<PAGE>

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

                                    FORM 10-Q
                                   (Mark One)

[X]      Quarterly report under Section 13 or 15(d) of the Securities Exchange
         Act of 1934 For the quarterly period ended June 30, 2006

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

                           Commission File No. 0-29785

                     AMERICAN ORIENTAL BIOENGINEERING, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

           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)

Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days.

                                                             Yes [X]     No [ ]

Check whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer.

Large accelerated filer       Accelerated filer        Non-accelerated filer [X]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

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

Title of each class of Common Stock              Outstanding as of June 30, 2006
Preferred Stock, $0.001 par value                            1,000,000
Common Stock, $0.001 par value                              62,665,788


<PAGE>

                                TABLE OF CONTENTS


                                                                            PAGE

PART I -    FINANCIAL INFORMATION............................................3
   ITEM 1 - FINANCIAL STATEMENTS.............................................3
   ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS...........................18
   ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......35
   ITEM 4 - CONTROLS AND PROCEDURES.........................................35

PART II -   OTHER INFORMATION...............................................36
   ITEM 1 - LEGAL PROCEEDINGS...............................................36
   ITEM 1A -RISK FACTORS....................................................36
   ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.....36
   ITEM 3 - DEFAULTS UPON SENIOR SECURITIES.................................36
   ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............36
   ITEM 5 - OTHER INFORMATION...............................................37
   ITEM 6 - EXHIBITS........................................................38


<PAGE>

<TABLE>
PART I -    FINANCIAL INFORMATION

ITEM 1 -    FINANCIAL STATEMENTS

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

                                              ASSETS
                                              ------

                                                                      JUNE 30,       DECEMBER 31,
                                                                        2006             2005
                                                                    ------------     ------------
                                                                     UNAUDITED
<S>                                                                 <C>              <C>
CURRENT ASSETS
   Cash and cash equivalents                                        $ 70,342,537     $ 57,532,049
   Accounts receivable, net of reserve of $216,891 and $266,248
     at June 30, 2006 and December 31, 2005, respectively              8,702,038        8,168,420
   Inventories, net of $860,838 and $842,112  provision for
     obsolete inventories at June 30, 2006 and December 31,
     2005, respectively                                               10,373,263        4,916,500
   Advances to suppliers                                               2,690,070        3,494,320
   Other receivables                                                   1,079,105          102,611
   Marketable securities                                                   3,593                -
   Due from employees                                                    954,724          409,159
   Deferred consulting expenses                                          404,300          752,620
                                                                    ------------     ------------
             Total Current Assets                                     94,549,630       75,375,679

PLANT AND EQUIPMENT, NET                                              23,280,626       13,386,439
LAND USE RIGHTS, NET                                                  32,546,914        7,925,763
CONSTRUCTION IN PROGRESS                                               1,724,613        1,655,349
DEFERRED TAX ASSETS                                                    1,677,565          614,336
LICENSE, NET                                                             422,107          464,673
GOODWILL                                                               2,197,553                -
LONG TERM INVESTMENT AND ADVANCE                                         204,182                -
                                                                    ------------     ------------

   TOTAL ASSETS                                                     $156,603,190     $ 99,422,239
                                                                    ============     ============

    See accompanying notes to the condensed consolidated financial statements


                                                3

<PAGE>

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

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

                                                      JUNE 30,       DECEMBER 31,
                                                        2006            2005
                                                    ------------     ------------
                                                     UNAUDITED
CURRENT LIABILITIES
Accounts payable                                    $  2,369,356     $  1,230,767
Other payables and accrued expenses                    2,652,475        1,604,096
Taxes payable                                          1,389,134        1,485,872
Short-term bank loans                                  7,504,127        3,717,380
Current portion of long-term bank loans                  625,344                -
Customer deposits                                      1,668,602          355,975
Notes payable                                            370,940                -
Stock to be issued                                     5,868,642          141,044
Other liabilities                                        900,967           27,036
                                                    ------------     ------------
      Total current liabilities                       23,349,587        8,562,170

LONG-TERM BANK LOANS                                   1,375,757                -
DEFERRED TAX LIABILITIES                               4,698,332          232,505
OTHER LIABILITIES                                         16,098           23,018
                                                    ------------     ------------
TOTAL LIABILITIES                                     29,439,774        8,817,693
                                                    ------------     ------------

SHAREHOLDERS' EQUITY
Preferred stock, $0.001 par value; 2,000,000
   shares authorized; 1,000,000 shares
   issued and outstanding at June 30, 2006 and
   December 31, 2005, respectively                         1,000            1,000
Common stock, $0.001 par value; 150,000,000
   shares authorized;
   62,665,788 and 57,109,188 shares issued
   and outstanding, at June
   30, 2006 and December 31, 2005, respectively           62,666           57,109
Additional paid-in capital                            84,673,795       59,491,393
Retained earnings (the restricted portion of
   retained earnings is $4,104,115 at
   June 30, 2006 and December 31, 2005)               40,357,292       29,625,765
Accumulated other comprehensive income                 2,068,663        1,429,279
                                                    ------------     ------------
Total Shareholders' Equity                           127,163,416       90,604,546
                                                    ------------     ------------
   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY       $156,603,190     $ 99,422,239
                                                    ============     ============

    See accompanying notes to the condensed consolidated financial statements


                                        4

<PAGE>

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


                                                        THREE MONTHS ENDED                  SIX MONTHS ENDED
                                                             JUNE 30,                            JUNE 30,
                                                  ------------------------------      ------------------------------
                                                      2006               2005             2006              2005
                                                  ------------      ------------      ------------      ------------
REVENUES                                          $ 22,761,882      $ 11,902,470      $ 41,808,826      $ 21,555,252

COST OF GOODS SOLD                                   7,678,437         4,188,755        14,173,998         7,816,319
                                                  ------------      ------------      ------------      ------------
GROSS PROFIT                                        15,083,445         7,713,715        27,634,828        13,738,933

Selling and marketing                                1,956,629           550,446         3,655,169         1,205,821
Advertising                                          3,001,974           589,350         5,222,067         1,404,084
General and administrative                           2,437,645         1,803,799         4,316,287         3,029,193
Depreciation and amortization                          681,355           303,946         1,067,548           608,927
                                                  ------------      ------------      ------------      ------------

INCOME FROM OPERATIONS                               7,005,842         4,466,174        13,373,757         7,490,908

INTEREST INCOME (EXPENSE), NET                         361,951           (65,401)          443,514          (157,075)
OTHER INCOME, NET                                       10,136             7,277             9,144             7,277
                                                  ------------      ------------      ------------      ------------
INCOME BEFORE INCOME TAXES                           7,377,929         4,393,496        13,826,415         7,326,556

INCOME TAXES                                         1,550,708         1,037,779         3,094,888         1,787,646
                                                  ------------      ------------      ------------      ------------

NET INCOME                                           5,827,221         3,355,717        10,731,527         5,538,910
                                                  ------------      ------------      ------------      ------------

OTHER COMPREHENSIVE INCOME

Foreign currency translation gain                      378,670                 -           638,295                 -
Unrealized gain on marketable security                   1,089                 -             1,089                 -
                                                  ------------      ------------      ------------      ------------
Other comprehensive income before tax                  379,759                             639,384
Income tax expense related to other
    comprehensive income                              (125,320)                -          (210,997)                -
                                                  ------------      ------------      ------------      ------------

TOTAL OTHER COMPREHENSIVE INCOME, NET OF TAX           254,439                 -           428,387                 -
                                                  ------------      ------------      ------------      ------------

COMPREHENSIVE INCOME                              $  6,081,660      $  3,355,717      $ 11,159,914      $  5,538,910
                                                  ============      ============      ============      ============

NET INCOME PER SHARE
     BASIC                                        $       0.09      $       0.08      $       0.17      $       0.14
     DILUTED                                      $       0.09      $       0.08      $       0.17      $       0.13

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
     BASIC                                          62,657,876        39,927,624        61,944,618        39,837,225
     DILUTED                                        62,795,439        42,506,207        62,060,700        42,447,551

                      See accompanying notes to the condensed consolidated financial statements


                                                          5

<PAGE>

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


                                                                               SIX MONTHS ENDED JUNE 30,
                                                                            ------------------------------
                                                                                2006              2005
                                                                            ------------      ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                                $ 10,731,527      $  5,538,910
  Adjustments to reconcile net income to net cash provided by operating
    activities:
  Depreciation and amortization                                                1,067,548           608,927
  Loss on disposal of plant and equipment                                          1,131                 -
  Amortization of deferred consulting expenses                                   490,520           514,616
  Provision for doubtful accounts                                                (77,401)          562,620
  Provision for obsolete inventories                                             (78,990)                -
  Deferred taxes                                                                  22,077          (218,914)
  Common stock to be issued for services                                          87,598                 -
  Stock option compensation expense                                               70,802                 -
  Share of income from affiliated company                                         (5,315)                -

Changes in operating assets and liabilities, net of effects of
    acquisition:
(Increase) Decrease In:
  Accounts receivable                                                           (241,073)       (1,624,133)
  Inventories                                                                 (2,933,276)       (3,612,136)
  Advances to suppliers                                                        1,172,463            45,758
  Other receivables                                                              153,022           142,570
  Due from employees and other assets                                           (328,563)          (22,458)
Increase (Decrease) In:
  Accounts payable                                                            (1,152,229)          236,524
  Other payables and accrued expenses                                           (226,397)          315,795
  Taxes payable                                                                  (96,738)          176,682
  Customer deposits                                                              (44,592)           21,597
                                                                            ------------      ------------
  Net cash provided by operating activities                                    8,612,114         2,686,358
                                                                            ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of construction in progress                                         (284,576)         (786,646)
  Purchases of plant and equipment                                              (367,153)          (48,902)
  Notes receivable                                                              (424,530)                -
  Purchase of subsidiary, net of cash acquired                               (18,074,186)                -
                                                                            ------------      ------------
  Net cash used in investing activities                                      (19,150,445)         (835,548)
                                                                            ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from short-term bank loans                                         1,250,688                 -
   Prepayments of short-term bank loans                                       (1,638,401)                -
   Repayment of notes payable                                                 (1,615,699)                -
   Repayments of capital lease                                                    (6,538)           (7,470)
   Cash proceeds from private placement, net                                  24,974,955                 -
   Proceeds from exercise of warrants                                                  -           303,876
   Advance for stock purchases                                                         -           290,048
   Due from shareholders                                                               -         1,033,357
                                                                            ------------      ------------
   Net cash provided by financing activities                                  22,965,005         1,619,811
                                                                            ------------      ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                     12,426,674         3,470,621
   Effect of exchange rate changes on cash                                       383,814                 -
   Cash and cash equivalents, beginning of year                               57,532,049        11,404,149
                                                                            ------------      ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                    $ 70,342,537      $ 14,874,770
                                                                            ============      ============

                      See accompanying notes to the condensed consolidated financial statements


                                                          6
</TABLE>

<PAGE>

             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               AS OF JUNE 30, 2006
                                   (UNAUDITED)
NOTE 1 -   BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements of American Oriental
Bioengineering, Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the requirements for reporting on Form
10-Q.Accordingly, they do not include all the information and footnotes required
by accounting principles generally accepted in the United States of America for
annual financial statements. However, the information included in these interim
financial statements reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary for
the fair presentation of the consolidated financial position and the
consolidated results of operations. Results shown for interim periods are not
necessarily indicative of the results to be obtained for a full year. The
condensed consolidated balance sheet information as of December 31, 2005 was
derived from the audited consolidated financial statements included in the
Company's Annual Report on 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 -   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. See
"Critical Accounting Policies and Estimates" in the Management's Discussion and
Analysis of Financial Condition and Results of Operations" section below.

NOTE 3 -   STOCK BASED COMPENSATION

In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based
Payment (SFAS No. 123R), which replaces SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS No. 123 requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values beginning with the first fiscal year
beginning after June 15, 2005 (as delayed by the Securities and Exchange
Commission), with early adoption encouraged. The pro forma disclosures
previously permitted under SFAS No. 123 no longer will be an alternative to
financial statement recognition. Under SFAS No. 123R, a determination must be
made regarding the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the
transition method to be sued at date of adoption. SFAS No. 123R permits a
prospective or two modified versions of retrospective application under which
financial statements for prior periods are adjusted on a basis consistent with
the pro forma disclosures required for those periods by the original SFAS No.
123. The adoption of SFAS No. 123R was required in the first quarter of 2006, at
which time the Company began recognizing an expense for unvested share-based
compensation that has been issued or will be issued after that date. The Company
adopted SFAS No. 123R on a prospective basis.


                                       7

<PAGE>

             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               AS OF JUNE 30, 2006
                                   (UNAUDITED)

The fair value of the stock based compensation expense for the three and six
months ended June 30, 2006 was $35,154 and $70,802, respectively.

NOTE 4 -   EARNINGS PER SHARE

Basic earnings per share are computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding 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>
                                        Three Months Ended June 30,      Six Months Ended June 30,
                                        ---------------------------     ---------------------------
                                            2006            2005           2006            2005
                                        -----------     -----------     -----------     -----------
<S>                                     <C>               <C>           <C>               <C>
Basic:
Income applicable to common
  shareholders                          $ 5,827,221       3,355,717     $10,731,527       5,538,910
Weighted average shares outstanding
  during the period                      62,657,876      39,927,624      61,944,618      39,837,225
                                        -----------     -----------     -----------     -----------
   Basic earnings per share             $      0.09            0.08     $      0.17            0.14
                                        ===========     ===========     ===========     ===========
Diluted:
Income applicable to common
  shareholders                          $ 5,827,221       3,355,717     $10,731,527       5,538,910
Weighted average shares outstanding
  during the period                      62,657,876      39,927,624      61,944,618      39,837,225
Effect of dilutive securities:
   Stock options                             48,687               -          45,201               -
   Warrants                                  88,876       2,578,583          70,881       2,610,326
                                        -----------     -----------     -----------     -----------
Diluted weighted common shares
  outstanding                            62,795,439      42,506,207      62,060,700      42,447,551
                                        ===========     ===========     ===========     ===========

   Diluted earnings per share           $      0.09            0.08     $      0.17            0.13
                                        ===========     ===========     ===========     ===========


                                                    8
</TABLE>

<PAGE>

             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               AS OF JUNE 30, 2006
                                   (UNAUDITED)


NOTE 5 -   FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of financial instruments including cash and cash equivalents,
accounts receivable, advances to suppliers, other receivables, accounts payable,
short-term bank loans, customer deposits, taxes payable, other payables and
accrued expenses and debt, approximates their fair value at June 30, 2006 and
December 31, 2005 due to the relatively short-term nature of these instruments.

NOTE 6 -   FOREIGN CURRENCY CONVERSION

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

                                                           2006          2005
                                                        ---------     ---------

     Quarter end RMB : US$ exchange rate                  7.9956        8.3000
     Average  RMB : US$ exchange rate                     8.0063        8.3000

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

NOTE 7 -      INVENTORIES

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

Inventories as of June 30, 2006 and December 31, 2005 are summarized as follows:

                                      June 30, 2006      December 31, 2005
                                     --------------      -----------------
                                       Unaudited

         Raw materials               $    6,965,006      $       3,759,549
         Work in progress                   582,648                607,835
         Finished good                    2,825,609                549,116
                                     --------------      -----------------
         Total                       $   10,373,263      $       4,916,500
                                     ==============      =================


                                       9

<PAGE>

             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               AS OF JUNE 30, 2006
                                   (UNAUDITED)

NOTE 8 -   LAND USE RIGHTS

According to the law of China, the government owns all the land in China.
Companies are authorized to possess and use of land through land use rights
granted by the Chinese government. Land use rights are being amortized using the
straight-line method over the lease term of 40 to 50 years. Land use rights
consist of the following as of June 30, 2006 and December 31, 2005:

                                            June 30, 2006     December 31, 2005
                                            ------------      -----------------
                                              Unaudited
         Cost of land use rights            $ 33,107,679      $       8,261,485
         Less: Accumulated amortization         (560,765)              (335,722)
                                            ------------      -----------------
         Land use rights, net               $ 32,546,914      $       7,925,763
                                            ============      =================

Amortization expenses for the three months ended June 30, 2006 and 2005 were
$178,806 and $42,539, respectively. Amortization expenses for the six months
ended June 30, 2006 and 2005 were $221,330 and $83,832, respectively.

NOTE 9 -  PLANT AND EQUIPMENT

Plant and equipment consist of the following as of June 30, 2006 and December
31, 2005:

                                             June 30, 2006    December 31, 2005
                                             ------------     -----------------
         At cost:                             Unaudited

           Buildings                         $ 18,062,195     $      10,309,221
           Machinery and equipment             13,278,270             8,947,241
           Motor vehicles                         810,553               534,854
           Office equipment                       799,946               633,256
                                             ------------     -----------------
                                               32,950,964            20,424,572
                                             ------------     -----------------
         Less : Accumulated depreciation
           Buildings                           (1,984,144)           (1,274,135)
           Machinery and equipment             (6,758,592)           (5,050,858)
           Motor vehicles                        (431,703)             (308,984)
           Office equipment                      (495,899)             (404,156)
                                             ------------     -----------------
                                               (9,670,338)           (7,038,133)
                                             ------------     -----------------
         Plant and equipment, net            $ 23,280,626     $      13,386,439
                                             ============     =================

Depreciation expense for the three months ended June 30, 2006 and 2005 were
$479,131 and $261,407, respectively. Depreciation expense for the six months
ended June 30, 2006 and 2005 were $799,534 and $479,914, respectively.


                                       10

<PAGE>

             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               AS OF JUNE 30, 2006
                                   (UNAUDITED)
NOTE 10 -  MARKETABLE SECURITIES

Marketable securities consist of an investment in a Chinese open-ended mutual
fund that invests in Chinese corporate equity securities. The investment is
classified as available-for-sale and is carried at fair market value. The
unrealized gain is included in other comprehensive income.

NOTE 11 -  DEBTS

Short-term bank loans are obtained from local banks with interest rates ranging
from 5.58% to 7.25% per annum. All the short-term bank loans are repayable
within one year and are secured by fixed assets and land use rights owned by the
Company. The Company did not obtain new bank loans during the quarter ended June
30, 2006. The increase in short-term bank loans is from the acquisition of GLP.
See Note 12.

Long-term bank loans are from the acquisition of GLP. The Company did not obtain
new bank loans during the quarter ended June 30, 2006. The current portion of
the long-term bank loans is $625,344 and bears 6.138% interest per annum and is
repayable in September 2006. The non-current portion of the long-term bank loans
is $1,375,757 with interest rates ranging from 3% to 6.138% per annum and is
repayable by December 2007. Long-term loans are secured by fixed assets and land
use rights owned by the Company.

Notes payable are from the acquisition of GLP with interest rates ranging form
7.06% to 10.88% per annum. All notes payable are non-secured and repayable on
demand.

Interest expense, which was paid quarterly, was $162,185 and $229,688 for the
second quarter of 2006 and for the six months ended June 30, 2006, respectively.

NOTE 12 -  ACQUISITIONS

HQPL ACQUISITION

On July 26, 2006, subsequent to the end of the second quarter of 2006, the
Company signed a legally-binding acquisition agreement ("Acquisition agreement")
to acquire Heilongjiang Qitai Pharmaceutical Limited ("HQPL"), a Chinese
distributor of pharmaceutical products. The Company agreed to pay $4 million
cash to acquire 100% ownership of HQPL. HQPL's net assets as of the agreement
date were approximately $4.4 million (unaudited). HQPL owns a pharmaceutical
retail distribution license and a HQPL Chinese herbal and medicinal material
wholesale exchange which is Good Service Practice ("GSP") certified as well as
certified by the Chinese government. HQPL's pharmaceutical wholesale and retail
network covers the entire country of China. The Company will utilize HQPL's
network to exclusively distribute the Company's products. The pro forma effects
of this acquisition are immaterial to the condensed consolidated financial
statements.


                                       11

<PAGE>

             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               AS OF JUNE 30, 2006
                                   (UNAUDITED)

GLP ACQUISITION

On April 18, 2006, the Company acquired from Guangxi Lingfeng Pharmaceutical
Company Limited ("GLP") shareholders all of the issued and outstanding shares of
capital stock of GLP. GLP is a pharmaceutical company specializing in
manufacturing and distribution of plant-based medicines and is based in Hezhou
City, Guangxi, China. It has developed a product portfolio for the treatment of
digestive and respiratory system illnesses and in the areas of pediatrics and
gynecopathy. The acquisition cost was $18,861,546 in cash (including $151,172 of
transaction costs) and 1,200,000 shares of the Company's common stock valued at
the five day average closing share prices from April 7 to April 13, 2006, or,
$4.70 per share for a total stock value of $5,640,000. The accompanying
condensed consolidated financial statements include the following allocation of
the acquisition cost to the net assets acquired based on their respective fair
values.

         Land use right                                     $24,702,995
         Deferred taxation assets                             1,027,735
         Long term investment                                    86,067
         Construction in progress                               323,222
         Fixed assets                                         9,661,731
         Cash                                                   787,360
         Accounts receivable                                    215,143
         Inventories                                          2,444,495
         Other receivables and prepayments                      439,884
         Notes receivable                                       597,568
         Other current assets                                   152,082
                                                            -----------
         Total assets purchased                              40,438,282
                                                            -----------

         Short-term loan                                      4,128,726
         Accounts payables                                    2,290,818
         Advances from customers                              1,357,219
         Notes payable                                        1,986,639
         Other payables and accrued expense                     902,002
         Current portion of long-term loans                     623,675
         Payable to suppliers                                   449,931
         Long term bank loans                                 1,372,084
         Deferred tax payables                                4,408,256
         Other current liabilities                              614,939
                                                            -----------
         Total liabilities assumed                           18,134,289
                                                            -----------

         Net assets acquired                                 22,303,993
         Total consideration paid                            24,501,546
                                                            -----------

         Goodwill                                           $ 2,197,553
                                                            -----------

The results of operations for GLP for the period are included in the
consolidated results of operations commencing April 19, 2006.


                                       12

<PAGE>

             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               AS OF JUNE 30, 2006
                                   (UNAUDITED)

The following unaudited pro forma combined condensed statements of income for
the period ended June 30, 2006 and 2005 have been prepared as if the acquisition
had occurred on January 1, 2006 and 2005. The statements are based on accounting
for the business acquisition under purchase accounting. The pro forma
information may not be indicative of the results that actually would have
occurred if the merger had been in effect from and on the dates indicated or
which may be obtained in the future.

                                                    Pro Forma Combined
                                                 Six Months Ended June 30,
                                               2006                   2005
                                            -------------        --------------

     REVENUES                               $  44,501,229        $   25,951,381

     GROSS PROFIT                              29,301,130            16,585,373

     INCOME FROM OPERATIONS                    13,476,156             7,455,138

     NET INCOME                             $  10,669,878        $    5,245,831

     NET INCOME PER SHARE
              BASIC                         $        0.17        $         0.13
              DILUTED                       $        0.17        $         0.12

              BASIC                            63,144,618            41,037,225
              DILUTED                          63,260,700            43,647,551

NOTE 13 -  LONG TERM INVESTMENT AND ADVANCE

Long-term investment and advance represents GLP's investment in Hezhou QiLi
Color Printing Co., Ltd. ("QiLi"). GLP owns a 40% equity interest of QiLi and
accounts for the investment using the equity accounting method. The carrying
value of this long-term investment was $91,620 as of June 30, 2006, which
included $5,315 of equity income during the second quarter of 2006. GLP also
advanced $112,562 to QiLi as of June 30, 2006.

NOTE 14 -  SHAREHOLDER'S EQUITY

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

On November 28, 2005, the Company entered into a stock purchase and warrant
agreement, ("Purchase Agreement"), with thirty-one (31) accredited investors.
Pursuant to the Purchase Agreement, the investors purchased 12,500,000 units,
each unit consisting of (a) one share of common stock and (b) three-tenths of
one common stock purchase warrant, at a purchase price of $4.80 per unit. The
units were issued in two tranches. The first tranche consisted of 6,973,400
units issued on December 8, 2005. The second tranche consisted of 5,526,600
units issued on January 23, 2006, following the expiration of the waiting period
under Rule 14c-2 of the Exchange Act and the amendment of our articles of
incorporation. The Company had received net proceeds of $31,470,487 and
$24,974,955, respectively, in connection with the first and second tranche of
the private placement.

                                       13

<PAGE>

             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               AS OF JUNE 30, 2006
                                   (UNAUDITED)

With the warrants attached to the units sold in the private placement, the
investors are entitled to purchase an aggregate of 3,750,000 shares of common
stock at an exercise price of $6.50 per share. Among which 2,092,020 warrants
were issued on December 8, 2005 and 1,657,980 warrants were issued on January
23, 2006. All these warrants expire on December 8, 2008.

Upon completion of the placement, the Company paid 5% of the gross proceeds in
cash to placement agents and issued to them warrants representing the right to
purchase up to 1,137,500 shares of the Company's common stock at an exercise
price of $4.80 per share. 634,579 warrants were issued on December 8, 2005 and
502,921 warrants were issued on January 23, 2006. All these warrants also expire
on December 8, 2008.

        The following tables summarize the movement of the two categories of
outstanding warrants:


Investor Warrants                             No. of Warrants     Exercise Price
-----------------                             --------------      --------------
Outstanding January 1, 2006 .............          2,092,020      $         6.50
      Granted ...........................          1,657,980      $         6.50
      Exercised .........................                 --                  --
      Cancelled .........................                 --                  --
                                              --------------      --------------
Outstanding as of June 30, 2006 .........          3,750,000      $         6.50
                                              ==============      ==============

Placement Agent Warrants                     No. of Warrants     Exercise Price
------------------------                      --------------      --------------
Outstanding January 1, 2006 .............            634,579      $         4.80
      Granted ...........................            502,921      $         4.80
      Exercised .........................                 --                  --
      Cancelled .........................                 --                  --
                                              --------------      --------------
Outstanding as of June 30, 2006 .........          1,137,500      $         4.80
                                              ==============      ==============

B. Issuance of Restricted Common Stock for Consulting Services
--------------------------------------------------------------

On April 25, 2006, the Company issued 30,000 shares of restricted common stock
to a consulting firm for services rendered and to be rendered in 2006. The
agreement was originally entered into in December 2005 and amended in April
2006. According to the agreement, the Company pays to the consulting firm a
$2,500 retainer per month, and upon retention, delivered to such firm 30,000
shares of restricted common stock and paid an initial retainer of $10,000. The
agreement also includes the payment of fees if certain investment banking
services are provided. The Company recorded deferred consulting expenses of
$142,200 in connection with the issuance of the 30,000 shares of restricted
common stock, which will be amortized over a one-year service period. The
Company recognized $71,100 in consulting expenses for the six months ended June
30, 2006 and the deferred consulting expenses were $71,100 as of June 30, 2006.

                                       14

<PAGE>

             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               AS OF JUNE 30, 2006
                                   (UNAUDITED)

C. Stock Options
----------------

In March 2004, the Company's Board of Directors formally adopted a stock option
plan (the "Plan"). The Plan provides for the grant of options to employees,
officers, directors and consultants. The Plan is presently administered directly
by the Company's board of directors. Subject to the provisions of the Plan, the
Company's board of directors determines who receives stock options, the number
of shares of common stock that may be covered by the option grants, the time and
manner of the exercise of the options and exercise prices, as well as any other
pertinent terms of the options.

The Company entered into employment agreements with four of the Company's
executives, officers and directors in March 2004 that were effective as of
October 1, 2003. Under the four employment agreements, the Company shall pay an
aggregate of $32,000 of intrinsic value of stock options per quarter to four of
the Company's officers and directors under the agreements. The stock options
issued are exercisable within 5 years from date of grant and with an exercise
price of $2.00 per share.

In June 2004, the 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. For six months ended June 30,
2006, according to the employment agreements as amended, the Company granted a
total of 19,191 stock options to four of the Company's officers and directors
under the agreements.

        The following table summarizes the stock option activity:

                                                               Weighted Average
                                                   Activity     Exercise Price
                                                   --------    ----------------
Outstanding as of January 1, 2006.............      68,925     $           2.00
      Granted ................................      19,191     $           2.00
      Exercised ..............................          --                   --
      Cancelled ..............................          --                   --
                                                   --------    ----------------
Outstanding as of June 30, 2006...............      88,116     $           2.00
                                                   ========    ================


                                       15

<PAGE>

             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               AS OF JUNE 30, 2006
                                   (UNAUDITED)

        The following table summarizes information about stock options
outstanding as of June 30, 2006:

<TABLE>
                                          Options Outstanding                         Options Exercisable
----------------------------------------------------------------------------------------------------------------
 Range of Exercise     Number of    Weighted Average
       Prices           Shares       Exercise Price         Weighted Average      Number of     Weighted Average
                                    Life (in years)      Remaining Contractual     Shares        Exercise Price
----------------------------------------------------------------------------------------------------------------
<S>    <C>              <C>              <C>                      <C>              <C>                <C>
       $2.00            88,116           $2.00                    3.63             88,116             $2.00
                      ---------                                                  --------
                        88,116                                                     88,116
                      =========                                                  ========
</TABLE>

        The weighted average fair value per share of the 88,116 options issued
under the Plan is $3.22 per share.

D. Common Stock to be Issued
----------------------------

For six months ended June 30, 2006, the Company accrued general and
administrative expenses of $87,598 for stock compensation in connection with the
services rendered by three of the Company's independent directors. 16,395 shares
of common stock related to such services were not issued as of June 30, 2006. An
aggregate number of 48,378 shares were to be issued to our independent directors
as of June 30, 2006.

The Company also accrued $5,640,000 for common stock to be issued in connection
with the acquisition of Guangxi Lingfeng Pharmaceutical Company Limited ("GLP").
Pursuant to an acquisition agreement with GLP, the Company agreed to issue an
aggregate of 1,200,000 shares to the shareholder of GLP as part of the
considerations for the acquisition. The shares were not issued as of June 30,
2006. For details of the acquisition refer to Note 12.

NOTE 15 -  CONTINGENCY AND COMMITMENTS

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

The Company entered into an unconditional purchase commitment during 2005 for
construction of manufacturing facilities in Harbin, China. As of June 30, 2006,
the future obligations of the Company under this commitment are as follows:

               2006                              $      194,672
               Thereafter                                     -
                                                 --------------
               Total                             $      194,672
                                                 --------------


                                       16

<PAGE>

             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               AS OF JUNE 30, 2006
                                   (UNAUDITED)

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

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

               2006                                   $   1,468,308
               Thereafter                                         -
                                                      -------------
               Total                                  $   1,468,308
                                                      -------------

NOTE 16 -  REPORTING SEGMENTS

The Company operates in two business segments: the development, production, and
sale of plant based pharmaceutical ("PBP") products and plant based
nutraceutical ("PBN") products.

PBPs are composed of the leaves and roots of one or more plants and do not use
synthetic chemicals. Each PBP has a certain medicinal function and treats one or
more illnesses or symptoms of illnesses. Most of our PBPs are prescription-based
and all PBPs require approval from the China's State Food and Drug
Administration before they may be sold.

PBNs, also frequently referred to as "dietary supplements" or "nutritional
supplements", are essentially prophylactic or preventive. PBNs are also composed
of the leaves and roots of one or more plants. All PBNs are available
over-the-counter, without a prescription and, in China, they require approval
from only the local government before they may be sold.

For the three and six months ended June 30, 2006, and 2005, the Company's sales
revenue from PBP products and PBN products are as follows:

<TABLE>
         Product                  Three Months Ended June 30,         Six Months Ended June 30,
                                ------------------------------      ------------------------------
                                    2006              2005              2006              2005
                                ------------      ------------      ------------      ------------
<S>                             <C>                 <C>             <C>                <C>
         PBP products           $ 15,845,371         7,420,609      $ 27,999,263        13,425,707
         PBN products              6,916,511         4,481,861        13,809,563         8,129,545
                                ------------      ------------      ------------      ------------
         TOTAL                  $ 22,761,882        11,902,470      $ 41,808,826        21,555,252
                                ============      ============      ============      ============
</TABLE>


                                       17

<PAGE>

             AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               AS OF JUNE 30, 2006
                                   (UNAUDITED)
NOTE 17 -  SUBSEQUENT EVENTS

On July 1, the Company signed independent director agreements with all
independent directors, which superseded the services agreements between the
Company and each of the independent directors, dated June 28, 2005 and amended
on March 8, 2006. Pursuant to the new agreements, the Company agrees to pay each
independent director the following fees for services to be rendered: (1) a fee
in cash of $30,000 for the year ending December 31, 2006; and (2) a fee in cash
of $30,000 per annum for each year subsequent to 2006. The fees in cash shall be
payable to each independent director monthly in equal installments. In addition,
during the term of the independent directors' service as a director or member of
any board committee of the Company and starting from January 1, 2007, each
independent director shall be entitled to receive each year shares of common
stock of the Company with an aggregate value of $30,000 per annum, calculated
based on the average closing price per share for the five (5) trading days
preceding and including January 1 of such year.

Also see Note 12 for subsequent event.


                                       18

<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 (1) the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2005 and (2) the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 2005. Readers
should carefully review the risk factors disclosed in Form 10-KSB for the year
ended December 31, 2005 and other documents filed by the Company with the SEC.

As used in this report, the terms "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 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in this report. Actual results may differ materially
from results anticipated in these forward-looking statements. We base the
forward-looking statements on information currently available to us, and we
assume no obligation to update them.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
------------------------------------------

This section should be read together with the Summary of Significant Accounting
Policies included as Note 3 to the consolidated financial statements included in
our annual report for 2005 filed with the SEC on Form 10-KSB.

         ESTIMATES AFFECTING ACCOUNTS RECEIVABLE AND INVENTORIES

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


                                       19

<PAGE>

         At June 30, 2006, the Company provided a $216,891 reserve against
accounts receivable. Management's estimate of the appropriate reserve on
accounts receivable at June 30, 2006 was based on the aged nature of some of
these accounts receivable. In making its judgment, management assessed its
customers' ability to continue to pay their outstanding invoices on a timely
basis, and whether their financial position might deteriorate significantly in
the future, which would result in their inability to pay their debts to the
Company.

         At June 30, 2006, the Company provided an allowance against its
inventories amounting to $860,838. Management determination that this allowance
is needed is based on potential impairments to the current carrying value of the
inventories due to potential obsolescence of aged inventories. In making its
estimate, management considered the probable demand for our products in the
future and historical trends in the turnover of our inventories.

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

         POLICY AFFECTING RECOGNITION OF REVENUE

         Among the most important accounting policies affecting our consolidated
financial statements is our policy of recognizing revenue in accordance with the
SEC's Staff Accounting Bulletin ("SAB") No. 104. Under this policy, all of the
following criteria must be met in order for us to recognize revenue:

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

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

         In August 2005, we established a subsidiary in Hong Kong with a
specialty store to sell some of our products. Our subsidiary in Hong Kong also
sells certain products to certain customers on consignment. We record revenue
from consignment transactions when the consignee sells the product to the end
user.


                                       20

<PAGE>

RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2006 AS COMPARED TO THREE
-----------------------------------------------------------------------------
MONTHS ENDED JUNE 30, 2005
--------------------------

The following table sets forth the amounts and the percentage relationship to
revenues of certain items in our condensed consolidated statements of income for
the three months ended June 30, 2006 and 2005:

<TABLE>
                                                  Three Months             Three Months
                                                 Ended June 30,           Ended June 30,
                                          --------------------------    -------------------
                                              2006           2005         2006       2005
                                          -----------    -----------    --------   --------
<S>                                        <C>            <C>                <C>        <C>
REVENUES                                  $22,761,882    $11,902,470         100%       100%
COST OF GOODS SOLD                          7,678,437      4,188,755       33.73      35.19
                                          -----------    -----------    --------   --------
GROSS PROFIT                               15,083,445      7,713,715       66.27      64.81
     Selling and marketing                  1,956,629        550,446        8.60       4.62
     Advertising                            3,001,974        589,350       13.19       4.95
     General and administrative             2,437,645      1,803,799       10.71      15.15
     Depreciation and amortization            681,355        303,946        2.99       2.55
                                          -----------    -----------    --------   --------
INCOME FROM OPERATIONS                      7,005,842      4,466,174       30.78      37.52
     Interest income (expense), net           361,951       (65,401)        1.59       0.55
     Other income(expenses), net               10,136          7,277        0.04       0.06
                                          -----------    -----------    --------   --------
INCOME BEFORE INCOME TAXES                  7,377,929      4,393,496       32.41      36.91
     Income taxes                          (1,550,708)    (1,037,779)       6.81       8.72
                                          -----------    -----------    --------   --------
NET INCOME                                $ 5,827,221    $ 3,355,717       25.60%     28.19%
                                          ===========    ===========    ========   ========
NET INCOME PER SHARE
     BASIC                                $      0.09    $      0.08
                                          ===========    ===========
     DILUTED                              $      0.09    $      0.08
                                          ===========    ===========

</TABLE>

Revenue

Revenues for the second quarter of 2006 were $22,761,882, an increase of
$10,859,412 over revenues for the second quarter of 2005. Revenues by business
segment were as follows:

Product                         Three Months Ended June 30,        Increase/
                                  2006               2005         (Decrease)
-------------------------------------------------------------------------------
PBP products                $    15,845,371   $     7,420,609   $     8,424,762
PBN products                      6,916,511         4,481,861         2,434,650
                            ---------------   ---------------   ---------------
TOTAL                       $    22,761,882   $    11,902,470   $    10,859,412
                            ===============   ===============   ===============


                                       21

<PAGE>

Sales of our Plant Based Pharmaceutical (PBP) products increased by $8,424,762,
or 114%, as compared to the same period during 2005 primarily due to the
following factors:

o        The increase in our sales of the Cease Enuresis Soft Gel by 119% from
         $1,919,802 in the second quarter of 2005 to $4,205,609 in the same
         period during 2006. The increase in sales of this product was due
         primarily to our continuous marketing efforts with respect to the Cease
         Enuresis Soft Gel together with the growing demand for the product in
         the Chinese market;

o        The sales of our Shuanghuanglian Injection Powder increased from
         $3,909,917 in the three months ended June 30, 2005 to $5,734,186 in the
         corresponding period during 2006, or 47%. This increase is due to the
         full integration of HSPL into our company after the acquisition,
         including full access to our sales channels as well as our continuous
         marketing efforts since that time;

o        The sales revenue from our UrinStopper Patch, a new product launched in
         2005, also increased from $351,830 in the second quarter of 2005 to
         $1,219,783 in the same quarter during 2006, or 247%. This was
         attributable to improved recognition of our new product supported by
         our marketing campaigns;

o        Sales revenues from other PBP products in the same period also
         increased by $432,722, or 35%, due primarily to the increased sales of
         our Double Ginseng Yishen Grain product; and

o        Our newly acquired Guangxi Lingfeng Pharmaceutical Co. Ltd. (GLP) has
         also contributed $3,014,011 to our revenue for the three month ended
         June 30, 2006. GLP was not a subsidiary during the same period last
         year.

Sales from our Plant Based Nutraceutical (PBN) products increased to $6,916,511
in the second quarter of 2006 from $4,481,861 in the same period during 2005,
representing a growth of 54% and it is primarily due to the following factors:

o        Sales of our Protein Peptide series of products which increased by 84%,
         from $3,190,033 during the three months ended June 30, 2005 to
         $5,876,848 in the same period of 2006. This increase was mainly
         attributed to the increase in sales of peptide coffee and peptide
         powder;

o        Increase in sales of PBN products was partially offset by the decrease
         in sales of our Compound Bio-functional beverage series from $935,020
         in the second quarter of 2005 to $506,455 in the same quarter during
         2006, representing an decrease of 46%. The decrease mainly resulted
         from reduced marketing efforts made for this product during the period;
         and

o        Sales of other PBN products increased from $356,807 in the second
         quarter of 2005 to $533,208 in the same period during 2006, or an
         increase of 49%, due primarily to increased sales of our Vitamate
         nutritional oral liquid product.

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

Cost of goods sold was $7,678,437 for the three months ended June 30, 2006,
compared to $4,188,755 for the three months ended June 30, 2005. Expressed as a
percentage of revenues, cost of goods sold was 33.73% for the three months ended
June 30, 2006, compared to 35.19% for the three months ended June 30, 2005. The
reduction in cost of goods sold as a percentage of revenues reflected a
continued focus on operating cost management, sourcing efficiencies and
operation efficiencies.


                                       22

<PAGE>

Cost of goods sold for the quarters ended June 30, 2006 and 2005 by product
categories were as follows:

                                 Three Months Ended June 30,       Increase/
     Product                         2006            2005         (Decrease)
     ------------------------  ------------    --------------   ---------------
     PBP products              $  5,301,094    $    2,647,978   $     2,653,116
     PBN products                 2,377,343         1,540,777           836,566
                               ------------    --------------   ---------------
     TOTAL                     $  7,678,437    $    4,188,755   $     3,489,682
                               ============    ==============   ===============

The cost of goods sold of PBP and PBN products increased by 100% and 54%,
respectively, in the three months ended June 30, 2006 compared to the same
quarter of 2005. These increases are attributed to our increase in sales.

Gross profit increased $7,369,730, or 96%, for the three months ended June 30,
2006 over the three months ended June 30, 2005. This increase reflected higher
net sales, improved margins and operating efficiencies generally across our PBP
and PBN businesses.

Gross profit as a percentage of net revenues increased from 64.81% in the
comparable period of the prior year to 66.27% due to the reductions in cost of
goods sold as a percentage of revenues discussed above and improved operational
efficiency.

Selling and Marketing
---------------------

         Selling and marketing expenses, including distribution expenses,
increased from $550,446 in the three months ended June 30, 2005 to $1,956,629 in
the same period of 2006, representing a 255% increase. The details of our sales
and marketing expenses were as follows:

                                      Three Months Ended June 30,      Increase/
                                         2006           2005          (Decrease)
                                      ----------     ----------       ----------
Payroll                               $  379,249        185,667            104%
Transportation                           514,179        151,823            239%
Promotional materials and fees           502,194         35,431          1,317%
Offices and sundries                     117,600         32,692            260%
AOBO Hong Kong marketing                  53,313          5,308            905%
AOBO US marketing                              -          5,651           (100%)
Other                                    390,094        133,874            191%

                                      ----------     ----------
      TOTAL                           $1,956,629        550,446            255%
                                      ==========     ==========

         Our increase in selling and marketing expenses in the quarter ended
June 30, 2006 compared to the same quarter during 2005 was primarily due to the
following factors:

o        An increase in our payroll expenses for Harbin Bioengineering by 59%.
         Payroll expenses for HSPL increased by 137% compared with the same
         quarter during 2005 due to an increase in the number of employees and
         average salaries for people working in marketing and distribution. GLP,
         our newly acquired subsidiary, has also incurred $66,239 of payroll
         expenses during the second quarter of 2006.


                                       23

<PAGE>

o        Transportation expenses for Harbin Bioengineering increased by 56% in
         the second quarter of 2006 compared to the same period during 2005.
         Transportation expenses for HSPL increased by $219,994. These increases
         resulted primarily from the growth in sales reflected in the increase
         in our sales revenue. GLP also added $57,806 of transportation expenses
         in the second quarter of 2006. GLP was not a subsidiary during the same
         period of 2005.

o        Harbin Bioengineering increased its promotional materials and fees
         expenses by $329,745 in the quarter ended June 30, 2006 compared to the
         same quarter during 2005. This increase reflects increased spending in
         marketing communications to increase market awareness of our brand and
         products. We launched more marketing campaigns in more cities in the
         second quarter of 2006 compared to the same quarter of 2005. GLP spent
         $137,019 on its promotional materials and fees during the second
         quarter of 2006, which contributed 27% to this category of expenses.

o        Harbin Bioengineering's office and sundries expenses increased by 135%
         in the second quarter of 2006 compared to the same period during 2005
         due to increased support of our marketing activities. HSPL's office
         sundries expenses also increased by $35,679, or 416%, in the second
         quarter of 2006 as compared to the same period during 2005. The
         increase resulted primarily from the cost related to continued
         development and implementation of HSPL's branding and marketing
         campaigns. In addition, GLP incurred $16,566 in its office and sundries
         expenses.

o        Marketing expenses increased also as a result of the opening of our
         AOBO Hong Kong specialty store in August 2005 and introducing products
         into many chain stores owned by chain pharmacies. To support the sales
         at these stores, as well as to increase our brand recognition, we
         engaged in substantial marketing activities during the second quarter
         of 2006.

o        As a result of the increase in selling and distribution expenses by
         both HSPL and Harbin Bioengineering, as well as the integration of GLP,
         our overall selling and marketing expenses increased by 255% in the
         second quarter of 2006 as compared to the same quarter during 2005.

Advertising
-----------

         Advertising expenses increased by $2,412,624, from $589,350 in the
second quarter of 2005 to $3,001,974 in the same quarter of 2006. The increase
in advertising expenses resulted from an increase in advertising and promotional
efforts in the second quarter of 2006 to promote the Company's Shuanghuanlian
Injection powder and Protein Peptide product series as well as our new products
the Urinstopper Capsule and UrinStopper Patch. Our Hong Kong branch also
increased advertisement on brand building and name recognition in the Hong Kong
market in the second quarter of 2006 compared to the second quarter of 2005.
GLP, our new acquired subsidiary, incurred $521,666 in advertising expenses
during the second quarter of 2006. GLP was not a subsidiary in the second
quarter of 2005.

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

         General and administrative expenses increased from $1,803,799 in the
second quarter of 2005 to $2,437,645 in the same quarter of 2006, or a 35%
increase. The details of general and administrative expenses were as follows:


                                       24

<PAGE>

                                      Three Months Ended June 30,      Increase/
                                          2006          2005           Decrease)
                                       ----------     ---------        ---------
  Payroll                              $  342,517     $  247,141            39%
  Directors' remuneration                 114,250         91,750            25%
  Stock compensation - directors           79,950              -           100%
  Stock compensation - consultants        245,262        257,308            (5%)
  Office rental                            96,889         26,562           265%
  Professional fees                       368,243        288,902            27%
  Office sundries                         179,835         31,451           472%
  Transportation                           10,246            703         1,357%
  Vehicles                                 21,642         10,313           110%
  Utilities                                55,478         42,437            31%
  Research                                198,097        125,209            58%
  Business entertainment                  132,302          4,638         2,753%
  Provision for bad debts                  38,033        562,620           (93%)
  Miscellaneous                           554,901        114,765           384%
                                       ----------     ----------
  TOTAL                                $2,437,645     $1,803,799            35%
                                       ==========     ==========

         Our increase in general and administrative expenses in the three months
ended June 30, 2006 compared to the same period during 2005 was primarily due to
the following factors:

o        An increase in general and administrative expenses incurred in the AOBO
         Hong Kong office of 160% as compared to the same period during 2005.
         The increase resulted primarily from additional personnel and facility
         expenses as well as fees paid for professional services.

o        An increase in general and administrative expenses incurred in the AOBO
         US office of 28% as compared to the same period last year. In the
         second half of 2005, we increased the number of employees in AOB US
         from three to five, and we increased the number of offices occupied by
         AOBO US from one to two. As a result, there were increases in expenses
         in the payroll, office rental, office sundries and other expense
         categories in the second quarter of 2006 as compared to the same period
         during 2005. Director remuneration increased by 25% as a result of the
         appointment of a new independent director in the late second quarter of
         2005, and stock-based compensation for directors was also initiated
         during that time. Stock-based compensation for consultants, however,
         decreased by 5% because some of the expenses for consultants were fully
         amortized earlier and as a result, such expenses did not recur in the
         second quarter of 2006. Professional fees for the second quarter of
         2006 increased by 27% as compared to the same quarter during 2005 as a
         result of an increase in our use of audit and consultancy services in
         connection with the listing of our stock on the American Stock Exchange
         and a $60.0 million private placement in December 2005.

o        Payroll expenses at Harbin Bioengineering increased by 6% compared with
         the second quarter during 2005, as a result of an increased number of
         employees. Our payroll expenses in HSPL decreased by 34% during that
         time, due to reduced number of employees in administrative departments
         of HSPL. Payroll expenses at GLP, our newly acquired subsidiary, were
         $56,934 for the second quarter of 2006.

o        Research expenses at Harbin Bioengineering increased by 36% compared
         with the second quarter during2005, reflecting the devotion of
         additional resources to research on new product development. In the
         same period, research expenses at HSPL increased by 40%, due to
         investment in research of potential new products. GLP has also spent
         $28,021 in research expenses for the quarter ended June 30, 2006.


                                       25

<PAGE>

o        Expenses for office sundries at Harbin Bioengineering increased by
         $109,318, or 447% compared with the same quarter of 2005, as a result
         of increased general and administrative activities to support our sales
         growth. In the same period, expenses for office sundries at HSPL
         increased by $5,656. This increase is due to the fact that during the
         second quarter of 2005, expenses for office sundries at HSPL were
         especially low because HSPL was then a newly-acquired subsidiary in the
         process of becoming integrated into our Company. The increased expenses
         for the second quarter of 2006 reflect HSPL's operation as a
         fully-integrated part of the Company. In addition, GLP contributed
         $29,787 in office sundries during the second quarter of 2006.

o        In 2005, HSPL established a provision for bad debts in the amount of
         $266,248, based on the age of some of its accounts receivable. However,
         some of these bad debts have been recovered since then. Management does
         a reassessment at the end of each quarter and determines the
         appropriate amount of bad debt provision. For the second quarter of
         2006, management reassessed and decided to increase the amount by
         $60,414. As of June 30, 2006, the provision for bad debts was $216,891
         for HSPL.

o        Other expenses at Harbin Bioengineering increased by $144,174, or 356%
         in the second quarter of 2006 compared with the same quarter during
         2005. This increase was due to increases in maintenance expenses and
         telecommunication expenses of $55,184 and $21,390, respectively, as a
         result of increase in business activities to support our rapid growth.
         Other expenses at HSPL also increased by $34,225, or 152% in the second
         quarter of 2006 against the same quarter of 2005 due primarily to the
         $12,441 increase in repair and maintenance costs. Other expenses at GLP
         for the second quarter this year were $240,942, consisted mainly of
         insurance cost and quality control expenses. GLP's other expenses
         accounted for 43% of the total cost in this category.

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

      Depreciation and amortization expenses increased by $377,409, or 124%, in
the quarter ended June 30, 2006 compared to the same quarter during 2005. The
increase was mainly due to the integration of GLP with the net book value of
$9,620,614 in fixed assets and $24,632,932 in intangible assets. The
depreciation and amortization expenses at GLP amounted to $296,477 for the
second quarter of 2006.

Interest Income (Expense), Net
------------------------------

      Net interest income was $361,951 for the three months ended June 30, 2006,
compared to net interest expense of $65,401 for the three months ended June 30,
2005. There were no significant fluctuations in interest expense incurred by us.
The increase in interest income was the result of a higher level of excess cash
reinvestment from the proceeds of our private placement in December 2005.


                                       26

<PAGE>

Other Income (Expense), Net
---------------------------

      Other income (expense), net, was a net income of $10,136 for the three
months ended June 30, 2006, compared to a net expense of $7,277 for the three
months ended June 30, 2005. This was resulted primarily from our investment
income of $5,315 and a government subsidy granted during the second quarter of
2006 that was not granted during the same quarter of 2005.

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

         Income tax expense for the quarter ended June 30, 2006 was $1,550,708
as compared to $1,037,779 for the quarter ended June 30, 2005. The increase was
due to the increase in pre-tax income of Harbin Bioengineering and the
contribution of profit from HSPL, which could not be offset against the losses
of AOB Hong Kong and AOB US operations.

         During the second quarter of 2006, income tax was provided for at 15%
of pre-tax income for Harbin Bioengineering and 33% of pre-tax income for HSPL
under applicable Chinese law. GLP enjoys a tax exemption according to applicable
Chinese tax laws. The Company's effective tax rate during that period was 21%.


                                       27

<PAGE>

RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2006 AS COMPARED TO SIX MONTHS
--------------------------------------------------------------------------------
ENDED JUNE 30, 2005
-------------------

The following table sets forth the amounts and the percentage relationship to
revenues of certain items in our condensed consolidated statements of income for
the six months ended June 30, 2006 and 2005:


<TABLE>
                                          Six Months Ended June 30,        Six Months Ended June 30,
                                        ------------------------------     -------------------------
                                            2006              2005           2006             2005
                                        ------------      ------------     --------         --------
<S>                                     <C>               <C>                   <C>              <C>
REVENUES                                $ 41,808,826      $ 21,555,252          100%             100%
COST OF GOODS SOLD                        14,173,998         7,816,319        33.90            36.26
                                        ------------      ------------     --------         --------
GROSS PROFIT                              27,634,828        13,738,933        66.10            63.74
     Selling and marketing                 3,655,169         1,205,821         8.74             5.59
     Advertising                           5,222,067         1,404,084        12.49             6.51
     General and administrative            4,316,287         3,029,193        10.32            14.05
     Depreciation and amortization         1,067,548           608,927         2.55             2.83
                                        ------------      ------------     --------         --------
INCOME FROM OPERATIONS                    13,373,757         7,490,908        31.99            34.75
     Interest income (expense), net          443,514          (157,075)        1.06            (0.73)
     Other income (expenses), net              9,144             7,277         0.02             0.03
                                        ------------      ------------     --------         --------
INCOME BEFORE INCOME TAXES                13,826,415         7,326,556        33.07            33.99
     Income taxes                         (3,094,888)       (1,787,646)        7.40             8.29
                                        ------------      ------------     --------         --------
NET INCOME                              $ 10,731,527      $  5,538,910        25.67%           25.70%
                                        ============      ============     ========         ========
NET INCOME PER SHARE
     BASIC                                      0.17              0.14
                                        ============      ============
     DILUTED                                    0.17              0.13
                                        ============      ============
</TABLE>

Revenues

Revenues for the first six months of 2006 were $41,808,826, an increase of
$20,253,574 over revenues for the same period of 2005. Revenues by business
segment were as follows:

     Product                           Six Months Ended June 30,     Increase/
                                        2006            2005         (Decrease)
     ------------------------------  ------------   ------------   ------------
     PBP products                    $ 27,999,263   $ 13,425,707   $ 14,573,556
     PBN products                      13,809,563      8,129,545      5,680,018
                                     ------------   ------------   ------------
     TOTAL                           $ 41,808,826   $ 21,555,252   $ 20,253,574
                                     ============   ============   ============

Sales of our Plant Based Pharmaceutical (PBP) products increased by $14,573,556,
or 109%, as compared to the same period during 2005 primary due to the following
factors:


                                       28

<PAGE>

o        The increase in our sales of the Cease Enuresis Soft Gel by 130% from
         $3,616,551 in the first six months of 2005 to $8,329,834 in the same
         period during 2006. The increase in sales of this product was due
         primarily to our continuous marketing efforts with respect to the Cease
         Enuresis Soft Gel together with the growing demand for the product in
         the Chinese market.

o        The sales of our Shuanghuanglian Injection Powder increased from
         $6,652,705 in the six months ended June 30, 2005 to $11,253,219 in the
         corresponding period during 2006, or 69%. This increase is due to the
         full integration of HSPL into our company after the acquisition,
         including full access to our sales channels as well as our continuous
         marketing efforts since that time;

o        The sales revenue from our UrinStopper Patch, a new product in 2005,
         also increased from $677,977 in the first six months of 2005 to
         $1,896,830 in the same period during 2006, or 180%. This was
         attributable to improved recognition of our new product supported by
         our marketing campaigns;

o        Sales revenues from other PBP products in the same period also
         increased by $1,026,894, or 41%, due primarily to the increased sales
         of our Double Ginseng Yishen Grain product; and

o        Our newly acquired Guangxi Lingfeng Pharmaceutical Ltd. (GLP) has also
         contributed $3,014,011 to our revenue for the six months ended June 30,
         2006. GLP was not a subsidiary during the same period last year.

Sales from our Plant Based Nutraceutical (PBN) products increased to $13,809,563
in the first six months of 2006 from $8,129,545 in the same period during 2005,
representing a growth of 70% and it is primarily due to the following factors:

o        Sales of our Protein Peptide series of products, which increased by
         101%, from $5,701,701 during the six months ended June 30, 2005 to
         $11,475,353 in the same period of 2006. This increase was mainly
         attributable to increased sales of two products, peptide coffee and
         peptide tablets, of $594,517 and $4,887,698, respectively, in the first
         six months ended June 30, 2006 as compared to the same quarters of
         2005;

o        Increase in sales of PBN products was partially offset by the decrease
         in sales of our Compound Bio-functional beverage series which decreased
         from $1,693,223 in the first six months of 2005 to $1,082,134 in the
         same period during 2006, representing an decrease of 36%. The decrease
         mainly resulted from reduced marketing efforts made for this product
         during the period; and

o        Sales of other PBN products increase from $734,620 in the first six
         months of 2005 to $1,252,076 in the same period during 2006, or an
         increase of 70%, due primarily to increased sales of our Vitamate
         nutritional oral liquid product.

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

Cost of goods sold was $14,173,998 for the six months ended June 30, 2006,
compared to $7,816,319 for the six months ended June 30, 2005. Expressed as a
percentage of revenues, cost of goods sold was 33.9% for the six months ended
June 30, 2006, compared to 36.26% for the six months ended June 30, 2005. The
reduction in cost of goods sold as a percentage of revenues reflected a
continued focus on operating cost management, sourcing efficiencies and
operation efficiencies.

Cost of goods sold for the six months ended June 30, 2006 and 2005 by product
categories were as follows:

                                       29

<PAGE>

                                    Six Months Ended June 30,         Increase/
     Product                        2006               2005          (Decrease)
     --------------------------  -------------     ------------     ------------
     PBP products                $   9,485,440     $  4,985,882        4,499,558
     PBN products                    4,688,558        2,830,437        1,858,121
                                 -------------     ------------     ------------
     TOTAL                       $  14,173,998     $  7,816,319        6,357,679
                                 =============     ============     ============

The cost of goods sold of PBP and PBN products increased by 90% and 66%,
respectively, in the six months ended June 30, 2006 compared to the same period
of 2005. These increases are attributed to our increase in sales.

Gross profit increased $13,895,895, or 101%, for the six months ended June 30,
2006 over the six months ended June 30, 2005. This increase reflected higher
sales, improved margins and operating efficiencies generally across our PBP and
PBN businesses.

Gross profit as a percentage of revenues increased from 63.74% in the comparable
period of the prior year to 66.1% due to the reductions in cost of goods sold as
a percentage of revenues discussed above and improved operational efficiency.

Selling and Marketing
---------------------

         Selling and marketing expenses, including distribution expenses,
increased from $1,205,821 in the six months ended June 30, 2005 to $3,655,169 in
the same period of 2006, representing a 203% increase. The details of our sales
and marketing expenses were as follows:

                                       Six Months Ended June 30,    Increase/
                                         2006            2005      (Decrease)
                                     ------------   ------------   -----------
Payroll                              $    572,763   $    369,531          55%
Transportation                            947,978        350,522         170%
Promotional materials and fees            848,130        169,843         399%
Offices and sundries                      190,066         46,289         311%
AOBO Hong Kong marketing                   76,964          8,231         835%
AOBO US marketing                               -          5,705        (100%)
Other                                   1,019,268        255,700         299%
                                     ------------   ------------
      TOTAL                          $  3,655,169   $  1,205,821         203%
                                     ============   ============

         Our increase in selling and marketing expenses in the six months ended
June 30, 2006 compared to the same period during 2005 was primarily due to the
following factors:

o        An increase in payroll expenses for Harbin Bioengineering by 31%.
         Payroll expenses for HSPL increased by 87% compared with the same
         period of the prior year. These increases were primarily due to an
         increase in the number of employees working in marketing and
         distribution in the first six months of 2006 compared to the same
         period during 2005. Our new subsidiary, GLP has also incurred $66,239
         of payroll expenses during the second quarter of 2006.


                                       30

<PAGE>

o        Transportation expenses for Harbin Bioengineering increased by 24% in
         the six months of 2006 compared to the same period during 2005. This
         increase resulted primarily from the growth in sales reflected in the
         increase in our sales revenue. Transportation expenses for HSPL
         increased by $460,163, or 2,542%. This increase is due to the fact that
         during the first six months of 2005, expenses for transportation at
         HSPL were especially low because HSPL was then a newly-acquired
         subsidiary. The increased expenses for the first six months of 2006
         reflect HSPL's operation as a fully-integrated part of the Company.

o        Harbin Bioengineering increased its promotional materials and fees
         expenses by $541,269, or 319% in the six months ended June 30, 2006
         compared to the same period during 2005. This increase represented
         increased spending in marketing communications to increase market
         awareness of our brand and products, especially for our peptide product
         series and our new products the Urinstopper Capsule and UrinStopper
         Patch. The promotional materials and fees at GLP were $137,019 for the
         six months ended June 30, 2006, which accounted for 16% of this
         category of expenses.

o        Harbin Bioengineering's office and sundries expenses increased by 87%
         in the first six months of 2006 compared to the same period during 2005
         due to increased support to its marketing activities. HSPL's office and
         sundries expenses also increased by $96,792, or 855%, in the first six
         months of 2006 as compared to the same period during 2005. The increase
         resulted primarily from the cost related to continued development and
         implementation of HSPL's branding and marketing campaigns. In addition,
         GLP incurred $16,566 in office and sundries since its acquisition.

o        In the first six months of 2006, our selling and marketing expenses for
         AOBO Hong Kong increased by 835%. This was because AOBO Hong Kong
         opened a specialty store in August 2005, and introduced products into
         many chain stores owned by chain pharmacies. To support the sales at
         these stores, as well as to increase our brand recognition, we engaged
         in substantial marketing activities during the first six months of
         2006; we engaged in no such activities in the same period of 2005.

o        As a result of the increase in selling and marketing expenses by both
         Harbin Bioengineering and HSPL as well as the integration of GLP, our
         overall selling and marketing expenses increased by 203% in the first
         six months of 2006 as compared to the same period during 2005.

Advertising
-----------

         Advertising expenses increased by $3,817,983, from $1,404,084 in the
first six months of 2005 to $5,222,067 in the same period during 2006. The
increase in advertising expenses resulted from an increase in advertising and
promotional efforts in the first six months of 2006 to promote the Company's
Shuanghuanlian Injection powder and Protein Peptide product series as well as
our new products the Urinstopper Capsule and UrinStopper Patch. Our Hong Kong
branch also increased advertisement on brand building and name recognition in
the Hong Kong market in the first six months of 2006 compared to the same period
during 2005. GLP, our newly acquired subsidiary in April 2006, incurred $521,666
in advertising expenses during the second quarter of 2006,and GLP was not a
subsidiary in the second quarter of 2005.

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

         General and administrative expenses increased from $3,029,193 in the
six months ended June 30, 2005 to $4,316,287 in the same period of 2006, or a
42% increase. The details of general and administrative expenses were as
follows:


                                           Six Months Ended June 30,  Increase/
                                               2006         2005      (Decrease)
                                           ----------    ----------   ---------

      Payroll                              $  620,006    $  411,506         51%
      Directors' remuneration                 228,500       221,500          3%
      Stock compensation - directors          158,400             -        100%
      Stock compensation - consultants        490,520       514,616         (5%)
      Office rental                           190,559        37,739        405%
      Professional fees                       829,615       524,661         58%
      Office sundries                         326,190        92,878        251%
      Transportation                           14,520         1,297      1,020%
      Vehicles                                 43,301        59,758        (28%)
      Utilities                               112,804        80,755         40%
      Research                                370,660       220,803         68%
      Business entertainment                  201,503        45,175        346%
      Provision for bad debts                (77,402)       562,331       (114%)
      Miscellaneous                           807,111       256,174        215%
                                           ----------    ----------
      TOTAL                                $4,316,287    $3,029,193         42%
                                           ==========    ==========

                                       31

<PAGE>

         Our increase in general and administrative expenses in the six months
ended June 30, 2006 compared to the same period during 2005 was primarily due to
the following factors:

o        An increase in general and administrative expenses incurred in the AOBO
         Hong Kong office of 158% as compared to the same period during 2005.
         The increase resulted primarily from additional personnel and facility
         expenses as well as fees paid for professional services related to our
         growth.

o        An increase in general and administrative expenses incurred in the AOBO
         US office of 43% as compared to the same period last year. In the
         second half of 2005, we increased the number of employees in AOB US
         from three to five, and we increased the number of offices occupied by
         AOBO US from one to two. As a result, there were increases in expenses
         in the payroll, office rental, office sundries and other expense
         categories in the first six months of 2006 as compared to the same
         period during 2005. Director remuneration increased by 3% as a result
         of the appointment of a new independent director in the late second
         quarter of 2005, and stock-based compensation for directors was also
         initiated during that time. Stock-based compensation for consultants,
         however, decreased by 5% because some of the expenses for consultants
         were fully amortized earlier and as a result, such expenses did not
         recur in the first six months of 2006. Professional fees for the first
         six months of 2006 increased by 58% as compared to the same period
         during 2005 as a result of an increase in our use of audit and
         consultancy services in connection with the listing of our stock on the
         American Stock Exchange and a $60.0 million private placement in
         December 2005.

o        Payroll expenses at Harbin Bioengineering increased by 10% compared
         with the same six months during 2005, as a result of an increased
         number of employees. Our payroll expenses in HSPL increased by 7%
         during that time, due to the additional employees in HSPL. Our newly
         acquired subsidiary in April, GLP, also incurred $56,934 in payroll
         expenses during the second quarter of 2006.

o        Research expenses at Harbin Bioengineering increased by 57% compared
         with the first six months during 2005, reflecting the devotion of
         additional resources to research on new product development. In the
         same period, research expenses at HSPL increased by 3%, mainly due to
         further investment in research of potential new products. GLP also
         spent $28,021 in research expenses for its existing products.

o        Expenses for office sundries at Harbin Bioengineering increased by
         $152,687, or 188% compared with the first six months of 2005, as a
         result of increased general and administrative activities to support
         our sales growth. In the same period, expenses for office sundries at
         HSPL increased by $45,881, or 1,503%. This increase is due to the fact
         that during the first six months of 2005, expenses for office sundries
         at HSPL were especially low because HSPL was then a newly acquired
         subsidiary in the process of becoming integrated into our Company. The
         increased expenses for the first six months of 2006 reflected HSPL's
         operation as a fully-integrated part of the Company.

o        In 2005, HSPL established a provision for bad debts in the amount of
         $266,248, based on the age of some of its accounts receivable. During
         the first six months of 2006, some of these aged accounts receivable
         were recovered. Based on this recovery, management has reassessed the
         bad debt provision and decided to reduce the amount by $55,021. As of
         June 30, 2006, the provision for bad debts was $216,891 for HSPL.

o        Other expenses at Harbin Bioengineering increased by $210,900, or 167%
         in the first six months of 2006 compared with the same period during
         2005. This increase was due to increases in maintenance fee and
         traveling expenses of $55,037 and $51,064, respectively, as a result of
         increase in business activities to support our rapid growth. Other
         expenses at HSPL increased by 83% in the first six months of 2006
         compared with the same period of 2005. The increase was primarily due
         to increased general and administrative activities in HSPL. Other
         expenses at GLP for the six months ended June 30, 2006 were $240,942,
         consisted mainly of insurance cost and quality control expenses. GLP's
         other expenses accounted for 30% of the total cost in this category.


                                       32

<PAGE>

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

         Depreciation and amortization increased by $458,621, or 75%, in the six
months ended June 30, 2006 compared to the same period during 2005. The increase
was mainly due to the increase in the assets of Harbin Bioengineering as a
result of the transfer onto its books of $517,650 worth of assets relating to
construction in progress for a protein peptide manufacturing facility in Harbin,
China and the integration of GLP with the net book value of $9,620,614 in fixed
assets and $24,632,932 in intangible assets. The depreciation and amortization
expenses at GLP amounted to $296,477 for the six month ended June 30, 2006.

Interest Income (Expense), Net
------------------------------

      Net interest income was $443,514 for the six months ended June 30, 2006,
compared to $157,075 in net interest expense for the six months ended June 30,
2005. There were no significant fluctuations in interest expense incurred by us.
The increase was the result of a higher level of excess cash reinvestment from
the proceeds of our private placement in December 2005.

Other Income (Expense), Net
---------------------------

      Other income (expense), net, was a net income of $9,144 for the six months
ended June 30, 2006, compared to a net expense of $7,277 for the three months
ended June 30, 2005. This was resulted primarily from our investment income of
$5,315 and a government subsidy granted during the first six months of 2006 that
was not granted during the same period of 2005.

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

      Income tax expense for the six months ended June 30, 2006 was $3,094,888
as compared to $1,787,646 for the six months ended June 30, 2005. The increase
was due to the increase in pre-tax income of Harbin Bioengineering and the
contribution of profit from HSPL, which could not be offset against the losses
of AOB Hong Kong and AOB US operations.

         During the first six months of 2006, income tax was provided for at 15%
of pre-tax income for Harbin Bioengineering and 33% of pre-tax income for HSPL
under applicable Chinese law. GLP enjoys a tax exemption according to applicable
Chinese tax laws. The Company's effective tax rate during that period was 22%.

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

Cash
----

         Our cash balance at June 30, 2006, was $70,342,537, representing an
increase of $12,810,488, or 22.3%, compared with our cash balance of $57,532,049
at December 31, 2005. The increase was mainly attributable to the receipt of the
second tranche of our private placement funding with net proceeds of $24,974,955
and net cash provided by operating activities of $8,612,114, net of cash used to
acquire our GLP subsidiary of $18,074,186.


                                       33

<PAGE>

Cash Flow
---------

         Cash flows from operations during the first six months of 2006 amounted
to $8,612,114, representing an increase of approximately 221% compared with cash
flows from operations of $2,686,358 in the first six months of 2005. The
increased cash flow was due primarily to the increase of our net income by 94%,
to $10,731,527 in the first six months of 2006, compared with net income of
$5,538,910 in the same period of 2005. The increased cash flow was also due in
part to a decrease in advance to suppliers and prepaid expenses by $1,172,463
during the first six months of 2006, due to our better control over payment to
our suppliers. These increases were partly offset by a decrease in our accounts
payable of $1,152,229 and an increase in our inventories of $2,933,276 during
the first six months of 2006, both of which resulted from our expanded scale of
operations, which required support of increased sales and production activities
and additional demands on working capital.

         Our cash flows used in investing activities amounted to $19,150,445 in
the six months ended June 30, 2006. During that period, we paid $18,074,186 for
the acquisition of Guangxi Lingfeng Pharmaceutical Ltd. (GLP). We also used
$284,576 for the construction of new protein peptide facilities, which are
expected to be completed in the third quarter of 2006. Compared to the first six
months of 2005, our cash flows used in investing activities increased by
$18,887,055, which resulted primarily from the acquisition payment.

         Our cash flows from financing activities amounted to $22,965,005 in the
first six months of 2006. We entered into a $60 million private placement in
2005 and the private placement was divided into two tranches. The first tranche
was completed on December 8, 2005 and the second tranche was completed on
January 23, 2006. Net cash proceeds of $31,470,487 were received from the first
tranche of the private placement. On January 23, 2006, we received net proceeds
of $24,974,955 in connection with the second tranche of the private placement.

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

         Our working capital increased by $4,386,534 to $71,200,043 at June 30,
2006, as compared to $66,813,509 at December 31, 2005, primarily due to our
increase in cash of $12,810,488, other receivable of $976,494 and inventories of
$5,456,763, and partly offset by an increase of $5,727,598 in stock to be issued
and an increase of $3,786,747 in short-term bank loans. The increases in other
receivable and inventories were primarily due to our increased production
capacity and volume of sales. The increase in stock to be issued was due
primarily to the fact that we had not issued the 1.2 million common stocks for
the acquisition of GLP as of June 30, 2006. The increase in short-term bank
loans was the result of integration of GLP in April 2006.

         We currently generate our cash flow through operations. We believe that
our cash flow generated from operations will be sufficient to sustain operations
for at least the next twelve months. There is no identifiable expansion plan as
of June 30, 2006, but from time to time, we may identify new expansion
opportunities for which there will be a need for use of cash.

ISSUANCE OF COMMON STOCK
------------------------

         See PART II Item 2 for issuance of common stock for the quarter ended
June 30, 2006.


                                       34

<PAGE>

INFLATION
---------

         Inflation has not had a material impact on our business and we do not
expect inflation to have an impact on our business in the near future.

CURRENCY EXCHANGE FLUCTUATIONS
------------------------------

         All of the Company's revenues and a majority of its expenses in the
quarter ended June 30, 2006 were denominated in Renminbi ("RMB"), the currency
of China, and were converted into US dollars at the exchange rate of 8.0063 to
1. In the third quarter of 2005, the Renminbi began to rise against the US
dollar. As a result of the appreciation of the RMB, we recognized a foreign
currency translation gain of $378,670 during the second quarter of 2006. There
can be no assurance that RMB-to-U.S. dollar exchange rates will remain stable. A
devaluation of RMB relative to the U.S. dollar would adversely affect our
business, financial condition and results of operations. We do not engage in
currency hedging.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         We do not hold any derivative instruments and do not engage in any
hedging activities. Because most of our purchases and sales are made in RMB, any
exchange rate change affecting the value of the RMB relative to the U.S. dollar
could have an effect on our financial results as reported in U.S. dollars. If
the RMB were to depreciate against the U.S. dollar, amounts reported in U.S.
dollars would be correspondingly reduced. If the RMB were to appreciate against
the U.S. dollar, amounts reported in U.S. dollars would be correspondingly
increased.

ITEM 4 - 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
Chinese auditing standards and applicable U.S. rules. The Company has an audit
group, which consists of the Chief Executive Officer, Chief Financial Officer,
one member 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 audit group
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), with respect
to this Quarterly Report on Form 10-Q before its filing with the Commission. The
audit group made its evaluation pursuant to Rule 13a-15 under the Exchange Act
to the maximum possible extent and to the best knowledge of the audit group.

         Based upon our evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that, as of the Evaluation Date, our disclosure
controls and procedures were effective and basically sound in all material
aspects under Rule 13a-15. However, given the fact that our major operations are
located China, the Company and the audit group consistently make efforts to
coordinate the evolving control and disclosure environment in China with the
regulatory environment in the United States. The Company has identified this
aspect as an area for improvement and is taking measures to train its staff for
better performance.


                                       35

<PAGE>

         The Company anticipates that it will be fully compliant with section
404 of the Sarbanes-Oxley Act of 2002 by the required date 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. There were no changes to our internal
controls or in other factors during the most recent quarter that have materially
affected, or are reasonably likely to affect materially, our internal controls
over financial reporting.

PART II -  OTHER INFORMATION

ITEM 1 -   LEGAL PROCEEDINGS

         We are currently not involved in any litigation that we believe could
have a material adverse effect on our financial condition or results of
operations. There is no action, suit, proceeding, inquiry or investigation
before or by any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of our executive officers or
any of our subsidiaries, threatened against or affecting our company, our common
stock, or any of our subsidiaries, or against our Company's or our Company's
subsidiaries' officers or directors in their capacities as such, in which an
adverse decision could have a material adverse effect.

ITEM 1A - RISK FACTORS

In addition to the other information set forth in this report, you should
carefully consider the risk factors discussed in Part I, "Item 6. Management
Discussion and Analysis" in our Annual Report on Form 10-KSB for the year ended
December 31, 2005, which could materially affect our business, financial
condition or future results. The risks described in our Annual Report on Form
10-KSB are not the only risks facing our Company. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results.

ITEM 2 -   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There have been no sales of equity securities during the period covered by this
report.

ITEM 3 -   DEFAULTS UPON SENIOR SECURITIES

There have been no material defaults.

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

There were no matters submitted to a vote of security holders during the period
covered by this report.

ITEM 5 -   OTHER INFORMATION

Not applicable.

ITEM 6 -   EXHIBITS

The following exhibits are filed as part of this Quarterly Report on Form 10-Q:


                                       36

<PAGE>

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

10.1     Acquisition Agreement, dated April 18, 2006, by and among American
         Oriental Bioengineering Inc. and Guangxi Lingfeng Pharmaceutical
         Company Limited (1)

10.8(A)  Independent Director Agreement, dated July 1, 2006, by and between
         American Oriental Bioengineering Inc. and Cosimo J. Patti

10.8(B)  Independent Director Agreement, dated July 1, 2006, by and between
         American Oriental Bioengineering Inc. and Xianmin Wang

10.8(C)  Independent Director Agreement, dated July 1, 2006, by and between
         American Oriental Bioengineering Inc. and Eileen Brody

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

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

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

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

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

(1) Incorporated by reference from the Current Report on Form 8-K filed on April
24, 2006


                                       37

<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: August 14, 2006



/s/ Yanchun Li
---------------------------------------
YANCHUN LI
ACTING CHIEF FINANCIAL OFFICER
DATED: August 14, 2006


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