boke enjoy a favorable tax rate of 15% as they are located in the Western
province of China. Three Happiness, HSPL and CCXA were granted high-tech enterprise status and also enjoy a favorable tax rate of 15% from 2008 to 2010. High-tech enterprise status is renewable and re-application should be done prior to the tax
preferences expire. HQPL, Nuo Hua and GHK do not qualify for any tax concession and they have a 25% tax rate.

The Companys tax expense differs from
the expected tax expense as follows:



|                            |  |                         |            |   |      |   |            |      |  |   |           |  
|--------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | --------- | -
|                            |  | Year Ended December 31, |           
|                            |  | 2008                    |            |   | 2007 |   |            | 2006 | 
|Computed expected expense |  | $                       | 15,133,319 |   |      | $ | 11,339,030 |      |  | $ | 8,165,851 |  
|Favorable tax rate effect   |  |                         | (8,424,544 | ) |      |   | (2,270,741 | )    |  |   | (769,608  | )
|Permanent differences       |  |                         | 6,018,613  |   |      |   | (14,890    | )    |  |   | 20,672    |  
|                            |  |                         |            |   |      |   |            |      |  |   |           |  
|Income tax expense          |  | $                       | 12,727,388 |   |      | $ | 9,053,399  |      |  | $ | 7,416,915 |  
|                            |  |                         |            |   |      |   |            |      |  |   |           |  



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AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



The provisions for income taxes for the year ended December 31, 2008, 2007 and 2006 are summarized as follows:



|         |  |                         |            |      |   |           |  |   |           |  
|-------- |  | ----------------------- | ---------- | ---- | - | --------- |  | - | --------- | -
|         |  | Year Ended December 31, |           
|         |  | 2008                    |            | 2007 |   | 2006      | 
|Current  |  | $                       | 12,469,511 |      | $ | 8,840,665 |  | $ | 7,908,963 |  
|Deferred |  |                         | 257,877    |      |   | 212,734   |  |   | (492,048  | )
|         |  |                         |            |      |   |           |  |   |           |  
|Total    |  | $                       | 12,727,388 |      | $ | 9,053,399 |  | $ | 7,416,915 |  
|         |  |                         |            |      |   |           |  |   |           |  

The tax effects of temporary differences that give rise to the Companys net deferred tax liabilities as of
December 31, 2008 and 2007 are as follows:



|                                           |  |                         |             |   |      |   |             |  
|------------------------------------------ |  | ----------------------- | ----------- | - | ---- | - | ----------- | -
|                                           |  | Year Ended December 31, |            
|                                           |  | 2008                    |             |   | 2007 |  
|Deferred tax assets                        |  |                         |             |   |      |   |             |  
|Current                                    |  |                         |             |   |      |   |             |  
|Bad debts                                  |  | $                       | 9,651       |   |      | $ |            |  
|Other costs                                |  |                         | 337,565     |   |      |   |            |  
|                                           |  |                         |             |   |      |   |             |  
|Total current deferred tax assets          |  |                         | 347,216     |   |      |   |            |  
|                                           |  |                         |             |   |      |   |             |  
|Non-current                                |  |                         |             |   |      |   |             |  
|Bad debts                                  |  |                         | 216,094     |   |      |   | 211,551     |  
|Amortization                               |  |                         | 164,313     |   |      |   | 98,239      |  
|Other costs                                |  |                         | 858,636     |   |      |   | 801,840     |  
|Stock provision                            |  |                         | 32,083      |   |      |   | 289,511     |  
|Depreciation                               |  |                         | 42,706      |   |      |   | 97,340      |  
|                                           |  |                         |             |   |      |   |             |  
|Total non-current deferred tax assets      |  |                         | 1,313,832   |   |      |   | 1,498,481   |  
|                                           |  |                         |             |   |      |   |             |  
|Total deferred tax assets                  |  | $                       | 1,661,048   |   |      | $ | 1,498,481   |  
|                                           |  |                         |             |   |      |   |             |  
|Deferred tax liabilities                   |  |                         |             |   |      |   |             |  
|Current                                    |  |                         |             |   |      |   |             |  
|Over accrual of welfare                    |  | $                       | (114,840    | ) |      | $ |            |  
|Boke acquisition                           |  |                         | (667,096    | ) |      |   |            |  
|CCXA acquisition                           |  |                         | 45,704      |   |      |   | 15,297      |  
|Other                                      |  |                         | (109,794    | ) |      |   | (125,030    | )
|                                           |  |                         |             |   |      |   |             |  
|Total current deferred tax liabilities     |  |                         | (846,026    | ) |      |   | (109,733    | )
|Non-current                                |  |                         |             |   |      |   |             |  
|Over accrual of welfare                    |  |                         | (18,283     | ) |      |   | (146,154    | )
|Amortization                               |  |                         | (291,034    | ) |      |   | (208,519    | )
|Depreciation                               |  |                         | (130,803    | ) |      |   | (51,976     | )
|Government grant                           |  |                         | (1,019,319  | ) |      |   | (887,633    | )
|GLP acquisition                            |  |                         | (3,831,290  | ) |      |   | (3,590,384  | )
|CCXA acquisition                           |  |                         | (4,429,843  | ) |      |   | (4,340,893  | )
|Boke acquisition                           |  |                         | (2,985,975  | ) |      |   | (3,298,341  | )
|Other                                      |  |                         | (166,351    | ) |      |   | (97,280     | )
|Other comprehensive income                 |  |                         | (3,210,870  | ) |      |   |            |  
|                                           |  |                         |             |   |      |   |             |  
|Total non-current deferred tax liabilities |  |                         | (16,083,768 | ) |      |   | (12,621,180 | )
|                                           |  |                         |             |   |      |   |             |  
|Total deferred tax liabilities             |  |                         | (16,929,794 | ) |      |   | (12,730,913 | )
|                                           |  |                         |             |   |      |   |             |  
|Net deferred tax liabilities               |  | $                       | (15,268,746 | ) |      | $ | (11,232,432 | )
|                                           |  |                         |             |   |      |   |             |  



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##### Table of Contents

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



The Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation
No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 , (FIN 48), on January 1, 2007. The Company did not have any material unrecognized tax benefits and there
was no effect on its financial condition or results of operations as a result of implementing FIN 48.

(b) Value Added Tax (VAT)

Enterprises or individuals who sell commodities, engage in repair and maintenance or import or export goods in the PRC are subject to a value added tax in accordance with
the PRC laws. The value added tax standard rate is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Companys finished products can be
used to offset the VAT due on the sales of the finished products.

The VAT payable balance of $6,262,715 and $3,722,621 at December 31, 2008 and 2007
respectively are included in Other Payables and Accrued Expenses in the accompanying consolidated balance sheets.

(c) Tax Holiday

Income before income tax expense was $60.5 million, $52.3 million and $36.6 million for 2008, 2007 and 2006 and was mainly attributed to subsidiaries with operations in
China. Income tax related to China income for 2008 was $12.7 million. The combined unaudited pro forma effects of the income tax expense exemption and reduction available to us are as follows:



|                                                      |  |                                    |           |      |   |          
|----------------------------------------------------- |  | ---------------------------------- | --------- | ---- | - | ---------
|                                                      |  | Year Ended December 31,(Unaudited)
|                                                      |  | 2008                               |           | 2007
|Tax holiday effect                                    |  | $                                  | 8,424,544 |      | $ | 2,270,741
|Basic net income per share exclude tax holiday effect |  | $                                  | 0.51      |      | $ | 0.59     

NOTE 20 - NON-CASH TRANSACTIONS

2008

Issued 26,748 shares of common stock valued at $260,000 for consulting services.

2007

Assets of $2,126,189 were transferred from construction in
progress to property, plant and equipment at completion.

Issued 20,000 shares of common stock valued at $260,000 for investment banking services.

2006

Assets of $3,836,919 were transferred from
construction in progress to property, plant and equipment at completion.

Issued 30,000 shares of common stock valued at $142,200 for consulting services.

Issued 1,200,000 shares of common stock valued at $5,640,000 as part of the consideration for the acquisition of GLP.

NOTE 21 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The tables
below list the quarterly financial information.



|                             |  |                |            |        |   |            |  |        |            |  |   |           
|---------------------------- |  | -------------- | ---------- | ------ | - | ---------- |  | ------ | ---------- |  | - | ----------
|                             |  | Quarters Ended
|                             |  | 31-Mar         |            | 30-Jun |   | 30-Sep     |  | 31-Dec
|Year Ended December 31, 2008 |  |                |            |        |   |            |  |        |            |  |   |           
|REVENUES                     |  | $              | 38,768,598 |        | $ | 59,010,005 |  | $      | 70,593,949 |  | $ | 96,270,506
|GROSS PROFIT                 |  | $              | 26,290,962 |        | $ | 40,081,558 |  | $      | 47,191,542 |  | $ | 60,047,722



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##### Table of Contents

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008 AND 2007



|                                    |  |                |            |        |   |            |  |        |            |  |   |           
|----------------------------------- |  | -------------- | ---------- | ------ | - | ---------- |  | ------ | ---------- |  | - | ----------
|                                    |  | Quarters Ended
|                                    |  | 31-Mar         |            | 30-Jun |   | 30-Sep     |  | 31-Dec
|NET INCOME                          |  | $              | 9,422,129  |        | $ | 13,859,692 |  | $      | 16,482,919 |  | $ | 8,041,149 
|Basic net income per common share   |  | $              | 0.12       |        | $ | 0.18       |  | $      | 0.22       |  | $ | 0.10      
|                                    |  |                |            |       
|Diluted net income per common share |  | $              | 0.12       |        | $ | 0.18       |  | $      | 0.21       |  | $ | 0.10      
|                                    |  |                |            |       
|Year Ended December 31, 2007        |  |                |            |        |   |            |  |        |            |  |   |           
|REVENUES                            |  | $              | 25,722,577 |        | $ | 33,913,234 |  | $      | 43,514,049 |  | $ | 57,332,523
|GROSS PROFIT                        |  | $              | 17,704,317 |        | $ | 23,702,749 |  | $      | 30,680,797 |  | $ | 39,030,034
|NET INCOME                          |  | $              | 6,446,267  |        | $ | 9,668,371  |  | $      | 11,943,627 |  | $ | 15,232,616
|Basic net income per common share   |  | $              | 0.10       |        | $ | 0.15       |  | $      | 0.16       |  | $ | 0.21      
|                                    |  |                |            |       
|Diluted net income per common share |  | $              | 0.10       |        | $ | 0.15       |  | $      | 0.16       |  | $ | 0.20      



F-31