<PAGE>

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


                                   FORM 10-QSB/A
                                  AMENDMENT NO. 2


                                   (Mark One)

[X]      Quarterly report under Section 13 or 15(d) of the Securities Exchange
         Act of 1934 For the quarterly period ended September 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 of November 11, 2004
--------------------------------------------------------------------------------
Preferred Stock, $0.001 par value                              1,000,000
Common Stock, $0.001 par value                                33,631,827

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 September 30, 2004. The date of
filing the original Form 10-QSB for the period ended September 30, 2004, was
November 15, 2004. Amendment No. 1 to the Form 10-QSB for the period ended
September 30, 2004 was filed November 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 No. 2 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 September 30, 2003 and 2004, and the nine months ended
September 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.                                               11

Item 3.  Controls and Procedures.                                             16

PART II - OTHER INFORMATION

Item 6.  Exhibits                                                             17

<PAGE>
<TABLE>

                                        PART I - FINANCIAL INFORMATION

ITEM 1.         FINANCIAL STATEMENTS

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

                                                    ASSETS
                                                    ------

                                                                    SEPTEMBER 30,    DECEMBER 31,
                                                                       2004              2003
                                                                    ------------     ------------
                                                                     UNAUDITED
<S>                                                                 <C>              <C>
CURRENT ASSETS
  Cash and cash equivalents                                         $ 2,214,039      $ 5,366,857
  Trade receivables                                                   3,533,872        3,112,998
  Other receivable                                                      425,511          143,809
  Inventories                                                         4,495,426        2,546,810
  Prepayments for goods                                                 321,081          868,458
  Advances to employees                                                 123,283           55,116
  Deferred taxes                                                         78,439           78,439
  Deferred merger costs                                                   8,335           33,334
  Deferred consulting expenses                                        1,937,243        1,569,442

                                                                    ------------     ------------
  TOTAL CURRENT ASSETS                                               13,137,229       13,775,263
                                                                    ------------     ------------

PLANT AND EQUIPMENT, NET                                              6,903,876        7,264,822

DEPOSIT FOR MACHINERY                                                   388,898               --

DEPOSIT FOR LEASEHOLD IMPROVEMENT                                       386,000               --

DEPOSIT FOR ACQUISITION                                               7,228,916               --

OTHER ASSETS, NET                                                       566,446          632,531

                                                                    ------------     ------------
TOTAL ASSET                                                         $28,611,365      $21,672,616
                                                                    ============     ============

CURRENT LIABILITIES
  Accounts payable and accrued expenses                             $ 1,497,581      $ 1,253,826
  Prepayments for materials                                             231,998           76,593
  Bank loans                                                          1,445,783        1,445,783
  Taxes payable                                                         444,365          310,480
  Obligation under finance leases within one year                         7,069            6,780
  Payable to related party                                               92,426           43,243

                                                                    ------------     ------------
  TOTAL CURRENT LIABILITIES                                           3,719,222        3,136,705
                                                                    ------------     ------------

LONG-TERM LIABILITIES
  Obligation under finance leases                                        21,638           25,449
                                                                    ------------     ------------

TOTAL LIABILITIES                                                     3,740,860        3,162,154
                                                                    ------------     ------------

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


  Common stock, $0.001 par value, 60,000,000 shares
  authorized: 33,631,827 and 32,725,827 shares and outstanding
  at September 30, 2004 and December 31, 2003, respectively              33,632           32,726


  Additional paid-in capital                                         11,399,038       10,048,734
  Retained earnings
    Restricted portion                                                  534,177          534,177
    Unrestricted portion                                             12,902,658        7,893,825

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

TOTAL SHAREHOLDERS' EQUITY                                           24,870,505       18,510,462
                                                                    ------------     ------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                          $28,611,365      $21,672,616
                                                                    ============     ============

                    See accompanying notes to condensed consolidated financial statements

</TABLE>

                                                     F-1
<PAGE>
<TABLE>

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

                                                      3 months ended Sept.30,               9 months ended Sept.30,
                                                      2004               2003               2004               2003
                                                      ----               ----               ----               ----
<S>                                                <C>                <C>                <C>                <C>
SALES                                              $  7,372,555       $  5,426,568       $ 19,283,134       $ 14,802,208

COST OF SALES                                         2,436,157          1,956,309          6,098,743          5,509,981

                                                   -------------      -------------      -------------      -------------
GROSS PROFIT                                          4,936,398          3,470,259         13,184,391          9,292,227

SELLING AND MARKETING EXPENSES                          508,477            440,322          1,537,631          1,144,636

ADVERTISING                                             728,802            420,987          2,336,006          1,593,682

GENERAL AND ADMINISTRATIVE EXPENSES                     892,701            882,504          2,757,745          1,655,667

MERGER COSTS                                              8,333              8,333             24,999             24,999

DEPRECIATION AND AMORTIZATION                           145,619            134,580            436,674            396,290

                                                   -------------      -------------      -------------      -------------
INCOME FROM OPERATIONS                                2,652,466          1,583,533          6,091,336          4,476,953

INTEREST, NET                                           (23,694)            (3,554)           (71,485)           (50,261)

OTHER INCOME / (EXPENSES)                                56,634               (679)            83,376             79,473

                                                   -------------      -------------      -------------      -------------
INCOME BEFORE INCOME TAXES                            2,685,406          1,579,300          6,103,227          4,506,165

INCOME TAXES                                            444,361            335,645          1,094,394            803,242

                                                   -------------      -------------      -------------      -------------
NET INCOME                                         $  2,241,045       $  1,243,655       $  5,008,833       $  3,702,923
                                                   =============      =============      =============      =============

NET INCOME PER SHARE
    BASIC                                          $       0.07       $       0.04       $       0.15       $       0.13
    DILUTED                                        $       0.07       $       0.04       $       0.15       $       0.13

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
    BASIC                                            33,570,957         31,625,827         33,073,499         27,762,034
    DILUTED                                          33,594,477         33,237,240         33,097,224         28,777,621


                         See accompanying notes to condensed consolidated financial statements

</TABLE>
                                                          F-2

<PAGE>
<TABLE>

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

                                                                   9 months ended Sept.30,
                                                                   2004              2003
                                                                   ----              ----
<S>                                                            <C>               <C>
CASH FLOWS FROM OPERATING ACTIVIES:
          Net income                                           $ 5,008,833       $ 3,702,923
          Adjustments to reconcile net income to net cash
               provided by operating activities:
          Depreciation and amortization                            436,674           396,290
          Stock option compensation expenses                        64,000                --
          Deferred merger cost                                      24,999            24,999
          Buy back of warrants                                      25,000                --
          Common stock for services                              1,287,210                --

          Amortization of deferred consulting                      691,299           225,000
          Common stock issued for deferred consulting           (1,059,100)               --

          Stock warrants issued                                         --           555,000
          Changes in operating assets and liabilities:
               Inventories                                      (1,948,616)       (2,911,535)
               Trade receivables                                  (420,874)       (1,242,791)
               Other receivable                                   (281,702)          (26,042)
               Prepayments for goods                               547,377          (179,062)
               Due from related parties                                 --           265,961
               Advances to employee                                (68,167)               --
               Trade payables and accrued expenses                 218,755           476,682
               Prepayments for materials                           155,405            60,046
               Payable to related party                             49,183          (175,093)
               Income taxes payable                                133,885           344,334
                                                               ------------      ------------
Net cash provided by operating activities                        4,864,161         1,516,712
                                                               ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
          Purchase of plant and equipment                           (9,643)          (69,380)
          Deposit for machinery                                   (388,898)               --
          Deposit for leasehold improvement                       (386,000)               --
          Deposit for acquisition                               (7,228,916)               --
                                                               ------------      ------------
Net cash uesd in investing activities                           (8,013,457)          (69,380)
                                                               ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
          Repayment of finance leases                               (3,522)               --
          Proceeds from bank loan                                  481,928                --
          Repayment of bank loan                                  (481,928)               --
                                                               ------------      ------------
Net cash used in financing activities                               (3,522)               --
                                                               ------------      ------------

NET (DECREASE) INCREASE IN CASH                                 (3,152,818)        1,447,332
  AND CASH EQUIVALENTS
          Cash and cash equivalents, beginning of period         5,366,857         2,816,723
                                                               ------------      ------------

          Cash and cash equivalents, end of period             $ 2,214,039       $ 4,264,055
                                                               ============      ============

SUPPLEMENTARY CASH FLOWS DISCLOSURES
             1 Interest paid                                   $    71,485       $    50,261
                                                               ============      ============
             2 Taxes paid                                      $   313,172       $   344,334
                                                               ============      ============
             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.
             5 Issued 700,000 common shares in July 2004 valued at $1,189,300
               for services performed.


                See accompanying notes to condensed consolidated financial statements

</TABLE>
                                                F-3

<PAGE>

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

NOTE 1 - BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements of American Oriental
Bioengineering, 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 performs 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, 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.

On September 8, 2004, the Company signed the Purchase Agreement relating to the
acquisition of HSPL. The Company paid a deposit to acquire 100% equity ownership
of HSPL of $7,229,000 and the Company will assume of HSPL's liabilities,
including without limitation its existing bank loan with the outstanding balance
of approximately $3,614,000. As a result of this transaction, AOBO will acquire
all manufacturing assets, facilities, equipment, land and land use rights, raw
material, inventories, intellectual properties and technical talents of HSPL.

The closing procedures are expected to be completed within forty five (45) days
after the signing of the Purchase Agreement.


                                      F-5

<PAGE>

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.

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. In quarters ending September
30 and June 30, 2004, the closing stock price on September 30, 2004 and June 30,
2004 was $1.35 and $1.75, respectively. According to the employment agreements
as amended, no options were granted to the employees for those two respective
quarters.

In the quarter ending March 31, 2004, the Company granted 23,704 stock options
(which 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 the Company
concluded with them. 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:

                                                         Nine months ended
                                                        September 30, 2004
                                                        -------------------

Net income as reported                                    $    5,008,833
Pro forma net income                                      $    4,981,337

Income per share as reported                              $         0.15
Pro forma income per share                                $         0.15

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.


                                      F-6

<PAGE>

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
based on the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable. The fair value
is 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.

NOTE 5 - EARNINGS PER SHARE

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

Basic and diluted earnings per share are calculated as follows:
<TABLE>
                                                                 NINE MONTHS ENDED
                                                                   SEPTEMBER 30
                                                               2004             2003
                                                           -----------      -----------
<S>                                                        <C>              <C>
Earnings:
   Net income                                              $ 5,008,833      $ 3,702,923
   Dividend                                                         --               --
                                                           -----------      -----------
Income applicable to common shareholders                   $ 5,008,833      $ 3,702,923
                                                           ===========      ===========

Basic:
Income applicable to common shareholders                   $ 5,008,833      $ 3,702,923
Weighted average shares outstanding during the period       33,073,499       27,762,034
                                                           -----------      -----------
   Basic earnings per share                                $      0.15      $      0.13
                                                           ===========      ===========

Diluted:
Income applicable to common shareholders                   $ 5,008,833      $ 3,702,923
Weighted average shares outstanding during the period               --       27,762,034
Effect of dilutive securities:
   Stock options                                                    --               --
   Warrants                                                     23,725        1,015,587
                                                           -----------      -----------
Diluted weighted common shares outstanding                  33,097,224       28,777,621
                                                           ===========      ===========

   Diluted earning per share                               $      0.15      $      0.13
                                                           ===========      ===========
</TABLE>


                                      F-7

<PAGE>

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.

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 evaluation of SAB 105, but does not
anticipate a material effect on the consolidated financial statements.

NOTE 9 - NOTE RECEIVABLE

On March 1, 2004, the Company loaned to Heilongjiang Songhuajiang Pharmaceutical
Limited ("HSPL") (an unrelated third party to the Company as of March 1, 2004)
$2,409,639. The loan was initially due in August 2004 and bore interest at the
prevailing best lending rate of the Bank of China on the first bank day of each
month. HSPL pledged a patent as security for the loan. On September 1, 2004, at
the request of HSPL, the Company extended the terms of borrowing for another 6
months.

On September 8, 2004, the Company signed the Purchase Agreement relating to the
acquisition of HSPL. The loan to HSPL, upon the request of HSPL, was transferred
to become part of the payment for the purchase price of the acquisition. As a
result, the Company has ceased to accrue interest income on the note receivable
after September 8, 2004 and starting from September 9, 2004, there was no more
outstanding note receivable reflected in the accounting records of the Company.
Also see Note 2.


                                      F-8

<PAGE>

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, as amended, 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. On December
30, 2003 and December 31, 2003 the Company filed separate registration
statements also in connection with the Investment Agreement, as amended as of
December 5, 2003, which have not become effective as of the end of the period
covered by this quarterly report.

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

1.    Extension of 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 previously
      provided for 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, as transferees of the Investors and/or FirsTrust Group,
the warrants that were issued to the Investors and FirsTrust Group (the
placement agent) in connection with the execution 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>

                                      F-9

<PAGE>

The Company cancelled all the warrants purchased back and therefore, there were
no warrants outstanding at September 30, 2004. As of September 30, 2004, the
Company had not yet paid the $25,000 for the cancellation of warrants and such
amount is included in accrued expenses at September 30, 2004.

NOTE 12 - SHAREHOLDERS' EQUITY

On April 7, 2004, the Company issued 206,000 shares of its restricted common
stock to Focus Partners, LLP for them to provide investor relations services to
the Company during 2002. Their services were terminated in early 2003 because of
a dispute between the parties over the quality of the services. 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.

On July 9, 2004, the Company filed a Form S-8 Registration Statement under the
Securities Act of 1933 to register a total of 700,000 shares of common stock of
the Company as compensation that related to the nine consulting agreements
entered between the Company and individuals effective July 1, 2004. All the
individuals are unrelated and non - affiliate third parties. The associated cost
of the stocks issued was valued at $1.70 per share, representing the closing
price of the Company's common stock on the agreement date, and is being
amortized over the terms of each respective consulting agreement. The value of a
total of 112,000 shares is being amortized over one year and the value of
588,000 shares is being amortized over 3 years. For the nine months ended
September 30, 2004, the Company recorded consulting expense of $130,900 and
deferred consulting expense of $1,059,100 at September 30, 2004.

NOTE 13 - SUBSEQUENT EVENTS

On September 8, 2004, the Company signed a Purchase Agreement relating to the
acquisition of HSPL, in connection with the legally binding letter of intent
signed between the Company and HSPL on May 26, 2004. The Company's total
consideration to acquire 100% equity ownership of HSPL consists of cash of
$7,229,000 and the assumption of HSPL's liabilities, including without
limitation its existing bank loan with the outstanding balance of approximately
$3,614,000. As a result of this transaction, AOBO will acquire all manufacturing
assets, facilities, equipment, land and land use rights, raw material,
inventories, intellectual properties and technical talents of HSPL. As of
September 30, 2004, the Company paid a deposit of $7,228,916 to HSPL for the
acquisition.

The closing procedures are expected to be completed within forty five (45) days
after the signing of the Purchase Agreement.


                                      F-10

<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 September 30, 2003.

As used in this report, the "Company", "we", "our", "us" and "AOBO" refer to
American Oriental Bioengineering, Inc., a Nevada corporation.

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 have any reserves against its accounts receivable or
inventories at September 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

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.


                                       11

<PAGE>

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

For the three months ended September 30, 2004 revenues increased by $1,945,987
or 36% to $7,372,555 from $5,426,568 as compared to the same quarter of the
prior year. This increase is attributed primarily to the increase in sales
volume from our existing product lines. Compared to three months ended September
30, 2003, our sales revenue from 3 main categories of products for current were
as follows:

                                            SALES REVENUE             Increase /
                                            THREE MONTHS              (decrease)
                                         ENDED SEPTEMBER 30,          in sales
         Product series                 2004            2003          revenue
                                    ------------    ------------    ------------
         Health food supplement     $   831,577     $   482,989     $   348,588
         Chinese medical products     6,370,038       4,490,485       1,879,553
         Soybean protein peptide        170,940         453,094        (282,154)
                                    ------------    ------------    ------------
         TOTAL REVENUE              $ 7,372,555     $ 5,426,568     $ 1,945,987
                                    ============    ============    ============

In the quarter ending September 30, 2004 the sales of our Chinese medical
products increased by $1,879,553 or 42% 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.

Sales revenue from our health food supplement series increased by $348,588 in
the current quarter as compared to the same quarter last year, representing a
72% increase. 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 2004 through intensive marketing and promotion
campaigns. As a result, the sales of our health food supplement products
increased by 72% against the same quarter last year.

However, 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 62%. In the same quarter last
year when we launched our soybean protein peptide products, our distributors
placed purchase orders with larger quantities to

Our cost of sales increased by $479,848 or 25% to $2,436,157 from $1,956,309 for
the three months ended September 30, 2004, as compared to the corresponding
period of the prior year. This increase was as a result of increase in sales
revenue. The increase in cost of sales by product categories were as follows:

                                             COST OF SALES            Increase /
                                             THREE MONTHS             (decrease)
                                          ENDED SEPTEMBER 30,         in sales
         Product series                  2004            2003         revenue
                                      -----------    -----------    -----------
         Health food supplement       $  359,522     $  252,144     $  107,378
         Chinese medical products      1,972,441      1,532,753        439,688
         Soybean protein peptide         104,194        171,412        (67,218)
                                      -----------    -----------    -----------
         TOTAL COST OF SALES          $2,436,157     $1,956,309     $  479,848
                                      ===========    ===========    ===========

The cost of sales of health food supplement series increased by $107,378, or 43%
in the current quarter of 2004 compared to same quarter in 2003 as a result of
increase of 72% of sales revenue. 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 quarter of 2003 to 57% in the same quarter this year. This was
attributable to our better utilization of raw material as a result of increased


                                       12

<PAGE>

scale of production due to we manage to pick up our sales in 2004 against 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 also increased by $439,688, or 29%
in the current quarter compared to the same quarter last year as a result of
increase in 42% sales. The % increase in cost of sales was lower than the
proportional increase in sales revenue because the % profit margin improved from
66% in 2003 to 69% 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.

The overall profit margin for the Company was 67% in the current quarter,
represented an improvement of 3% as compared to 64% in the same quarter last
year.

SELLING AND MARKETING EXPENSES

Selling and marketing expenses increased by $68,155 or 15% to $508,477 as
compared to the corresponding quarter of prior year. We increased our
expenditures in payroll expenses in sales and marketing by $44,210 in the
current quarter compared to same quarter last year as a result of increased in
number of sales employees. Also, in order to better support sales and marketing
department in promoting the products of the Company, we spent an additional
$23,945 in department overheads in the current quarter of 2004 compared to same
quarter in 2003 for marketing materials and other miscellaneous expenses.

Advertising expenses increased by $307,815 or 73% to $728,802 as
compared to the corresponding quarter of prior year. This increase was
attributed to increase in advertising efforts in order to support the increase
in sales and marketing activities for all product lines that enabled the
increase in revenue.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses increased by $10,197 or 1% to $882,504 as
compared to the corresponding quarter of prior year. In the current quarer, the
Company spent an addition of $32,752 in payroll expenses as compared to same
quarter in 2003 as a result of increased in number of executives to support
increased business activities. However, the Company reduced its expense in
non-payroll overhead by of $22,555 as compared to same quarter 2003 detailed as
follows:

         Compensation to directors                           $  91,750
         Stock based consultant expenses                       131,800
         Overhead from Hong Kong sales office                   44,974
         Other non-payroll expenses                           (245,969)
                                                             ----------
         TOTAL                                               $ (22,555)
                                                             ==========

The reduction in spending on other non-payroll expenses in the current quarter
in 2004 against same quarter in 2003 was because in the same quarter last year
the Company incurred one-time expenses on company supplies that was not repeated
in the same quarter in 2004.

Depreciation and amortization increased by $11,039 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 at 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 17%. %. Compared to the last year of the same
quarter, the income tax provided has decreased from 21% to 17%, reason being for
the quarter ending September 30, 2003, there was a one time provision of
expenses for warrants granted out for the quarter and thus increased the
effective income tax provision to 21%.


                                       13

<PAGE>

Our net income increased by $997,386 to a net income of $2,241,041 from a net
income of $1,243,655.

RESULTS OF OPERATION - NINE MONTHS ENDED SEPTEMBER 30, 2004 AS COMPARED TO NINE
-------------------------------------------------------------------------------
MONTHS ENDED SEPTEMBER 30, 2003
-------------------------------

For the nine months ended September 30, 2004 revenues increased by $4,480,926 or
30% to $19,283,134 from $14,802,208 as compared to the corresponding period of
the prior year. This increase is attributed primarily to the increase in sales
volume of all of our existing product lines including soybean protein peptide,
health food products and medical products. Compared to nine months ended
September 30, 2003, our sales revenue from 3 main categories of products for
nine months ended September 30, 2004 were as follows:

<TABLE>
                                            SALES REVENUE             Increase /
                                             NINE MONTHS              (decrease)
                                         ENDED SEPTEMBER 30,          in sales
         Product series                 2004            2003          revenue
                                      -------------    -------------    -------------
<S>                                   <C>              <C>              <C>
         Health food supplement       $  1,829,204     $  1,305,170     $    524,034
         Chinese medical products       16,640,421       12,632,040        4,008,381
         Soybean protein peptide           813,509          864,998          (51,489)
                                      -------------    -------------    -------------
         TOTAL REVENUE                $ 19,283,134     $ 14,802,208     $ 44,008,381
                                      =============    =============    =============
</TABLE>

In the period ending September 30, 2004 the sales of our Chinese medical
products increased by $4,008,381, or 32% increase as compared to the same period
in 2003. Our Cease enuresis soft gel and other Chinese medical products still
experienced strong market recognition and demand in the first 3 quarters of this
year. Cease enuresis soft gel was a unique product over Chinese market and also
our distribution strategy of selling cease enuresis soft gel through clinic
networks and hospitals were proved to be successful.

Also, sales revenue from our health food supplement series increased from
$1,305,170 as of the period ended September 30, 2003to $1,829,204 as of period
ended September 30, 2004, representing a 40% increase. 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 the first 3 quarters
in 2004 through intensive marketing and promotion campaigns.

However, the new soybean protein peptide series of which we launched in 2003
recorded a slight decrease in sales revenue in the first 3 quarters of 2004.
Compared to the same period in 2003, sales revenue decreased by 6%.

Cost of sales increased also in the period ended September 30, 2004 as compared
to same period in 2003 as a result of increase in sales revenue. The increase in
cost of sales by product categories were as follows:

                                             COST OF SALES            Increase /
                                              NINE MONTHS             (decrease)
                                          ENDED SEPTEMBER 30,         in sales
         Product series                  2004            2003         revenue
                                      -----------    -----------    -----------
         Health food supplement       $  852,299     $  682,752     $  169,547
         Chinese medical products      4,971,182      4,394,100        577,082
         Soybean protein peptide         275,262        433,129       (157,867)
                                      -----------    -----------    -----------
         TOTAL COST OF SALES          $6,098,743     $5,509,981     $  588,762
                                      ===========    ===========    ===========


                                       14

<PAGE>

The cost of sales of health food supplement series increased by $169,547, or 25%
in first 3 quarter of 2004 compared to same period in 2003 as a result of
increase of 40% of sales revenue. The increase in cost was not in the same
proportion as increase in revenue because we managed to improve our profit
margin from 48% in the period ended September 30, 2003 to 53% in the same period
in 2004. This was attributable to our better utilization of raw material as a
result of increased scale of production due to increased sales volume.

The cost of sales of Chinese medical products also increased by $577,082, or 13%
in the first 3 quarters of 2004 compared to the same period in 2003 as a result
of increase in 32% 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 70% 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.

The overall profit margin for the Company was 68% in the period ended September
30, 2004, represented an improvement of 5% as compared to 63% in the same period
in 2003. In the first 3 quarters in 2004, all the 3 product lines of our Company
improved in profit margin, leading to an improvement of profit margin for the
Company overall.

SELLING AND MARKETING EXPENSES

Selling and marketing expenses increased by $392,995 or 34% to $1,537,631 as
compared to the corresponding period of the prior year. We increased our
expenditures in payroll expenses in sales and marketing by $54,437 in the first
3 quarters of 2004 against 2003 as a result of increased in staffing in sales
and marketing department. Also, in order to better support sales and marketing
department in promoting the products of the Company, we spent an additional
$338,558 in department overheads in the first 3 quarters of 2004 compared to
same period in 2003 for marketing materials and other miscellaneous expenses.

Advertising expenses increased by $742,324 or 47% to $2,336,006 as
compared to the corresponding period of the prior year. This increase was
attributed to increase in advertising efforts in order to support the increase
in sales and marketing activities for all product lines that enabled the
increase in revenue.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses increased by $1,102,078 or 67% to $2,757,745
as compared to the corresponding period of the prior year. During the first 3
quarters of 2004, the Company spent $278,840 in payroll expenses as compared to
$233,185 in the same period in 2003 as a result of increased in number of
executives to support increased business activities. The Company also spent an
additional of $1,056,423 non-payroll overhead in 2004 as compared to same period
2003 detailed as follows:

         Compensation to directors                           $  307,750
         Stock based consultant expenses                        598,099
         Overhead from Hong Kong sales office                    88,304
         Other non-payroll expenses                              62,270
                                                             -----------
         TOTAL                                               $1,056,423
                                                             ===========

Depreciation and amortization increased by $40,384 or 10% as compared to the
corresponding period to the prior year. This is mainly due to the increase in
assets 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 at 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%.

Our net income increased by $1,305,906 to a net income of $5,008,829 from a net
income of $3,702,923.


                                       15

<PAGE>

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

We have funded capital requirements through cash flow from operations. As of
September 30, 2004 we had a cash balance of $2,214,039 and a working capital
surplus of $9,418,007. This compares with a cash balance of $5,366,857 and a
working capital surplus of $10,638,558 at December 31, 2003.

For nine months ended September 30, 2004, cash flow from operating activities
amounted to $4,864,161. During the period, inventories, trade receivables and
other receivables increased by $1,948,616, $420,874 and $281,702, respectively.
Increased sales revenues in the period demanded an increased working capital in
terms of inventories, trade receivables and other receivables to support
expanded operations to cope with increased sales.

We believe that 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 cash inflow streams attributable to our profit from operations
and we do not anticipate any material liquidity issues in the near future.

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 evaluation 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
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.



                                       16

<PAGE>

                          PART II - OTHER INFORMATION


ITEM 6 - EXHIBITS

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

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

3.1.1       Certificate of Amendment to Articles of Incorporation of American
            Oriental Bioengineering, Inc. (incorporated by reference to the
            Report on Form 10-KSB of American Oriental Bioengineering, Inc.
            (Commission File No. 0-29015), filed with the Commission on April
            15, 2004).

*3.1.2      Certificate of Correction to Amended Articles of Incorporation,
            dated October 19, 2004.

*3.1.3      Certificate of Correction to Amended Articles of Incorporation,
            dated November 12, 2004.

*3.1.4      Certificate of Correction to Amended Articles of Incorporation,
            dated November 12, 2004.

**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


* Previously filed.
** Filed herewith.


                                       17

<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


                                       18