<PAGE>

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

                                   FORM 10-QSB/A
                                  AMENDMENT NO. 1

                                   (Mark One)
[X]      Quarterly report under Section 13 or 15(d) of the Securities Exchange
         Act of 1934 For the quarterly period ended June 30, 2004

[ ]      Transition report under Section 13 or 15(d) of the Securities Exchange
         Act of 1934 For the transition period from _________ to _________

                           Commission File No. 0-29015

                     AMERICAN ORIENTAL BIOENGINEERING, INC.
                 (Name of Small Business Issuer in Its Charter)

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

           NO. 308 XUEFU ROAD, NANGANG DISTRICT, HARBIN, CHINA, 150086
                    (Address of principal executive offices)

                                86-451-8666-6601
                (Issuer's telephone number, including area code)

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

The number of shares outstanding of each of the issuer's class of equity as of
the latest practicable date is stated below:

Title of each class of Common Stock             Outstanding as June 30, 2004
--------------------------------------------------------------------------------
Preferred Stock, $0.001 par value                1,000,000
Common Stock, $0.001 par value                  32,931,827

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




<PAGE>
            Explanatory Note Regarding the Purpose of this Amendment

American Oriental Bioengineering, Inc. is filing this report on Form 10-QSB/A to
amend its quarterly report for the period ended June 30, 2004. The date of
filing the original Form 10-QSB for the period ended June 30, 2004, was August
16, 2004. The main body of the financial statements contained in the Form 10-KSB
are not being amended. The Management Discussion and Analysis and the notes to
the financial statements were expanded and revised to provide discussion and
explanation in greater detail. The reasons that we are filing this amendment are
as follows:

1. Item 1. Financial Statements. We have clarified that the amounts previously
attributable to "selling and administrative expenses" are more accurately
attributable to "selling and marketing expenses". We have changed the item
previously titled "Property, Plant and Equipment" to "Plant and Equipment", to
reflect the fact that the Company does not own its property, but uses it in
accordance with a land use right granted by the PRC. We expanded our discussion
regarding Stock-Based Compensation in Note 4. Throughout the financial
statements, we have amended our prior references to "fixed assets" to specify
that we are referring to our "plant and equipment".

2. Item 2. Management Discussion and Analysis. We have amended the "Critical
Accounting Policies and Estimates" discussion to describe in greater detail why
estimates are made with respect to net realizable value of our accounts
receivable and inventories. Our "Results of Operations" discussions comparing
the three months ended June 30, 2003 and 2004 and the six months ended June 30,
2003 and 2004 have been revised. Finally, our discussion of the "liquidity and
capital resources" section has been expanded.

3. Item 8A. Controls and Procedures has been revised in this amendment.

4. We have filed new Rule 13a-14(a)/15d-14(a) and Section 1350 Certifications in
connection with this amended filing.

<PAGE>

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

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

         o        Condensed Consolidated Balance Sheets                      F-1

         o        Condensed Consolidated Statements of Income                F-2

         o        Condensed Consolidated Statements of Cash Flows            F-3

         o        Notes to Condensed Consolidated Financial Statements       F-4

Item 2.  Management Discussions & Analysis of Financial Condition and
         Results of Operations.                                               12

Item 3.  Controls and Procedures.                                             18

PART II - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K.                                    19

<PAGE>
<TABLE>
                                   PART I - FINANCIAL INFORMATION

ITEM 1.         FINANCIAL STATEMENTS

                       AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                                CONDENSED CONSOLIDATED BALANCE SHEETS

                                               ASSETS
                                               ------
                                                                       JUNE 30,      DECEMBER 31,
                                                                         2004            2003
                                                                    ------------     ------------
                                                                     (UNAUDITED)
<S>                                                                 <C>              <C>
CURRENT ASSETS
  Cash and cash equivalents                                         $ 4,922,240      $ 5,366,857
  Trade receivables                                                   3,249,216        3,112,998
  Other receivables                                                     422,696          143,809
  Note receivable                                                     2,441,928               --
  Inventories                                                         3,581,535        2,546,810
  Prepayments for goods                                                 729,410          868,458
  Advances to employees                                                  85,198           55,116
  Deferred taxes                                                         78,439           78,439
  Deferred merger costs                                                  16,668           33,334
  Deferred consulting expenses                                        1,108,576        1,569,442
                                                                    ------------     ------------
  TOTAL CURRENT ASSETS                                               16,635,906       13,775,263
                                                                    ------------     ------------

PLANT AND EQUIPMENT, NET                                              7,023,398        7,264,822

DEPOSIT FOR MACHINERY                                                   379,934               --

DEPOSIT FOR LEASEHOLD IMPROVEMENTS                                      386,000               --

OTHER ASSETS, NET                                                       587,350          632,531

                                                                    ------------     ------------
TOTAL ASSET                                                         $25,012,588      $21,672,616
                                                                    ============     ============

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

CURRENT LIABILITIES
  Accounts payable and accrued expenses                             $ 1,509,264      $ 1,253,826
  Prepayments for materials                                             164,241           76,593
  Bank loans                                                          1,445,783        1,445,783
  Taxes payable                                                         336,861          310,480
  Obligation under finance leases within one year                         6,972            6,780
  Payable to related party                                               88,666           43,243

                                                                    ------------     ------------
  TOTAL CURRENT LIABILITIES                                           3,551,787        3,136,705
                                                                    ------------     ------------

LONG-TERM LIABILITIES
  Obligation under finance leases                                        21,340           25,449
                                                                    ------------     ------------

TOTAL LIABILITIES                                                     3,573,127        3,162,154
                                                                    ------------     ------------

SHAREHOLDERS' EQUITY
  Preferred stock, $0.001 par value; 2,000,000 shares
  authorized; 1,000,000 shares issued or outstanding
  at June 30, 2004 and December 31, 2003, respectively                    1,000            1,000

  Common stock, $0.001 par value, 60,000,000 shares
  authorized: 32,931,827 and 32,725,827 shares and outstanding
  at June 30, 2004 and December 31, 2003, respectively                   32,932           32,726

  Additional paid-in capital                                         10,209,738       10,048,734
  Retained earnings
    Restricted portion                                                  534,177          534,177
    Unrestricted portion                                             10,661,614        7,893,825

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

TOTAL SHAREHOLDERS' EQUITY                                           21,439,461       18,510,462
                                                                    ------------     ------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                          $25,012,588      $21,672,616
                                                                    ============     ============

See accompanying notes to the Condensed Consolidated Financial Statements
</TABLE>


                                                F-1


<PAGE>
<TABLE>

                                 AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
                                       CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                                       (UNAUDITED)

                                                    THREE MONTHS ENDED JUNE 30,            SIX MONTHS ENDED JUNE 30,
                                                       2004              2003                2004               2003
                                                       ----              ----                ----               ----
<S>                                                <C>                <C>                <C>                <C>
SALES                                              $  6,003,960       $  4,876,978       $ 11,910,579       $  9,375,640

COST OF SALES                                         1,842,825          1,921,310          3,662,586          3,553,672

                                                   -------------      -------------      -------------      -------------
GROSS PROFIT                                          4,161,135          2,955,668          8,247,993          5,821,968
                                                   -------------      -------------      -------------      -------------

SELLING AND MARKETING EXPENSES                          550,423            417,839          1,029,154            704,314

ADVERTISING                                             761,431            537,497          1,607,204          1,172,695

GENERAL AND ADMINISTRATIVE EXPENSES                     841,347            382,179          1,865,044            773,163

MERGER COSTS                                              8,333              8,333             16,666             16,666

DEPRECIATION AND AMORTIZATION                           145,572            135,315            291,055            261,710

                                                   -------------      -------------      -------------      -------------
INCOME FROM OPERATIONS                                1,854,029          1,474,505          3,438,870          2,893,420

INTEREST, NET                                           (23,811)           (23,409)           (47,791)           (46,707)

OTHER INCOME                                             14,392             84,970             26,742             80,152

                                                   -------------      -------------      -------------      -------------
INCOME BEFORE INCOME TAXES                            1,844,610          1,536,066          3,417,821          2,926,865

INCOME TAXES                                            336,861            246,477            650,033            467,597

                                                   -------------      -------------      -------------      -------------
NET INCOME                                         $  1,507,749       $  1,289,589       $  2,767,788       $  2,459,268
                                                   =============      =============      =============       ============

NET INCOME PER SHARE
    BASIC                                          $       0.05       $       0.04       $       0.08       $       0.10
                                                   =============      =============      =============       ============
    DILUTED                                        $       0.05       $       0.04       $       0.08       $       0.09
                                                   =============      =============      =============       ============

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
    BASIC                                            32,909,190         31,625,827         32,817,508         25,798,147
    DILUTED                                          32,936,131         32,625,827         32,848,200         26,510,854

See accompanying notes to the Condensed Consolidated Financial Statements
</TABLE>


                                                          F-2


<PAGE>
<TABLE>

                          AMERICAN ORIENTAL BIOENGINEERING, INC.
                                     AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

                                                              6 MONTHS ENDED JUNE 30,
                                                              -----------------------
                                                              2004               2003
                                                              ----               ----
                                                           (UNAUDITED)
<S>                                                        <C>               <C>
CASH FLOWS FROM OPERATING ACTIVIES:
      Net income                                           $ 2,767,788       $ 2,459,268
      Adjustments to reconcile net income to net cash
           provided by operating activities:
      Depreciation and amortization                            291,055           261,710
      Deferred merger cost                                      16,666            16,666
      Deferred consulting expenses                             460,866           150,000
      Common stock for services                                 97,210                --
      Stock option compensation expense                         32,000                --
      Buy back of warrants                                      25,000
      Changes in operating assets and liabilities:
           Inventories                                      (1,034,725)       (1,783,331)
           Trade receivables                                  (129,217)       (1,123,974)
           Other receivables                                  (278,887)               --
           Prepayments for goods                               139,048          (170,858)
           Due from related parties                                 --           267,768
           Advances to employees                               (30,082)               --
           Accounts payable and accrued expenses               255,438           356,733
           Prepayments for materials                            87,648           904,659
           Payable to related party                             45,423          (175,093)
           Income taxes payable                                 26,381           228,777

                                                           ------------      ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                    2,771,612         1,392,325
                                                           ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Addition to note receivable                           (2,441,928)               --
      Purchase of plant and equipment                           (4,450)          (49,967)
      Deposit for machinery                                   (379,934)               --
      Deposit for leasehold improvement                       (386,000)               --

                                                           ------------      ------------
NET CASH UESD IN INVESTING ACTIVITIES                       (3,212,312)          (49,967)
                                                           ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Repayment of finance leases                               (3,917)               --

                                                           ------------      ------------
NET CASH USED IN FINANCING ACTIVITIES                           (3,917)               --
                                                           ------------      ------------

NET (DECREASE)/INCREASE IN CASH AND                           (444,617)        1,342,358
      CASH EQUIVALENTS
      Cash and cash equivalents, beginning of period         5,366,857         2,816,723
                                                           ------------      ------------

      Cash and cash equivalents, end of period             $ 4,922,240       $ 4,159,081
                                                           ============      ============

SUPPLEMENTARY CASH FLOWS DISCLOSURES
         1 Interest paid                                   $    23,679       $    23,298
                                                           ============      ============

         2 Taxes paid                                      $   313,172       $   269,787
                                                           ============      ============

         3 Issued 1,000,000 preferred shares and 20,284,810 common shares in
           February 2003 valued at $3,285,856 for the assets acquisition.

         4 Issued 200,600 common shares in April 2004 valued at $97,210 for
           services performed.
</TABLE>

See accompanying notes to the Condensed Consolidated Financial Statements


                                           F-3


<PAGE>

             AMERICAN ORIENTAL BIOENGINEERING, INC AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                  JUNE 30, 2004
--------------------------------------------------------------------------------

NOTE 1 - BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements of American Oriental
Bioengineering, Inc. (formerly Internet Golf Association, Inc.) have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the requirements for reporting on Form
10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all
the information and footnotes required by accounting principles generally
accepted in United States of America for complete financial statements. However,
such information reflects all adjustments (consisting solely of normal recurring
adjustments), which are, in the opinion of management, necessary for a fair
statement of results for the interim periods. Results shown for interim periods
are not necessarily indicative of the results to be obtained for a full fiscal
year. The condensed consolidated balance sheet information as of December 31,
2003 was derived from the audited consolidated financial statements included in
the Company's Annual Report Form 10-KSB. These interim financial statements
should be read in conjunction with that report.

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

NOTE 2 - NATURE OF COMPANY

On December 18, 2001, the Company and Harbin Bioengineering entered into an
agreement whereby the Company acquired 100% of the equity interest of Harbin
Bioengineering. As a result, Harbin Bioengineering became a wholly owned
subsidiary of the Company (the "Acquisition"). The Company exchanged 8,538,943
shares of its common stock for that number of shares of Harbin Bioengineering
that constitutes 100% of the equity interest of Harbin Bioengineering. On
December 18, 2001, the directors and executive officers of the Company resigned
and Shujun Liu was appointed Chairman of the Board of Directors and President of
the Company. On June 26, 2002, the Acquisition became effective when the Company
filed Articles of Exchange with the Secretary of State of Nevada.

On October 15, 2002, the Company filed a Information Statement of Schedule 14C
reporting the issuance of 20,284,810 shares of common stock and 1,000,000 shares
of class A preferred stock in consideration for all of the ownership interest in
a soybean protein peptide biochemical engineering project (the "Project") as
described in the purchase agreement, dated as of August 17, 2002 by Shujun Liu
and the Company ("Purchase Agreement"). The value of the common stock issued was
approximately $3,205,000, which was equivalent to $0.158 per share of common
stock, the average of the closing price for the five-day period immediately
following the date of the Purchase Agreement, i.e, from August 19, 2002 to
August 23, 2002. By acquiring the Project, among other assets, the Company had
also acquired the ownership of the building housing the Project's manufacturing
plant, manufacturing equipment, and environmental control equipment the
historical cost of which was approximately $3,205,000. In addition, the Company
had also received the right to produce the products that resulted from the
Project as well as ownership rights on a pending patent in PRC for the process
of the extraction and production of soybean peptide. The shares were issued on
February 22, 2003.


                                      F-4


<PAGE>

On April 16, 2004, the Company formed a subsidiary registered in Hong Kong,
American Oriental Bioengineering (H.K.) Limited ("AOBOHK") to be wholly owned by
Bestkey International Limited, a 100% subsidiary of the Company. The new
subsidiary commenced operations in May 2004 and currently employs four
individuals. This new subsidiary will perform business development, sales and
marketing and logistics services exclusively for the Company in Hong Kong and
Asia.

On May 26, 2004, the Company signed a legally binding letter of intent to
acquire Heilongjiang Songhuajiang Pharmaceutical Limited ("HSPL"), a Chinese
state-owned pharmaceutical company. The letter of intent provides that the
Company has the right to acquire all or part of the equity ownership in HSPL for
a period of 90 days following the date of the execution of the letter of intent,
subject to signing an acquisition agreement. The acquisition of HSPL can be
completed only when the definitive acquisition agreement are signed by both
parties and all the criteria are being met to the satisfaction of the board of
directors of the Company. According to information provided by HSPL, which the
Company has not verified yet, it has over 50 years of operations and is a
well-known Chinese state-owned pharmaceutical company located in Heilongjiang
province. It has approximately 500 employees and an in-house research and
development team. All of HSPL's manufacturing facilities have been certified by
the Chinese Government according to the GMP (Good Manufacturing Practices)
standards. In addition, HSPL has an extensive line of antiviral products with
more than 70 types of medicines, with delivery methods covering intravenous
injection, tablet, capsule, powder, granule, and oral liquid. HSPL's flagship
product, Shuanghuangliang Lyophilize Powder Injection, which is a product aimed
at administering one of the traditional antiviral Chinese herbs to patients
through intravenous injection. This product had some effect in fighting the SARS
virus during the spring of 2003.

NOTE 3 - USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the reporting period. Actual
results when ultimately realized could differ from those estimates.

NOTE 4 - STOCK BASED COMPENSATION

The Company's stock option plan is subject to the provisions of Statement of
Financial Accounting Standards ("SFAS") No 123, Accounting for Stock-Based
Compensation. Under the provisions of this standard, employee stock-based
compensation expense is measured using either the intrinsic-value method as
prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees and related Interpretations, or the fair value method
described in SFAS No. 123. The Company has elected to account for its employee
stock-based awards under the provisions of APB Opinion No. 25. Under APB Opinion
No. 25, compensation cost for stock options is measured as the excess, if any,
of the fair value of the underlying common stock on the date of grant over the
exercise price of the stock option.


                                      F-5


<PAGE>

Companies choosing the intrinsic-value method are required to disclose the pro
forma impact of the fair value method on net income.

In June 2004, employment agreements for certain executive employees of the
Company were amended to include a provision that if the Company's closing stock
price was less than $2.00 on the last day of the quarter, the employees would
not be entitled to their quarterly stock options. Since the closing stock price
on June 30, 2004 was $1.75, no options were granted to the employees for the
quarter.

In the quarter ending March 31, 2004, the Company granted 23,704 stock options
(with an exercise price of $2.00 per share, expire March 31, 2009 and vest
immediately) to the directors covered by the stock option plan of the Company in
accordance with the executive employee employment agreements signed. For the
three months ended March 31, 2004, the Company recognized $32,000 of
compensation expense for the difference between the closing market price of the
Company's common stock on March 31, 2004 and the exercise price of $2.00.

There were no stock options granted to employees in 2003. The pro forma effect
on net income and income per share relating to the 2004 stock option grants, net
of the previously recognized intrinsic value expense are as follows:

                                                             Six months ended
                                                                June 30, 2004
                                                             -----------------

Net income as reported                                          $2,767,788
Pro forma net income                                            $2,740,292

Income per share as reported                                    $     0.08
Pro forma income per share                                      $     0.08

Additionally, in accordance with the executive employment agreements, the
Company was obligated to grant stock options to purchase 19,393 shares of the
Company's common stock in the last quarter of 2003. The options vested
immediately, are exercisable at $2.00 per share and expire December 31, 2008.
Since the options were not physically granted until the establishment of the
Company's stock option plan in March 2004, the Company had accrued for the
compensation expense associated with the options at December 31, 2003 amounting
to $32,000. In the first quarter 2004, the $32,000 was reclassified from accrued
expenses to additional paid-in capital.

The fair value of options granted under the Company's stock option plans were
estimated on the date of grant using the Black-Scholes pricing model with the
following assumptions:

         Weighted average of expected risk-free interest rates           3.00%
         Expected years to exercise date                                     5
         Expected stock volatility                                      81.49%
         Expected dividend yield                                            0%

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


                                      F-6


<PAGE>

NOTE 5 - EARNING PER SHARE

Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share is computed similar to basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.

Basic and diluted earnings per share are calculated as follows:
<TABLE>
                                                                 SIX MONTHS ENDED
                                                                      JUNE 30
                                                               2004             2003
                                                           -----------      -----------
<S>                                                        <C>              <C>
Earnings:
   Net income                                              $ 2,767,788      $ 2,459,268
   Dividend                                                         --               --
                                                           -----------      -----------
Income applicable to common shareholders                   $ 2,767,788      $ 2,459,268
                                                           ===========      ===========

Basic:
Income applicable to common shareholders                   $ 2,767,788      $ 2,459,268
Weighted average shares outstanding during the period       32,817,508       25,798,147
                                                           -----------      -----------
   Basic earnings per share                                $      0.08      $      0.10
                                                           ===========      ===========

Diluted:
Income applicable to common shareholders                   $ 2,767,788      $ 2,459,268
Weighted average shares outstanding during the period       32,817,508       25,798,147
Effect of dilutive securities:
   Stock options                                                 8,935               --
   Warrants                                                     21,757          712,707
                                                           -----------      -----------
Diluted weighted common shares outstanding                  32,848,200       26,510,854
                                                           ===========      ===========

   Diluted earning per share                               $      0.08      $      0.09
                                                           ===========      ===========
</TABLE>

NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUTMENTS

The carrying value of financial instruments including cash and cash equivalents,
receivables, accounts payable and accrued expenses and debt, approximates their
fair value at June 30, 2004 and December 31, 2003 due to the relatively
short-term nature of these instruments.

NOTE 7 - FOREIGN CURRENCY CONVERSION

The Company's financial information is presented in US dollars. People's
Republic of China currency (Reminbi dollars) has been converted into US dollars
at the exchange rate of 8.3 to 1.


                                      F-7


<PAGE>

NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS

In March 2004, the U.S. Securities and Exchange Commission's Office of the Chief
Accountant and the Division of Corporate Finance released Staff Accounting
bulletin ("SAB") No. 105, "Loan Commitments Accounted for as Derivative
Instruments". This bulletin contains specific guidance on the inputs to a
valuation-recognition model to measure loan commitments accounted for at fair
value, and requires that fair-value measurement include only differences between
the guaranteed interest rate in the loan commitment and market interest rate,
excluding any expected future cash flows related to the customer relationship or
loan servicing. In addition, SAB 105 requires the disclosure of the accounting
policy for loan commitments, including methods and assumptions used to estimate
the fair value of loan commitments, and any associated hedging strategies. SAB
105 is effective for derivative instruments entered into subsequent to March 31,
2004 and should also be applied to existing instruments as appropriate.

The Company has not yet completed its evaluating of SAB 105, but does not
anticipate a material impact on the consolidated financial statements.

NOTE 9 - NOTE RECEIVABLE

On March 1, 2004, the Company made a loan to an unrelated third party for the
amount of US$2,409,639. The loan is due in August 2004 and bears interest at the
prevailing best lending rate of the Bank of China on the first bank day of each
month. The interest rate at June 30, 2004 was 5.31%. The borrower pledged a
patent as security for the loan. As of June 30, 2004, no portion of the
outstanding note has been repaid and the Company has accrued $32,289 of interest
income included in note receivable in the accompanying condensed consolidated
balance sheet at June 30, 2004. Subject to the request of the borrower, the
Company intends to extend the terms of borrowing for another 6 months commencing
September 1, 2004, with prevailing terms and conditions. As of the date of this
report, the Company has not received any request from the borrower requesting an
extension.

NOTE 10 - INCOME TAXES

Income taxes are provided on Harbin Three Happiness Bioengineering Limited in
accordance with taxation principles currently effective in the People's Republic
of China as it relates to the Company.

NOTE 11 - INVESTMENT AGREEMENTS AND WARRANTS

On July 22, 2003, the Company filed a Form 8-K current report pursuant to
section 13 or 15(D) of the Securities Exchange Act of 1934, to announce that BH
Capital Investments, LP and Excalibur Limited Partnership (together, the
"Investors") and the Company entered into an investment agreement (the
"Investment Agreement"). On September 18, 2003, in conjunction with the
Investment Agreement, the Company filed with the Securities and Exchange
Commission (the "Commission") a Form SB-2 registration statement under the
Securities Act of 1933 ("Registration Statement") to register the common stock
and the warrants associated with the Investment Agreement and on April 14, 2004,
the Company filed with the Commission a request to withdraw the September 18,
2003 registration statement, for reasons specified in that request.


                                      F-8


<PAGE>

On June 3, 2004, the Company has signed Amendment No. 2 to the Investment
Agreement, in which the Company and the Investors agreed to the following:

1.       Extend the terms of the Investment Agreement to January 31, 2005
2.       Removal of minimum drawdown requirement of $750,000
3.       The Investors agreed to waive all the registration rights (as
         stipulated in the Registration Agreement associated with the Investment
         Agreement) relating to the warrants issued to the Investor in
         connection with execution of the Investment Agreement .

Furthermore, on June, 30, 2004, the Company paid $ 25,000 to purchase back from
unrelated third parties the following warrants that were issued to the Investors
(BH Capital Investments, LP and Excalibur Limited Partnership)and FirsTrust
Group (the placement agent) in association with the signing of the Investment
Agreement and all subsequent Amendments to Investment Agreement:

<TABLE>

Name of recipient                        Number of warrant  Exercise price    Date of exercise       Expiry date
-----------------                        -----------------  --------------    ----------------       -----------
<S>                                          <C>                <C>             <C>                 <C>
BH Capital Investments, LP                   225,000            $ 0.3            Jul 18, 2003        Jul 17, 2008
Excalibur Limited Partnership                225,000            $ 0.3            Jul 18, 2003        Jul 17, 2008
FirsTrust Group, Inc.                        276,000            $ 0.3            Jul 18, 2003        Jul 17, 2008
BH Capital Investments, LP                    30,000            $ 2.5             Jan 1, 2004        Dec 31, 2008
BH Capital Investments, LP                    30,000            $ 2.5             Apr 1, 2004        Mar 31, 2009
BH Capital Investments, LP                    30,000            $ 2.5            July 1, 2004       June 30, 2009
Excalibur Limited Partnership                 30,000            $ 2.5             Jan 1, 2004        Dec 31, 2008
Excalibur Limited Partnership                 30,000            $ 2.5             Apr 1, 2004        Mar 31, 2009
Excalibur Limited Partnership                 30,000            $ 2.5            July 1, 2004       June 30, 2009
</TABLE>

The Company cancelled all the warrants purchased back and therefore, there were
no warrants outstanding at June 30, 2004. At June 30, 2004, the Company did not
pay the $25,000 for the cancellation of warrants and as a result, the Company
recorded additional expenses of $25,000 and an additional accrued liability of
$25,000.

NOTE 12 - SHAREHOLDERS' EQUITY

On April 7, 2004, the Company issued 206,000 shares of restricted stocks to
Focus Partners, LLP. The issuance of shares was related to the Company's service
contract with Focus Partners, LLC to appoint them to provide investor relations
services to the Company during 2002. In the contract, the Company agreed to
issue them restricted stocks as part of the compensation of their services.
Their services were terminated in early 2003 because of a dispute over the
quality of the services. The Company did not pay, and Focus Partners had not
requested the Company to pay the stock and the Company considered the chance of
issuing the stock remote in 2003 and therefore did not accrue any expense at
December 31, 2003.


                                      F-9


<PAGE>

In early 2004, the Company reached a settlement with Focus Partners, LLC and
206,000 shares of restricted stock were issued in April 2004. The stock is
restricted under the Securities Act of 1933, and such shares bear a legend under
rule 144 of the Act and bear a restrictive legend or other restrictions on
transfer or resale.

The service agreement provided that the shares of common stock were to be issued
at the end of each month during the service period. The 206,000 shares of
restricted stock issued to Focus Partners, LLC were therefore valued based on
the average of the closing share prices of the common stock at the end of each
month during the service period. The total value of the shares was $97,210.

NOTE 13 - SUBSEQUENT EVENTS

The Company entered in nine consulting agreements with individuals effective
July 1, 2004. A summary of the agreements is as follows:

Agreement 1:
------------

The individual will engage in evaluating the technical aspects of the Company's
Hong Kong regional office and other subsidiaries of the Company. The Company
issued 120,000 shares of common stock to the individual for such services and
valued them based on the closing market price of the Company's common stock
($1.70 per share) for a total value of $204,000. The Company will amortize the
expense over the term of the consulting agreement of 3 years.

Agreement 2:
------------

The individual will engage in evaluating the marketing and sales channeling of
the Hong Kong regional office and other subsidiaries of the Company. The Company
issued 153,000 shares of common stock to the individual for such services and
valued them based on the closing market price of the Company's common stock
($1.70 per share) for a total value of $260,100. The Company will amortize the
expense over the term of the consulting agreement of 3 years.

Agreement 3:
------------

The individual will engage in assisting the Company in negotiating with the
government regulators, and working with the management to facilitate the
development of the Hong Kong regional office and other subsidiaries of the
Company. The Company issued 120,000 shares of common stock to the individual for
such services and valued them based on the closing market price of the Company's
common stock ($1.70 per share) for a total value of $204,000. The Company will
amortize the expense over the term of the consulting agreement of 3 years.

Agreement 4:
------------

The individual will engage in reviewing and improving the internal control
system of the Hong Kong regional office and other subsidiaries of the Company.
The Company issued 85,000 shares of common stock to the individual for such
services and valued them based on the closing market price of the Company's
common stock ($1.70 per share) for a total value of $144,500. The Company will
amortize the expense over the term of the consulting agreement of 1 year.


                                      F-10


<PAGE>

Agreement 5:
------------

The individual will engage in reviewing, redesigning and implementing the
websites (including back end back ups) of various entities, as may be specified
by the Company. The Company issued 30,000 shares of common stock to the
individual for such services and valued them based on the closing market price
of the Company's common stock ($1.70 per share) for a total value of $51,000.
The Company will amortize the expense over the term of the consulting agreement
of 3 year.

Agreement 6:
------------

The individual will engage in completing the Company's growth strategy in China
by reviewing, redesigning and implement the product mix and product line
strategies of the Company and marketing of those products in new geographic
areas inside China. The Company issued 115,000 shares of common stock to the
individual for such services and valued them based on the closing market price
of the Company's common stock ($1.70 per share) for a total value of $195,500.
The Company will amortize the expense over the term of the consulting agreement
of 3 year.

Agreement 7:
------------

The individual will engage in providing administrative support and documentation
in relation to the Hong Kong regional office and other subsidiaries of the
Company. The Company issued 5,000 shares of common stock to the individual for
such services and valued them based on the closing market price of the Company's
common stock ($1.70 per share) for a total value of $8,500. The Company will
amortize the expense over the term of the consulting agreement of 1 year.

Agreement 8:
------------

The individual will engage in completing the Company's growth strategy in the
U.S. by providing general corporate advice on the strategies and directions of
potential growth of the Company. The Company issued 50,000 shares of common
stock to the individual for such services and valued them based on the closing
market price of the Company's common stock ($1.70 per share) for a total value
of $85,000. The Company will amortize the expense over the term of the
consulting agreement of 3 year.

Agreement 9:
------------

The individual will engage in completing work on the finance and reporting
issues of the Company's Hong Kong regional office and other subsidiaries. The
Company issued 22,000 shares of common stock to the individual for such services
and valued them based on the closing market price of the Company's common stock
($1.70 per share) for a total value of $37,400. The Company will amortize the
expense over the term of the consulting agreement of 1 year.


                                      F-11


<PAGE>

ITEM 2.  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 condensed consolidated financial statements of the Company and
the notes thereto appearing elsewhere herein and in conjunction with the
Management's Discussion and Analysis set forth in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 2003 and Quarterly Report on Form
10-QSB for the quarter ended June 30, 2004.

PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
-----------------------------------------------------

This quarterly 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,"
"AOBO believes," "management believes" and similar language. The forward-looking
statements are based on the current expectations of AOBO and are subject to
certain risks, uncertainties and assumptions, including those set forth in the
discussion under "Description of Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," including the
discussion under "--Risk Factors" there under. The actual results may differ
materially from results anticipated in these forward-looking statements. We base
the forward-looking statements on information currently available to us, and we
assume no obligation to update them.

Investors are advised to consult any further disclosures by us on the subject in
our filings with the Securities and Exchange Commission, especially on Forms
10-KSB, 10-QSB 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
------------------------------------------

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

The Company does not provide any reserves against its accounts receivable or
inventories at June 30, 2004. Management's estimation that there are no reserves
is based on the facts that our sales are paid for on a timely basis and there
are currently no significant aged accounts receivables and the current inventory
turnover is sufficiently high to realize the current carrying value of the
inventories. In addition, some of our raw material inventories appreciate in
value as demand for certain commodities used in our processes have appreciated
in market value. In making this judgment, management has reasonably assumed,
based on the past and current experience, that the current demand trend for our
products with continue in the near future and that our inventory turnover will
maintain the efficiency level. The Company tracks closely the payment record of
its customers. Based on the current payment record, the management has assumed
that our customers will continue to pay their outstanding invoices timely, and
that our customers' financial position will not deteriorate significantly in the
near future to impair their inability to pay for purchases from the Company.
However, while we currently do not believe that actual results will differ
materially in the near future from our current estimates, if customer demand for
our products decreases significantly in the near future, or if the financial
positions of our customers deteriorate in the future, the Company might have to
provide reserves or write-downs on its account receivables and inventories


                                       12


<PAGE>

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

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

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

The majority of the Company's revenues result from sales contracts with
distributors and, in a significant number of cases, payments are received upon
the shipment of goods. The Company's pricing structure is fixed and there are no
rebate or discount programs. We conduct credit background check on new customers
as a means to reduce risks and subjectivity and to assure collectability. Based
on these factors, the Company believes that it can apply the provisions of SAB
104 with minimal subjectivity.

RECENT DEVELOPMENTS
-------------------

On January 10, 2002, the Company filed a Current Report on Form 8-K reporting
the acquisition (the "Acquisition") by the Company of all of the equity interest
of Harbin Three Happiness Bioengineering Co., Ltd. ("Harbin Bioengineering"), a
People's Republic of China company. On June 26, 2002, the Acquisition became
effective when the Company filed Articles of Exchange with the Secretary of
State of Nevada. On July 1, 2002, the Company filed an Amendment No. 2 to the
Company's Current Report on Form 8-K in order to report the effectiveness of the
Acquisition.

On October 15, 2002, the Company filed another Information Statement Pursuant to
Section 14(c) of the Securities Exchange Act of 1934 the acquisition of a
soybean protein peptide biochemical engineering project ("Project") of which the
transaction was closed in February, 2003.

The Project covers derivatives and extractions of soybean protein peptides,
substances derived from soybeans through a biochemical engineering process
involving cutting, decomposition, conversion and synthesis of soybean protein
that can be absorbed by the body. In addition to absorbing soybean peptide
directly in the form of various tablets or powders, soybean peptide can also be
used as an additive in various foods and beverages including milk, tea and
coffee. By acquiring the Project, the Company acquired ownership of the
properties associated with the Project, the manufacturing plant, manufacturing
equipment and environmental control equipment. The purchased Project was crucial
to the Company's expansion and growth in the field of bioengineering. It was
also important to the Company's over-all technological strategy. Acquiring the
Project enabled the Company to develop new products and will increase the
Company's revenue in the future.

On April 16, 2004, the Company formed a subsidiary registered in Hong Kong,
American Oriental Bioengineering (H.K.) Limited ("AOBOHK") to be wholly owned by
Bestkey International Limited, a 100% subsidiary of the Company. The new
subsidiary commenced operations in May 2004 and currently employs four
individuals. This new subsidiary will perform business development, sales and
marketing and logistics services exclusively for the Company in Hong Kong and
Asia.

On May 26, 2004, we signed a legally binding letter of intent to acquire
Heilongjiang Songhuajiang Pharmaceutical Limited ("HSPL"), a Chinese state-owned
pharmaceutical company. The letter of intent provides that we have the right to
acquire all or part of the equity ownership in HSPL for a period of 90 days
following the date of the execution of the letter of intent, subject to signing
of full length acquisition agreements. The acquisition of HSPL can be completed

                                       13


<PAGE>

only when the definitive acquisition agreements are signed by both parties and
all the criteria are being met to the satisfaction of our board of directors.
According to information provided by HSPL, which we have not verified yet, it
has over 50 years of operations and is a well-known Chinese state-owned
pharmaceutical company located in Heilongjiang province. It has approximately
500 employees and an in-house research and development team. All of HSPL's
manufacturing facilities have been certified by the Chinese Government according
to the GMP (Good Manufacturing Practices) standards. In addition, HSPL has an
extensive line of antiviral products with more than 70 types of medicines, with
delivery methods covering intravenous injection, tablet, capsule, powder,
granule, and oral liquid. Most notable is the HSPL's flagship product,
Shuanghuangliang Lyophilize Powder Injection, which is a product aimed at
administering one of the traditional antiviral Chinese herbs to patients through
intravenous injection. This product had some effect in fighting the SARS virus
during the spring of 2003.

RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2004 AS COMPARED TO THREE
-----------------------------------------------------------------------------
MONTHS ENDED JUNE 30, 2003
--------------------------

For the quarter ended June 30, 2004 revenues increased by $1,126,982 or 23% to
$6,003,960 from $4,876,978 as compared to the corresponding period of the prior
year. Compared to three months ended June 30, 2003, our sales revenue from 3
main categories of products for current quarter were as follows:

                                                                     Increase /
                                           SALES REVENUE             (decrease)
                                    THREE MONTHS ENDED JUNE 30,       in sales
         Product series                 2004            2003          revenue
                                    ------------    ------------    ------------
         Health food supplement     $   392,162     $   404,424     $   (12,262)
         Chinese medical products     5,315,228       4,060,650       1,254,578
         Soybean protein peptide        296,570         411,904        (115,334)
                                    ------------    ------------    ------------
         TOTAL REVENUE              $ 6,003,960     $ 4,876,978     $ 1,126,982
                                    ============    ============    ============

In the quarter ending June 30, 2004 the sales of our Chinese medical products
increased by $1,254,578 or 31% increase as compared to the same quarter last
year. Our distribution strategy of selling cease enuresis soft gel and other
Chinese medical through clinic networks and hospitals in 2004 increased our
sales revenue compared to 2003.

However, sales revenue from our health food supplement series decreased by
$12,262 in the current quarter as compared to the same quarter last year,
representing a 3% decrease. We recorded a reduction in sales revenue from health
food supplement products in 2003 against 2002 due to severe competition in
health food supplement market in China and we managed to slowly pick up and
recovered our market penetration in first quarter of 2004 through intensive
marketing and promotion campaigns. For this particular quarter, our sales in
health food supplement was almost the same as the same quarter last year,
indicating the sales in health food supplement is still quite reluctant.

Also, the new soybean protein peptide series of which we launched in 2003
recorded a decrease in sales revenue in the current quarters. Compared to the
same quarter last year, sales revenue decreased by 28%. In the same quarter last
year when we launched our soybean protein peptide products, our distributors
placed purchase orders with larger quantities for initial ordering and in the
same quarter in 2004 when the distributors placed their refill orders, the order
size was reduced and caused a reduction in sales revenue for soybean protein
peptide products.

Cost of sales increased by $78,485 or 4% to $1,842,825 from $1,921,310 for the
three months ended June 30, 2004, as compared to the corresponding period of the
prior year. The increase in costs of sales by product categories were as
follows:


                                       14


<PAGE>

                                                                     Increase /
                                             COST OF SALES           (decrease)
                                      THREE MONTHS ENDED JUNE 30,    in cost of
         Product series                  2004            2003          sales
                                      -----------    -----------    -----------
         Health food supplement       $  256,980     $  215,446     $   41,534
         Chinese medical products      1,467,632      1,444,147         23,485
         Soybean protein peptide         118,213        261,717       (143,504)
                                      -----------    -----------    -----------
         TOTAL COST OF SALES          $1,842,825     $1,921,310     $  (78,485)
                                      ===========    ===========    ===========

The cost of sales of health food supplement series increased by $41,534, or 19%
in the current quarter of 2004 compared to same quarter in 2003. There was an
increase in cost of sales while revenue decreased because we wrote off
manufacturing overheads due to wastage in the current quarter that was not
occurred in the same quarter of 2003.

The cost of sales of Chinese medical products increased by $23,485, or 2% in the
current quarter compared to the same quarter last year as a result of increase
in 31% sales. The % increase in cost of sales was lower than the proportional
increase in sales revenue because the % profit margin improved from 64% in 2003
to 72% in 2004. The Company continued to experience increase in sales for
Chinese medical products and as a result, we managed to improve our profit
margin through better production experience and increased scale of production.

In the current quarter, the cost of sales of soybean protein peptide decreased
by $143,504, or 55% against the same quarter last year. This was mainly due to
decrease in 28% of sales revenue of soybean protein peptide in the current
quarter against the same quarter last year. The decrease in cost of sales for
soybean protein peptide was much higher than decrease in revenue, because we
managed to increase our profit margin from 36% in second quarter last year to
60% in current quarter. Last year the same quarter our Company first launched
soybean protein peptide products and the production process was new to our
Company. As a result, the profit margin was low due to high production cost.
However, in current quarter we were more experienced with our production process
and we managed to lower our production cost and hence improved our profit
margin.

The gross profit margin has improved from 61% in the second quarter last year to
69% in current quarter.

Selling and marketing expenses increased by $132,584 or 32% to $550,423 as
compared to the corresponding period of the prior year. In the current quarter
we spent $109,697 on payroll for sales and marketing employees, an increase of
8% compared to same quarter last year due to increase in staff force for sales
and marketing. Selling and marketing overheads increased from $316,140 in second
quarter last year to $440,726, or 39% increase against the current quarter. We
increased our expenditure in sales and marketing overheads in the current
quarter in order to capture the increase in 23% sales revenues for the current
quarter as compared to the same quarter of last year.

Advertising expenses increased by $223,934 or 42% to $761,431 as compared to the
corresponding period of the prior year. This increase is attributed to increase
advertising efforts in order to support the increase in sales and marketing
activities for all product lines that enabled increase in revenue in current
quarter ended June 30, 2004 as compared to June 30, 2003.

General and administrative expenses increased by $459,168 or 120% to $841,347 as
compared to the corresponding period of the prior year. This increase is
attributed to: (1) increased in activity level as a result of sales expansion of
existing products of $317,985; and (2) increase in consultancy expenses of
$141,183 as compared to the same period of the prior year.

Depreciation and amortization increased by $10,257 or 8% as compared to the
corresponding period to the prior year. This is the result of purchases of new
assets.

The income tax was provided at 15% of income before tax at the level of the
operating entity in China. However, since there were other operating expenses
incurred in the holding company level as well as AOBOHK and these expenses could
not enjoy tax benefits in China, the income tax rate provided for the Company
was higher than 15% and reached 18%.


                                       15


<PAGE>

Our net income increased by $218,160 to a net income of $1,507,749 from a net
income of $1,289,589.

RESULTS OF OPERATION - SIX MONTHS ENDED JUNE 30, 2004 AS COMPARED TO SIX MONTHS
-------------------------------------------------------------------------------
ENDED JUNE 30, 2003
-------------------

For the six months ended June 30, 2004 revenues increased by $2,534,939 or 27%
to $11,910,579 from $9,375,640 as compared to the corresponding period of the
prior year. Compared to six months ended June 30, 2003, our sales revenue from 3
main categories of products for the period ended June 30, 2004 against same
period last year were as follows:

                                                                     Increase /
                                           SALES REVENUE             (decrease)
                                     SIX MONTHS ENDED JUNE 30,        in sales
         Product series                 2004            2003           revenue
                                    ------------    ------------    ------------
         Health food supplement     $   997,627     $   822,181     $   175,446
         Chinese medical products    10,270,383       8,141,555       2,128,828
         Soybean protein peptide        642,569         411,904         230,665
                                    ------------    ------------    ------------
         TOTAL REVENUE              $11,910,579     $ 9,375,640     $ 2,534,939
                                    ============    ============    ============

In the quarter ending June 30, 2004 the sales of our Chinese medical products
increased by $1,254,578 or 31% increase as compared to the same quarter last
year. Our distribution strategy of selling cease enuresis soft gel and other
Chinese medical through clinic networks and hospitals in 2004 increased our
sales revenue compared to 2003.

However, sales revenue from our health food supplement series decreased by
$12,262 in the current quarter as compared to the same quarter last year,
representing a 3% decrease. We recorded a reduction in sales revenue from health
food supplement products in 2003 against 2002 due to severe competition in
health food supplement market in China and we managed to slowly pick up and
recovered our market penetration in first quarter of 2004 through intensive
marketing and promotion campaigns. For this particular quarter, our sales in
health food supplement was almost the same as the same quarter last year,
indicating the sales in health food supplement is still quite reluctant.

Also, the new soybean protein peptide series of which we launched in 2003
recorded a decrease in sales revenue in the current quarters. Compared to the
same quarter last year, sales revenue decreased by 28%. In the same quarter last
year when we launched our soybean protein peptide products, our distributors
placed purchase orders with larger quantities for initial ordering and in the
same quarter in 2004 when the distributors placed their refill orders, the order
size was reduced and caused a reduction in sales revenue for soybean protein
peptide products.

Cost of sales increased by $108,914 or 3% to $3,662,586 from $3,553,672 for the
six months ended June 30, 2004, as compared to the corresponding period of the
prior year. The increase in costs of sales by product categories were as
follows:

                                                                     Increase /
                                           SALES REVENUE             (decrease)
                                     SIX MONTHS ENDED JUNE 30,        in sales
         Product series                 2004            2003          revenue
                                     -----------    -----------     -----------
         Health food supplement      $  492,777     $  430,608      $   62,619
         Chinese medical products     2,998,741      2,861,347         137,394
         Soybean protein peptide        171,068        261,717         (90,649)
                                     -----------    -----------     -----------
         TOTAL COST OF SALES         $3,662,586     $3,553,672      $  108,914
                                     ===========    ===========     ===========


                                       16


<PAGE>

The cost of sales of health food supplement series increased by $62,619, or 14%
in the period ended June 30, 2004 compared to same period in 2003. The increase
in cost was not in the same ratio as increase in revenue because we managed to
improve our profit margin from 48% in the last period ended June 2003 to 51% in
the same period this year. This was attributable to our better utilization of
raw material as a result of increased scale of production due to we manage to
pick up our sales in first 6 months of 2004 in aggregate against the same period
in 2003. In 2003 we recorded a reduction in sales revenue from health food
supplement products in 2003 against 2002 due to severe competition in health
food supplement market in China.

The cost of sales of Chinese medical products increased by $137,394, or 5% in
the current period ended June 30, 2004 compared to the same period last year as
a result of increase in 26% sales. The % increase in cost of sales was lower
than the proportional increase in sales revenue because the % profit margin
improved from 65% in 2003 to 71% in 2004. The Company continued to experience
increase in sales for Chinese medical products and as a result, we managed to
improve our profit margin through better production experience and increased
scale of production.

In the current period ended June 30, 2004, the cost of sales of soybean protein
peptide decreased by $90,649, or 35% against the same period ended June 30 last
year. This was mainly due to decrease in 28% of sales revenue of soybean protein
peptide in the current quarter against the same quarter last year, even though
our sales in soybean protein peptide increased by 56% in the current period
ended June 30 this year against the same period last year. The decrease in cost
of sales for soybean protein peptide was because we managed to increase our
profit margin from 36% in first two quarter last year to 73% in same quarters
this year. Second quarter last year our Company first launched soybean protein
peptide products and the production process was new to our Company. As a result,
the profit margin was low due to high production cost. However, in current
quarter we were more experienced with our production process and we managed to
lower our production cost and hence improved our profit margin. As a result, in
aggregate the first 6 months this year we increased our profit margin against
the aggregate of the 6 months last year.

The gross profit margin has improved from 62% in the period ended June 30 last
year to 69% in the same period this year.

Selling and marketing expenses increased by $324,840 or 46% to $1,029,154 as
compared to the corresponding period of the prior year. In the period ended June
30, 2004 and 2003, we spent $204,751 and $194,524, respectively, on payroll for
sales and marketing staffs. The increase was attributable to increase in sales
and marketing employees in the current period ended June 30, 2004 compared to
the same period in 2003. Also, in the current period ended June 30, 2004, we
spent $824,403 on sales and marketing overheads, representing an addition of
$314,613 compared to same period last year. We increased our expenditure in
sales and marketing overheads in the current period ended June 30, 2004 in order
to capture the increase in 27% sales revenues for the current period ended June
30, 2004 as compared to the same period last year.

Advertising expenses increased by $434,509 or 37% to $1,607,204 as compared to
the corresponding period of the prior year. This increase is attributed to
increase advertising efforts in order to support the increase in sales and
marketing activities for all product lines that enabled increase in revenue.

General and administrative expenses increased by $1,091,881 or 141% to
$1,865,044 as compared to the corresponding period of the prior year. This is
mainly due to (1) increased in activity level as a result of sales expansion of
existing products of $685,765; (2) expenses of $123,750 associated with adoption
of new directors and officers compensation plan and stock option plan and 3)
increase in consultancy expenses of $ 282,366 as compared to the same period of
the prior year.

Depreciation and amortization increased by $29,345 or 11% as compared to the
corresponding period to the prior year. This is mainly due to the increase in
asset as compared to the same period of the prior year.

The income tax was provided at 15% of income before tax at the level of the
operating entity in China. However, since there were other operating expenses
incurred in the holding company level as well as AOBOHK and these expenses could
not enjoy tax benefits in China, the income tax rate provided for the Company
was higher than 15% and reached 19%.

                                       17


<PAGE>

Our net income increased by $308,520 to a net income of $2,767,788 from a net
income of $2,459,268.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

We have funded capital requirements through cash flow from operations. As of
June 30, 2004 we had a cash balance of $4,922,240 and a working capital surplus
of $13,084,119. This compares with a cash balance of $5,366,857 and a working
capital surplus of $10,638,558 at December 31, 2003. Cash flow provided by
operating activities amounted to $2,771,612 in the current period ended June 30,
2004. Inventories, trade receivables and other receivables increased by
$1,034,725, $129,217 and $278,887, respectively. Our sales increased by 27% in
the current period ended June 30, 2004 against the same period last year and as
a result, the Company was required to increase working capital in terms of
inventories, trade receivables and other receivables to cope with increase level
of operating activities and increased sales revenue. However, the Company
reduced our account payable and other accrued expenses by $255,438 even we have
increased level of operating activities in the current period ended June 30,
2004. The raw materials for production of soybean protein and medical products
were originated from the agricultural products cultivated by the farmers in
Harbin. Farmers did not take in any credit and all transactions were in cash
basis. As a result, increase in production volume and operating activities did
not create corresponding increase in account payable and accrued expenses.

Cash flow generated from our existing operations will be sufficient to fund our
working capital needs of the Company for the next twelve months. We have strong
cash inflow streams attributable from our profit from operations and we do not
anticipate any material liquidity issues in the near future.

We have no intention to fund up any of our future merger and acquisition plan
through our internal source of capital should such expenditure impair our
existing level of liquidity or affect our normal business operations.

NEW ACCOUNTING PRONOUNCEMENT
----------------------------

In March 2004, the U.S. Securities and Exchange Commission's Office of the Chief
Accountant and the Division of Corporate Finance released Staff Accounting
bulletin ("SAB") No. 105, "Loan Commitments Accounted for as Derivative
Instruments". This bulletin contains specific guidance on the inputs to a
valuation-recognition model to measure loan commitments accounted for at fair
value, and requires that fair-value measurement include only differences between
the guaranteed interest rate in the loan commitment and market interest rate,
excluding any expected future cash flows related to the customer relationship or
loan servicing. In addition, SAB 105 requires the disclosure of the accounting
policy for loan commitments, including methods and assumptions used to estimate
the fair value of loan commitments, and any associated hedging strategies. SAB
105 is effective for derivative instruments entered into subsequent to March 31,
2004 and should also be applied to existing instruments as appropriate.

The Company has not yet completed its evaluating of SAB 105, but does not
anticipate a material impact on the consolidated financial statements.

ITEM 3.  CONTROLS AND PROCEDURES.

As of the end of the period covered by this report (the "Evaluation Date"), we
carried out an evaluation in accordance with the requirements of the Chinese
auditing standards as well as the applicable rules in the United States. The
Company had set up an audit group, which consisted of the Chief Executive
Officer, Chief Financial Officer, one of the members of the board of directors
and two executives (including the manager) from our internal audit department.
This audit group is under the supervision of our Chief Executive Officer and
Chief Financial Officer. The Company's audit group evaluated the effectiveness
of the design and operation of our disclosure controls and procedures of our
Form 10QSB before it was filed with the Commission. The Company did not have any
restatements as a result of the SEC staff comments and the Company acknowledges
that the Management Discussion and Analysis needed expanded disclosure under the
current SEC guidelines and in future filings the Company will continue to expand
its Management Discussion and Analysis to be compliant with the SEC rules. In
response to the comments of the Staff of the Commission, the Company identified
certain areas for improvement, such as a more detailed breakdown discussion of
our product lines and inventory treatment. Pursuant to the request of the Staff


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<PAGE>

of the Commission, the Company has made such amendments in its amended periodic
reports, and the Company intends to make more detailed disclosure on a
going-forward basis. In view of the above, the audit group made their evaluation
pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange act") to the maximum possible extent and to the best knowledge of
the audit group. Notwithstanding the matters noted above, and based upon our
evaluation, our Chief Executive Officer and our Chief Financial Officer
concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective and basically sound in all material aspects under Rule
13a-15. However, given the fact that our major operations are located China, the
Company and the audit group consistently make efforts to coordinate the evolving
control and disclosure environment in China with the regulatory environment in
the United States. The Company has identified this aspect as an area for
improvement and is taking measures to train its staff for better performance.

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


                           PART II - OTHER INFORMATION

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

On February 13, 2004, the Company filed a Form 8K current report pursuant to
section 13 or 15(d) of the Securities Exchange Act of 1934, to announce that
Thomas Leger & Co. ("Thomas Leger"), our certifying accounting firm, resigned as
our principal independent accountant on February 6, 2004. Our board of directors
authorized the engagement of Weinberg & Company, P.A. as the new independent
auditor to audit our financial statements. During our two most recent fiscal
years and any subsequent interim period up to the date of resignation of Thomas
Leger on February 6, 2004, there were no disagreements between our company and
Thomas Leger, on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which, if not resolved to
the former accountant's satisfaction, caused it to make reference to the subject
matter of the disagreement(s) in connection with its report.

(a)        Exhibits

         The following exhibits are filed as part of this quarterly report on
Form 10-QSB/A:

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

31.1       Certification of Chief Executive Officer pursuant to Section 302 of
           the Sarbanes-Oxley Act of 2002

31.2       Certification of Chief Financial Officer pursuant to Section 302 of
           the Sarbanes-Oxley Act of 2002

32.1       Certification of Chief Executive Officer pursuant to Section 906 of
           the Sarbanes-Oxley Act of 2002

32.2       Certification of Chief Financial Officer pursuant to Section 906 of
           the Sarbanes-Oxley Act of 2002

(b)        Reports on Form 8-K

Current report on Form 8-K filed with the SEC on June 9, 2004: In this report we
disclosed that on May 26, 2004, we signed a letter of intent to acquire
Heilongjiang Songhuajiang Pharmaceutical Limited, a Chinese state-owned
pharmaceutical company, subject to a number of conditions described in that
report.


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<PAGE>

                                   SIGNATURES

         In accordance with 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.

AMERICAN ORIENTAL BIOENGINEERING, INC.

/S/ SHUJUN LIU
---------------------------------------
SHUJUN LIU
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
DATED: APRIL 12, 2005

/S/ YANCHUN LI
---------------------------------------
YANCHUN LI
CHIEF FINANCIAL OFFICER
DATED: APRIL 13, 2005


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