**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

# **FORM 10-QSB**

 

**(Mark One)**

**ý****     Quarterly report under Section 13 or15(d) of the Securities Exchange Act of 1934 For  the  quarterly  period ended  September 30, 2002**

** **

**o****      Transition report under Section 13 or15(d) of the Securities Exchange Act of 1934 For the transition period from_________ to _________**

** **

**Commission File No. 0-29015**

** **

**AMERICAN ORIENTAL BIOENGINEERING, INC.**

(Nameof Small Business Issuer in Its Charter)

 

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

 

**NO.12 JIANCE ROAD, NANGANG DISTRICT, HARBIN,CHINA, 15008**

(Addressof principal executive offices)

 

**86-451-666-6601**

(Issuer’stelephone number, including area code)

 

SECURITIES REGISTERED PURSUANT TO SECTION12(B) OF THE ACT            :               (None)

SECURITIES REGISTERED PURSUANT TO SECTION12(G) OF THE ACT            :

 

**Common Stock, par value $0.01**

(Titleof Class)

 

Check whether the issuer (1) filed allreports required to be filed by Section 13 or 15(d) of the Exchange Act duringthe past 12 months (or for such shorter period that the registrant was requiredto file such reports); and (2) has been subject to such filing requirements forthe past 90 days.

Yes   ý     No   o

Indicate the number of shares outstanding ofeach of the issuer’s class of common stock as of the latest practicable date:

 
| **Title of each class of Common Stock** |   | **Outstanding  as September 30, 2002** |   |
|-----------------------------------------|--------|----------------------------------------|--------|
| Common Stock, $0.01 par value           |   | 11,341,017                             |   |

 

Transitional Small Business Disclosure Format(check one):

Yes   o    No ý

 

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**TABLE OF CONTENTS**

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## **PART I - FINANCIALINFORMATION**

 

Item  1.                   Financial Statements.

•                        Statement of Income

•                        Balance Sheet

•                        Cash Flow Statement

•                        Notes 5. - Subsequent Events

Item 2.                   ManagementDiscussions & Anlaysis of Financial Condition and Results of Operations.

 

## **PART II - OTHER INFORMATION**

 

Item 1.     Legal Proceedings.

Item  2.     Changes in Securities.

Item 3.     Defaults Upon SeniorSecurities.

Item 4.     Submission of Matters to a Vote of Security Holders.

Item 5.     Other Information.

Item 6.     Exhibits and Reports onForm 8-K.

 

2

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**PARTI - FINANCIAL INFORMATION**

 

## **ITEM 1.                  FINANCIAL STATEMENTS**

 

# **AMERICAN ORIENTAL BIOENGINEERING, INC**

(FORMERLYINTERNET GOLF ASSOCIATION, INC.)

# **CONSOLIDATED BALANCE SHEET**

UNAUDITED

SEPTEMBER30, 2002

 
| ASSETS                                                                                                                                                      |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                        |   |   |   |   |   |
|                                                                                                                                                        |   | **September  30,** |   | **December  31,** |   |
|                                                                                                                                                        |   | **2002** |   | **2001** |   |
| CURRENT ASSETS                                                                                                                                              |   |   |   |   |   |
| Cash and bank balances                                                                                                                                      |   | $ | 2,125,943 |   | $ | 1,325,453 |   |
| Trade receivables, net of provisions                                                                                                                        |   | 1,690,507 |   | 1,089,572 |   |
| Inventory                                                                                                                                                   |   | 693,843 |   | 603,520 |   |
| Prepayments for goods                                                                                                                                       |   | 1,125,239 |   | 565,931 |   |
| Due from related parties                                                                                                                                    |   | 10,690 |   | 108,908 |   |
| Deferred taxes                                                                                                                                              |   | 40,067 |   | 103,116 |   |
| Deferred consulting expense                                                                                                                                 |   | 565,625 |   | 30,361 |   |
|                                                                                                                                                        |   |   |   |   |   |
| TOTAL CURRENT ASSETS                                                                                                                                        |   | 6,251,914 |   | 3,826,861 |   |
|                                                                                                                                                        |   |   |   |   |   |
| FIXED ASSETS, net of depreciation                                                                                                                           |   | 3,841,567 |   | 4,043,301 |   |
|                                                                                                                                                        |   |   |   |   |   |
| OTHER ASSETS, net of amortization                                                                                                                           |   | 740,528 |   | 813,253 |   |
|                                                                                                                                                        |   |   |   |   |   |
| TOTAL ASSETS                                                                                                                                                |   | $ | 10,834,009 |   | $ | 8,683,415 |   |
|                                                                                                                                                        |   |   |   |   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                   |   |
|                                                                                                                                                        |   |   |   |   |   |
| CURRENT LIABILITIES                                                                                                                                         |   |   |   |   |   |
| Accounts payable and accrued expenses                                                                                                                       |   | $ | 654,062 |   | $ | 429,647 |   |
| Prepayments for materials                                                                                                                                   |   | 170,742 |   | 278,982 |   |
| Bank loans                                                                                                                                                  |   | 1,445,783 |   | 1,445,783 |   |
| Government grant                                                                                                                                            |   | 120,482 |   | 120,482 |   |
| Taxes payable                                                                                                                                               |   | 76,031 |   | 88,031 |   |
| Payable to related party                                                                                                                                    |   | 175,094 |   | 7,133 |   |
|                                                                                                                                                        |   |   |   |   |   |
| TOTAL CURRENT LIABILITIES                                                                                                                                   |   | 2,642,194 |   | 2,370,058 |   |
|                                                                                                                                                        |   |   |   |   |   |
| MEMBERS’ EQUITY                                                                                                                                        |   | — |   | 6,313,357 |   |
|                                                                                                                                                        |   |   |   |   |   |
| SHAREHOLDERS’ EQUITY                                                                                                                                   |   |   |   |   |   |
| Preferred stock, $0.001 par value; 5,000,000 shares authorized; no  shares issued or outstanding                                                            |   |   |   |   |   |
| Common stock, $.001 par value, 20,000,000 shares authorized:  10,141,017 and 11,341,017 issued and outstanding at December 31, 2001 and  September 30, 2002 |   | 11,341 |   | — |   |
| Additional paid-in capital                                                                                                                                  |   | 4,609,208 |   | — |   |
| Retained Earnings                                                                                                                                           |   | 3,571,266 |   | — |   |
| Equity in the amount of $716,202 and  $550,202 is restricted at September 30, 2002 and December 31, 2001.                                                   |   | — |   | — |   |
|                                                                                                                                                        |   |   |   |   |   |
| TOTAL EQUITY                                                                                                                                                |   | 8,191,815 |   | 6,313,357 |   |
|                                                                                                                                                        |   |   |   |   |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                             |   | $ | 10,834,009 |   | $ | 8,683,415 |   |

 

 

3

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# **AMERICAN ORIENTAL BIOENGINEERING, INC**

(FORMERLYINTERNET GOLF ASSOCIATION, INC.)

# **CONSOLIDATED STATEMENT OFINCOME**

UNAUDITED

SEPTEMBER30, 2002

 
|                                                               |   | **NINE  MONTHS ENDED**  |      | **THREE  MONTHS ENDED** |   |
|--------------------------------------------------------------------|--------|-------------------------|-----------|-------------------------|--------|
|                                                               |   | **September  30, 2002** |      | **September  30, 2002** |   |
|                                                               |   | **2002**                |      | **2001**                |   | **2002** |   | **2001** |   |
|                                                               |   |                    |      |                    |   |   |   |   |   |
| SALES                                                              |   | $                       | 7,671,287 |                    | $      | 5,942,244 |   | $ | 2,898,373 |   | $ | 2,349,155 |   |
|                                                               |   |                    |      |                    |   |   |   |   |   |
| COST OF SALES                                                      |   | 2,931,092               |      | 2,486,325               |   | 1,054,656 |   | 869,025 |   |
|                                                               |   |                    |      |                    |   |   |   |   |   |
| GROSS PROFIT                                                       |   | 4,740,195               |      | 3,455,919               |   | 1,843,717 |   | 1,480,130 |   |
|                                                               |   |                    |      |                    |   |   |   |   |   |
| SELLING AND ADMINISTRATIVE EXPENSE                                 |   | 720,737                 |      | 513,927                 |   | 285,157 |   | 283,579 |   |
|                                                               |   |                    |      |                    |   |   |   |   |   |
| ADVERTISING                                                        |   | 1,087,507               |      | 821,128                 |   | 601,926 |   | 199,293 |   |
|                                                               |   |                    |      |                    |   |   |   |   |   |
| GENERAL AND ADMINISTRATIVE EXPENSES                                |   | 923,302                 |      | 446,372                 |   | 498,580 |   | 248,268 |   |
|                                                               |   |                    |      |                    |   |   |   |   |   |
| MERGER COSTS                                                       |   | 589,824                 |      | —                  |   | — |   | — |   |
|                                                               |   |                    |      |                    |   |   |   |   |   |
| DEPRECIATION AND AMORTIZATION                                      |   | 317,369                 |      | 289,234                 |   | 100,235 |   | 112,770 |   |
|                                                               |   |                    |      |                    |   |   |   |   |   |
| INTEREST                                                           |   | 69,960                  |      | 70,202                  |   | 23,442 |   | 23,696 |   |
|                                                               |   |                    |      |                    |   |   |   |   |   |
| OTHER (INCOME)EXPENSE                                              |   | (87,441                 | )         | (2,349                  | )      | (14,918 | ) | (2,349 | ) |
|                                                               |   |                    |      |                    |   |   |   |   |   |
| INCOME BEFORE INCOME TAXES                                         |   | 1,118,937               |      | 1,317,405               |   | 349,295 |   | 614,873 |   |
|                                                               |   |                    |      |                    |   |   |   |   |   |
| INCOME TAXES                                                       |   | 235,245                 |      | 197,610                 |   | 76,032 |   | 87,178 |   |
|                                                               |   |                    |      |                    |   |   |   |   |   |
| NET INCOME                                                         |   | $                       | 883,692   |                    | $      | 1,119,795 |   | $ | 273,263 |   | $ | 527,695 |   |
|                                                               |   |                    |      |                    |   |   |   |   |   |
| Basic and diluted net income per common share:                     |   |                    |      |                    |   |   |   |   |   |
|                                                               |   |                    |      |                    |   |   |   |   |   |
| Basic and diluted net income per common share                      |   | $                       | 0.08      |                    | 0.11   |   | $ | 0.03 |   | 0.05 |   |
|                                                               |   |                    |      |                    |   |   |   |   |   |
| Basic and diluted weighted average common  Shares outstanding |   | 10,467,987              |      | 10,141,017              | (1)    | 10,923,625 |   | 10,141,017 |  (1) |

 

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(1)Number of shares outstanding the day of the merger for comparison only

 

 

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# **AMERICAN ORIENTAL BIOENGINEERING, INC**

(FORMERLYINTERNET GOLF ASSOCIATION, INC.)

# **CONSOLIDATED STATEMENT OFCASH FLOW**

UNAUDITED

SEPTEMBER30, 2002

 
|                                                                                    |   | **NINE  MONTHS ENDED** |      |
|-----------------------------------------------------------------------------------------|--------|------------------------|-----------|
|                                                                                    |   | **September 30, 2002** |      | **September  30, 2001** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                   |   |                   |      |   |   |
| Net income                                                                              |   | $                      | 883,692   |   | $ | 1,119,795 |   |
| Adjustments to reconcile net income to  net cash provided by operating activities: |   |                   |      |   |   |
| Depreciation and amortization                                                           |   | 317,369                |      | 289,234 |   |
| Deferred merger costs                                                                   |   | 312,514                |      | — |   |
| Stock issued for services                                                               |   | 600,000                |      | — |   |
| (Increase)decrease in assets:                                                           |   |                   |      |   |   |
| Inventory                                                                               |   | (90,323                | )         | (14,897 | ) |
| Trade receivables                                                                       |   | (600,935               | )         | (581,515 | ) |
| Advance payments                                                                        |   | (559,308               | )         | (167,764 | ) |
| Due from related parties                                                                |   | 98,218                 |      | (71,557 | ) |
| Due from shareholders                                                                   |   | —                 |      | (332,530 | ) |
| Due from employees                                                                      |   | —                 |      | (41,995 | ) |
| Deferred taxes                                                                          |   | 63,049                 |      | 3,659 |   |
| Deferred consulting expense                                                             |   | (452,211               | )         | — |   |
| Increase(decrease) in liabilities:                                                      |   |                   |      |   |   |
| Trade payables and accrued expenses                                                     |   | 223,614                |      | 320,268 |   |
| Taxes payable                                                                           |   | (12,000                | )         | (8,011 | ) |
| Prepayments                                                                             |   | (108,240               | )         | 45,391 |   |
| Due to related party                                                                    |   | 167,961                |      | (97,934 | ) |
| Net cash provided by operating activities                                               |   | 843,400                |      | 462,144 |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                   |   |                   |      |   |   |
| Purchase of fixed assets                                                                |   | (42,910                | )         | (13,624 | ) |
| Net cash used in investing activities                                                   |   | (42,910                | )         | (13,624 | ) |
| NET INCREASE IN CASH AND BANK BALANCES                                                  |   | 800,490                |      | 448,520 |   |
| Cash and bank balances, beginning of period                                             |   | 1,325,453              |      | 470,448 |   |
| Cash and bank balances, at end of period                                                |   | $                      | 2,125,943 |   | $ | 918,968 |   |

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Note 1 - On June 26, 2002 the reverse mergerwith Harbin Bioengineering was finalized. The following amounts represent thenon-cash portion of this transaction:

 
| Other            |   | $       | 83,333  |   |
|------------------|--------|---------|---------|--------|
| Merger Costs     |   | 312,514 |    |
| Accrued Expenses |   | (800    | )       |
|             |   | $       | 395,047 |   |

 

Note 2 - On August 2, 2002 the Companyissued  1,200,000 shares of common stockfor consulting  services.

 

 

5

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**AMERICAN ORIENTAL BIOENGINEERING, INC**

(FORMERLYINTERNET GOLF ASSOCIATION, INC.)

# **NOTES TO THE FINANCIAL STATEMENTS**

UNAUDITED

SEPTEMBER30, 2002

 

NOTE 1. - BASIS OF PRESENTATION

 

The unaudited consolidated financialstatements of American Oriental Bioengineering, Inc. (formerly Internet GolfAssociation, Inc.) have been prepared in accordance with generally acceptedaccounting principles for interim financial information and pursuant to therequirements for reporting on Form 10QSB and Item 310(b) of Regulation S-B.Accordingly, they do not include all the information and footnotes required bygenerally accepted accounting principles for complete financial statements.However, such information reflects all adjustments (consisting solely of normalrecurring adjustments), which are, in the opinion of management, necessary fora fair statement of results for the interim periods. Results shown for interimperiods are not necessarily indicative of the results to be obtained for a fullfiscal year. These interim financial statements should be read in conjunctionwith the audited financial statements and notes thereto included in the CompanyForm 10-KSB for the fiscal year ended December 31, 2001.

 

NOTE 2. - NATURE OF COMPANY

 

On December 18, 2001, the Company and HarbinThree Hapiness Bioengineering Co., Ltd. ("Harbin Bioengineering")entered into an agreement whereby the Company acquired 100% of the equity interestof Harbin Bioengineering. As a result, Harbin Bioengineering became a whollyowned subsidiary of the Company (the “Acquisition”). The Company exchanged8,538,943 shares of its common stock for that number of shares of HarbinBioengineering that constitutes 100% of the equity interest of HarbinBioengineering. On December 18, 2001, the directors and executive officers ofthe Company resigned and Shujun Liu was appointed Chairman of the Board ofDirectors and President of the Company. On June 26, 2002, the Acquisitionbecame effective when the Company filed Articles of Exchange with the Secretaryof State of Nevada.

 

Refer to “NOTE 5. - SUBSEQUENT EVENTS” in theManagement Discussions and Analysis section for acquisition events occuredafter September 30, 2002.

 

 

NOTE 3. - FOREIGN CURRENCY CONVERSION

 

The Company financial information ispresented in US dollars. The People’s Republic of China ("PRC")currency (Reminbi dollars) has been converted into US dollars at the exchangerate of 8.3 to 1.

 

NOTE 4. - INCOME TAXES

 

Income taxes are provided on HarbinBioengineering in accordance with taxation principles currently effective inthe People’s Republic of China.

 

NOTE 5. - SUBSEQUENT EVENTS

 

On October 15, 2002, the Company filed anInformation Statement of Schedule 14C reporting the issuance of 20,284,810shares of common stock and 1,000,000 shares of class A preferred stock inconsideration for all of the ownership interest in a soybean protein peptidebiochemical engineering project (the “Project”) as described in the purchaseagreement, dated as of August 17, 2002 by Shujun Liu and the Company (“PurchaseAgreement”).  The value of the commonstock to be issued is approximately $3,205,000, which is equivalent to $0.158per share of common stock which is the

 

6

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average of the closing price for the five-dayperiod immediately following the date of the Purchase Agreement, i.e, fromAugust 19, 2002 to August 23, 2002.  Byacquiring the Project, among other assets, the Company will acquire ownershipof the building housing of the Project’s manufacturing plant, manufacturingequipment, and environmental control equipment the historical cost of which isapproximately $3,205,000.  In addition,the Company will receive the right to produce the products that resulted fromthe Project as well as ownership rights on a pending patent in the PRC for theprocess of the extraction and production of soybean peptide. The patentregistration is expected to be issued in December 2002.

 

7

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## **ITEM2.**    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

The following discussion should be read inconjunction with the information contained in the financial statements of theCompany and the notes thereto appearing elsewhere herein and in conjunctionwith the Management’s Discussion and Analysis set forth in the Company’s AnnualReport on Form 10-KSB for the year ended December 31, 2001 and Quarterly Reporton Form 10-QSB for the quarter ended June 30, 2002.

 

### **PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Statements made in this report other thanstatements of historical or current fact, including, without limitation,statements relating to our plans, strategies, objectives, expectations,intentions and adequacy of resources, are considered “forward-lookingstatements” as defined in the Private Securities Litigation Reform Act of1995.  These forward-looking statementsinvolve known and unknown risks, uncertainties and other factors that may causeour actual results, performance or achievements to be materially different fromany future results, performance or achievements expressed or implied by theforward-looking statements.

 

We undertake no obligation to update anyforward-looking statements, but investors are advised to consult any furtherdisclosures by us on the subject in our filings with the Securities andExchange Commission, especially on Forms 10-KSB, 10-QSB and 8-K, in which wediscuss in more detail various important factors that could cause actualresults to differ from expected or historic results.  It is not possible to foresee or identify all such factors.  As such, investors should not consider anylist of such factors to be an exhaustive statement of all risk, and certaintiesor potentially inaccurate assumptions.

 

#### CRITICAL ACCOUNTING POLICIES AND ESTIMATES 

 

Our discussion and analysis or plan ofoperations are based upon our consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States. The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On an on-going basis, we evaluate our estimates, includingthose related to inventory and accounts receivable reserves, provisions forimpairment losses of affiliated companies and other intangible assets, incometaxes and contingencies. We base our estimates on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions.

 

#### RECENT DEVELOPMENTS

 

On January 10, 2002, the Company filed aCurrent Report on Form 8-K reporting the acquisition (the “Acquisition”) by theCompany of all of the equity interest of Harbin Bioengineering, a People’sRepublic of China company. On June 26, 2002, the Acquisition became effectivewhen the Company filed Articles of Exchange with the Secretary of State ofNevada. On July 1, 2002, the Company filed an Amendment No. 2 to the Company’sCurrent Report on Form 8-K in order to report the effectiveness of theAcquisition.

 

As a result of the reverse merger, historicalfinancial data of Harbin Bioengineering is substituted for prior financialdata.  Immediately prior to theeffective date the Company had deferred merger costs of $395,847 of which$312,514 was expensed following the effective date.  The remaining $83,333 will 

 

8

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be expensed in the future over the life of aconsulting agreement.

 

SUBSEQUENT EVENTS

 

On October 15, 2002, the Company filed aInformation Statement of Schedule 14C reporting the issuance of 20,284,810shares of common stock and 1,000,000 shares of class A preferred stock inconsideration for all of the ownership interest in a soybean protein peptidebiochemical engineering project (the “Project”) as described in the purchaseagreement, dated as of August 17, 2002 by Shujun Liu and the Company (“PurchaseAgreement”).  The value of the commonstock to be issued is approximately $3,205,000, which is equivalent to $0.158per share of common stock which is the average of the closing price for thefive-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 will acquireownership of the building housing of the Project’s manufacturing plant,manufacturing equipment, and environmental control equipment the historicalcost of which is approximately $3,205,000. In addition, the Company will receive the right to produce the productsthat resulted from the Project as well as ownership rights on a pending patentin the PRC for the process of the extraction and production of soybean peptide.The patent registration is expected to be issued in December 2002. The Project,including the production, marketing and sales of various functional soybeanpeptide medical tablets and powders, was valued by Vigers, an independentappraiser in Hong Kong, on June 30, 2002, to have a fair market value of$40,406,000.

 

#### RESULTS OF OPERATION - THREE MONTHS ENDED SEPTEMBER 30, 2002 ASCOMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2001

 

Revenues increased by $549,218 or 23% to$2,898,373 as compared to the corresponding period of the prior year. Thisincrease is attributed primarily to increased selling and marketing efforts.

 

Cost of sales increased by $185,631 or 21% to$1,054,656 as compared to the corresponding period of the prior year. Thisincrease resulted from increased production volume costs.

 

Selling expenses increased by $1,578 or 0.6%to $285,157 as compared to the corresponding period of the prior year. Thisincrease is attributed primarily to increased selling and marketing efforts.

 

Advertising expenses increased by $402,633 or202% to $601,926 as compared to the corresponding period of the prior year.This increase is attributed to advertising efforts.

 

General and administrative expenses increasedby $250,312 or 101% to $498,580 as compared to the corresponding period of theprior year. This increase is the result of increased professional feesassociated with becoming a publicly traded company.

 

Depreciation and amortization decreased by$12,535 or 11% as compared to the corresponding period to the prior year. Thisis the result of rearrangement and adjustments on Company’s property, plant andequipment in 2002.

 

Other income increased by $12,569. This wasthe result of consulting services.

 

Our net income decreased by $254,432 to$273,263. This is mainly due to the overall increase in expenses.

 

 

RESULTS OF OPERATION — NINE MONTHS ENDEDSEPTEMBER 30, 2002 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001

 

Revenues increased by $1,729,043 or 29% to$7,671,287 as compared to the corresponding period of the prior year. Thisincrease is attributed to increased selling and marketing efforts.

 

9

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Cost of sales increased by $444,767 or 18% to$2,931,092 as compared to the corresponding period of the prior year. Thisincrease resulted from increased production volume costs.

 

Selling expenses increased by $206,810 or 40%to $720,737 as compared to the corresponding period of the prior year. Thisincrease is attributed primarily to increased selling and marketing activities.

 

Advertising increased by $266,379 or 32% to$1,087,507 compared to the corresponding period of the prior year.  This increase is attributed to increase inmarketing efforts during the second and third quarter compared to the sameperiods of year 2001.

 

General and administrative expenses increasedby $476,930 or 107% to $923,302 as compared to the corresponding period of theprior year. This increase is the result of increased professional feesassociated with becoming a publicly traded company.

 

Depreciation and amortization increased by$28,135 or 10% as compared to the corresponding period of the prior year. Thisis the result of additions to property, plant and equipment in 2001.

 

Other income increased by $85,092. This wasthe result of consulting income.

 

Our net income decreased by $236,103 to$883,692. This is mainly due to the increase in advertising expenses of$266,379, general and administrative expenses of $476,930 and merger expensesof $589,824.  Merger expenses totaling$589,824 were expensed during the six months ended June 30, 2002, as the mergerwith Harbin Bioengineering became effective June 26, 2002. The Company will notreceive any tax benefit from approximately $312,514 of merger expenses, whichwere incurred by the United States parent company. Taxes are provided onforeign operations only.

 

#### LIQUIDITY AND CAPITAL RESOURCES

 

We have funded capital requirements throughoperations. As of September 30, 2002 we had a cash balance of $2,125,943 and aworking capital of $3,609,720. This compares with a cash balance of $1,325,453and a working capital surplus of $1,456,803 for the end of the prior year.

 

10

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**PARTII - OTHER INFORMATION**

 

 

## **ITEM 1 - LEGAL PROCEEDINGS**

 

The Company may from time to time be involvedin various claims, lawsuits, disputes with third parties, actions involvingallegations of discrimination, or breach of contract actions incidental to theoperation of its business. The Company is not currently involved in any suchlitigation that it believes could have a materially adverse effect on itsfinancial condition or results of operations.

 

## **ITEM 2 - CHANGES INSECURITIES**

 

On August 2, 2002, the Company has issued anaggregate of 1,200,000 shares of its common stock to three independentconsultants who will provide services to the Company.  The aggregate value of the issuance on the date of issuance was$600,000 (or an average of $0.50 per share).

 

Refer to “NOTE 5. - SUBSEQUENT EVENTS” inManagement Discussions and Analysis section for events leading to change insecurities of the Company after report date.

 

## **ITEM 3 - DEFAULTS UPONSENIOR SECURITIES**

 

There have been no material defaults.

 

## **ITEM 4 - SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

 

On August 2, 2002, the Company held a specialmeeting of its stockholders. The Company stockholders considered and approvedthe following proposals:

 

Approve the Company to issue20,284,810 shares of common stock and 1,000,000 shares of class A preferredstock in consideration for all of the ownership interest in a soybean proteinpeptide biochemical engineering project (the “Project”) as described in thepurchase agreement, dated as of August 17, 2002 by Shujun Liu and the Company(“Purchase Agreement”).  The value ofthe common stock to be issued is approximately $3,205,000, which is equivalentto $0.158 per share of common stock which is the average of the closing pricefor the five-day period immediately following the date of the PurchaseAgreement, i.e, from August 19, 2002 to August 23, 2002.  By acquiring the Project, among otherassets, the Company will acquire ownership of the building housing of theProject’s manufacturing plant, manufacturing equipment, and environmentalcontrol equipment the historical cost of which is approximately$3,205,000.  In addition, the Companywill receive the right to produce the products that resulted from the Project aswell as ownership rights on a pending patent in the PRC for the process of theextraction and production of soybean peptide. The patent registration isexpected to be issued in December 2002. The Project, including the production,marketing and sales of various functional soybean peptide medical tablets andpowders, was valued by Vigers, an independent appraiser in Hong Kong, on June30, 2002, to have a fair market value of $40,406,000.

 

The record date for security holders votingon this proposal was August 2, 2002 and as of August 2, 2002, the number ofshares outstanding and eligible to vote in this matter was 10,141,017, of which7,161,997 voted in favor of the proposal.

 

 

## **ITEM 5 - OTHER INFORMATION**

 

None.

 

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## **ITEM 6 - EXHIBITS ANDREPORTS ON FORM 8-K**

 

None.

 

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**SIGNATURES**

 

        In accordance with the requirements of the Securities Exchange Act of1934, the registrant has duly caused this Report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 

 

 

 

**AMERICAN ORIENTALBIOENGINEERING, INC.**

 

 
| By                                       |  /s/  Shunjun Liu |
|------------------------------------------|-----------------------------|
| **Shunjun Liu**                          |
| **Chief Executive Officer and Chairman** |
| **Dated: November 14, 2002**             |
|                                     |

 

13

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**CERTIFICATION****OF CHIEFEXECUTIVE OFFICER PER**

**SECTION302 OF THE SARBANES-OXLEY ACT**

 

I, ShunjunLiu, certify that:

 

1.               I have reviewed this quarterly report onForm 10-Q of American Oriental Bioengineering, Inc.

 

2.               Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.               The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

a)              designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)             evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)              all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)             any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.               The registrant’s other certifyingofficers and I have indicated in this quarterly report whether or not therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  November 14, 2002 | /s/  Shunjun Liu                   |   |
|-------------------------------|-----------------------------------------|--------|
|                          | Shunjun Liu                             |
|                          | Chief  Executive Officer & Chairman |

 

14

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**CERTIFICATIONOF CHIEF FINANCIAL OFFICER PER**

**SECTION302 OF THE SARBANES-OXLEY ACT**

 

I, Yanchun Li,certify that:

 

1.               I have reviewed this quarterly report onForm 10-Q of American Oriental Bioengineering, Inc.

 

2.               Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.               The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

a)              designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)             evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)              all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)             any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.               The registrant’s other certifyingofficers and I have indicated in this quarterly report whether or not therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  November 14, 2002 | /s/ Yanchun  Li          |   |
|-------------------------------|--------------------------|--------|
|                          |  Yanchun Li         |
|                          | Chief  Financial Officer |

 

15

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**CERTIFICATION**

 

 

 

The undersigned, the Chief Executive Officerand Chairman and acting Chief Financial Officer of American OrientalBioengineering, Inc. (the “Issuer”), hereby certify that the 10-QSB for theperiod ended September 30, 2002 filed with the Commission on November 14, 2002and containing certain financials statements for fiscal quarter ended September30, 2002 fully complies with the requirements of section 13(a) and 15(d) of theSecurities Exchange Act of 1934 and that information contained in the 10-QSBfairly represents, in all material respects, the financial condition andresults of operations of the Issuer.

 

 

 

 
| By                                       |  /s/  Shunjun Liu |
|------------------------------------------|-----------------------------|
| **Shunjun Liu**                          |
| **Chief Executive Officer and Chairman** |
| **Dated: November 14, 2002**             |
|                                     |

 
| By                                 |  /s/  Yanchun Li |
|------------------------------------|----------------------------|
| **Yanchun Li**                     |
| **Acting Chief Financial Officer** |
| **Dated: November 14, 2002**       |

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