UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY ~~Quarterly~~REPORT ~~report~~PURSUANT ~~under~~TO ~~Section~~SECTION 13 orOR 15(d) ~~of the Securities Exchange Act of 1934~~OF

~~For~~THE ~~the~~SECURITIES ~~quarterly~~EXCHANGE ~~period~~ACT ~~ended~~OF ~~September 30, 2011~~1934

¨For ~~Transition report under Section 13 or 15(d) of~~ the ~~Securities~~Quarterly Period ~~Exchange~~Ended ~~Act~~March of31, ~~1934~~2013

~~For~~¨ TRANSITION ~~the~~REPORT ~~transition~~PURSUANT ~~period~~TO ~~from to~~ SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~COMMISSION~~For ~~FILE~~the ~~NO:~~Transition ~~001-32569~~Period from _________ to _________

~~American~~Commission ~~Oriental~~file ~~Bioengineering,~~number: ~~Inc.~~000- 32569

AMERICAN ORIENTAL BIOENGINEERING, INC.

(Exact name of registrant as specified in its charter)

NEVADA

84-0605867

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

1 Liangshuihe First Ave, Beijing E-Town Economic and Technology Development Area, E-Town,

Beijing, 100176, People’s Republic of China

(Address of principal executive offices) (Zip ~~Code~~code)

86-10-5982-2039

(Registrant’s telephone number, including area code):

~~____________________________________~~Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x

~~(Former~~Indicate ~~name,~~by ~~former~~check ~~address~~mark whether the registrant has submitted electronically and ~~former~~posted ~~fiscal~~on ~~year~~its corporate Web site, if ~~changed~~any, ~~since~~every ~~last~~Interactive ~~report~~Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is ~~(1) has~~a ~~filed~~large ~~all~~accelerated ~~reports~~filer, ~~required~~an toaccelerated befiler, ~~filed~~a bynon-accelerated ~~Section 13~~filer, or ~~15(d)~~a ofsmaller ~~the~~reporting ~~Securities~~company. ~~Exchange~~See ~~Act~~the definitions of ~~1934~~“large ~~during~~accelerated ~~the~~filer,” ~~preceding~~“accelerated ~~12 months (or for such shorter period that the registrant was required to file such reports)~~filer,” and ~~(2) has~~“smaller ~~been~~reporting ~~subject~~company” toin ~~such~~Rule 12b-2 ~~filing~~of ~~requirements for~~ the ~~past~~Exchange ~~90 days~~Act. ~~Yes x No ¨~~

~~Indicate~~Large byaccelerated ~~check~~filer ~~mark~~£ ~~whether~~Accelerated ~~the~~filer ~~registrant~~£ ~~has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S~~Non-Taccelerated ~~(§232.405~~filer of£ ~~this~~Smaller ~~chapter)~~reporting ~~during~~company ~~the~~x ~~preceding 12 months~~ (orDo ~~for~~not ~~such~~check ~~shorter~~if ~~period~~a ~~that~~smaller ~~the~~reporting ~~registrant was required to submit and post such files~~company)~~. Yes o No x~~

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

~~The~~On ~~number~~June of10, ~~shares~~2013, ~~outstanding~~36,419,706 shares of ~~each class~~ the ~~issuer~~registrant’s Common ~~common~~Stock, ~~stock~~$0.002 aspar value and 1,000,000 shares of the ~~latest~~registrant’s ~~practicable~~Class ~~date~~A isPreferred ~~stated~~Stock, ~~below~~$0.001 par value were outstanding.

Title of each class of common stock		Outstanding as of November 11, 2011
Common Stock, $0.001 par value		78,503,381

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION 3 ITEM 1 – Financial Statements 3 Unaudited condensed consolidated balance sheet as of September 30, 2011 and condensed consolidated balance sheet as of December 31, 2010 (restated) 3 Unaudited condensed consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2011 and 2010 (restated) 5 Unaudited condensed statements of cash flow for the nine months ended September 30, 2011 and 2010 (restated) 6 Notes to unaudited condensed consolidated financial statements - September 30, 2011 7 ITEM 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations 28 ITEM 3 – Quantitative and Qualitative Disclosures About Market Risk 40 ITEM 4 – Controls and Procedures 40 PART II – OTHER INFORMATION 42 ITEM 1 – Legal Proceedings 42 ITEM 1A – Risk Factors 42 ITEM 2 – Unregistered Sales of Equity Securities and Use of Proceeds 42 ITEM 3 – Defaults upon Senior Securities 42 ITEM 4 – (Removed and Reserved) 42 ITEM 5 – Other Information 42 ITEM 6 – Exhibits 42 Signatures 43

	Page

PART I - FINANCIAL INFORMATION	3

ITEM 1 - Financial Statements	3

Unaudited condensed consolidated balance sheet as of March 31, 2013 and condensed consolidated balance sheet as of December 31, 2012	3

Unaudited condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2013 and 2012	5

Unaudited condensed statements of cash flow for the three months ended March 31, 2013 and 2012	6

Notes to unaudited condensed consolidated financial statements - March 31, 2013	7

ITEM 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations	20

ITEM 3 – Quantitative and Qualitative Disclosures About Market Risk	29

ITEM 4 – Controls and Procedures	29

PART II – OTHER INFORMATION	30

ITEM 1 – Legal Proceedings	30

ITEM 1A – Risk Factors	30

ITEM 2 – Unregistered Sales of Equity Securities and Use of Proceeds	30

ITEM 3 – Defaults upon Senior Securities	30

ITEM 4 – Mine Safety Disclosures	30

ITEM 5 – Other Information	30

ITEM 6 – Exhibits	31

Signatures	32

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

~~(UNAUDITED)~~ASSETS

	SEPTEMBER 30, 2011		DECEMBER 31, 2010
	MARCH 31,		DECEMBER 31,
			(RESTATED)
	2013		2012
	(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	836,~~018~~415,~~431~~616	$	947,~~568~~097,~~520~~098
Restricted cash		~~654~~3,~~977~~150,665		~~537~~6,~~297~~514,224
Accounts and notes receivable, net		64,117,238		80,598,919
Accounts receivable, net of allowance for doubtful accounts of $20,039,711 and $18,134,912 as of March 31, 2013 and December 31, 2012, respectively		31,949,270		45,543,611
Inventories, net		24,201,066		12,665,586
Inventories, net of provision for slow-moving inventories of $51,440 and $47,281 as of March 31, 2013 and December 31, 2012 , respectively		21,767,677		20,570,846
Advances to suppliers and prepaid expenses		1910,~~547~~383,~~924~~510		1410,~~246~~292,~~144~~360
Deferred tax assets		221,222		649,503
Notes receivable		474,911		4,682,607
Receivable for disposal of investment		39,832,547		38,567,410
Deferred tax assets		28,818		28,660
Other current assets		1616,~~839,855~~406		2719,~~986,005~~075
Total Current Assets		233,433,260		244,819,384
Total current assets		74,786,873		95,448,481
LONG-TERM ASSETS
Property, plant and equipment, net		~~136~~171,~~405~~060,~~433~~254		~~109~~171,~~547~~381,~~616~~389
Land use rights, net		~~157~~145,~~892~~269,~~698~~346		~~155~~145,~~433~~314,~~311~~928
Other long term assets		12,281,370		8,167,880
Capitalized agricultural costs		17,539,278		17,443,475
Construction in progress		32,378,396		22,516,044
Acquired intangible assets, net		12,607,249		13,116,380
Other intangible assets, net		12,858,509		14,889,127
Investments in and advances to equity method investments		2,350,219		3,337,485
Investments in and advances to equity investments		18,922,088		19,179,235
Deferred financing costs and other		115,045		266,786
Goodwill		33,164,121		33,164,121
Total Long-Term Assets		348,941,391		350,860,443
Deferred tax assets		84,176		147,024
TOTAL ASSETS	$	423,728,264	$	446,308,924
Unamortized financing cost		1,580,721		2,359,404
Total Long-Term Assets		405,567,512		365,403,762
TOTAL ASSETS	$	639,000,772	$	610,223,146

See accompanying notes to the condensed consolidated financial statements.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

~~(UNAUDITED)~~LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES AND EQUITY

	MARCH 31,			DECEMBER 31,
	2013			2012
	(Unaudited)
CURRENT LIABILITIES
Accounts payable	$	9,583,307		$	11,005,423
Accrued expenses and other payables		20,081,465			16,339,129
Taxes payable		268,559			762,943
Accrued taxes		11,356,056			11,015,810
Convertible notes, in default		49,161,000			49,161,000
Short-term notes payable		6,066,997			11,054,449
Short-term bank loans		6,845,390			6,807,999
Current portion of long-term bank loan		65,108			64,811
Total current liabilities		103,427,882			106,211,564

LONG-TERM LIABILITIES
Long-term bank loan, net of current portion		537,242			554,590
Deferred tax liabilities		12,047,971			11,956,064
Total Long-Term Liabilities		12,585,213			12,510,654
TOTAL LIABILITIES		116,013,095			118,722,218

COMMITMENTS AND CONTINGENCIES


SHAREHOLDERS’ EQUITY
Preferred stock, $0.001 par value; 2,000,000 shares authorized; 1,000,000 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively		1,000			1,000
Common stock, $0.002 par value; 75,000,000 shares authorized; 36,644,288 shares issued as of March 31, 2013 and December 31, 2012; 36,419,706 shares outstanding as of March 31, 2013 and December 31, 2012, respectively		73,336			73,336
Common stock to be issued (705,721 shares and 611,971 shares as of March 31, 2013 and December 31, 2012, respectively)		488,061			450,561
Additional paid-in capital		178,497,616			177,974,127
Retained earnings		56,982,866			78,097,723
Less: Treasury stock, at cost (224,582 shares as of March 31, 2013 and December 31, 2012)		(799,999	)		(799,999	)
Accumulated other comprehensive income		72,472,289			71,789,958
TOTAL SHAREHOLDERS’ EQUITY		307,715,169			327,586,706
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	423,728,264		$	446,308,924

	SEPTEMBER 30, 2011			DECEMBER 31, 2010
				(RESTATED)
CURRENT LIABILITIES
Accounts payable	$	14,304,039		$	10,716,686
Notes payable		654,977			537,297
Other payables and accrued expenses		14,987,564			18,039,557
Taxes payable		845,753			1,237,169
Short-term loans		12,766,861			6,957,258
Current portion of long-term bank loans		62,472			61,405
Other liabilities		5,160,521			6,284,107
Deferred tax liabilities		87,382			243,304
Total Current Liabilities		48,869,569			44,076,783
LONG-TERM LIABILITIES
Long-term bank loans, net of current portion		631,990			679,866
Deferred tax liabilities		14,263,066			15,837,479
Unrecognized tax benefits		7,874,802			6,055,656
Convertible notes		109,500,000			115,000,000
Total Long-Term Liabilities		132,269,858			137,573,001
TOTAL LIABILITIES		181,139,427			181,649,784
COMMITMENTS AND CONTINGENCIES
EQUITY
SHAREHOLDERS’ EQUITY
Preferred stock, $0.001 par value; 2,000,000 shares authorized; 1,000,000 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		1,000			1,000
Common stock, $0.001 par value; 150,000,000 shares authorized; 78,952,544 shares and 78,598,604 shares issued as of September 30, 2011 and December 31, 2010, respectively; 78,503,381 shares and 78,598,604 shares outstanding as of September 30, 2011 and December 31, 2010, respectively		78,952			78,598
Common stock to be issued		224,333			350,500
Additional paid-in capital		205,971,757			203,322,671
Retained earnings (the restricted portion of retained earnings is $26,293,785 at both September 30, 2011 and December 31, 2010)		216,442,093			205,260,681
Less: Treasury stock, at cost (449,163 shares and nil as of September 30, 2011 and December 31, 2010, respectively)		(799,999	)		-
Less: Prepaid forward repurchase contract		(29,998,616	)		(29,998,616	)
Accumulated other comprehensive income		65,421,859			49,053,329
Total Shareholders’ Equity		457,341,379			428,068,163
Non-controlling Interest		519,966			505,199
TOTAL EQUITY		457,861,345			428,573,362
TOTAL LIABILITIES AND EQUITY	$	639,000,772		$	610,223,146

See accompanying notes to the condensed consolidated financial statements

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF ~~INCOME~~OPERATIONS AND COMPREHENSIVE ~~INCOME~~LOSS

(UNAUDITED)

	Three Months Ended March 31,
	2013			2012

Revenues	$	21,006,763		$	25,745,276
Cost of sales		16,505,888			18,063,454
GROSS PROFIT		4,500,875			7,681,822

Selling, general and administrative expenses		12,476,722			11,982,069
Advertising costs		3,645,454			6,156,353
Research and development costs		1,407,045			1,566,933
Depreciation and amortization expenses		1,864,207			2,080,699
Provision for doubtful accounts		1,763,952			985,786
Long term crop inventory costs		2,361,383			–
Total operating expenses		23,518,763			22,771,840

LOSS FROM OPERATIONS		(19,017,888	)		(15,090,018	)

Equity in losses from equity method investments		(968,232	)		(191,450	)
Interest expense, net		(763,691	)		(1,743,270	)
Other income (expense), net		(13,801	)		281,047
LOSS BEFORE INCOME TAX		(20,763,612	)		(16,743,691	)
Provision for income taxes		351,245			443,068
NET LOSS		(21,114,857	)		(17,186,759	)
Loss attributable to non-controlling interest		–			29,834

NET LOSS ATTRIBUTABLE TO AMERICAN ORIENTAL BIOENGINEERING, INC.		(21,114,857	)		(17,156,925	)

OTHER COMPREHENSIVE INCOME
Foreign currency translation gain		682,331			2,591,784

COMPREHENSIVE LOSS	$	(20,432,526	)	$	(14,565,141	)

LOSS PER COMMON SHARE, basic and diluted	$	(0.58	)	$	(0.43	)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, basic and diluted		36,644,288			39,476,274

	THREE MONTHS ENDED SEPTEMBER 30,						NINE MONTHS ENDED SEPTEMBER 30,
	2011			2010			2011			2010
				(RESTATED)						(RESTATED)
Revenues	$	53,934,602		$	91,533,044		$	159,988,508		$	222,579,024
Cost of sales		28,730,424			44,250,846			83,863,569			107,219,753
GROSS PROFIT		25,204,178			47,282,198			76,124,939			115,359,271
Selling, general and administrative expenses		12,080,424			20,920,522			34,577,769			48,326,800
Advertising costs		2,964,877			10,983,946			10,185,380			26,949,663
Research and development costs		2,825,967			4,724,703			8,652,455			10,754,394
Depreciation and amortization expenses		1,804,888			1,682,058			5,359,979			4,902,005
Debt extinguishment (gain)		(2,666,829	)		-			(2,666,829	)		-
Total operating expenses		17,009,327			38,311,229			56,108,754			90,932,862
INCOME FROM OPERATIONS		8,194,851			8,970,969			20,016,185			24,426,409
Equity in (losses) earnings from unconsolidated entities		(796,727	)		242,183			(857,811	)		201,097
Impairment loss on equity investment		-			(1,083,637	)		-			(1,083,637	)
Gain (loss) on changes in ownership of unconsolidated entities		-			-			658,540			(12,240	)
Interest expense, net		(1,802,954	)		(1,456,062	)		(4,850,651	)		(4,393,093	)
Other (expenses) income, net		(116,196	)		(67,548	)		321,571			(85,340	)
INCOME BEFORE INCOME TAXES		5,478,974			6,605,905			15,287,834			19,053,196
Provision for income taxes		(2,203,013	)		2,366,398			4,091,655			6,578,178
NET INCOME		7,681,987			4,239,507			11,196,179			12,475,018
Net (income) loss attributable to non-controlling interest		(28,446	)		7,679			(14,767	)		19,555
NET INCOME ATTRIBUTABLE TO CONTROLLING INTEREST		7,653,541			4,247,186			11,181,412			12,494,573
OTHER COMPREHENSIVE INCOME
Foreign currency translation gain		5,020,779			7,780,438			16,368,530			9,716,941
OTHER COMPREHENSIVE INCOME		5,020,779			7,780,438			16,368,530			9,716,941
COMPREHENSIVE INCOME	$	12,674,320		$	12,027,624		$	27,549,942		$	22,211,514
EARNINGS PER COMMON SHARE
Basic	$	0.10		$	0.06		$	0.15		$	0.17
Diluted	$	0.10		$	0.06		$	0.15		$	0.17
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		74,845,855			74,934,428			74,801,120			74,765,028
Diluted		76,524,003			75,965,266			76,307,044			75,647,024

See accompanying notes to the condensed consolidated financial statements

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended March 31,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(21,114,857	)	$	(17,186,759	)

Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		3,035,131			3,038,486
Amortization of deferred financing costs		97,680			218,552
Provision for doubtful accounts		1,763,952			985,786
Deferred taxes		91,749			64,512
Stock-based consulting expenses		–			25,000
Stock-based compensation expenses		523,489			645,887
Independent director stock compensation		37,500			53,250
Equity in losses from equity method investments		968,232			191,450
Changes in operating assets and liabilities:
Accounts receivable		11,689,541			574,204
Inventories		(1,200,990	)		(9,674,838	)
Advances to suppliers and prepaid expenses		(91,150	)		805,386
Other current assets		200,668			1,912,872
Accounts payable		(1,423,722	)		1,300,082
Accrued expenses and other payables		3,723,706			(4,413,697	)
Taxes payable		(494,384	)		(648,557	)
Accrued taxes		340,246			580,408
Net cash used in operating activities		(1,853,209	)		(21,527,976	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(357,988	)		(1,607,702	)
Purchase of intangible assets		–			(52,145	)
Capitalized agricultural costs		–			(3,395,407	)
Proceeds from repayment of notes receivable		4,207,696			18,078,344
Cash proceeds from disposal of NuoHua affiliate		–			16,495,493
Deposit for long-term assets		–			(3,895,508	)
Investments in and advances to equity investments		21,079			44,319
Net cash provided by investing activities		3,870,787			25,667,394
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash		3,363,559			(1,636,032	)
Proceeds from bank loans		–			3,385,401
Repayment of bank loans		(5,060,885	)		(305,502	)
Repurchase of common stock		–			(1,270,603	)
Net cash provided by (used in) financing activities		(1,697,326	)		173,264
Effect of exchange rate changes on cash and cash equivalents		(1,001,734	)		362,837
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(681,482	)		4,675,519
Cash and cash equivalents, beginning of the period		7,097,098			52,627,928
CASH AND CASH EQUIVALENTS, END OF THE PERIOD	$	6,415,616		$	57,303,447

SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest	$	111,989		$	2,827,561
Cash paid for income taxes	$	495,052		$	192,133
Non-cash investing and financing activities:
Transfer from construction in progress to property, plant and equipment	$	–		$	122,167

	NINE MONTHS ENDED SEPTEMBER 30,
	2011			2010
				(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	11,196,179		$	12,475,018
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,288,606			9,595,579
Amortization of deferred issuance cost		695,510			696,216
Loss on disposal of property, plant and equipment		9,712			370
Impairment loss on equity investment		-			1,083,637
Stock-based consulting expenses		64,813			93,917
(Reversal) /Provision of doubtful accounts and slow moving inventories		(79,935	)		12,722
Deferred taxes		(1,712,491	)		(508,000	)
Stock-based compensation expenses		2,258,850			1,983,421
Equity in (earnings) /losses from unconsolidated entities		857,811			(201,097	)
(Gain) /loss on changes in ownership of unconsolidated entities		(658,540	)		12,240
Independent director stock compensation		224,333			266,000
Debt extinguishment (gain)		(2,666,829	)		-
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts and notes receivable		16,554,608			(22,638,890	)
Inventories		(11,521,442	)		(8,007,819	)
Advances to suppliers and prepaid expenses		(5,326,505	)		5,732,837
Other current assets		1,562,285			89,782
Increase (decrease) in:
Accounts payable		3,622,793			4,077,922
Other payables and accrued expenses		(3,853,121	)		(2,206,738	)
Taxes payable		(391,416	)		609,868
Other liabilities		(1,123,586	)		2,454,682
Unrecognized tax benefits		1,785,656			1,712,866
Net cash provided by operating activities		20,787,291			7,334,533
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(378,478	)		(609,818	)
Purchases of construction in progress		(8,950,290	)		(4,747,741	)
Deposit for long-term assets		(30,353,949	)		(29,022	)
Advances to equity investments		65,949			(21,368	)
Proceeds from disposal of property, plant and equipment		228			-
Net cash used in investing activities		(39,616,540	)		(5,407,949	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans		12,663,526			6,764,562
Repayment of loans		(7,157,474	)		(10,612,644	)
Repurchase of convertible notes		(2,750,000	)		-
Repurchase of common stock		(799,999	)		-
Net cash provided by (used in) financing activities		1,956,053			(3,848,082	)
Effect of exchange rate changes on cash and cash equivalents		5,323,107			3,251,787
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(11,550,089	)		1,330,289
Cash and cash equivalents, beginning of period		94,568,520			91,126,486
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	83,018,431		$	92,456,775

See accompanying notes to the condensed consolidated financial statements

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ASTHREE OFMONTHS ~~SEPTEMBER~~ENDED 30MARCH 31, ~~2011~~2013 AND 2012

~~(UNAUDITED)~~NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

~~NOTE~~American 1Oriental -Bioengineering, Inc. ~~BASIS~~(“AOB” OFor ~~PRESENTATION~~“the Company”) is a fully integrated pharmaceutical company dedicated to improving health through the development, manufacture, commercialization and distribution of a broad range of pharmaceutical and healthcare products in the People’s Republic of China (the “PRC”).

~~The~~Basis ~~unaudited condensed consolidated financial statements~~ of American Oriental Bioengineering, Inc. and subsidiaries (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete 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 as of December 31, 2010 has been derived from the amended audited consolidated financial statements included in the Company’s Annual Report on Form 10-K/A. These interim financial statements should be read in conjunction with that report.

The accompanying unaudited interim condensed consolidated financial statements of the Company and its subsidiaries as of and for the three months ended March 31, 2013 and 2012 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the ”SEC”) that permit reduced disclosure for interim periods and include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the financial position, results of operations and cash flows as of March 31, 2013 and for all periods presented. Information as of December 31, 2012 has been derived from the audited consolidated financial statements of the Company for the year ended December 31, 2012. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on June 11, 2013. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the operating results to be expected for the full year ending December 31, 2013.

Basis of Consolidation

The unaudited ~~condensed~~ consolidated financial statements include the financial statements of American Oriental Bioengineering, Inc. and its wholly owned subsidiaries. Intercompany ~~All~~accounts ~~significant inter-company balances~~ and transactions ~~between~~have ~~the~~been ~~Company and its subsidiaries are~~ eliminated ~~upon~~in consolidation. Results of acquired subsidiaries are consolidated from the date on which control is transferred to the Company and are no longer consolidated from the date that control ceases.

~~Use~~Going ofConcern ~~Estimates~~

The ~~preparation~~accompanying consolidated of financial statements are prepared under a going concern basis in ~~conformity~~accordance with US generally accepted accounting principles (“GAAP”) which contemplates the realization of assets and discharge of liabilities and commitments in the ~~United~~normal ~~States~~course ~~requires~~of ~~management~~business. toFor ~~make~~the ~~estimates~~three ~~and~~months ~~assumptions~~ended ~~that~~March ~~affect~~31, 2013, the ~~reported~~Company recorded ~~amounts~~a loss from operations of ~~assets~~$19,017,888 and ~~liabilities~~utilized ~~and~~cash ~~disclosure~~in operations of $1,853,209. ~~contingent~~As ~~assets~~of ~~and~~March ~~liabilities~~31, at2013, the ~~date~~Company had a working capital deficit of $28,641,009. In addition, the ~~consolidated~~Company ~~financial~~was ~~statements~~in default of $49,161,000 ~~and~~of ~~the~~its ~~reported~~convertible ~~amounts~~notes due July 15, 2015 (see Note 13). On April 8, 2013, four of ~~revenue~~the ~~and~~holders ~~expenses~~of ~~during~~the Notes filed this action claiming a default under the ~~reporting~~Notes, ~~period~~which allegedly resulted in an acceleration of the maturity of the Notes. ~~Significant~~The ~~estimates~~Plaintiffs ~~reflected~~had previously commenced a similar action in ~~the~~federal ~~consolidated~~court ~~financial~~in ~~statements~~New ~~include~~Jersey, but ~~are~~that ~~not~~action ~~limited~~was ~~to,~~withdrawn and the ~~recoverability~~present action was interposed. The action seeks payment of ~~the~~$20,378,608 ~~carrying~~plus ~~amount~~prejudgment interest and ~~estimated~~other ~~useful~~fees ~~lives~~and ofcosts. ~~long-lived~~The ~~assets,~~Company ~~allowance~~has ~~for~~been ~~accounts~~served ~~receivable~~with the complaint, ~~realizable~~and Plaintiffs ~~values~~agreed ~~for~~to ~~inventories~~extend the Company’s time to answer. When that time passed on June 3, ~~valuation~~2013, Plaintiffs refused to ~~allowance~~grant ofadditional ~~deferred~~time ~~tax~~and ~~assets,~~have ~~purchase~~now ~~price~~made ~~allocation~~a motion seeking entry of a default. The Company filed its ~~acquisitions~~answer on June 5, ~~valuation~~2013 (see Note 14). The Company presently does not have the ability to pay these notes. The Company’s ability to continue as a going concern is dependent upon its ability to return to profitability or to develop additional sources of ~~derivative~~financing ~~financial~~or capital. ~~instruments~~These factors, ~~and~~among ~~share-based~~others, ~~compensation~~raise ~~expenses.~~substantial ~~Changes~~doubt inabout ~~facts~~the ~~and~~Company’s ~~circumstances~~ability ~~may~~to continue as a going concern. As a result, the Company’s independent registered public accounting firm, in ~~revised~~their ~~estimates~~report on the Company’s 2012 consolidated financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. ~~Actual~~The ~~results~~Company’s ~~could~~financial ~~differ~~statements do not include any adjustments that might result from the outcome of these ~~estimates~~uncertainties.

~~Foreign~~Historically, ~~Currency~~the Company’s main source of cash was through the sales of its products, proceeds from the issuance of common stock, and debt financing. However, due to the decrease in sales, the Company’s ability to meet contractual obligations and payables depends on its ability to implement cost reductions effectively and obtain additional financing. The Company believes that the ongoing economic challenges and uncertainties experienced in 2012 and the first quarter of 2013 will continue to negatively impact its business in the remainder 2013. Thus, the Company expects that for 2013 it will continue to generate losses from operations, and its operating cash flows will not be sufficient to cover operating expense; therefore, the Company expects to continue to incur net losses.

To meet its capital needs, the Company is considering multiple alternatives, including, but not limited to, additional debt financing and credit lines, delaying capital spending for future periods, and/or operating cost reductions. The ~~accompanying~~Company ~~consolidated~~believes it ~~financial~~can ~~statements~~utilize ~~are~~its ~~presented~~currently unencumbered buildings and land use rights located in ~~United~~Beijing, ~~States~~PRC ~~dollars~~with ~~(“US~~an aggregate net book value of approximately $”)105,000,000 at March 31, 2013 to secure financing. ~~The~~No ~~functional~~assurance ~~currency~~can ofbe given that the financing ~~Company~~will isbe ~~US$~~available or, ~~while~~if available, that ofit ~~the~~will ~~Company’~~be ~~subsidiaries~~on ~~operating~~terms inthat are satisfactory to the ~~PRC~~Company. Even if the Company is ~~Renminbi~~able ~~(“RMB”)~~to obtain additional financing, asit ~~determined~~may ~~based~~contain undue restrictions on its operations, in the ~~criteria~~case of ~~Financial~~debt financing ~~Accounting~~or ~~Standards~~cause ~~Board~~substantial ~~(“FASB”)~~dilution ~~Accounting~~to ~~Standards~~shareholders, ~~Codification~~in (“the ~~ASC”)~~case ~~830~~of ~~“Foreign~~equity ~~Currency Matters”.~~financing

Assets and liabilities of non-U.S. subsidiaries are translated into U.S. dollars at the noon buying rate certified by the Federal Reserve Bank of New York on September 30, 2011. Income and expense items are translated at average exchange rates prevailing during the period. The resulting translation adjustments are recorded as a component of shareholders’ equity. Gains and losses from foreign currency transactions are included in net income.

	SEPTEMBER 30,
	2011		2010
Quarter end RMB : US$ exchange rate		6.4018		6.6981
Average quarterly RMB : US$ exchange rate		6.4329		6.7534

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$ at the rates used in translation.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ASTHREE OFMONTHS ~~SEPTEMBER~~ENDED 30MARCH 31, ~~2011~~2013 AND 2012

~~(UNAUDITED)~~Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant estimates reflected in the consolidated financial statements include, but are not limited to, the recoverability of the carrying amount of property, plant, and equipment and intangible assets, allowance for accounts receivable, realizable values for inventories and capitalized agriculturual costs, valuation allowance of deferred tax assets, and valuation of share-based compensation expenses. Changes in facts and circumstances may result in revised estimates. Actual results could differ from these estimates

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Revenues represent the invoiced value of goods sold and are recognized upon the shipment of goods to customers. The product sales price stated in the sales contract or purchase order is final and not subject to adjustment. Revenues are recognized pursuant to FASB ASC 605 “Revenue Recognition”, when all of the following criteria are met:

● Persuasive evidence of an arrangement exists,

● Delivery has occurred or services have been rendered,

● The seller’s price to the buyer is fixed or determinable, and

● Collectability is reasonably assured.

Revenue is recognized net of all value-added taxes imposed by governmental authorities and collected from customers concurrent with revenue-producing transactions.

Cost of Sales

Cost of sales includes direct and indirect production costs, as well as freight in and handling costs for products sold.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses include salaries, benefits and other staff-related costs associated with sales and marketing, finance and other administrative personnel; facilities and overhead costs; legal expenses and other general and administrative costs. SG&A expenses also include the costs of selling merchandise, including preparing the merchandise for sale, such as picking, packing, warehousing and order charges. All shipping and handling are expensed as incurred and outbound freight is not billed to customers.

Advertising Costs

The Company expenses advertising costs as incurred. Point of sale materials are accounted for as inventories and are charged to expense as utilized.

Research and Development Costs

Research and development costs are expensed as incurred.

FASB ASC 805 “Business combinations” requires the recognition of tangible and intangible assets that result from or are to be used in research and development activities as assets, irrespective of whether the acquired assets have an alternative future use. Acquired In-Progress Research & Development (IPR&D) assets are required to be measured at their acquisition-date fair value. Uncertainty about the outcome of an individual project does not affect the recognition of an IPR&D asset, but is reflected in its fair value.

Comprehensive Income

Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. The Company’s comprehensive income includes net income and foreign currency translation adjustments.

Stock-Based Compensation

Stock-based compensation includes 1) stock options and common stock awards granted to employees and directors for services, and are accounted for under FASB ASC 718 “Compensation - Stock Compensation”, and 2) common stock awards granted to consultants which are accounted for under FASB ASC 505-50 “Equity – Equity-Based Payments to Non-Employees”.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2011

(UNAUDITED)

All grants of common stock awards and stock options to employees and directors are recognized in the financial statements based on their grant date fair values. The Company has elected to recognize compensation expense using the straight-line method for all common stock awards and stock options granted with service conditions that have a graded vesting schedule, with a corresponding charge to additional paid-in capital.

Common stock awards are granted to directors for services provided. The vested portions of common stock awards granted but not yet issued are recorded in “Common stock to be issued” until issuance.

Common stock awards issued to consultants represent common stock granted to non-employees in exchange for services at fair value. The measurement dates for such awards are set at dates that the contracts are entered into as the awards are non-forfeitable and vest immediately. The measurement date fair value is then recognized over the service period as if the Company has paid cash for such service. The Company does not have significant grants to consultants for any of the period presented.

The Company estimates fair value of common stock awards based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant.

The fair value of stock options is estimated using the Black-Scholes model. The Company’s expected volatility assumption is based on the historical volatility of the Company’s stock. The expected life assumption is presumed to be the mid-point between the vesting date and the end of the contractual term, as is permitted for “plain vanilla” employee stock options. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

FASB ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Forfeiture rate is estimated based on historical and future expectation of employee turnover rate and are adjusted to reflect future change in circumstances and facts, if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense was recorded only for those stock options and common stock awards that are expected to vest.

Income Taxes

The Company accounts for income taxes following the liability method pursuant to FASB ASC 740 “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rate is recognized in income in the period that includes the enactment date.

The Company accounts for uncertainty in income taxes in accordance with FASB ASC 740-10 “Income Taxes-Overall”. The Company has elected to classify interest and penalties related to an uncertain position, if and when required, as part of interest expenses and other expenses, respectively, in the consolidated statements of income and comprehensive income.

Value-Added Tax (“VAT”)

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

Segment Reporting

The Company has two operating segments based on its major lines of businesses: manufacturing and distribution. Each operating segment derives its revenues from the sale of products or services, respectively and each is the responsibility of a group of senior management of the Company who has knowledge of product and service specific operational risks and opportunities. The Company’s chief operating decision maker reviews and evaluates separate sets of financial information for decisions regarding resources allocation and performance assessments.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2011

(UNAUDITED)

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and bank deposits with original maturities of three months or less, which are unrestricted as to withdrawal and use.

Restricted Cash

Restricted cash represents amounts held by a bank as security for bank acceptance notes and therefore is not available for the Company’s use. The restriction on cash is expected to be released within the next twelve months.

Accounts and Notes Receivable

Accounts and notes receivable are carried at net realizable value. An allowance for doubtful accounts is recorded in the period when loss is probable based on an assessment of specific evidence indicating troubled collection, historical experience, accounts aging and other factors. A receivable is written off after all collection effort has ceased.

Financing Costs

Financing costs represent the incurred costs directly attributable to the issuance of the convertible notes. These costs, presented as non-current assets, are deferred and amortized ratably using the effective interest method from the debt issuance date over the earliest redemption date of the convertible notes. If the notes are converted prior to the debt maturity date, the unamortized financing costs will be transferred to equity immediately upon occurrence of such an event.

Inventories

Inventories are stated at the lower of cost or market value. Cost is determined by the weighted average method. Costs of raw materials and consumables and packaging materials are based on purchase costs while costs of work-in-progress and finished goods comprise direct materials, direct labor and an allocation of manufacturing overhead costs.

Recurring agricultural costs include costs relating to irrigation, fertilizing, seedling, utility, farming wages and other ongoing crop and land maintenance activities. Recurring agricultural costs are capitalized as inventory and cease to be accumulated when the crops have reached maturity and ready to be harvested. Any recurring agricultural costs incurred subsequent to the crops reaching maturity are expensed as incurred. Non-recurring agricultural costs, primarily comprising soil improvements and other long-term crop growing costs that benefit multiple harvests, are deferred and amortized over the estimated production period.

Fair Value of Financial Instruments

FASB ASC 820 “Fair Value Measurements and Disclosures” establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.

These tiers include:

●· Level 1 - defined as observable inputs such as quoted prices in active markets;

●· Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

●· Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts and notes receivable, short-term bank loans, accounts payable, notes payable and other payables, approximate their fair values because of the short maturity of these instruments. The carrying values of long-term loans approximate their fair values due to the fact that the interest rates on these loans are reset each year based on prevailing market interest rates. The convertible notes are initially recognized based on residual proceeds after allocation to the derivative financial liabilities, if any, at fair value and subsequently carried at amortized cost using the effective interest rate method, with any accrued and unpaid interest included under other payables and accrued expenses.

Earnings per share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the year. The diluted earnings per share calculation gives effect to all potentially dilutive common shares outstanding during the year. As of March 31, 2013, common stock equivalents were composed of options convertible into 883,639 shares of the Company’s common stock and notes convertible into 6,084,282 shares of the Company’s common stock. For the three months ended March 31, 2013 and 2012, common stock equivalents have been excluded from the calculation of earnings per share as their effect is anti-dilutive.

Impairment

In evaluating long-lived assets for recoverability, including finite-lived intangibles and property and equipment, the Company uses its best estimate of future cash flows expected to result from the use of the asset and eventual disposition. To the extent that estimated future, undiscounted cash inflows attributable to the asset, less estimated future, undiscounted cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount equal to the difference between the carrying value of such asset and its fair value. Assets to be disposed of and for which there is a committed plan of disposal, whether through sale or abandonment, are reported at the lower of carrying value or fair value less costs to sell.

In evaluating capitalized agriculture costs, the Company uses its best estimate of the future cash flows expected to result from future market values, yields and costs to harvest. To the extent that estimated future cash inflows attributable to the asset, less estimated future, cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount equal to the excess of the carrying value over the estimated fair values of the capitalized agricultural costs.

The Company’s annual impairment testing is performed in the fourth quarter of each year.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2013 AND 2012

Newly Adopted Accounting Pronouncements

In July 2012, FASB issued ASU No. 2012-02, “Intangibles – Goodwill and Other”. This update presents an entity with the option to first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, “Intangibles – Goodwill and Other – General Intangibles Other than Goodwill”. The more-likely-than-not threshold is defined as having a likelihood of more than fifty percent. ASU No. 2012-02 will be effective for annual and impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company’s adoption of this update did not have a material effect on its consolidated financial statements.

In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The new guidance requires entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income unless the amounts are not reclassified in their entirety to net income. For amounts that are not required to be reclassified in their entirety to net income in the same reporting period, entities are required to cross-reference other disclosures that provide additional detail about those amounts. The new guidance is effective prospectively for all interim and annual periods beginning after December 15, 2012, with early adoption permitted. The Company’s adoption of this update did not have a material effect on its consolidated financial statements.

NOTE 3 – CONCENTRATION OF RISKS

Concentration of credit risks

Assets that potentially subject the Company to significant concentration of credit risk primarily consist of cash and cash equivalents, accounts receivable and prepaid forward repurchase contract. As of March 31, 2013, substantially all of the Company’s cash and cash equivalents were deposited in financial institutions located in PRC, which management believes are of high credit quality. Accounts receivable are typically unsecured and mainly derived from revenue earned from customers in the PRC, which are exposed to credit risk. The risk is mitigated by credit evaluations the Company performs on its customers and its ongoing monitoring process of outstanding balances. The Company maintains reserves for estimated credit losses, which have generally been within its expectations.

Current vulnerability due to certain other concentrations

The Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 30 years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.

Currency convertibility risk

The Company transacts the majority of its business in the Renminbi (“RMB”), which is not freely convertible into foreign currencies. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People’s Bank of China (the “PBOC”). However, the unification of the exchange rates does not imply that the RMB may be readily convertible into United States dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC. Approval of foreign currency payments by the PBOC or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts. Additionally, the value of the RMB is subject to changes in central government policies and international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2013 AND 2012

NOTE 4 – ACCOUNTS RECEIVABLE

Accounts receivable consist of the following:

	March 31,			December 31,
	2013			2012
Accounts receivable	$	51,988,981		$	63,678,523
Allowance for doubtful accounts		(20,039,711	)		(18,134,912	)
Accounts receivable, net	$	31,949,270		$	45,543,611

Provision for doubtful accounts activity is as follows:

	Three Months Ended March 31,
	2013		2012
Allowance for doubtful accounts, beginning balance	$	18,134,912	$	16,354,873
Provision for doubtful accounts		1,803,992		3,635
Currency translation difference		100,807		103,432
Allowance for doubtful accounts, ending balance	$	20,039,711	$	16,461,940

Accounts receivable arise from sales to our customers and are generally due on terms ranging from 30 to 180 days beginning after the invoice date. The Company assessed distributors’ credit history, operation performance, financial position, reputation among peers, etc. to assign credit terms. The Company’s management reviews credit terms and conditions of the account receivable balance for each distributor on a quarterly basis.

During the three months ended March 31, 2013 and 2012, the Company reviewed its accounts receivable based on the changing climate in the pharmaceutical business in China and estimated that increases to its allowance was required. The Company estimates that the remaining net receivables will be collected.

NOTE 5 – INVENTORIES

Inventories are summarized as follows:

	March 31,			December 31,
	2013			2012
Raw materials	$	9,433,511		$	6,390,360
Work in process		1,782,432			4,042,287
Finished goods		10,603,174			10,185,480
Total inventories		21,819,117			20,618,127
Less: provision against slow-moving inventories		(51,440	)		(47,281	)
Inventories, net	$	21,767,677		$	20,570,846

Capitalized agricultural costs are summarized as follows:

	March 31,		December 31,
	2013		2012
Growing crops	$	6,716,785	$	6,643,146
Payments for long-term crop contracts		6,659,131		6,622,758
Prepaid land leasing costs for long-term supply contracts		4,163,362		4,177,571
Capitalized agricultural costs	$	17,539,278	$	17,443,475

The Company has reflected capitalized agriculture costs for Millettia and Xanthoceras Sorbifolia Bge (“XSB”) as a long term asset as it does not expect to utilize these assets currently. In 2012, the Company recorded an impairment of approximately $8.5 million in the fourth quarter of 2012 representing the excess of the carrying value over the estimated fair values of the capitalized agricultural costs. Subsequent to December 31, 2012, pre-harvest agriculture costs, including cultivation, labor, land leasing costs, and other crop and land maintenance activities, will be capitalized if it is probable that future economic benefits from the use of the assets will be increased. These pre-harvest agriculture costs usually require substantial investment in the early stages, gradually decreasing to maintenance costs during the growing stage. During the three months ended March 31, 2013, pre-harvest agricultural costs incurred during the period of $2,361,383 were expensed. During the three months ended March 31, 2012, pre-harvest agricultural costs incurred during the period of $3,395,407 were capitalized.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ASTHREE OFMONTHS ~~SEPTEMBER~~ENDED 30MARCH 31, ~~2011~~2013 AND 2012

~~(UNAUDITED)~~NOTE 6 – ADVANCES TO SUPPLIERS AND PREPAID EXPENSES

Construction in Progress

	March 31,		December 31,
	2013		2012
Advances to suppliers	$	10,204,445	$	10,065,358
Prepaid expenses		179,065		227,002
Advances to suppliers and prepaid expenses	$	10,383,510	$	10,292,360

~~Construction~~Advances into ~~progress~~suppliers mainly ~~represents~~represent ~~direct costs of construction or acquisition,~~ interest-free ~~and~~cash ~~design~~deposits ~~fees~~paid ~~incurred. Capitalization of these costs ceases and the construction in progress is transferred~~ to ~~property,~~suppliers ~~plant~~for ~~and~~future ~~equipment~~purchases ~~when~~of ~~substantially~~raw ~~all~~materials. ~~the~~Prepaid ~~activities~~expenses ~~necessary~~mainly relate to ~~prepare~~ the ~~assets~~prepaid ~~for~~research ~~their intended use are completed. No depreciation is provided until it is completed~~ and ~~ready~~development ~~for~~expenses ~~intended~~to ~~use~~external contractors.

~~The~~NOTE ~~Company~~7– ~~accounts for interest capitalization in accordance with FASB ASC 835 "Interest". Interest costs are capitalized if they are incurred during the acquisition~~PROPERTY, ~~construction~~PLANT orAND production of a qualifying asset and such costs could have been avoided if expenditures for the assets have not been made. Capitalization of interest costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Interest costs are capitalized until the assets are ready for their intended use.EQUIPMENT

~~Land~~Property, ~~Use~~plant ~~Rights~~and equipment consist of the following:

According to the PRC laws, the government owns all the land in the PRC. Companies or individuals are authorized to possess and use the land only through land use rights granted by the PRC government. Land use rights are being amortized using the straight-line method over the lease term ranging from 40 to 50 years.

	March 31,			December 31,
	2013			2012
Buildings	$	140,052,569		$	139,294,146
Machinery and equipment		28,623,585			28,451,421
Motor vehicles		1,929,415			2,091,043
Office equipment		3,376,008			3,168,422
Other equipment		2,406,067			2,392,323
Construction in progress		33,892,931			33,389,418
		210,280,575			208,786,773
Less: Accumulated depreciation		(39,220,321	)		(37,405,384	)
Property, plant and equipment, net	$	171,060,254		$	171,381,389

~~Property~~Depreciation expense for the three months ended March 31, ~~Plant~~2013 and ~~Equipment~~2012 was $1,611,228 and $1,684,604, respectively. As of March 31, 2013 and December 31, 2012, the net book value of property, plant and equipment pledged as collateral for bank loans was $6,124,558 and $6,099,734, respectively (see Note 11). As of March 31, 2013, the Company had entered into capital commitments for $16,944,950 for manufacturing facilities under construction in the PRC, and all due within one year (see Note 14). In the fourth quarter of 2012 an impairment reserve of $12,584,875 was recorded for property, plant, and equipment.

~~Property,~~NOTE ~~plant~~8 ~~and~~– ~~equipment~~LAND ~~are~~USE carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the property, plant and equipment are as follows:RIGHTS

Buildings	40 years
Machinery and equipment	10 years
Motor vehicles	5 years
Office equipment	5 years
Other equipment	5 years
Leasehold improvements	Shorter of 10 years or the lease term

Land use rights consist of the following:

The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the consolidated statements of income and comprehensive income. The cost of maintenance and repairs is charged to the statement of income as incurred, whereas significant renewals and betterments are capitalized.

	March 31,			December 31,
	2013			2012
Cost of land use rights	$	159,328,617		$	158,458,327
Less: Accumulated amortization		(14,059,271	)		(13,143,399	)
Land use rights, net	$	145,269,346		$	145,314,928

~~Other~~Amortization ~~Intangible~~expense for ~~Assets~~the three months ended March 31, 2013 and 2012 was $843,122 and $891,151, respectively. As of March 31, 2013 and December 31, 2012, the net book value of land use rights pledged as collateral was $20,777,972 and $20,664,778, respectively (see Note 11). In the fourth quarter of 2012 an impairment reserve of $10,255,550 was recorded against land use rights.

Other intangible assets include product licenses, trademarks, patents and proprietary technologies, which are stated at acquisition cost less accumulated amortization. Amortization expense is recognized using the straight-line method over the estimated useful life. Proprietary technologies are recorded as an intangible asset only if regulatory approval from the Chinese State Food and Drug Administration, or SFDA, has been obtained and for which the re-registration of the proprietary technologies with the SFDA by the Company in its name is determined to be reasonably assured or perfunctory. The amortization of such intangible assets will not commence until the technology has been re-registered with the SFDA and hence ready for its intended use. The cost of the product licenses are amortized over their licensed period of 2 to 12 years; the cost of trademarks are amortized over their registered period of 2 to 10 years; the cost of patents are amortized over their protection period of 7 to 20 years and the cost of proprietary technologies is amortized over its protection period of 10 years. The weighted-average amortization period of product licenses, trademarks, patents and proprietary technologies are 7.56 years, 6.40 years, 12.85 years and 9.42 years, respectively.

Goodwill

Goodwill and other intangible assets are accounted for in accordance with the provisions of FASB ASC 805 and FASB ASC 350 “Intangibles - Goodwill and Other”. Under FASB ASC 805, goodwill is measured as the excess of “a” over “b” below:

a. The aggregate of the following:

1. The consideration transferred measured in accordance ASC 805, which generally requires acquisition-date fair value.

2. The fair value of any non-controlling interest in the acquiree.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ASTHREE OFMONTHS ~~SEPTEMBER~~ENDED 30MARCH 31, ~~2011~~2013 AND 2012

~~(UNAUDITED)~~NOTE 9– ACQUIRED INTANGIBLE ASSETS

3.Acquired Inintangible assets aare ~~business~~summarized ~~combination~~as ~~achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree.~~follows:

b. The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with FASB ASC 805.

	March 31,			December 31,
	2013			2012
Product licenses	$	13,514,688		$	13,440,868
Trademarks		6,740,821			6,704,001
Patents		3,428,145			3,409,420
Software		188,498			187,469
Liaoning Baicao pharmaceutical trade license		5,594,116			5,563,560
		29,466,268			29,305,318
Less: Accumulated amortization
Product licenses		(8,185,632	)		(7,947,887	)
Trademarks		(5,731,147	)		(5,514,005	)
Patents		(2,687,640	)		(2,616,351	)
Software		(114,747	)		(110,695	)
Liaoning Baicao pharmaceutical trade license		(139,853	)		–
		(16,859,019	)		(16,188,938	)
Acquired intangible assets, net	$	12,607,249		$	13,116,380

~~Other~~Amortization ~~intangible~~expense for ~~assets are separately recognized from goodwill if~~ the ~~benefit~~three ofmonths ~~the~~ended ~~intangible~~March ~~asset is obtained through contractual or other legal rights~~31, or2013 ifand ~~the~~2012 ~~intangible~~was ~~asset can be sold~~$580,781 ~~transferred,~~and ~~licensed~~$425, ~~rented~~804, ~~or exchanged, regardless of an intent to do so~~respectively.

~~Under~~The Company ~~FASB~~conducts ~~ASC~~impairment ~~350,~~tests ~~goodwill,~~on ~~including~~a ~~any~~regular ~~goodwill~~basis ~~included~~to indetermine if the carrying ~~value~~values of ~~investments~~acquired ~~accounted~~intangible ~~for~~assets ~~using~~are ~~the~~in excess ~~equity~~of ~~method~~the offair ~~accounting~~value, and ~~certain~~that ~~other~~such ~~intangible~~ assets ~~deemed~~are toactive, ~~have~~being ~~indefinite~~used ~~useful~~in ~~lives~~production of products, or are ~~not~~intended ~~amortized~~to be utilized in future production. No impairment charges were recognized in the three months ended March 31, 2013 or 2012. In the fourth quarter of 2012 an impairment reserve of $6,928,064 was recorded against acquired intangible assets.

~~Impairment~~NOTE 10 – INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTMENTS

~~The~~At ~~annual~~March ~~evaluation~~31, ~~of impairment of goodwill involves comparing~~ 2013, the ~~current fair value of each of the~~ Company’s ~~reporting~~owned ~~units~~a ~~to their recorded value, including goodwill~~33.7% ~~The~~equity ~~Company~~interest ~~utilizes~~in aAXN, ~~two-step method to perform~~ a ~~goodwill~~49% ~~impairment~~equity ~~review~~interest in ~~the~~Yushuntang, ~~fourth quarter of each fiscal year or when facts~~ and ~~circumstances~~a ~~indicate~~40% ~~goodwill~~equity ~~may~~interest bein ~~impaired~~Jinji. In For the ~~first~~three ~~step,~~months ~~the~~ended ~~Company~~March ~~determines~~31, ~~the fair value of the reporting unit using expected future discounted cash flows and estimated terminal values. If the net book value of the reporting unit exceeds the fair value~~2013, the ~~Company~~changes ~~would~~in ~~then~~investments ~~perform~~in ~~the second step of the impairment test which requires allocation of the reporting unit’s fair value of all of its assets~~ and ~~liabilities~~advances ~~in a manner similar~~ to aequity ~~purchase~~method ~~price~~investments ~~allocation,~~are ~~with~~summarized ~~any residual fair value being allocated to goodwill. The implied fair value of the goodwill is then compared to the carrying value to determine impairment, if any.~~as follows:

During the nine months ended September 30, 2011, the Company considered the on-going decline in its stock price an impairment indication and conducted an interim goodwill impairment assessment. Based on the first step of the goodwill impairment test, the fair value of the reporting units exceeded the net book value. Therefore, the Company did not perform step two of the goodwill impairment test and no goodwill impairment loss was recognized as of September 30, 2011.

	AXN			Jinji			Yushuntang			Total
Balance, January 1, 2013	$	2,957,077		$	147,512		$	232,896		$	3,337,485
Advances		(6,600	)		(14,321	)		–			(20,921	)
Income (loss)		(919,879	)		56			(48,409	)		(968,232	)
Foreign currency translations		–			800			1,087			1,887
Balance, March 31, 2013	$	2,030,598		$	134,047		$	185,574		$	2,350,219

~~Finite-lived~~The ~~intangible~~Company ~~assets~~had ~~are~~previously consolidated ~~amortized~~the ~~over~~financial ~~their~~statements ~~respective~~of ~~useful~~Yushuntang ~~lives~~as ~~and,~~a ~~along~~55% ~~with~~majority ~~other~~owned ~~long-lived~~subsidiary. ~~assets~~Effective December 31, ~~are~~2012, ~~evaluated~~the Company’s ownership decreased below 50% to 49% and this entity no longer qualified for ~~impairment~~consolidation ~~periodically~~and ~~whenever~~is ~~events~~treated oras ~~changes~~a inlong ~~circumstances~~term ~~indicate~~investment using ~~that~~the ~~their~~equity ~~related~~method. ~~carrying~~For ~~amounts~~the ~~may~~three ~~not~~months beended ~~recoverable~~March in31, ~~accordance~~2012, ~~with~~Yushuntang ~~FASB~~reported ~~ASC~~revenues ~~360~~of $4,239,862, ~~“Property~~gross profit of $324,863, ~~Plant~~loss from operations of $67,177, and ~~Equipment”~~net loss of $66,298, which are included in the accompanying consolidated statement of operations.

In evaluating long-lived assets for recoverability, including finite-lived intangibles and property and equipment, the Company uses its best estimate of future cash flows expected to result from the use of the asset and eventual disposition in accordance with FASB ASC 360-10-15. To the extent that estimated future, undiscounted cash inflows attributable to the asset, less estimated future, undiscounted cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount equal to the difference between the carrying value of such asset and its fair value. Assets to be disposed of and for which there is a committed plan of disposal, whether through sale or abandonment, are reported at the lower of carrying value or fair value less costs to sell.

No impairment loss is subsequently reversed even if facts and circumstances indicate recovery. There was no impairment loss recognized for the periods presented.

Investments

The Company applies FASB ASC 323, “Investments—Equity Method and Joint Ventures”, in accounting for its equity investments. Under FASB ASC 323, the equity method of accounting is used for investments in entities in which the Company has the ability to exercise significant influence but does not own a majority equity interest or otherwise control. Under the equity method, the Company initially records its investment at cost and adjusts the carrying amount of the investment to recognize the Company’s proportionate share of each equity investee’s net income or loss into consolidated statements of income after the date of acquisition.

The difference between the cost of the equity investee and the amount of the underlying equity in the net assets of the equity investee is recognized as equity method goodwill included in equity method investment on the consolidated balance sheets. The Company monitors its investments for other-than-temporary impairment by considering factors including, but not limited to, current economic and market conditions, the operating performance of the investee companies including current earnings trends and other company-specific information. Any balance of equity method goodwill is not tested for impairment under the provisions of FASB ASC 350. Instead, equity method goodwill is tested for impairment together with the related investment as they are not separable.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ASTHREE OFMONTHS ~~SEPTEMBER~~ENDED 30MARCH 31, ~~2011~~2013 AND 2012

~~(UNAUDITED)~~NOTE 11 – DEBT

AnAt March ~~impairment~~31, ~~loss~~2013 onand ~~the~~December ~~equity~~31, ~~method~~2012, ~~investments~~short-term isnotes ~~recognized~~payable due to various banks in the ~~consolidated~~PRC ~~statements~~were $6,066,997 and $11,054,449, respectively and due at various dates from April 2013 to September 2013. The short-term notes payable are lines of ~~income~~credit ~~when~~extended by the ~~decline~~banks, which in turn issue the Company a bank acceptance note that can be endorsed and assigned to vendors as payments for purchases. The short-term notes payable are generally payable within three to six months, and guaranteed by the bank. The banks do not charge interest on these notes, but usually charge a transaction fee of 0.05% of the total note value. In addition, the banks usually require the Company to deposit a certain amount of cash at the bank as a guarantee deposit which is ~~determined~~classified on the balance sheet as restricted cash. At March 31, 2013 and December 31, 2012, restricted cash as a guarantee for the notes payable amounted to be$3,150,665 ~~other-than-temporary~~and 6,514,224, respectively.

~~Economic~~At March 31, 2013 and ~~Political~~December 31, ~~Risks~~2012, short-term loans obtained from local banks were $6,845,390 and $6,807,999, respectively. The short-term loans payable are due on various dates through November 15, 2013, with interest ranging from 6.00% to 6.56% per annum, and secured by property, plant and equipment and land use rights owned by the Company. At March 31, 2013 and December 31, 2012, the short-term loans are secured by property, plant and equipment owned by the Company of $6,124,558 and $6,099,734, respectively, and land use rights owned by the Company of $20,777,972 and $20,664,778, respectively.

~~The~~At ~~Company’s~~March ~~operations~~31, ~~are~~2013 ~~conducted~~and inDecember 31, ~~the PRC. Accordingly~~2012, the Company’s ~~business,~~has ~~financial~~an ~~condition~~outstanding ~~and~~long-term ~~results~~bank loan of ~~operations~~$602,350 ~~may~~and be$619,401, ~~influenced~~respectively. byThe ~~the~~long-term ~~political~~bank loan bears interest at 2.50% per annum, ~~economic~~is due December 31, 2021, and ~~legal~~is ~~environment~~secured inby ~~the~~property, ~~PRC~~plant, and byequipment ~~the~~with ~~general~~a ~~state~~net book value of ~~the~~$1,226,600 ~~PRC~~at ~~economy~~March 31, 2013.

~~The~~NOTE ~~Company’s~~12 ~~operations~~– inCONVERTIBLE the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, rates and methods of taxation and price controls, among other things.NOTES

~~The~~On July 15, 2008 the Company’s ~~products~~issued ~~are~~$115,000,000, ~~subject~~5% tounsecured ~~price~~senior ~~control~~convertible bynotes (the ~~PRC~~“Notes”), ~~government.~~due ~~The~~July ~~maximum~~15, ~~prices~~2015, for net proceeds of $110,358,550. At March 31, 2013, the ~~products~~Notes are ~~published~~in default, which was caused by the ~~PRC~~delisting ~~price~~of ~~administration~~the ~~authorities~~Company’s ~~from~~common stock ~~time~~by tothe ~~time.~~New ~~Any~~York ~~changes~~Stock Exchange (“NYSE”) as described in ~~product~~Form ~~pricing~~25NSE ~~announced~~filed on April 16, 2012 by NYSE; and by the non-payment ~~PRC~~of ~~price~~the ~~administration~~semiannual ~~authorities~~interest ~~affect~~payment ~~future~~due ~~sales~~on ~~transactions~~July 15, 2012 and January 15, 2013.

~~Newly~~On ~~Adopted~~February ~~Accounting~~19, ~~Pronouncements~~2013, the Company received a notice of acceleration under the terms of the Notes. The notice was sent by certain holders of the Senior Notes that together hold more than 25% of the aggregate principal amount of the Notes. As of March 31, 2013, the aggregate principal amount of the Notes, and unpaid, but accrued interest was $52,330,329. The notice of acceleration resulted in the principal amount of the Notes plus accrued and all unpaid interest and accrued and unpaid additional interest on the Notes through February 19, 2013, to become immediately due and payable.

InOn ~~September~~April 8, ~~2011~~2013, ~~the~~four ~~FASB~~of ~~issued~~the ~~Accounting~~holders ~~Standards~~of ~~Update~~the ~~2011-08~~Notes ~~(ASU~~filed ~~2011-08),~~this ~~“Testing~~action ~~Goodwill~~claiming ~~for~~a ~~Impairment.”~~default ~~ASU~~under ~~2011-08~~the isNotes, ~~intended~~which toallegedly ~~reduce~~resulted ~~the~~in ~~cost and~~an acceleration ~~complexity~~ of the ~~annual~~maturity ~~goodwill~~of ~~impairment~~the ~~test~~Notes. byThe ~~providing~~Plaintiffs ~~entities~~had anpreviously ~~option~~commenced ~~to perform~~ a ~~“qualitative”~~similar ~~assessment~~action toin ~~determine~~federal ~~whether~~court ~~further~~in ~~impairment~~New ~~testing~~Jersey, but ~~is necessary.~~that ~~Specifically,~~action anwas ~~entity~~withdrawn ~~has~~and the ~~option~~present toaction ~~first~~was ~~assess~~interposed. ~~qualitative~~The ~~factors~~action toseeks ~~determine~~payment ~~whether~~of it$20,378,608 ~~is necessary~~plus toprejudgment interest ~~perform~~and ~~the~~other ~~current~~fees ~~two-step~~and ~~test~~costs. If anThe ~~entity~~Company ~~believes,~~has asbeen aserved ~~result~~with ofthe ~~its qualitative assessment~~complaint, ~~that~~and itPlaintiffs isagreed ~~more-likely-than-not~~to ~~that~~extend the ~~fair~~Company’s time ~~value~~to ofanswer. aWhen ~~reporting unit~~that ~~is less~~time ~~than~~passed ~~its~~on ~~carrying~~June ~~amount~~3, ~~the quantitative impairment test is required. Otherwise~~2013, noPlaintiffs ~~further~~refused ~~testing~~to isgrant ~~required.~~additional ~~This~~time ~~standard is effective for annual~~ and ~~interim~~have ~~goodwill~~now ~~impairment~~made ~~tests performed~~a ~~for~~motion seeking ~~fiscal~~entry ~~years~~of ~~beginning~~a ~~after December 15, 2011~~default. The ~~provisions~~Company offiled ~~ASU~~its ~~2011-08~~answer ~~are not expected to have a material impact~~ on ~~the~~June ~~financial position~~5, ~~results of operations or cash flows of the Company~~2013.

InThe ~~June~~Notes ~~2011~~are convertible, at the ~~FASB~~option ~~issued~~of ~~Accounting~~the ~~Standards~~holder, ~~Update~~at ~~2011-05~~an ~~(ASU~~initial ~~2011-05),~~conversion ~~"Presentation~~price of ~~Comprehensive Income~~$9.~~" ASU~~29 ~~2011-05~~per ~~eliminates~~share, ~~the~~adjusted ~~option~~ to ~~report~~$8.08 ~~other~~on ~~comprehensive~~January 15, ~~income~~2009. ~~and~~The conversion ~~its~~rate ~~components~~is insubject ~~the~~to ~~statement~~certain ofadjustments. ~~changes~~Holders inmay ~~shareholders'~~require ~~equity~~the ~~and~~Company ~~requires an entity~~ to ~~present~~repurchase ~~the~~all ~~total~~or ofa ~~comprehensive~~portion ~~income, the components~~ of ~~net~~their ~~income~~Notes on ~~and~~July 15, ~~the~~2013 ~~components~~for ofcash ~~other~~at ~~comprehensive income either in~~ a ~~single~~price ~~continuous~~equal ~~statement~~to or100% inof ~~two~~the ~~separate~~principal ~~but~~amount ~~consecutive~~of ~~statements.~~the ~~This~~notes ~~pronouncement~~to isbe ~~effective~~purchased, ~~for~~plus ~~fiscal~~accrued ~~years,~~ and unpaid ~~interim periods within those years~~interest, ~~beginning~~if ~~after December 15~~any, ~~2011.~~ ~~The~~up ~~provisions of ASU 2011-05 are not expected~~ to, ~~have~~but ~~a material impact on the financial position~~excluding, ~~results of operations or cash flows of~~ the ~~Company~~repurchase date.

InThrough ~~May~~December ~~2011~~31, 2012, the ~~FASB~~Company ~~issued~~had ~~Accounting~~repurchased ~~Standards~~a ~~Update~~total ~~2011-04~~of ~~(ASU 2011-04)~~$65,839,000 ~~“Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements~~ in ~~U.S.~~principal ~~GAAP~~amount ~~and~~of ~~IFRS.” ASU 2011-04 clarifies~~ the ~~application~~Notes of existing fair value measurement and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for ~~financial~~cash ~~statements~~consideration ~~issued~~of ~~for fiscal years~~$21, ~~and interim periods within those fiscal years~~638, ~~beginning after December 15~~892, leaving ~~2011.~~an ~~The~~aggregate ~~provisions~~ of ~~ASU~~$49,161,000 ~~2011-04~~in ~~are~~principal ~~not~~amount ~~expected~~outstanding. toDuring ~~have~~the athree ~~material~~months ~~impact on~~ended ~~the~~March ~~financial position~~31, ~~results~~2013 ofand ~~operations~~2012, orthere were ~~cash~~no ~~flows~~repurchases of ~~the Company~~Notes.

The effective interest rate on the convertible notes for the three months ended March 31, 2013 and 2012 was 5.94% and interest cost recognized for the three months ended March 31, 2013 and 2012 was $614,513 and $1,356,250, respectively.

Note issuance costs incurred by the Company were deferred and are recognized using the effective interest rate method over the term of the Notes. As of March 31, 2013 and December 31, 2012, the unamortized portion of the deferred financing fees was $115,045 and $212,724, respectively.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ASTHREE OFMONTHS ~~SEPTEMBER~~ENDED 30MARCH 31, ~~2011~~2013 AND 2012

~~(UNAUDITED)~~NOTE 13 – SHAREHOLDERS’ EQUITY

~~NOTE~~Common 3Stock ~~– RESTATEMENT OF PRIOR PERIOD CONSOLIDATED FINANCIAL STATEMENTS~~Awards

~~Subsequent~~During tothe three months ended March 31, 2013 and 2012, the ~~issuance~~Company recorded selling, general and administrative expenses of $352,097 and $351,697, respectively, of stock based compensation cost based on the ~~consolidated~~vesting ~~financial~~of ~~statements~~the ascommon stock awards granted to employees in prior periods. The total fair value of ~~and~~the ~~for~~stock awards granted to employees at the ~~fiscal~~respective ~~year~~grant ~~ended~~dates ~~December~~was 31$5, ~~2010~~665,538, ~~the~~of ~~Company’s~~which ~~Independent~~the ~~Registered~~unrecognized ~~Public~~portion of ~~Accounting~~$2,165,306 ~~Firm~~at ~~identified~~March ~~accounting~~31, ~~errors~~2013 ~~related~~is expected to be recognized following the ~~Company’s~~straight-line ~~equity~~method ~~investment~~over inthe ~~Nuo~~remaining ~~Hua~~weighted ~~Affiliate~~average vesting period of 2.4 years.

~~The~~During ~~Company and~~ the ~~Audit~~three ~~Committee~~months ended ~~undertook~~March a31, ~~review~~2013 toand ~~determine~~2012, the ~~total~~Company ~~amount~~recorded ofresearch ~~the errors~~ and ~~the~~development ~~accounting~~costs ~~periods~~of innil ~~which the error occurred~~ and ~~concluded~~$25,000, ~~that~~respectively, ~~the~~of ~~Company’s~~stock ~~previously~~based compensation ~~issued~~cost ~~audited~~based ~~consolidated~~on ~~financial~~the ~~statements~~vesting as of ~~and for~~ the ~~year~~common ~~ended~~stock ~~December~~awards ~~31,~~granted ~~2010,~~to ~~and~~consultants ~~unaudited~~in ~~interim~~prior ~~condensed~~periods. ~~consolidated~~At ~~financial statements as of September 30, 2010,~~ March 31, ~~2011 and June 30~~2013, ~~2011,~~these common ~~should~~stock beawards ~~and,~~were ~~accordingly,~~fully ~~have been restated because of these accounting errors~~amortized.

OnDuring ~~September 27, 2010,~~ the ~~Company~~three ~~entered~~months ended ~~into~~March an31, ~~equity~~2013 ~~transfer~~and ~~agreement~~2012, ~~with an unrelated third party pursuant to which~~ the Company ~~agreed~~recorded ~~to sell its equity interest in Nuo Hua Affiliate~~selling, ~~for~~general aand ~~consideration~~administrative expenses of ~~RMB255,000,000 (~~$3837,~~567,410),~~500 ~~with~~and ~~RMB148,543,200 (~~$2253,~~466~~250,~~378)~~ torespectively of beearned ~~paid~~director inshare-based ~~cash~~compensation. ~~and~~Independent ~~RMB106,456,800~~directors ~~($16,101,032)~~earned tocommon bestock ~~paid~~awards inon ~~equity~~a ~~interests~~monthly ofbasis, ~~another~~with ~~company~~grants ~~owned~~generally made byin the ~~third~~following ~~party~~year ~~buyer~~for shares earned. In ~~October~~Shares ~~2010,~~earned ~~the~~but ~~Company’s~~not ~~equity~~granted ~~interest~~are reflected in ~~Nuo~~“Common ~~Hua~~Stock ~~Affiliate~~to ~~was~~be ~~legally~~issued” on ~~transferred~~the toaccompanying ~~the~~condensed ~~third~~consolidated ~~party~~financial ~~buyer~~statements. AsDuring ofthe ~~December~~three months ended March 31, ~~2010~~2013 and ~~up to November 14~~2012, ~~2011,~~ the Company did ~~has~~ not ~~received~~issue ~~the~~any ~~consideration~~shares ~~from~~of ~~the~~common ~~third~~stock ~~party~~related ~~buyer~~to the director awards.

~~The~~Stock Company did not appropriately account for this transaction in its financial statements as filed with the Securities and Exchange Commission for year ended December 31, 2010 or the quarters ended September 30, 2010, March 31, 2011 or June 30, 2011.options

The ~~errors~~Company ~~made~~calculates the inestimated ~~accounting~~fair ~~for~~value ~~this~~of ~~transaction~~granted ~~resulted~~options on the grant date, using the Black-Scholes-Merton Option Pricing Model. During the three months ended March 31, 2013 and 2012, the Company recorded selling, general and administrative expenses of $171,392 and $294,190, respectively, of stock based compensation based on the vesting of options granted to employees in: prior periods. The total fair value of the options granted to employees at the respective grant dates was $9,194,987, of which the unrecognized portion of $326,474 is expected to be recognized following the straight-line method over the remaining weighted average vesting period of 0.3 years as of March 31, 2013.

·The ~~For~~following ~~the~~table summarizes ~~quarter ended September 30, 2010,~~ the ~~recognition~~stock ofoption anactivities ~~impairment loss and a corresponding reduction in the carrying amount~~ of the ~~equity investment.~~Company:

· For the year ended December 31, 2010, a reclassification from “Investments in and advances to equity investments” to “Receivables for disposal of equity investment”; the recognition of a loss on disposal of equity investment; the reversal of income in equity earnings in unconsolidated entities, and the recording of income tax expense and a corresponding unrecognized tax benefits liability due to the tax effect of the capital gain resulting from the transaction, as the equity interest in Nuo Hua Affiliate was initially purchased at a price that was lower than the disposition consideration.

			Weighted
			Average
	Activity		Exercise Price
Outstanding as of January 1, 2012		883,639	$	15.70
Granted		–		–
Exercised		–		–
Cancelled/Forfeited		–		–
Outstanding as of December 31, 2012		883,639		15.70
Granted		–		–
Exercised		–		–
Cancelled/Forfeited		–		–
Outstanding as of March 31, 2013		883,639	$	15.70

Vested and expected to vest as of March 31, 2013		883,639

· For the quarter ended March 31, 2011, a reclassification from “Investments in and advances to equity investments” to “Receivables for disposal of equity investment”, and the reversal of income in equity earnings in unconsolidated entities.

· For the quarter ended June 30, 2011, a reclassification from “Other long-term investment” to “Receivables for disposal of equity investment”; the reversal of income in equity earnings in unconsolidated entities, and the reversal of a gain on change in ownership of unconsolidated entities.

In the unaudited interim consolidated financial statements as of June 30, 2011, the Company disclosed that it had lost the ability to exercise significant influence over the operating and financial policies of Nuo Hua Affiliate due to a change in ownership. As a result, it discontinued the equity method by reclassifying the investment in Nuo Hua Affiliate to “other long-term investment” in the consolidated balance sheet and recognized a gain of $759,338 which was recorded in “Gain on changes in ownership of unconsolidated entities” in the consolidated statements of income and comprehensive income. As the investment in Nuo Hua Affiliate had been disposed as of December 31, 2010, the gain of $759,338 recognized as of June 30, 2011 was also an error as discussed above.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ASTHREE OFMONTHS ~~SEPTEMBER~~ENDED 30MARCH 31, ~~2011~~2013 AND 2012

~~(UNAUDITED)~~The following table summarizes information about stock options outstanding as of March 31, 2013:

Restatement Adjustments

	Options Outstanding				Options Exercisable

		Weighted		Weighted Average		Weighted
		Average		Remaining		Average
	Number of	Exercise		Contractual Life	Number of	Exercise
Range of Exercise Prices	Shares	Price		(in years)	Shares	Price
$17.08 – 21.48	416,350	$	20.04	4.04	416,350	$	20.04
$9.90 – 16.70	323,040	$	13.53	5.30	300,143	$	13.53
$8.02	144,249	$	8.02	6.03	118,750	$	8.02
	883,639				835,243

~~The~~Options ~~following~~granted ~~tables~~have no ~~present~~intrinsic ~~the~~value ~~impact~~at ofgrant ~~the~~date ~~restatement~~and ~~adjustments~~at on the ~~Company’s~~date ~~previously~~of ~~reported~~these ~~quarterly~~financial ~~reports~~statements onas ~~Form 10-Q for~~ the ~~periods~~exercise ~~ended~~price ~~March~~of ~~31,~~all ~~2011~~vested and ~~June~~unvested options ~~30,~~was ~~2011.~~higher ~~The~~than ~~increase~~the ~~(decrease)~~market inprice ~~each~~of ~~line item on~~ the Company’s ~~consolidated~~Common ~~financial statements is displayed for each line requiring restatement~~Stock.

~~CONDENSED~~The ~~CONSOLIDATED~~weighted ~~BALANCE~~average value ~~SHEETS~~per share of the 883,639 options issued under the Company’s 2006 Plan is $10.41 per share.

	As of March 31, 2011						As of June 30, 2011
	Previously		Adjustments		As Restated		Previously		Adjustments		As Restated
	Reported						Reported
Receivable for disposal of investment	$	-	$	38,812,195	$	38,812,195	$	-	$	39,449,257	$	39,449,257
Total Current Assets		204,861,056		38,812,195		243,673,251		183,707,294		39,449,257		223,156,551
Other long-term investment		-		-		-		41,772,510		(41,772,510)		-
Investments in and advances to equity investments		58,933,172		(40,254,885)		18,678,287		19,759,725		-		19,759,725
Total Long-Term Assets		409,752,650		(40,254,885)		369,497,765		447,118,915		(41,772,510)		405,346,405
Unrecognized tax benefits		5,551,703		1,011,881		6,563,584		6,666,147		1,043,917		7,710,064
Total Long-Term Liabilities		136,871,572		1,011,881		137,883,453		137,986,635		1,043,917		139,030,552
TOTAL LIABILITIES		178,834,295		1,011,881		179,846,176		183,189,757		1,043,917		184,233,674
TOTAL ASSETS		614,613,706		(1,442,690)		613,171,016		630,826,209		(2,323,253)		628,502,956
Retained earnings		208,439,256		(2,366,521)		206,072,735		212,020,274		(3,231,722)		208,788,552
Accumulated other comprehensive income		52,258,717		(88,050)		52,170,667		60,536,528		(135,448)		60,401,080
Total Shareholders’ Equity		435,277,218		(2,454,571)		432,822,647		447,144,932		(3,367,170)		443,777,762
TOTAL EQUITY		435,779,411		(2,454,571)		433,324,840		447,636,452		(3,367,170)		444,269,282
TOTAL LIABILITIES AND EQUITY	$	614,613,706	$	(1,442,690)	$	613,171,016	$	630,826,209	$	(2,323,253)	$	444,269,282

Treasury Stock

~~CONDENSED~~During ~~CONSOLIDATED~~the ~~STATEMENTS~~three OFmonths ended ~~INCOME~~March ~~AND~~31, ~~COMPREHENSIVE~~2012, ~~INCOME~~the Company repurchased 1,003,336 shares of its common stock at a total cost of $1,270,603 that were retired in June 2012. During 2011, the Company repurchased 224,582 shares of its common stock at a total cost of $799,999 that were retired in May 2013.

	Three months ended March 31, 2011									Three months ended June 30, 2011
	Previously			Adjustments			As Restated			Previously			Adjustments			As Restated
	Reported									Reported
Equity in earnings (losses) from unconsolidated entities	$	(409,886	)	$	(112,098	)	$	(521,984	)	$	551,461		$	(90,561	)	$	460,900
Interest Income (Expense), Net		-			-			-			(1,518,810	)		(15,302	)		(1,534,112	)
Gain (loss) on changes in ownership of unconsolidated entities		-			-			-			1,417,878			(759,338	)		658,540
INCOME BEFORE INCOME TAXES		4,046,001			(112,098	)		3,933,903			6,740,158			(865,201	)		5,874,957
NET INCOME		921,146			(112,098	)		809,048			3,570,345			(865,201	)		2,705,144
NET INCOME ATTRIBUTE TO CONTROLLING INTEREST		924,152			(112,098	)		812,054			3,581,018			(865,201	)		2,715,817
Foreign currency translation gain		3,132,466			(15,128	)		3,117,338			8,277,811			(47,398	)		8,230,413
OTHER COMPREHENSIVE INCOME, NET OF TAX		3,132,466			(15,128	)		3,117,338			8,277,811			(47,398	)		8,230,413
COMPREHENSIVE INCOME		4,056,618			(127,226	)		3,929,392			11,858,829			(912,599	)		10,946,230
Basic EPS		0.01			-			0.01			0.05			(0.01	)		0.04
Diluted EPS	$	0.01		$	-		$	0.01		$	0.05		$	(0.01	)	$	0.04

NOTE 14 – COMMITMENTS AND CONTINGENCIES

Commitments

As of March 31, 2013, the Company had entered into capital commitments for the manufacturing facilities under construction in the People’s Republic of China. The capital commitments were $16,944,950, all of which were within one year. In addition, the Company had R&D commitments of $3,615,639 within one year and $2,750,891 after one year but within three years, and purchase commitments for Millettia of $2,362,962 within one year and $4,472,297 after one year but within three years.

The Company also has an unconditional purchase commitment in connection with the Millettia long-term supply contracts, which is not expected to be harvested until after 2018 (note 5). The purchase amount will be based on fair value discounted at a pre-determined rate pursuant to the long-term supply contracts. At March 31, 2013, the Company had a commitment to pay maintenance fees of approximately $111,000 (RMB 700,000) per year from 2013 to 2019 related to the XSB long-term supply contract.

Legal proceedings

As of March 31, 2013 and December 31, 2012, the Company was subject to various legal proceedings and claims. Management continues to evaluate the lawsuits discussed below and based on the stage of these proceedings, management is unable to reasonably estimate the likelihood of any loss or the amount or range of any potential loss that could result from the litigation. Therefore, at March 31, 2013 and December 31, 2012, no accrual has been established for any potential loss in connection with these lawsuits. Should the Company fail to prevail in any of these legal matters or should several of these legal matters be resolved against the Company in the same reporting period, the operating results of a particular reporting period could be materially adversely affected.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ASTHREE OFMONTHS ~~SEPTEMBER~~ENDED 30MARCH 31, ~~2011~~2013 AND 2012

On June 22, 2012, a putative class action complaint was filed by Kevin McGee against American Oriental Bioengineering Inc, Eileen Brody, Binsheng Li, Yangchun Li, Tony Liu, Cosimo Patti, Xianmin Wang, and Lawrence Wizel alleging violations of Section 10b of the Securities Exchange Act of 1934 and liability pursuant to Section 20(~~UNAUDITED~~a) thereunder. The complaint, as subsequently amended (see below) centers on the accounting treatment of the sale of an interest held by the Company’s subsidiary, Nuo Hua Investment Company Limited and the Company’s Restatement filed on November 14, 2011. Several motions were filed for appointment as lead plaintiff, and on October 16, 2012, the Court appointed lead plaintiff, consolidated the cases, and ordered that a consolidated complaint be filed, which occurred on November 19, 2012. The served defendants (AOB, Brody, Wizel and Patti) moved to dismiss the consolidated complaint, and on March 25, 2013 those motions were granted with leave to amend. On April 15, 2013, Plaintiffs filed a Second Amended Complaint, which the served Defendants moved to dismiss on May 15, 2013. In the interim, the Court granted Plaintiffs’ motion for leave to serve most of the remaining Defendants by alternative means, and on May 15, 2013, the parties entered into a stipulation consenting to the filing of a Third Amended Complaint (“TAC,” setting forth no new paragraphs), deeming the TAC served on all defendants, deeming the motion to dismiss the Second Amended Complaint interposed against the TAC, and reserving all rights of the un-served Defendants.

~~CONDENSED~~On ~~CONSOLIDATED~~October ~~STATEMENTS~~1, OF2012, Peter ~~CASH~~Barbato ~~FLOWS~~filed a shareholder derivative Complaint against Tony Liu, Yanchun Li, Binsheng Li, Lawrence Wizel, Cosimo Patti, Xianmin Wang, Eileen Brody, Jun Min, and Baiqing Zhang (collectively, “Defendants”), and the Company as a nominal Defendant. The Complaint asserts causes of action for Breach of Fiduciary Duty and Unjust Enrichment. These claims similarly arise out of alleged accounting errors that were made the Company’s financial statements for in the periods between the third quarters ending September 30, 2009 and September 30, 2011, which were filed with the SEC. The alleged accounting errors were related to the Company’s sale of an interest held by the Company’s subsidiary, Nuo Hua Investment Company Limited, and were disclosed in the Company’s Restatement filed on November 14, 2011. The Complaint also alleges that its claims arise out of alleged inconsistencies that the Company’s then auditor, Ernst and Young Hua Ming, discovered throughout the course of the Company’s audit for the year ending 2011. The Parties have agreed that Defendants need not respond to the complaint until motions to dismiss the class action Complaint filed against the Company in the Central District of California are resolved.

	Three months ended March 31, 2011							Six months ended June 30, 2011
	Previously Reported		Adjustments			As Restated		Previously			Adjustments			As Restated
Net income	$	921,146	$	(112,098	)	$	809,048	$	4,491,491		$	(977,299	)	$	3,514,192
Equity in (earnings) /losses from unconsolidated entities		409,886		112,098			521,984		(141,575	)		202,659			61,084
(Gain)/loss on changes in ownership of unconsolidated entities		-		-			-		(1,417,878	)		759,338			(658,540	)
Unrecognized tax benefits	$	-	$	-		$	-	$	1,615,990		$	15,302		$	1,631,292

On December 6, 2012, David Bravetti filed a shareholder derivative Complaint against Tony Liu, Yanchun Li, Binsheng Li, Jun Min, Lawrence Wizel, Cosimo Patti, Xianmin Wang, Baiqing Zhang, Eileen Brody (collectively, “Defendants”). Because the complaint sets forth a shareholder derivative claim, the Company is named as a nominal Defendant, although no relief is sought for the Company and any relief obtained from the Defendants would inure to the benefit of the Company. The Complaint asserts causes of action for breach of fiduciary duty, waste of corporate assets, and unjust enrichment. Bravetti’s claims arose out of alleged accounting errors that were made in the Company’s financial statements for the periods between the third quarters ending September 30, 2009 and September 30, 2011, which financial statements were included in filings made with the SEC. The alleged accounting errors were related to the Company’s sale of an interest held by the Company’s subsidiary, Nuo Hua Investment Company Limited and were disclosed in the Company’s Restatement filed on November 14, 2011. The Complaint also alleges that its claims arise out of alleged inconsistencies that the Company’s then auditor, Ernst and Young Hua Ming, discovered throughout the course of the Company’s audit for the year ending 2011. Although the Complaint claims that jurisdiction is proper in federal court in New Jersey because of diversity of citizenship, according to the Complaint, Bravetti is a New Jersey citizen, as is one of the Defendants. The Company did not file a responsive pleading to Bravetti’s Complaint, and subsequent to seeking and obtaining a default against the Company, Bravetti agreed to dismiss his claim and file elsewhere. Subsequently, however, Bravetti “corrected” his complaint now to claim to be a Florida citizen. On March 26, 2013, Bravetti undertook to provide Defendants proof of his citizenship. That proof has been provided, and Defendants have not come to a conclusion whether this was sufficient.

~~NOTE~~On ~~4 -~~April 8, ~~ACCOUNTS~~2013, ~~AND~~four ~~NOTES~~of ~~RECEIVABLE~~the holders of the Company’s 5% senior convertible notes issued July 15, 2008 (the “Notes”) filed this action claiming a default under the Notes, which allegedly resulted in an acceleration of the maturity of the Notes. The Plaintiffs had previously commenced a similar action in federal court in New Jersey, but that action was withdrawn and the present action was interposed. The action seeks payment of $20,378,608 plus prejudgment interest and other fees and costs. The Company has been served with the complaint, and Plaintiffs agreed to extend the Company’s time to answer. When that time passed on June 3, 2013, Plaintiffs refused to grant additional time and have now made a motion seeking entry of a default. The Company filed its answer on June 5, 2013.

~~Accounts~~There ~~and~~are ~~notes~~no ~~receivable~~other isknown legal ~~net~~proceedings ofagainst ~~provision~~the ~~for doubtful debts~~Company. ~~Provision for doubtful debt activity is as follows:~~

	SEPTEMBER 30, 2011			DECEMBER 31, 2010
Beginning balance	$	687,879		$	522,897
Provision for doubtful debts		-			164,982
Reversal		(57,471	)		-
Written off		-			-
Ending balance	$	630,408		$	687,879

NOTE 5 - INVENTORIES

Inventories are summarized as follows:

	SEPTEMBER 30, 2011		DECEMBER 31, 2010
Raw materials	$	14,496,602	$	6,902,658
Work in process		1,538,939		2,274,499
Finished goods		8,186,117		3,511,163
Total inventories		24,221,658		12,688,320
Less: provision against slow-moving inventories		(20,592)		(22,734)
Inventories, net	$	24,201,066	$	12,665,586

In 2009 and 2010, the Company entered into long-term supply contracts with various third parties to grow Millettia, a major raw material of the Company, on behalf of the Company through leasing land use rights and production arrangements. Under these contracts, the Company bear the costs in relation to Millettia cultivation and in return entitled to a supply price at fair value discounted at a pre-determined rate when delivered. All pre-harvest agricultural costs, including irrigation, fertilization, seeding, laboring, land leasing costs, and other ongoing crop and land maintenance activities, are capitalized as inventory and cease to be accumulated when Millettia has reached maturity and is ready to be harvested. Land leasing costs incur prior harvest are capitalized as they are an essential pre-condition to the cultivation and an inevitable cost component of the total growing cost during the cultivation period. All costs incurred subsequent to the Millettia reaching maturity will be expensed as incurred. The Company expects the initial supply of Millettia to occur between year nine and year eleven of the contract period as Millettia is a stem from a certain plant which requires an eight to ten-year period to mature. These contracts expire after 30 years but entitle the Company to renew with terms to be negotiated.

As of September 30, 2011 and December 31, 2010, the Company capitalized agricultural costs in relation to Millettia cultivation of $983,458 and $190,697, respectively. As of September 30, 2011, the Company also made a prepayment of $4,526,852 in relation to Millettia cultivation that is expected to be commenced in June 2012. Such prepayment is capitalized as Advances to suppliers and prepaid expenses in the consolidated balance sheets and will be reclassified to inventory upon the commencement of cultivation (Note 6).

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ASTHREE OFMONTHS ~~SEPTEMBER~~ENDED 30MARCH 31, ~~2011~~2013 AND 2012

~~(UNAUDITED)~~NOTE 15 – SEGMENT REPORTING

~~NOTE~~For 6the -three ~~ADVANCES~~months ended TOMarch ~~SUPPLIERS~~31, ~~AND~~2013 ~~PREPAID~~and ~~EXPENSES~~2012, the Company’s segments were as follows:

	SEPTEMBER 30, 2011			DECEMBER 31, 2010
	Three Months Ended March 31,
Advance to suppliers	$	14,531,367		$	12,292,689
	2013			2012
Prepaid expenses		489,705			1,953,455
Manufacturing Segment
Prepayment for long-term supply contracts (See Note 5)		4,526,852			-
Revenue from pharmaceutical products	$	11,742,769		$	14,223,255
Advances to suppliers and prepaid expenses	$	19,547,924		$	14,246,144
Revenue from nutraceutical products		1,693,222			1,925,252
Total manufacturing revenue		13,435,991			16,148,507
Cost of sales		9,431,255			9,283,679
Depreciation and amortization expense		1,206,590			1,562,214
Selling, general and administrative expenses, research and development
costs and advertising costs		16,969,025			16,213,137
Provision for doubtful accounts-manufacturing segment		(2,028,644	)		(666,136	)
Operating loss of manufacturing segment		(16,199,523	)		(11,576,659	)
Distribution Segment
Distribution revenue		7,570,772			9,596,769
Cost of sales		7,074,633			8,779,775
Depreciation and amortization expense-distribution segment		179,816			49,341
Provision for doubtful accounts-distribution segment		295,535			–
Operating (loss) income of distribution segment		23,442			(58,182	)
Reconciliation to Consolidated Net Loss Attributable to Controlling Interest:
Net loss for reportable segments		(16,176,081	)		(11,634,841	)
Net loss for non segment subsidiaries		(4,938,776	)		(5,522,084	)
Consolidated Net Loss Attributable to Controlling Interest	$	(21,114,857	)	$	(17,156,925	)

~~Advances~~All tooperating ~~suppliers~~revenues comprise ~~mainly~~amounts ~~represent~~received ~~interest-free~~from ~~cash~~external ~~deposits~~third ~~paid~~party tocustomers. ~~suppliers~~All ~~for future purchases~~ of ~~raw~~the ~~materials.~~Company’s ~~Prepaid~~operations ~~expenses~~are ~~mainly~~located ~~relate~~in to the ~~prepaid research and development expenses to external contractors for research on new knowledge and product development~~PRC.

~~NOTE~~As 7of -March ~~LAND~~31, ~~USE~~2013 ~~RIGHTS~~and December 31, 2012, total assets of the manufacturing and distribution segments are as follows:

Land use rights consist of the following:

	March 31,		December 31,
	2013		2012
Manufacturing	$	258,964,569	$	276,885,064
Distribution		5,870,495		8,741,917
Corporate		158,893,200		160,681,943
Total assets	$	423,728,264	$	446,308,924

	SEPTEMBER 30, 2011			DECEMBER 31, 2010
Cost of land use rights	$	171,058,744		$	165,625,682
Less: Accumulated amortization		(13,166,046	)		(10,192,371	)
Land use rights, net	$	157,892,698		$	155,433,311

NOTE 16 – INCOME TAX

As The provisions offor ~~September~~income ~~30,~~taxes ~~2011~~for ~~and December 31, 2010,~~ the ~~net~~three ~~book~~months ~~value~~ended ofMarch ~~land use rights pledged as collateral was $21~~31,~~026,243~~ 2013 and ~~$20,729,293,~~2012 ~~respectively.~~are ~~See~~summarized ~~Note~~as ~~16.~~ follows:

Amortization expense for the quarter ended September 30, 2011 and 2010 was $875,525 and $833,974, respectively. Amortization expense for the nine months ended September 30, 2011 and 2010 was $2,594,261 and $2,483,327, respectively.

	Three Months Ended March 31,
	2013		2012
Current tax provision-PRC	$	259,496	$	378,556
Deferred taxes-PRC		91,749		64,512
Total provision for income taxes	$	351,245	$	443,068

NOTE 8 - CONSTRUCTION IN PROGRESS

Construction in progress as of September 30, 2011 and December 31, 2010 was $32,378,396 and $22,516,044, respectively. Construction in progress represents the construction for production lines and buildings. The Company capitalizes interest as a component of construction in progress in accordance with ASC 835. Total interest costs incurred for the three months ended September 30, 2011 and 2010 amounted to $2,174,163 and $1,884,477, respectively; total interest costs incurred for the nine months ended September 30, 2011 and 2010 amounted to $5,982,908 and $5,707,743, respectively.

Total interest costs capitalized as part of construction in progress for the three months ended September 30, 2011 and 2010 amounted to $274,755 and $338,534, respectively, and for the nine months ended September 30, 2011 and 2010 amounted to $801,129 and $1,051,684, respectively. Capitalized interest included in construction in progress was $2,441,761 and $1,640,632 as of September 30, 2011 and December 31, 2010, respectively.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ASTHREE OFMONTHS ~~SEPTEMBER~~ENDED 30MARCH 31, ~~2011~~2013 AND 2012

~~(UNAUDITED)~~The reconciliation of tax computed by applying the statutory income tax rate applicable to the PRC operations to income tax expenses was as follows:

NOTE 9 - PROPERTY, PLANT AND EQUIPMENT

	Three Months Ended March 31,
	2013			2012
Income tax benefit at PRC statutory tax rate of 25%	$	(5,190,903	)	$	(4,185,923	)
Preferential PRC tax rate of 10%		1,593,723			1,124,263
Effect of different tax rates on non-PRC operations		488,773			572,665
Non-recognition of income tax benefit for current year losses		2,147,901			1,950,513
Provision for taxes on deemed interest income		323,917			364,925
Non-deductible expenses in current year		1,022,724			165,480
Other permanent differences		(34,890	)		451,145
Total provision for income taxes	$	351,245		$	443,068

~~Property~~The tax effects of temporary differences that give rise to the Company’s net deferred tax liabilities as of March 31, ~~plant~~2013 and ~~equipment~~December ~~consist~~31, of2012 ~~the~~were ~~following~~as follows:

	SEPTEMBER 30, 2011			DECEMBER 31, 2010
	March 31,			December 31,
At cost:
	2013			2012
Buildings	$	135,387,799		$	104,865,498
Deferred tax assets
Machinery and equipment		24,254,844			23,512,674
Current
Motor vehicles		1,584,441			1,568,813
Provision for doubtful accounts receivable	$	25,753		$	25,386
Office equipment		2,643,608			2,529,352
Other costs		3,065			3,274
Other equipment		4,386,861			3,996,164
Total current deferred tax assets		28,818			28,660
		168,257,553			136,472,501
Deferred tax liabilities
Less: Accumulated depreciation
Non-current
Buildings		(11,878,352)			(9,278,438)
Amortization		(1,213,446	)		(1,156,516	)
Machinery and equipment		(16,214,453)			(14,438,180)
Depreciation		(326,633	)		(323,750	)
Motor vehicles		(1,430,786)			(1,331,806)
Step up of acquired assets		(10,507,892	)		(10,475,798	)
Office equipment		(1,789,483)			(1,458,772)
Total non-current deferred tax liabilities		(12,047,971	)		(11,956,064	)
Other equipment		(539,046)			(417,689)
Net deferred tax liabilities	$	(12,019,153	)	$	(11,927,404	)
		(31,852,120)			(26,924,885)
Property, plant and equipment, net	$	136,405,433		$	109,547,616

AsThe ofCompany ~~September~~has ~~30,~~not recorded ~~2011~~a ~~and~~provision ~~December~~for U.S. federal income tax for the three months ended March 31, ~~2010,~~2013 and 2012 due to the cumulative tax net ~~book~~operating ~~value~~losses in the United States. As of ~~property~~March 31, ~~plant~~2013, ~~and~~the ~~equipment~~Company ~~pledged~~had asnet ~~collateral~~operating ~~for~~tax ~~bank~~losses ~~loans~~carried ~~were~~forward of approximately $622,~~263~~000,~~303~~000, $71,000,000 and $68,~~243~~000,~~893~~000 in the US, PRC, and Hong Kong, respectively. ~~See~~Those ~~Note~~losses 16carried forward in the US expire between years 2025 and 2030, and in the PRC expire between years 2015 and 2018. Losses incurred in Hong Kong are carried forward indefinitely. In the PRC and Hong Kong the subsidiaries with loss carryforwards are taxed on a separate return basis and the Company has determined all amounts should have full valuation allowances. At March 31, 2013, the tax benefit of the loss carryforwards had not been recorded and therefore is not presented in the table above.

~~Depreciation~~The ~~expense~~Company’s ~~for~~PRC ~~the~~subsidiaries ~~three~~that are ~~months~~deemed ~~ended~~“high ~~September~~technology” ~~30,~~enterprises ~~2011~~are ~~and~~subject ~~2010~~to ~~was~~preferred ~~$1,416,939~~tax ~~and~~rates ~~$1,265,671,~~(tax ~~respectively~~holiday). ~~Depreciation~~The ~~expense~~table ~~for~~below shows the effect ~~nine~~of ~~months~~using ~~ended~~the ~~September~~higher ~~30,~~rates ~~2011~~ and ~~2010~~earnings ~~was~~per ~~$4,214,570 and $3,652,541, respectively~~share.

NOTE 10 - OTHER INTANGIBLE ASSETS, NET

	Three Months Ended March 31,
	2013			2012
Loss per common share-basic	$	(0.58	)	$	(0.43	)
Effect of tax holiday		0.00			0.00
Pro forma loss per common share-basic	$	(0.58	)	$	(0.43	)

Other intangible assets are summarized as follows:

	SEPTEMBER 30, 2011		DECEMBER 31, 2010
At cost:
Product licenses	$	16,580,293	$	16,053,679
Trademarks		11,304,816		10,945,759
Patents		5,135,114		4,972,016
Proprietary technology		301,568		291,990
Software		97,590		94,488
		33,419,381		32,357,932
Less: Accumulated amortization
Product licenses	$	(10,100,977)	$	(8,891,025)
Trademarks		(7,517,448)		(6,009,283)
Patents		(2,786,773)		(2,448,111)
Proprietary technology		(128,100)		(100,775)
Software		(27,574)		(19,611)
		(20,560,872)		(17,468,805)
Other intangible assets, net	$	12,858,509	$	14,889,127

Amortization expense for the three months ended September 30, 2011 and 2010 was $808,808 and $1,011,184, respectively. Amortization expense for the nine months ended September 30, 2011 and 2010 was $2,475,425 and $3,448,668, respectively.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ASTHREE OFMONTHS ~~SEPTEMBER~~ENDED 30MARCH 31, ~~2011~~2013 AND 2012

~~(UNAUDITED)~~Accrued Taxes

~~NOTE~~Effective January 1, 2007, the Company adopted guidance for accounting for uncertainty in income taxes which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken in the tax return. As of March 31, 2013, the Company has recorded an accrued tax of $11,015,810 –mainly ~~RECEIVABLE~~related ~~FOR~~to ~~DISPOSAL~~tax OFpositions ~~INVESTMENT~~associated with deemed interest on non-trade intercompany transactions. It is possible that the amount accrued will change in the next 12 months; however, an estimate of the range of the possible change cannot be made at this time. The accrued taxes, if ultimately recognized will impact the effective tax rate.

OnThe ~~September 27, 2010, the~~ Company ~~entered~~has ~~into~~various open atax ~~share~~years ~~transfer~~between ~~agreement~~2007 ~~with an unrelated third party to transfer its equity interest in Nuo Hua Affiliate for a consideration of RMB255,000,000 (equivalent to $39.83 million), including cash~~ and ~~equity~~2012 ~~interest of another company owned by the unrelated third party. The legal procedure of the transfer had been completed~~ in ~~October~~its ~~2010~~significant ~~and~~operating ~~the consideration is expected to be received by the fourth quarter of fiscal 2011~~jurisdictions.

~~NOTE~~At 12March -31, ~~INVESTMENTS~~2013, $300,000 INis ~~AND~~included ~~ADVANCES~~in TOtaxes ~~EQUITY~~payable ~~INVESTMENTS~~for the US for what the Company believes to be the potential liabilities for the untimely filing of IRS Forms 5471 and IRS Report of Foreign Bank and Financial Accounts. However, the potential liabilities could be greater if the IRS were to so determine the Company’s failure to file was willful. The Company believes the likelihood of the IRS considering our failure to file as being willful is remote.

~~Investments~~All of the Company’s operations are conducted in ~~and~~the ~~advances~~PRC. toAt ~~equity~~March ~~investments~~31, ~~include~~2013, ~~our~~the ~~equity~~Company’s ~~investments~~unremitted inforeign earnings ~~Aoxing~~of ~~Pharmaceutical~~its PRC subsidiaries totaled approximately $128 million and the Company, ~~Inc~~held approximately $9.6 million ~~(“AXN”)~~of cash and ~~Hezhou~~cash ~~Jinji~~equivalents ~~Color~~in ~~Printing~~the CoPRC., These ~~Ltd.~~unremitted ~~(“Jinji”)~~earnings are planned to be reinvested indefinitely into the operations of the Company in the PRC. While ~~AXN~~repatriation isof asome cash held in the PRC~~-based~~ ~~pharmaceutical~~may ~~company~~be restricted by local PRC laws, ~~listed~~most onof the ~~NYSE~~Company's ~~AMEX,~~foreign ~~specializing~~cash inbalances could be repatriated to the ~~research~~United States but, ~~development~~under current U.S. income tax laws, ~~manufacture~~could ~~and~~be ~~distribution~~subject ofto ~~narcotic~~U.S. ~~and~~federal ~~pain-management~~income ~~products~~taxes inless ~~the~~applicable ~~PRC~~foreign tax credits. Determination ~~Jinji~~of isthe aamount of ~~color~~unrecognized ~~printing~~deferred ~~company~~U.S. ~~focusing~~income tax liability on the ~~printing~~unremitted earnings is not practicable because of ~~external~~the ~~packaging~~complexities ~~materials.~~associated with ~~These~~this ~~investments~~hypothetical ~~are~~calculation, ~~accounted~~and ~~for~~as ~~using~~the Company does not plan to repatriate any cash in the ~~equity~~PRC ~~method~~to the United States, no deferred tax liability has not been accrued for cash to be repatriated.

As of September 30, 2011 and December 31, 2010, the value based on quoted market price and the carrying amount of the investment in AXN is as follows:

	SEPTEMBER 30, 2011		DECEMBER 31, 2010
Investment in AXN based on quoted market price	$	6,044,113	$	46,841,875
Carrying amount of investment in AXN	$	18,701,611	$	18,903,366

The Company performed an interim impairment assessment by comparing fair value of the investment based on a discounted cash flows model to the carrying value. As of September 30, 2011, the derived fair value of the assessment exceeded the carrying value and no impairment loss was recognized. The discounted cash flows model is based on publicly available information issued by AXN, such as annual and quarterly reports, management and investor relations announcements, as well as analyses reports on AXN. This information is further substantiated by internal analysis. The Company will continue to monitor the market price movement closely for impairment assessment.

NOTE 13 - OTHER LONG-TERM ASSETS

	SEPTEMBER 30, 2011		DECEMBER 31, 2010
Payment for long-term supply contract	$	7,977,444	$	7,724,069
Prepaid land leasing costs for long-term supply contracts		4,303,926		443,811
Total other long-term assets	$	12,281,370	$	8,167,880

On October 17, 2009, the Company entered into a long-term supply contract with a third party to secure the supply of Xanthoceras Sorbifolia Bge (“XSB”), which is a major raw material of the Company. The Company expects such supply to start from year four of the contract as XSB is a fruit from a certain plant which requires a three-year period to mature. The contract expires after 10 years while the Company is entitled to renewal with terms to be negotiated. Under the contract, the Company is entitled to a supply price at fair value when delivered. The payment will be amortized to inventory upon delivery of the raw material.

Prepaid land leasing costs are prepayment for the Millettia long-term supply contracts the Company entered into in 2009 and 2010, which are amortized over the lease term and the amortized expenses are capitalized as inventory until Millettia has reached maturity and is ready to be harvested (Note 5).

The Company assesses the impairment of the prepayment as of each balance sheet date. As of September 30, 2011 and December 31, 2010, no impairment was recognized.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 14 - OTHER PAYABLES AND ACCRUED EXPENSES

The components of other payables and accrued expenses are as follows:

	SEPTEMBER 30, 2011		DECEMBER 31, 2010
Other taxes payable	$	211,216	$	295,702
Other payables		7,650,575		9,378,014
Accrued expenses		7,125,773		8,365,841
Other payables and accrued expenses	$	14,987,564	$	18,039,557

Other payables balance mainly represent VAT-output for manufacturing subsidiaries.

Accrued expenses mainly represent promotional fee, interest expenses accrued on convertible notes and other banks loans and accrued advertisement expenses.

NOTE 15 - OTHER LIABILITIES

	SEPTEMBER 30, 2011		DECEMBER 31, 2010
Due to employees	$	596,340	$	2,803,189
Advances from customers		3,107,713		2,194,450
Other current liabilities		1,456,468		1,286,468
Other liabilities	$	5,160,521	$	6,284,107

Due to employees mainly represent deposits collected from the Company’s salesmen to encourage receivables collection.

Advances from customers mainly represent cash received for goods not yet delivered to customers.

NOTE 16 - DEBT

Short-term loans are obtained from local banks and a third party. All of the short-term loans are repayable within one year and the short-term loans from local banks are secured by property, plant and equipment and land use rights owned by the Company. See Notes 6 and 8.

Long-term loans include a mortgage loan that bears interest on daily balances at 2.50% per annum below HSBC HKD best lending rate and is repayable over 15 years. The principal amount of long-term loans is not payable until the end of the term.

Interest expense for all outstanding debt excluding the convertible notes was $ 226,216 and $110,706 for the three months ended September 30, 2011 and 2010, respectively.

Interest expense for all outstanding debt excluding the convertible notes was $442,895 and $405,178 for the nine months ended September 30, 2011 and 2010, respectively.

NOTE 17 - CONVERTIBLE NOTES

On July 15, 2008, the Company closed a private offering and issued $115 million aggregate principal amount of 5.00% Convertible Senior Notes due 2015 (the “Notes”). The Notes were sold to qualified institutional buyers in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. The net proceeds from the sale of the Notes were $110,474,993, after deducting the placement agents’ commission and offering expenses payable by the Company.

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

● Total offering was $115,000,000 aggregate principal amount of 5.00% Convertible Senior Notes due on July 15, 2015.

● Interest at 5.00% per year, payable semiannually in arrears in cash.

● The Notes are convertible, at the option of the holder, at any time prior to the close of business on the second business day preceding the maturity date based on an initial conversion rate of 107.6195 shares per $1,000 principal amount of Notes, which represents an initial conversion price of $9.29 per share.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2011

(UNAUDITED)

● The conversion rate is subject to certain adjustments. In particular, holders who convert their Notes in connection with certain events of fundamental changes, as defined pursuant to the convertible notes agreement, may be entitled to a make whole premium in the form of additional shares of our common stock.

● The initial conversion rate may also be adjusted on January 15, 2009 if the volume weighted average price (“VWAP”) of common stock for each of the 30 consecutive trading days ended on January 15, 2009 is less than $8.08 per share. In such an event, the conversion rate will be increased as a one-time conversion price adjustment such that the conversion price as adjusted would represent the greater of (1) 115.0% of such arithmetic average of the daily VWAP and (2) $8.08.

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

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

● The Notes are unsecured, unsubordinated obligations and rank equal in right of payment to all of the Company’s existing and future unsecured and unsubordinated indebtedness. The Notes will be effectively subordinated to all of the Company’s existing and future secured indebtedness.

Notes issuance costs incurred by the Company that were directly attributable to the issuance of the Notes were deferred and are charged to the consolidated statements of income and comprehensive income using the effective interest rate method over the term of the Notes.

The Company has determined that the conversion feature embedded in the Notes is not required to be bifurcated and accounted for as a derivative pursuant to FASB ASC 815 “Derivatives and Hedging”, since the embedded conversion feature is indexed to the Company’s own stock and would be classified in shareholders’ equity if it was a free-standing instrument. The holder’s put rights qualify as an embedded derivative, but bifurcation of such is not required since it is considered to have economic characteristic and risks that are clearly and closely related to those of the debt host.

On the date of issuance of the Notes, no portion of the proceeds was attributable to the beneficial conversion feature (“BCF”) since the conversion price of the Notes exceeded the market price of the Company’s common stock. Furthermore, no contingent BCF exists from the one time conversion rate adjustment based on VWAP, as the adjustment is subject to a floor of $8.08, which equals the market price of the Company’s common stock on the issuance date of the Notes.

The VWAP of the Company’s common stock for each of the 30 consecutive trading days ending on January 15, 2009 was $6.02 per share and as such, the initial conversion price of $9.29 per share was adjusted to $8.08 on January 15, 2009.

During the three months ended September 30, 2011, the Company repurchased a total $5,500,000 in principal amount of the Notes for $2,750,000 cash consideration and expensed $83,171 of related unamortized Notes issue cost resulting in a net gain of $2,666,829 and leaving an aggregate of $109,500,000 in principal amount outstanding as of September 30, 2011.

	The Notes repurchased
Principal	$	5,500,000
+unamortized premium		-
-unamortized bond issue cost		(83,171	)
Net Carrying Value		5,416,829
Repurchase Price		2,750,000
Gain on debt extinguishment	$	2,666,829

The effective interest rate on the Notes for the three months ended September 30, 2011 and 2010 was 5.945%.

The amount of interest cost recognized for the three months ended September 30, 2011 and 2010 was $1,413,819 and $1,437,500, respectively. Interest cost recognized for the nine months ended September 30, 2011 and 2010 was $4,288,819 and $4,312,500, respectively.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 18 - PREPAID FORWARD SHARES REPURCHASE TRANSACTION

In connection with the offering of the Notes, the Company entered into a prepaid forward repurchase contract with an affiliate of the lead placement agent (“Merrill affiliate”). Pursuant to the prepaid forward repurchase contract, the Company paid approximately $30 million to the Merrill affiliate to fund the purchase of 3.7 million shares of common stock for settlement at or about maturity of the Notes, which will occur on July 15, 2015. The forward shares purchase transaction was also intended to reduce the potential dilution of common stock that would result from the conversion of the Notes into shares of common stock.

The $30 million cost of the forward stock repurchase transaction qualifies as an equity transaction and was separately presented under shareholders’ equity in the balance sheet without subsequent recognition of changes in fair value.

The prepaid forward repurchase contract contains an embedded equity forward derivative that is contingently cash settleable based on certain events. The contingent cash settlement feature was bifurcated from the prepaid forward repurchase contract but its value was insignificant for any of the years presented.

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

NOTE 19 - SHAREHOLDERS’ EQUITY

Preferred Stock

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

Common Stock

Stock-Based Compensation

At the Annual Shareholders’ Meeting held on October 21, 2006, the shareholders of the Company approved the stock incentive plan (the “2006 Plan”), which allows the Company’s Board of Directors, at its discretion, to offer stock options and common stock awards to employees, directors and consultants of the Company.

The Company has reserved 5,000,000 shares of common stock for issuance upon the exercise of stock options and common stock awards granted under the 2006 Plan. The term of the options granted under the 2006 Plan should be no more than 10 years from the grant date. Options will be granted with an exercise price not less than the fair market value of a share of common stock on the date of the grant.

Common Stock Awards issued to consultants and non-employee directors

Common stock awards are issued to consultants as partial payment in connection with the consulting services rendered or to be rendered, or to directors as compensation for participating in the Company’s board meetings. Number of shares granted and expenses recognized were insignificant during the periods presented.

In connection with common stock awards described above, the Company recorded “Common stock to be issued” for vested but yet to be issued shares. Number of shares to be issued was insignificant during the periods presented.

Stock Options and Common Stock Awards issued to Employees

Stock options and common stock awards granted to employees vest over a five year service period using a graded vesting schedule of 20% per fully completed year (based on each subsequent one-year anniversary of the date of grant). Compensation expense for all stock options and common stock awards granted is recognized over the grantee’s respective requisite service period.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2011

(UNAUDITED)

Stock options

The Company calculated the estimated fair value of the options of the grant date using the Black-Scholes Option Pricing Model with the following assumptions:

Grant Date	April 10, 2009			November 25, 2008			April 9, 2008			August 20, 2007			April 20, 2007
Risk-free interest rates		2.33	%		2.41	%		2.93	%		4.45	%		4.59	%
Expected term		6.5			6.5			6.5			6.5			6.5
Expected volatility		65.70	%		64.81	%		56.89	%		71.71	%		74.69	%
Expected dividend yield		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Fair value of share option		2.64			3.34			4.81			5.87			7.44

The model requires the input of subjective assumptions including the expected stock price volatility and the expected dividend yield. The Company uses historical experience of employee turnover and future expectation to estimate forfeiture rate. For expected volatilities, the Company has made reference to historical volatilities of the Company’s stock. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury Bills yield in effect at the time of grant.

The Company recorded $474,638 compensation cost for both of the three month ended September 30, 2011 and 2010,and $1,423,914 for both of the nine months ended September 30, 2011 and 2010, with corresponding credits to additional paid-in capital. Compensation cost of all stock option awards are recorded in selling, general and administrative expenses. The total fair value of the options granted to employees at the respective grant dates was $9,492,751, of which the unrecognized portion of $2,212,263 is expected to be recognized following the straight-line method over the remaining weighted average vesting period of 1.4 years as of September 30, 2011.

The expected forfeiture rate of the stock options granted as of September 30, 2011 is 0%.

Common Stock Awards

On April 10, 2009, April 8, 2010, April 10, 2011, the Compensation Committee of the Board of Directors of the Company approved the grant of common stock awards to the Company’s executive officer and certain senior management members. Common stock awards granted vest over a five-year service period. Compensation expense is recognized for the fair value of common stock on the grant date on a straight-line basis over five years, the requisite service period of the awards. The number of shares granted and the grant date market price of the Company’s common stock determines the fair value of the common stock awards under the 2006 Plan.

The expected forfeiture rate of the common stock awards granted as of September 30, 2011 is 0%.

The Company recorded selling, general and administrative expenses of $303,491 and $227,954 in connection with such awards for the three months ended September 30, 2011 and 2010, respectively and $834,936 and $559,507 for the nine months ended September 30, 2011 and 2010, respectively.

The total fair value of the common stock awards granted as of the respective grant date was $6,069,829, of which the unrecognized portion of $4,136,682 is expected to be recognized following the straight-line method over the remaining weighted average vesting period of 3.7 years as of September 30, 2011.

Statutory Reserves

In accordance with the PRC Regulations on Enterprises with Foreign Investment, an enterprise established in the PRC with foreign investment is required to provide for certain statutory reserves, namely (i) General Reserve Fund, (ii) Enterprise Expansion Fund and (iii) Staff Welfare and Bonus Fund, which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A wholly-owned foreign enterprise (“WOFE”) is required to allocate at least 10% of its annual after-tax profit to the General Reserve Fund until the balance of such fund has reached 50% of its respective registered capital. A non- wholly-owned foreign invested enterprise is permitted to provide for the above allocation at the discretion of its Board of Directors. Appropriations to the Enterprise Expansion Fund and Staff Welfare and Bonus Fund are at the discretion of the Board of Directors for all foreign invested enterprises. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2011

(UNAUDITED)

As a result, $26,293,785 has been appropriated to the accumulated statutory reserves, which were included in retained earnings, by the Company’s PRC subsidiaries as of September 30, 2011 and December 31, 2010.

Treasury Stock

On March 20, 2011, the Board of Directors authorized the Company to repurchase up to $20 million of the Company’s outstanding common stock over the next two years in the open market, in privately negotiated transactions, block trades and accelerated stock repurchase transactions or otherwise, as determined by the Company and will be funded from available working capital. The timing and extent of any purchases depend upon the trading price of the Company’s common stock, general business and market conditions and other investment opportunities. The Company entered into a share buyback program and engaged a financial institution to act as a broker on behalf of the Company to repurchase common stock based on a predetermined quantity and price range (“Share Buyback Program”).

Any common stock repurchased by the Company became part of its treasury stock which will be shown as a separate item in the consolidated statements of changes in shareholders’ equity. The treasury stock may be retired or used by the Company to finance or execute acquisitions or other arrangements. As of September 30, 2011, the Company had repurchased 449,163 shares of its common stock at a total cost of $799,999 pursuant to this Share Buyback Program.

NOTE 20 - COMMITMENTS AND CONTINGENCIES

As of September 30, 2011, the Company had entered into capital commitments for the manufacturing facilities under construction in the People’s Republic of China and purchase commitments for the purchase of raw materials. The capital commitments and purchase commitments were $2,954,378 and $4,288,159 within one year and $9,681,839 and $10,038,729 after one year but within five years. In addition, the Company had advertisement contract commitments of $9,637,881 for the next 12 months as well as R&D commitments of $2,570,982 within one year and $676,087 after one year but within five years.

Effective from January 1, 2007, the Company adopted the guidance for accounting for uncertainty in income taxes as provided under FASB ASC 740-10, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken in the tax return. As of September 30, 2011, the Company has recorded an unrecognized tax benefit of $6,772,972.

As of September 30, 2011, the Company has no significant litigation claims. Also, the Company does not have significant operating-lease commitments as of September 30, 2011.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 21 - SEGMENT REPORTING

For the three months ended September 30, 2011 and 2010 the Company’s segments were as follows:

	Three Months Ended September 30,
	2011			2010
				(RESTATED)
Manufacturing Segment
Revenue from pharmaceutical products	$	40,276,279		$	77,171,414
Revenue from nutraceutical products		8,774,711			10,294,564
Total manufacturing revenue		49,050,990			87,465,978
Total manufacturing costs		24,181,804			40,307,771
Depreciation and amortization expense		1,331,032			1,244,031
Selling, general and administrative expenses, research and development costs and advertising costs		15,188,293			33,834,283
Operating income of manufacturing segment		10,569,294			9,583,131
Distribution Segment
Distribution revenue	$	4,883,612		$	4,067,066
Equity in earnings from unconsolidated entities		-			773,038
Operating income of distribution segment		12,376			(402,707	)
Reconciliation to Consolidated Net Income Attributable to Controlling Interest:
Total net operating income, as defined, for reportable segments		10,581,670			9,180,424
Unallocated		(2,928,129	)		(4,933,238	)
Consolidated Net Income Attributable to Controlling Interest	$	7,653,541		$	4,247,186

For the nine months ended September 30, 2011 and 2010, the Company’s segments were as follows:

	Nine months Ended September 30,
	2011			2010
				(RESTATED)
Manufacturing Segment
Revenue from pharmaceutical products	$	119,969,639		$	181,813,000
Revenue from nutraceutical products		28,110,229			29,894,355
Total manufacturing revenue		148,079,868			211,707,355
Total manufacturing costs		72,568,527			96,675,330
Depreciation and amortization expense		3,956,892			3,659,475
Selling, general and administrative expenses, research and development costs and advertising costs		45,220,153			78,668,115
Operating income of manufacturing segment		25,466,535			26,208,683
Distribution Segment
Distribution revenue	$	11,908,640		$	10,871,669
Equity in earnings from unconsolidated entities		-			2,117,833
Operating income of distribution segment		(129,635	)		536,230
Reconciliation to Consolidated Net Income Attributable to Controlling Interest:
Total net operating income, as defined, for reportable segments		25, 336,900			26,744,913
Unallocated		(14,155,488	)		(14,250,340	)
Consolidated Net Income Attributable to Controlling Interest	$	11,181,412		$	12,494,573

All operating revenues comprise amounts received from external third party customers. All of the Company’s operations are located in the PRC.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 22 - EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income attributable to controlling interest by the weighted average number of common shares outstanding, excluding common shares to be delivered under a prepaid forward repurchase contract (3,712,700 shares). Diluted earnings per share is computed by dividing net income attributable to controlling interest as adjusted for the effect of dilutive potential common shares, if any, by the weighted average number of common shares and dilutive potential common shares outstanding during the period. The potential common stocks are stock options, common stock awards and convertible notes.

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

	Three Months Ended September 30,				Nine months Ended September 30,
	2011		2010		2011		2010
			(RESTATED)				(RESTATED)
EPS Numerator:
Net income attributable to controlling interest	$	7,653,541	$	4,247,186	$	11,181,412	$	12,494,573
EPS Denominator:
Weighted average shares outstanding – Basic		74,845,855		74,934,428		74,801,120		74,765,028
Effect of dilutive instruments:
Convertible notes		-		-		-		-
Common stock awards to be issued		1,678,148		1,030,838		1,505,924		881,996
Weighted average shares outstanding – Diluted		76,524,003		75,965,266		76,307,044		75,647,024

EPS - Basic		$	0.10			$	0.06			$	0.15			$	0.17
EPS - Diluted		$	0.10			$	0.06			$	0.15			$	0.17

The calculation of weighted average common shares outstanding for the diluted earnings per share calculation excludes consideration of stock options for the three and nine months ended September 30, 2011 and 2010, because the exercise of these options would not have been dilutive for those periods due to the fact that the exercise prices were greater than the weighted average market price of the Company’s common stock for each period.

As more fully discussed in Note 17, the Company had certain convertible notes outstanding during the periods presented. The aggregate number of shares of common stock that could be issued in the future to settle these notes is deemed outstanding for the purposes of the calculation of diluted earnings per share. This approach, referred to as the if-converted method, requires that such shares be deemed outstanding regardless of whether the notes are then contractually convertible into the Company’s common stock. For this if-converted calculation, the interest expense and issuance costs (net of tax) attributable to these notes are added back to net income attributable to controlling interest, reflecting the assumption that the notes have been converted. The calculation of diluted earnings per share excludes the convertible notes for the three and nine months ended September 30, 2011 and 2010 because conversion of the convertible notes under the if-converted method would have been anti-dilutive..

NOTE 23 – TAXES

The Company had total income tax credit of $2,203,013 and income tax expenses of $4,091,655 for the three and nine months ended September 30, 2011, respectively. The Company continues to conduct most of its business through its major PRC subsidiaries whose applicable income tax rates are 15% for the three and nine months ended September 30, 2011 and 2010. A full valuation allowance was recorded for deferred tax assets of those entities within the Company that continue to be in a cumulative loss position. The Company recorded a current tax expense of $5,804,146 for the nine months ended September 30, 2011 of which $1,335,226 was related to an increase in unrecognized tax benefits. The unrecognized tax benefits were primarily related to the tax impact of deemed interest at PRC subsidiaries. The Company recorded cumulative interests of $919,771 as of September 30, 2011.

The Company's effective tax rates were (40)% and 36% for the three months ended September 30, 2011 and 2010, respectively and were 27% and 35% for the nine months ended September 30, 2011 and 2010, respectively.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2011

(UNAUDITED)

The decrease in effective tax rate for the three months ended September 30, 2011 was mainly due to the reverse of the provision for income taxes for the applicable tax rate change of its PRC subsidiaries, GLP, BOKE, Three Happiness, HSPL and CCXA. During the six months ended June 30, 2011, the Company increased its applicable tax rate for these PRC subsidiaries as the High & New Technology status (“HNTE status”) will expire near the year end of 2011. At that stage, the management did not believe it was more-likely-than-not that these entities will qualify for the HNTE status upon renewal; as a result, the Company applied 25% corporate income tax rate for these subsidiaries during the three and six months ended June 30, 2011. At current stage, the management believed it is probable that these entities will qualify for the HNTE status upon renewal since these entities passed the government assessment; as a result, the Company applied 15% corporate income tax rate for these subsidiaries for the three and nine months ended September 30, 2011.

NOTE 24 - EMPLOYEE DEFINED CONTRIBUTION PLAN

Full time employees of the Company’s subsidiaries in the PRC participate in a government-mandated defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC subsidiaries of the Company make contributions to the government for these benefits based on 41% of the employees’ salaries. The Company’s PRC subsidiaries have no legal obligation for the benefits beyond the contributions made. The total amounts for such employee benefits, which were expensed as incurred, were $1,407,086 and $1,392,671 for the three months ended September 30, 2011 and 2010, respectively, and $4,252,448 and $2,023,756 for the nine months ended September 30, 2011 and 2010, respectively, and are included in cost, inventory, selling, general and administrative expenses.

NOTE 25 - SUBSEQUENT EVENTS

On October 5, 2011, the Company repurchased a total $1,000,000 in principal amount of the Notes for $405,000 cash consideration, leaving an aggregate of $108,500,000 in principal amount outstanding.

There were no other significant subsequent events that occurred after September 30, 2011.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~All~~The offollowing ~~the~~discussion should ~~financial~~be ~~information~~read ~~presented~~ in ~~this~~conjunction ~~Item 2~~with ~~has~~the ~~been~~information ~~adjusted~~contained toin ~~reflect~~ the ~~restatement of our~~ condensed consolidated financial statements ~~for~~of the ~~three months ended September 30, 2010. Specifically, we have restated our condensed consolidated balance sheets as of September 30, 2010~~ Company and ~~our~~the ~~condensed~~notes ~~consolidated~~thereto ~~statements~~appearing ofelsewhere ~~operations~~herein and ~~cash~~in ~~flows~~conjunction ~~for~~with the ~~nine~~Management’s ~~months~~Discussion ~~ended~~and ~~September~~Analysis ~~30,2010~~set ~~as reported~~ forth in the ~~amended~~Company’s ~~annual~~Annual ~~report~~Report on Form ~~10K/A~~ 10-K for the ~~fiscal~~ year ended December 31, ~~2010~~2012. ~~The~~Readers ~~restatement~~should iscarefully ~~fully~~review ~~described in~~ the ~~“Explanatory~~risk ~~Note”~~factors ~~immediately~~disclosed ~~preceding~~in ~~Part I, Item 1of~~ the ~~amended~~Company’s ~~annual~~Form ~~report~~10-K onfor ~~Form 10K/A~~the ~~for~~year ended December 31, ~~2010~~2012 filed ~~concurrently~~by ~~with~~the ~~this~~Company ~~report~~with ~~and in Note 3 to~~ the ~~condensed~~Securities and ~~consolidated~~Exchange ~~financial~~Commission ~~statements in this report~~(“SEC”).

The following discussion should be read in conjunction with the information contained in the condensed consolidated financial statements of the Company and the notes thereto appearing elsewhere herein and in conjunction with the Management’s Discussion and Analysis set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Readers should carefully review the risk factors disclosed in the Company’s Form 10-K for the year ended December 31, 2010 filed by the Company with the Securities and Exchange Commission (“SEC”).

As used in this report, the terms “Company,” “we,” “our,” “us,” and “AOB” 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,” “AOB believes,” “management believes” and similar language. The forward-looking statements are based on the current expectations of AOB and are subject to certain risks, uncertainties and assumptions, including those set forth in the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. Actual results may differ materially from results anticipated in these forward-looking statements. We base the forward-looking statements on information currently available to us, and we assume no obligation to update them.

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

BUSINESS OVERVIEW

Global economic challenges and uncertainties have impacted our business in 2011, 2012 and the first half of 2013. These challenges and uncertainties have negatively affected consumers’ demands for both pharmaceutical and nutraceutical products, which contributed to the overall decline in sales of our manufacturing segments.

In addition, the establishment of price controls over prescription and over-the-counter medicines negatively impacted our business. There were two price adjustments by the Price Control Office in 2011 and 2012, respectively that lowered certain prices of prescription and over-the-counter medicines. As a result, we lost our ability to compete effectively due to the pricing adjustments, particularly when we entered the state-owned hospitals’ purchase of medicine tendering process. As a result, sales in our manufacturing segments fell sharply.

The continuous increase in cost of raw material also impacted our business as gross profit has declined since the end of 2010.

In addition to the ongoing economic challenges and uncertainties, our business was negatively impacted by the toxic drug capsules incident in 2012. Incidents like that shook the pharmaceutical industry and resulted in a decline in market demand. Although we were not directly involved in the scandal and our facilities were inspected and passed the safety requirements, our subsequent sales have been impacted significantly due to the loss of consumer confidence in pharmaceutical products and huge decline in market demand. All of these challenges, uncertainties and incidents may continue to have an adverse impact on our future performance.

We are taking actions to mitigate the impact of these economic conditions by: 1) focusing on our well-recognized brand names, including AOBO and our Jinji products; 2) diversifying our products through products line extension; and 3) developing and introducing new products.

To mitigate the impact of the increasing cost and supply of the raw material needed for our products, we entered into long-term supply contracts with various third parties to grow Millettia and Xanthoceras Sorbifolia Bge (“XSB”), which are major raw materials. We bear the cultivation cost for these raw materials, including leasing the land use rights. In return, we are entitled to purchase the raw material at a pre-determined discounted price. In 2012, the Company recorded an impairment of approximately $8.5 million of its capitalized agricultural costs. Through these supply contracts, we believe that we can stabilize the supply of our major raw materials in the long run and reduce the risk of increasing costs in future periods.

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 amended Annual Report on Form 10-K/A for the year ended December 31, ~~2010~~2012 filed with the SEC on June 11, 2013.

~~Estimates affecting accounts and notes receivable and inventories~~20

~~The~~Estimates ~~preparation~~affecting 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 ~~and notes~~ receivable and inventories.

AtThe ~~September~~preparation of ~~30,~~our ~~2011,~~consolidated ~~the~~financial ~~Company~~statements ~~provided~~requires amanagement ~~$630,408~~to ~~reserve~~make ~~against~~estimates ~~accounts~~ and ~~notes~~assumptions ~~receivable.~~that ~~Management’s~~affect ~~estimate~~our reporting of ~~the~~assets and ~~appropriate~~liabilities ~~reserve~~(and oncontingent ~~accounts~~assets and ~~notes~~liabilities). ~~receivable~~These atestimates ~~September~~are ~~30,~~particularly ~~2011~~significant ~~was~~where ~~based~~they onaffect the ~~aged~~reported net ~~nature~~realizable value of ~~these~~the Company’s accounts ~~and notes~~ 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~~inventories.

At ~~September~~March 31, 302013 and December 31, ~~2011~~2012, ~~the~~we ~~Company~~ provided ana ~~allowance~~reserve of $20,039,711 and $18,134,912, respectively, against ~~its~~accounts ~~inventories~~receivable. Our ~~amounting~~estimate toof ~~$20~~the appropriate reserve on accounts receivable at March 31,~~592.~~ ~~Management’s~~2013 ~~determination~~and ofDecember ~~this~~31, ~~allowance~~2012 was based on ~~potential~~the ~~impairments~~aged tonature of ~~the~~these ~~current~~accounts ~~carrying~~receivable. ~~value~~In ofmaking ~~the~~our ~~inventories~~judgment, ~~due~~we assessed our customers’ ability to ~~potential~~continue ~~obsolescence~~to ofpay ~~aged~~their ~~inventories.~~outstanding invoices Inon ~~making~~a ~~its~~timely ~~estimate~~basis, ~~management~~and ~~considered~~whether ~~the~~their ~~probable~~financial ~~demand~~position ~~for~~might ~~our~~deteriorate ~~products~~significantly in the future, ~~and~~which ~~historical~~would ~~trends~~ result in ~~the~~their ~~turnover~~inability ofto ~~our~~pay ~~inventories~~their debts to the Company.

~~While~~At ~~the~~March ~~Company~~31, ~~currently~~2013 and ~~believes~~December ~~that~~31, ~~there~~2012, iswe ~~little~~provided ~~likelihood~~an ~~that~~allowance ~~actual~~against ~~results~~inventories ~~will~~amounting ~~differ~~to ~~materially~~$51,440 ~~from~~and ~~these~~$47,281, ~~current~~respectively. ~~estimates,~~Our ifdetermination of ~~customer~~this ~~demand~~allowance ~~for~~was ~~our~~based ~~products~~on ~~decreases~~potential ~~significantly~~impairments into the ~~near~~current ~~future,~~carrying orvalue ifof the ~~financial~~inventories ~~condition~~due ofto ~~our~~potential ~~customers~~obsolescence of ~~deteriorates~~aged ininventories. ~~the~~In ~~near~~making ~~future~~our estimate, we considered the ~~Company~~probable ~~could~~demand ~~realize~~for ~~significant~~our ~~write~~products ~~downs~~in ~~for~~the ~~slow-moving~~future ~~inventories~~and orhistorical ~~uncollectible~~trends in ~~accounts~~the ~~and~~turnover ~~notes~~of ~~receivable~~our inventories.

28While we currently believe 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, we could realize significant write downs for slow-moving inventories or uncollectible accounts receivable and notes 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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605 “Revenue Recognition”. Under this policy, all of the following criteria must be met in order for us to recognize revenue:

1. Persuasive evidence of an arrangement exists;

2. Delivery has occurred or services have been rendered;

3. The seller’s price to the buyer is fixed or determinable; and

4. Collectability is reasonably assured.

The majority of the Company’s revenue results from sales contracts with distributors and revenue is recorded upon the shipment of goods. Management conducts credit background checks for new customers as a means to reduce the subjectivity of assuring collectability. Based on these factors, the Company believes that it can apply the provisions of FASB ASC 605 with minimal subjectivity.

~~Goodwill~~Investment in equity method investment

We account for ~~goodwill~~our equity investment in accordance with ~~the provisions of~~ FASB ASC ~~350~~323, “~~Intangible~~ Investments–Equity ~~Goodwill~~Method and ~~Other~~Joint Ventures”. WeUnder ~~conduct~~FASB ASC an323, ~~impairment~~the ~~test~~equity onmethod anof ~~annual~~accounting ~~basis~~is ~~and,~~used for investments in ~~addition,~~entities ifin which we ~~notice~~have ~~any~~the ~~indication~~ability ofto ~~impairment~~exercise significant influence but do not own a majority equity interest or otherwise control. Under the equity method, we ~~conduct~~initially ~~such~~record ~~test~~our ~~immediately~~investment at cost and adjust the carrying amount of the investment to recognize our proportionate share of each equity investee’s net income or loss into consolidated statements of income after the date of acquisition.

~~The~~We ~~application~~monitor our ofinvestments ~~the~~for other-than-temporary impairment ~~test~~by ~~requires~~considering ~~judgment,~~factors including, ~~the~~but ~~identification~~not oflimited ~~reporting units~~to, ~~assignments~~current ofeconomic ~~assets~~ and market ~~liabilities~~conditions, tothe ~~reporting~~operating ~~units~~performance ~~and~~of the ~~determination~~investee ofcompanies ~~the~~including ~~fair~~current ~~value~~earnings oftrends ~~each~~and ~~reporting~~other ~~unit~~company-specific information. ~~Fair~~We ~~value~~perform isan ~~primarily~~impairment ~~determined~~assessment by ~~computing~~comparing ~~the~~fair ~~future~~value ~~discounted~~of ~~cash flows expected to be generated by~~ the ~~reporting~~investment ~~unit that are believed~~ to bereadily ~~reasonable~~available ~~under~~market ~~current~~information, or ~~and~~if ~~forecasted~~not ~~circumstances~~available, ~~the~~to ~~results~~discounted ofcash ~~which~~flow ~~form the basis for making judgments about carrying values of the reported net assets of our reporting units~~models.

We conducted an impairment test as of September 30, 2011 and no impairment loss was identified. We will continue to closely monitor the projections for our reporting units and the economic conditions of the product end-markets. Any significant change in market conditions and estimates or judgments could give rise to impairment in the period that the change becomes known.Impairment

In evaluating long-lived assets for recoverability, including finite-lived intangibles and property and equipment, we use our best estimate of future cash flows expected to result from the use of the asset and eventual disposition. To the extent that estimated future, undiscounted cash inflows attributable to the asset, less estimated future, undiscounted cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount equal to the difference between the carrying value of such asset and its fair value. Assets to be disposed of and for which there is a committed plan of disposal, whether through sale or abandonment, are reported at the lower of carrying value or fair value less costs to sell.

In evaluating capitalized agriculture costs, we use our best estimate of the future cash flows expected to result from future market values, yields and costs to harvest. To the extent that estimated future cash inflows attributable to the asset, less estimated future, cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount equal to the excess of the carrying value over the estimated fair values of the capitalized agricultural costs.

The Company’s annual impairment testing is performed in the fourth quarter of each year.

Share-based Compensation

We ~~account~~periodically issue stock options and warrants to employees and non-employees in non-capital raising transactions for ~~the~~services and for financing costs. We account for stock ~~options~~option and ~~common~~warrant ~~stock~~grants ~~awards~~issued ~~granted~~and ~~under~~vesting ~~our~~to ~~2006~~employees ~~stock~~based ~~incentive~~on ~~plan~~the (authoritative guidance provided by the ~~“2006~~FASB ~~Plan”)~~whereas inthe ~~accordance~~value ~~with~~of ~~FASB~~the ~~ASC~~award ~~718~~is ~~“Compensation~~measured –on ~~Stock~~the ~~Compensation”~~date of grant and recognized over the vesting period. InWe account for stock option and warrant grants issued and vesting to non-employees in accordance with ~~FASB~~the ~~ASC~~authoritative ~~718,~~guidance ~~all~~of ~~grants~~the ofFASB ~~share~~whereas the ~~options~~value ~~and~~of ~~common~~the stock ~~awards~~compensation ~~are~~is ~~recognized~~based inupon the ~~financial~~measurement ~~statements~~date ~~based~~as ondetermined ~~their~~at ~~grant~~either a) the date ~~fair~~at ~~values.~~which Wea ~~have~~performance commitment ~~elected~~is reached, or b) at the date at which the necessary performance to ~~recognize~~earn the equity instruments is complete. Non-employee stock-based compensation ~~expense~~charges ~~using~~generally are amortized over the vesting period on a straight-line ~~method~~basis. ~~for~~In ~~all~~certain ~~share~~circumstances where ~~options~~there are no future performance requirements by the non-employee, option grants are immediately vested and ~~common~~the total stock-based compensation ~~awards~~charge ~~granted~~is ~~with~~recorded ~~services~~in ~~conditions~~the ~~that~~period ~~have~~of athe ~~graded~~measurement ~~vesting schedule~~date.

WeThe ~~have~~fair ~~applied~~value of our common stock option grant is estimated using the Black-Scholes-Merton ~~Option~~option ~~Pricing~~pricing ~~Model~~model, inwhich ~~determining~~uses ~~the~~certain ~~fair~~assumptions ~~value~~related to ofrisk-free ~~the~~interest ~~options~~rates, ~~granted.~~expected Wevolatility, ~~estimate~~ expected ~~volatility~~life atof the ~~date~~common ofstock ~~grant~~options, ~~based~~and onfuture adividends. ~~combination~~Compensation expense ofis ~~historical~~recorded ~~and~~based ~~implied~~upon ~~volatilities~~the ~~from~~value ~~comparable~~derived ~~publicly~~from ~~listed~~the ~~companies.~~Black-Scholes-Merton ~~Forfeiture~~option ~~rate~~pricing ismodel, ~~estimated~~and based on ~~historical~~actual ~~forfeiture~~experience. The ~~patterns~~assumptions ~~and~~used ~~adjusted~~in tothe ~~reflect~~Black-Scholes-Merton ~~future~~option ~~changes~~pricing inmodel ~~circumstances~~could ~~and~~materially ~~facts,~~affect ifcompensation ~~any~~expense recorded in future periods.

Accounting for Income Taxes and Uncertain Income Tax Positions

We ~~account~~use ~~for~~an ~~income~~asset ~~taxes~~and liability inapproach ~~accordance~~for ~~with~~financial ~~FASB~~accounting ~~ASC~~and ~~740,~~reporting ~~“Accounting~~ for ~~Income~~income ~~Taxes”.~~taxes Wethat ~~consider~~allows ~~many~~recognition ~~factors~~and ~~when~~measurement ~~assessing~~of deferred tax assets based upon the likelihood of ~~future~~ realization of ~~our deferred~~ tax ~~assets,~~benefits ~~including~~in ~~our~~future ~~recent~~years. ~~cumulative~~Under ~~earnings~~the ~~experience~~asset byand ~~taxing~~liability ~~jurisdiction~~approach, ~~expectations~~deferred taxes are provided for the net tax effects of ~~future~~temporary ~~taxable~~differences ~~income,~~between the ~~carry-forward~~carrying ~~periods~~amounts ~~available~~of toassets usand liabilities for financial ~~tax~~ reporting purposes, and ~~other~~the ~~relevant~~amounts ~~factors.~~used ~~Deferred~~for income tax ~~assets~~purposes. ~~are~~A ~~reduced by a~~ valuation allowance ~~when,~~is inprovided ~~the~~for ~~opinion~~deferred oftax ~~management,~~assets if it is more likely than not ~~that~~these ~~some~~items ~~portion~~will either expire before we are able to realize their benefits, or ~~all~~that offuture deductibility is uncertain. We account for uncertainty in income taxes in accordance with FASB ASC 740-10 which prescribes a recognition threshold and a measurement attribute for the ~~deferred~~financial statement recognition and measurement of tax ~~assets~~positions ~~will~~taken ~~not~~or expected to be ~~realized~~taken in a tax return. Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense.

We account for uncertainty in income taxes in accordance with FASB ASC 740-10. FASB ASC 740-10 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of the benefit that is more likely than not to be realized upon ultimate settlement. As of September 30, 2011, the Company recorded an unrecognized tax benefit of approximately $7,874,802, which is mainly related to non-trade intercompany transactions, fixed assets and intangible assets.

Our accounting policy for interest and penalties related to an uncertain position, if any when required, is classified as part of interest expenses and other expenses, respectively. The Company recorded $919,771 interest and a penalty of nil as of September 30, 2011.

Newly Adopted Accounting Pronouncements

In ~~September~~July ~~2011~~2012, ~~the~~ FASB issued ~~Accounting~~ASU ~~Standards~~No. ~~Update 2011~~2012-~~08 (ASU 2011-08)~~02, “~~Testing~~Intangibles – Goodwill ~~for~~and ~~Impairment.~~Other”. ~~ASU~~This ~~2011-08~~update ispresents ~~intended~~an toentity ~~reduce~~with the ~~cost and complexity of the annual goodwill impairment test by providing entities an~~ option to ~~perform~~ first ato “assess qualitative” ~~assessment~~factors to determine whether ~~further~~it ~~impairment~~is ~~testing~~more ~~is necessary.~~likely ~~Specifically,~~than annot ~~entity~~that ~~has~~an ~~the~~indefinite-lived ~~option~~intangible toasset ~~first~~is impaired ~~assess~~as ~~qualitative~~a ~~factors~~basis tofor ~~determine~~determining whether it is necessary to perform the ~~current~~quantitative ~~two-step~~impairment test~~. If~~ anin ~~entity~~accordance ~~believes~~with Subtopic 350-30, as“Intangibles a– ~~result~~Goodwill ofand ~~its qualitative~~Other ~~assessment,~~– ~~that~~General itIntangibles isOther than Goodwill”. The more-likely-than-not threshold ~~that~~is ~~the~~defined ~~fair~~as ~~value~~having of a ~~reporting unit~~likelihood ~~is less~~of more than ~~its~~fifty ~~carrying amount, the quantitative impairment test is required~~percent. ~~Otherwise,~~ noASU ~~further testing is required~~No. ~~This~~2012-02 ~~standard~~will isbe effective for annual and ~~interim goodwill~~ impairment tests performed for fiscal years beginning after ~~December~~ 15 September 2012, ~~2011~~with early adoption permitted. The ~~provisions~~Company ofdoes ~~ASU~~not ~~2011-08~~expect the ~~are~~adoption ~~not~~of ~~expected~~this toupdate will have a material ~~impact~~effect on ~~the~~its consolidated financial ~~position, results of operations or cash flows of the Company~~statements.

In ~~June 2011~~February 2013, the FASB issued ~~Accounting~~ASU ~~Standards~~No. ~~Update 2011~~2013-0502, “Comprehensive Income (~~ASU~~Topic ~~2011-05~~220),: ~~"Presentation~~Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.~~" ASU~~” ~~2011-05~~The ~~eliminates~~new ~~the~~guidance ~~option~~requires entities to report the effect of significant reclassifications out of accumulated other comprehensive income ~~and~~on ~~its~~the ~~components~~respective line items in net income unless the ~~statement~~amounts ofare ~~changes~~not reclassified in their ~~shareholders'~~entirety ~~equity~~to ~~and~~net ~~requires~~income. anFor ~~entity~~amounts tothat ~~present~~are ~~the~~not ~~total~~required ofto ~~comprehensive~~be ~~income,~~reclassified ~~the~~in ~~components~~their ofentirety to net income ~~and~~in the ~~components~~same reporting ofperiod, ~~other~~entities ~~comprehensive~~are ~~income~~required ~~either~~to incross-reference aother ~~single~~disclosures ~~continuous~~that ~~statement~~provide oradditional indetail ~~two~~about ~~separate~~those ~~but consecutive statements~~amounts. The ~~This~~new ~~pronouncement~~guidance is effective prospectively for ~~fiscal~~all ~~years,~~interim and ~~interim~~annual periods ~~within those years,~~ beginning after December 15, ~~2011.~~ ~~The~~2012, ~~provisions~~with ofearly ~~ASU~~adoption permitted. ~~2011-05~~The ~~are~~Company does not ~~expected~~expect tothe ~~have~~adoption aof ~~material impact~~this onupdate ~~the~~will ~~financial~~have ~~position,~~a ~~results~~material ofeffect ~~operations~~on orits ~~cash~~consolidated ~~flows~~financial ~~of the Company~~statements.

InOther ~~May~~recent ~~2011,~~accounting pronouncements issued by the FASB ~~issued~~(including ~~Accounting~~its ~~Standards~~Emerging ~~Update~~Issues ~~2011-04~~Task ~~(ASU 2011-04~~Force), ~~“Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” ASU 2011-04 clarifies~~ the ~~application of existing fair value measurement and disclosure requirements~~AICPA, ~~changes changes certain fair value measurement principles~~ and ~~requires~~the ~~additional~~Securities ~~disclosures~~Exchange ~~about~~Commission (the ~~fair~~"SEC") ~~value~~did ~~measurements.~~not ~~The~~or updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The provisions of ASU 2011-04 are not ~~expected~~believed by management to have a material impact on the ~~financial~~Company's ~~position,~~present ~~results of operations~~ or ~~cash~~future ~~flows~~consolidated financial ~~of the Company~~statements.

3022

RESULTS OF OPERATIONS – THREE MONTHS ENDED ~~SEPTEMBER 30~~MARCH 31, ~~2011~~2013 AS COMPARED TO THREE MONTHS ENDED ~~SEPTEMBER~~MARCH 3031, ~~2010~~2012

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 ~~quarters~~three months ended ~~September~~March 3031, ~~2011~~2013 and ~~2010~~2012:

	Three Months Ended September 30,						Three Months Ended September 30,
	Three Months Ended March 31,
	2011			2010			2011		2010
	Results						% of Revenue
				(RESTATED)					(RESTATED)
	2013			2012			2013		2012
Revenues	$	53,934,602		$	91,533,044			100%		100%
Statement of Operations Data:
Cost of sales		28,730,424			44,250,846			53		48
Revenues	$	21,006,763		$	25,745,276			100%		100%
GROSS PROFIT		25,204,178			47,282,198			47		52
Cost of sales		16,505,888			18,063,454			79%		70%
Selling, general and administrative expenses		12,080,424			20,920,522			22		23
GROSS PROFIT		4,500,875			7,681,822			21%		30%
Advertising costs		2,964,877			10,983,946			6		12
Selling, general and administrative expenses		12,476,722			11,982,069			59%		47%
Research and development costs		2,825,967			4,724,703			5		5
Advertising costs		3,645,454			6,156,353			17%		24%
Depreciation and amortization expenses		1,804,888			1,682,058			3		2
Research and development costs		1,407,045			1,566,933			7%		6%
Debt extinguishment (gain)		(2,666,829)			-			(5)		-
Depreciation and amortization		1,864,207			2,080,699			9%		8%
Total operating expenses		17,009,327			38,311,229			31		42
Provision for doubtful accounts		1,763,952			985,786			8%		4%
INCOME FROM OPERATIONS		8,194,851			8,970,969			16		10
Long term crop inventory maintenance costs		2,361,383			–			11%		0%
Equity in (losses) earnings from unconsolidated entities		(796,727)			242,183			(2)		(1)
LOSS FROM OPERATIONS		(19,017,888	)		(15,090,018	)		-91%		-59%
Impairment loss on equity investment		-			(1,083,637)			-		-
Equity in earnings (losses) from equity method investments		(968,232	)		(191,450	)		-5%		-1%
Interest expense, net		(1763,~~802,954)~~691	)		(1,~~456~~743,~~062)~~270	)		~~(3)~~-4%		~~(2)~~-7%
Other expenses, net		(116,196)			(67,548)			-		-
Other income (expenses), net		(13,801	)		281,047			0%		1%
INCOME BEFORE INCOME TAX		5,478,974			6,605,905			11		7
LOSS BEFORE INCOME TAX		(20,763,612	)		(16,743,691	)		-99%		-65%
Provision for income taxes		(2351,~~203,013)~~245			2443,~~366,398~~068			~~(4)~~2%		2%
NET INCOME		7,681,987			4,239,507			15		5
NET LOSS		(21,114,857	)		(17,186,759	)		-101%		-67%
Net (income) loss attributable to non-controlling interest		(28,446)			7,679			-		-
Net loss(income) attributable to non-controlling interest		–			29,834			0%		0%
NET INCOME ATTRIBUTABLE TO CONTROLLING INTEREST EARNINGS PER COMMON SHARE	$	7,653,541		$	4,247,186			15%		5%
NET LOSS ATTRIBUTABLE TO AMERICAN ORIENTAL BIOENGINEERING, INC.	$	(21,114,857	)	$	(17,156,925	)		-101%		-67%
Basic	$	0.10		$	0.06
LOSS PER COMMON SHARE - basic and diluted	$	(0.58	)	$	(0.43	)
Diluted	$	0.10		$	0.06

Revenues

Revenues for the third quarter of 2011 were $53,934,602, a decrease of $37,598,442, or 41% compared to revenues for the same period of 2010.

We classify our revenues into two segments: manufacturing revenue and distribution revenue. The manufacturing revenue comprises revenue from pharmaceutical and nutraceutical products. Revenues by segments and product categories were as follows:

Three Months Ended September 30,

Increase/

Three Months Ended March 31,

Increase/

2011

2010

(Decrease)

2013

2012

(Decrease)

Revenue from pharmaceutical products

4011,~~276~~742,~~279~~769

7714,~~171~~223,~~414~~255

(362,~~895~~480,~~135)~~486

)

~~(48)~~-17%

Revenue from nutraceutical products

81,~~774~~693,~~711~~222

101,~~294~~925,~~564~~252

(1232,~~519,853)~~030

)

~~(15)~~-12%

Total manufacturing revenue

4913,~~050~~435,~~990~~991

8716,~~465~~148,~~978~~507

(382,~~414~~712,~~988)~~516

)

~~(44)~~-17%

Distribution revenue

47,~~883~~570,~~612~~772

49,~~067~~596,~~066~~769

~~816~~(2,~~546~~025,997

)

20-21%

Total revenues

5321,~~934~~006,~~602~~763

9125,~~533~~745,~~044~~276

(374,~~598~~738,~~442)~~513

)

~~(41)~~-18%

~~Revenue in connection with our pharmaceutical products decreased by $36,895,135, or 48%, as compared to the same period of 2010 primarily due to the following factors:~~ 23

~~● sales~~ Revenue from our ~~prescription~~ pharmaceutical products decreased from $3714,~~324~~223,~~901~~255 for ~~the~~three ~~third~~months ~~quarter~~ended ofMarch ~~2010~~31, 2012 to $2211,~~262~~742,~~905~~769 for the same period of ~~2011~~2013, or a 4017% decrease. The decrease was primarily due to the ~~decrease~~following ~~in sales from SHL powder and CCXA’s generic pharmaceutical products and partially offset by the increase in sales from our prescription formulated Jinji capsule; and~~factors:

●· ~~sales~~Rapidly ~~from~~evolving ~~our~~Chinese ~~OTC~~government healthcare policies have a material impact on the entire pharmaceutical ~~products~~industry ~~decreased~~in ~~from~~China. ~~$39~~In April 2009,~~846,513~~ ~~for~~the State Council issued “Opinions of the ~~third~~State ~~quarter~~Council on Deepening the Reform of ~~2010~~the toMedical ~~$18~~and Health Care System,~~013~~” a major public health initiative,~~374~~ the goal of which is to provide access to basic medical care for every person in China by 2020. In the ~~same~~implementation ~~period~~of this plan, we witnessed increased dispensing of ~~2011~~drugs that were listed on the government-published essential drug list, orand aof ~~55%~~products ~~decrease~~covered by the National Medical Insurance Catalog. This ~~was~~nationwide ~~mainly~~trend ~~due~~has toexerted ~~the~~a ~~decreased~~continuous ~~sales~~and ~~volume~~powerful downward pressure on the pricing of ~~GLP’s~~all generic ~~OTC~~ drugs, whether branded or not, resulting in a significant shrinkage of profit margins for manufacturers of these products. Our profit margins from our manufacturing segment decreased from 43% in 2012 to 16% in 2013, principally as a result of this pricing pressure.

31· Negative publicity surrounding the discovery of toxic substances in drug capsules in China in 2012 has resulted in an overall decline in demand in the pharmaceutical market. Although we were not directly involved in the scandal and we have passed safety inspections, our sales have been impacted significantly due to the widespread loss of confidence by consumers in pharmaceutical products.

We· ~~decreased~~Because of the ~~manufacturing~~actual and potential size of ~~certain~~the ~~generic~~Chinese ~~drugs~~pharmaceutical ~~since~~market, ~~the~~we ~~TCM~~face ~~raw~~intense ~~material~~competition ~~price~~from ~~for~~companies ~~these~~that ~~drugs~~manufacture ~~has~~products ~~continued~~similar to ~~increase~~ours, ~~during~~which ~~the~~has ~~last~~had ~~quarter~~a negative impact on our revenues. ~~Accordingly,~~Many of these manufacturers are more established than we ~~shifted~~are, ~~the~~have ~~products~~greater ~~mix~~brand ~~toward~~recognition ~~higher-margin~~of products ~~from~~that ~~lower~~compete ~~margin~~with ~~products~~ours, have more financial, technical, marketing and other resources than we presently possess, and have a larger customer base. These competitors are often able to ~~minimize~~respond ~~the~~more ~~impact~~quickly ~~from~~to ~~the~~new ~~increased~~or ~~cost~~changing ofopportunities ~~certain~~and ~~raw~~customer ~~materials~~requirements, and ~~the~~are ~~continuing~~able ~~government~~to ~~price~~undertake ~~cut~~more onextensive ~~certain~~promotional ~~products~~activities, offer more attractive terms to customers, or adopt more aggressive pricing policies.

~~Revenue~~· inBecause ~~connection~~traditional ~~with~~Chinese ~~our~~medicine ~~nutraceutical~~injection products ~~decreased~~are bynot ~~15%,~~covered ~~compared~~under to the ~~same~~new ~~period~~essential ofdrug ~~2010.~~list, ~~The decrease was primarily due to the decrease in~~ sales ~~from~~of ~~our~~SHL ~~Soy~~powder, ~~Peptide~~one ~~tablets~~of ~~and partially offset by the increase in sales from~~ our ~~Soy~~two ~~Peptide~~flagship ~~drinks which we launched commercially in late 2009. We decreased the advertising for certain old nutraceutical~~ products, ~~and~~declined ~~focused~~materially onfrom ~~new~~2012 ~~products~~ to ~~achieve optimum efficiency while maintaining strict advertising cost control~~2013.

~~The~~Revenue in ~~distribution~~connection ~~revenue~~with ~~from~~our ~~Nuo~~nutraceutical ~~Hua's~~products ~~majority~~decreased ~~owned~~from ~~subsidiary~~$1,925,252 ~~increased~~in by2012 ~~20%,~~ to $41,~~883~~693,~~612~~222 in 2013, a 12% decrease. ~~This~~Revenues were ~~increase~~adversely affected by the food safety and drug problem in 2012. The decrease was mainly ~~attributed~~due to ~~Nuo~~the ~~Hua's~~decrease ~~expanding~~in ~~market~~sales ~~coverage~~from our Soy Peptide tablets and Soy Peptide drinks.

Distribution revenue decreased by $2,025,997 or 21%, to $7,570,772 in 2013 as compared to $9,596,769 in 2012. Sales from our former Yushuntang subsidiary were $4,239,862 in 2012, but due to the sale of our interest in Yushuntang in December 2012, which resulted in the deconsolidation of this subsidiary, Yushuntang’s sales are no longer consolidated in our consolidated statement of operations for 2013. Net of Yushuntang, sales of the balance of our distribution business increased from $5,365,907 in 2012 to $7,570,772 in 2013.

Cost of Sales and Gross Profit

Cost of sales was $2816,~~730~~505,~~424~~888 ~~for~~in ~~the third quarter of 2011~~2013, compared to $4418,~~250~~203,~~846~~986 in ~~the same period of 2010~~2012. Cost of sales ~~in the third quarter of 2011 and 2010~~ by segments and product categories were as follows:

Three Months Ended September 30,

Increase/

Three Months Ended March 31,

Increase/

2011

2010

(Decrease)

2013

2012

(Decrease)

Pharmaceutical products

198,~~201~~286,~~942~~060

358,~~068~~079,~~249~~845

~~(15~~206,~~866,307)~~215

~~(45)~~3%

Nutraceutical products

41,~~979~~145,~~862~~195

51,~~239~~203,~~522~~834

(~~259~~58,~~660)~~639

)

(-5)%

Total manufacturing cost

249,~~181~~431,~~804~~255

409,~~307~~283,~~771~~679

~~(16~~147,~~125,967)~~576

~~(40)~~2%

Distribution cost

47,~~548~~074,~~620~~633

38,~~943~~779,~~075~~775

~~605~~(1,~~545~~705,142

)

15-19%

Total cost

2816,~~730~~505,~~424~~888

4418,~~250~~063,~~846~~454

(151,~~520~~557,~~422)~~566

)

~~(35)~~-9%

~~Gross~~Cost ~~profit~~of sales ~~decreased~~in bythe ~~$22,078,020,~~manufacturing orsegment ~~47%,~~remained consistent despite a decrease in revenues for ~~the~~this ~~third~~segment, ~~quarter~~as a result of ~~2011~~decreasing profit ~~compared~~margins toresulting from the ~~same~~pricing ~~period~~pressures ofdescribed ~~2010~~above. Gross profit as a percentage of revenues ~~decreased~~for ~~from~~the 52manufacturing segment was 30% in ~~the~~2013, ~~third~~down ~~quarter~~from ~~of 2010 to 47~~43% in ~~the~~2012. ~~same~~Cost ~~period~~ of ~~2011~~Sales ~~mainly~~from ~~due~~our toformer ~~the~~Yushuntang ~~new~~subsidiary were ~~levied~~$3,915,000 ~~urban~~in ~~construction and maintenance tax and educational surcharge~~2012.

~~From~~Cost ~~December~~of sales ~~2010,~~in the ~~urban~~distribution ~~construction~~segment ~~and~~decreased ~~maintenance~~proportionally ~~tax~~to ~~and educational surcharge were levied on foreign investment enterprises and foreign enterprises who previously enjoyed~~ the ~~exemption.~~decrease ~~We recognized the urban construction and maintenance tax and educational surcharge~~ in ~~cost of~~ sales. Asfrom a2012 ~~result~~to ~~of the regulation change~~2013, ~~our~~with gross ~~margin~~profit ~~for~~as ~~the~~a ~~third quarter~~ percentage of ~~2011~~revenues ~~was~~decreasing ~~affected~~slightly byfrom ~~approximately~~9% 2to 7%.

~~We continued our efforts to manage the margin pressure although the increased purchase prices of certain raw materials increased the cost of sales.~~24

Selling, General and Administrative Expenses

Selling, general and administrative expenses, ~~decreased~~increased byfrom $811,~~840~~982,~~098,~~069 ~~or 42%,~~ in ~~the~~2012 ~~third~~to ~~quarter~~$12,476,722 ofin ~~2011~~2013, ~~compared~~representing toa ~~the~~4% ~~same period of 2010~~increase. The details of our sales and marketing expenses were as follows:

	Three Months Ended September 30,				Increase/			Increase/
	Three Months Ended March 31,				Increase/			Increase/
	2011		2010		(Decrease)			(Decrease)
	2013		2012		(Decrease)			(Decrease)
Payroll	$	3,238,886	$	3,707,591	$	(468,705)			(13)%
Promotional materials and fees	$	2,186,010	$	1,255,985	$	930,025			74%
Staff welfare and insurance		873,021		1,162,842		(289,821)			(25)%
Payroll		3,444,846		3,147,784		297,062			9%
Promotional materials and fees		2,339,837		8,473,031		(6,133,194)			(72)%
Shipping		297,212		449,768		(152,556	)		-34%
Trips and traveling		1568,~~107,824~~568		~~997~~1,~~740~~136,317		~~110~~(567,~~084~~749	)		11-50%
Shipping		878,162		1,604,280		(726,118)			(45)%
Professional fees		1,388,185		868,119		520,066			60%
Stock based compensation		850,979		806,417		44,562			6%
Staff welfare and insurance		1,204,090		1,519,790		(315,700	)		-21%
Professional fees		534,319		1,124,727		(590,408)			(52)%
Stock based compensation		560,990		664,135		(103,145	)		-16%
Miscellaneous		2,~~257~~826,~~396~~821		32,~~043~~940,~~894~~171		(~~786~~113,~~498)~~350	)		~~(26)~~-4%
TOTAL	$	12,080,424	$	20,920,522	$	(8,840,098)			(42)%
Total	$	12,476,722	$	11,982,069	$	494,653			4%

32The increase in promotional fees resulted from more promotional expense by us in an effort to generate additional sales in the highly competitive Chinese pharmaceutical marketplace.

The decrease in ~~selling,~~shipping ~~general~~costs ~~and~~was ~~administrative~~primarily ~~expenses~~due into the ~~third~~reduction ~~quarter~~in ofsales ~~2011~~volume ~~compared to the same period~~ of ~~2010~~our ~~was primarily due to the following factors:~~products.

●The ~~the~~ decrease in oftrips ~~promotional materials~~ and ~~fees~~traveling byis ~~$6,133,194,~~a ordirect ~~72%,~~result ~~in the third quarter~~ of ~~2011~~overhead ascost ~~compared to the same period of 2010. This was primarily due to the~~ reduction ~~of our promotional activities in relation to SHL powder and generic prescription and OTC drugs;~~efforts.

●Increased professional ~~the~~fees ~~decrease~~resulted ofprimarily ~~shipping~~from ~~costs~~audit byfees ~~$726,118,~~incurred ~~or 45%,~~ in ~~the third quarter of 2011 as compared to the same period of 2010~~2013. ~~This was mainly due to the reduction of sales volume of our products; and~~

●Stock ~~the~~based ~~decrease~~compensation decreased ofas ~~payroll~~a ~~expenses~~result ~~and~~of ~~staff~~fewer ~~welfare~~directors ~~and~~receiving ~~insurance~~stock ~~expenses~~based bycompensation ~~$468,705 and $289,821, respectively,~~ in ~~the third quarter of 2011~~2012, as ~~compared~~well to the ~~same~~completion ~~period~~ of ~~2010.~~amortization ~~The~~of previously-issued ~~Company~~consultant ~~optimized~~shares ~~human resource~~ and ~~cut~~employee ~~certain~~stock ~~jobs in order to maintain strict expense control~~options.

Advertising Costs

Advertising costs decreased by $82,~~019~~510,~~069~~899, or 7341%, from $106,~~983~~156,~~946~~353 in ~~the~~2012 ~~third quarter of 2010~~ to $23,~~964~~645,~~877~~454 in ~~the~~2013, ~~same~~primarily ~~period~~as a result of ~~2011~~the initial implementation of our cost reduction measures started in 2012, as further discussed in the “Liquidity” section. Advertising costs as a percentage of revenue decreased from 1224% infor ~~the~~2012 ~~third quarter of 2010~~ to 617% infor ~~the same period of 2011~~2013.

We decreased the advertising costs related to some of our OTC generic drugs during this quarter. We continued to invest in advertising to create a unified megabrand for AOBO so that we can leverage on the establishment of all our individual brands to increase brand awareness and market shares.

Research and Development Costs

Research and development costs decreased by $159,888 from $1,~~898~~566,~~736,~~933 orin ~~40%,~~2012 ~~from~~to $41,~~724~~407,~~703~~045 in ~~the~~2013, ~~third~~primarily ~~quarter~~as a result of ~~2010~~the toinitial implementation ~~$2,825,967~~of our cost reduction measures started in ~~the~~2012, ~~same~~as ~~period~~further ofdiscussed ~~2011~~in the “Liquidity” section. Expressed as a percentage of revenue, research and development costs were 57% ~~for~~and ~~both~~6% ~~the~~for ~~third~~2013 ~~quarter of 2011~~ and ~~2010~~2012, respectively.

Our research and development activities consist of near term, middle term and long term stages which contribute to both our current and future business strategies. Our key research and development programs include the improvement of our existing products and development of new products such as SHL Lyophilized Injection Powder, Cease Enuresis Soft Gel and Jinji series products. The majority of our research and development expenditures are on pharmaceutical products.

Depreciation and Amortization

Depreciation and amortization expenses ~~increased~~decreased by $~~122~~216,~~830~~492, or 710%, in ~~the~~2013 ~~third quarter of 2011~~ as compared to ~~the same period of 2010~~2012. This was mainly due to the ~~increase~~recognized impairment of ~~the~~ property, plant and equipment and land use rights ~~during~~in the ~~second~~fourth ~~half~~quarter of ~~2010~~2012.

~~Debt~~Provision ~~Extinguishment~~for ~~Gain~~doubtful accounts

~~During~~Provision for ~~the~~doubtful ~~third~~accounts ~~quarter~~increased offrom ~~2011~~$985,786 ~~the~~in ~~Company~~2012 ~~repurchased~~to ~~a total~~ $51,~~500~~763,~~000~~952 in ~~principal~~2013, ~~amount~~due to continued deterioration of our ~~convertible~~customers’ ability ~~Notes~~to ~~for~~continue ~~$2,750,000~~to pay their outstanding invoices on a timely basis. AWe ~~gain~~evaluate ofthe ~~debt~~provision ~~extinguishment~~for ofdoubtful $2accounts on an ongoing basis,~~666,829~~ ~~was~~based ~~recognized~~upon ~~representing~~our ~~the~~customers’ ~~difference~~ability ~~between~~to ~~the~~continue ~~net~~to ~~carrying~~pay ~~value~~their ofoutstanding ~~the~~invoices ~~notes~~on ~~repurchased~~a timely basis, and ~~the~~whether their ~~repurchase~~financial ~~price.~~position ~~For~~might ~~additional~~deteriorate ~~information~~significantly in the future, ~~see~~which ~~“Item~~would 1.result ~~Financial~~in ~~Statements~~their —inability ~~Note~~to ~~16.~~pay ~~Convertible~~their ~~Notes”~~debts to the Company.

~~Equity in (Losses) Earnings from Unconsolidated Entities~~25

~~Equity~~Long interm ~~(loss)~~crop ~~earnings~~inventory from unconsolidated entities decreased from a gain of $242,183 in the third quarter of 2010 to a loss of $796,727 in the same period of 2011. The increased loss was mainly due to the recognition of the share of equity loss from investment in AXN. On October 18, 2010, the Nuo Hua Affiliate was disposed to an unrelated third party. As a result, the Company was no longer entitled to recognize its equity earnings from the Nua Hua Affiliate.costs

Subsequent to December 31, 2012, pre-harvest agriculture costs, including cultivation, labor, land leasing costs, and other crop and land maintenance activities, will be capitalized if it is probable that future economic benefits from the use of the assets will be increased. These pre-harvest agriculture costs usually require substantial investment in the early stages, gradually decreasing to maintenance costs during the growing stage. During the three months ended March 31, 2013, agricultural costs of $2,361,383 were expensed. During the three months ended March 31, 2012, agricultural costs of $3,395,407 were capitalized.

Equity in Losses from Equity Method Investments

Equity in losses from equity method investments increased from a loss of $191,450 in 2012 to a loss of $968,232 in 2013. The increased loss was mainly due to the recognition of the share of equity losses from investment in AXN, as well as a loss from our share of Yushuntang’s loss in 2013.

Interest Expense, Net

Net interest expense was $1763,~~802,954~~691 ~~for~~in ~~the~~2013, ~~third quarter of 2011~~ compared to net interest expense of $1,~~456~~743,~~062~~270 for ~~the same period of 2010~~2012. The ~~increase~~decrease was mainly due to ~~the~~lower ~~increase~~average balances ~~proceeds~~of ~~from~~convertible ~~short-term~~notes ~~loans~~resulting infrom ~~the~~early ~~third~~retirements ~~quarter~~in ~~of 2011 as compared to~~ the ~~same~~second ~~period~~half of ~~2010~~2012.

Income Tax

The Company’s effective tax rate for ~~the~~2013 ~~third quarter of 2011~~ was ~~(40)~~2%, ~~which~~compared isto ~~an decrease of 76~~3% ~~from 36%~~ in ~~the same period of 2010~~2012. The decrease in effective tax rate for the third quarter of 2011was mainly due to the reverse of the provision for income taxes for the applicable tax rate change of its PRC subsidiaries, GLP, BOKE, Three Happiness, HSPL and CCXA. For additional information, see “Item 1. Financial Statements – — Note 2319. ~~Taxes~~Income Tax”.

RESULTS OF OPERATIONS – NINE MONTHS ENDED SEPTEMBER 30, 2011 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2010

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 quarters ended September 30, 2011 and 2010:

	Nine months Ended September 30,				Nine months Ended September 30,
	2011		2010		2011		2010
			(RESTATED)				(RESTATED)
Revenues	$	159,988,508	$	222,579,024		100%		100%
Cost of sales		83,863,569		107,219,753		52		48
GROSS PROFIT		76,124,939		115,359,271		48		52
Selling, general and administrative expenses		34,577,769		48,326,800		22		22
Advertising costs		10,185,380		26,949,663		6		12
Research and development costs		8,652,455		10,754,394		6		5
Depreciation and amortization expenses		5,359,979		4,902,005		3		2
Debt extinguishment (gain)		(2,666,829)		-		(2)		-
Total operating expenses		56,108,754		90,932,862		35		41
INCOME FROM OPERATIONS		20,016,185		24,426,409		13		11
Equity in earnings (losses) from unconsolidated entities		(857,811)		201,097		-		-
Impairment loss on equity investment		-		(1,083,637)		-		-
Gain (loss) on changes in ownership of unconsolidated entities		658,540		(12,240)		-		-
Interest expense, net		(4,850,651)		(4,393,093)		(3)		(2)
Other income (expenses), net		321,571		(85,340)		-		-
INCOME BEFORE INCOME TAX		15,287,834		19,053,196		10		9
Provision for income taxes		4,091,655		6,578,178		3		3
NET INCOME		11,196,179		12,475,018		7		6
Net (income) loss attributable to non-controlling interest		(14,767)		19,555		-		-
NET INCOME ATTRIBUTABLE TO CONTROLLING INTEREST EARNINGS PER COMMON SHARE	$	11,181,412	$	12,494,573		7%		6%
Basic	$	0.15	$	0.17
Diluted	$	0.15	$	0.17

Revenues

Revenues for the nine months ended September 30, 2011 were $159,988,508, a decrease of $62,590,516, or 28%, compared to revenues for the same period of 2010.

	Nine months Ended September 30,				Increase/		Increase/
	2011		2010		(Decrease)		(Decrease)
Revenue from pharmaceutical products	$	119,969,639	$	181,813,000	$	(61,843,361)		(34)%
Revenue from nutraceutical products		28,110,229		29,894,355		(1,784,126)		(6)%
Total manufacturing revenue		148,079,868		211,707,355		(63,627,487)		(30)%
Distribution revenue		11,908,640		10,871,669		1,036,971		10%
Total revenues	$	159,988,508	$	222,579,024	$	(62,590,516)		(28)%

Revenue in connection with our pharmaceutical products decreased by $61,843,361, or 34%, as compared to 2010 primarily due to the following factors:

● sales from our prescription pharmaceutical products decreased from $88,667,804 for the nine months ended September 30, 2010 to $72,554,541 for the same period of 2011, or a 18% decrease. The decrease was primarily due to the decrease in sales from SHL powder and CCXA’s generic pharmaceutical products and partially offset by the increase in sales from our prescription formulated Jinji capsule; and

● sales from our OTC pharmaceutical products decreased from $93,145,196 for the nine months ended September 30, 2010 to $47,415,098 for the same period of 2011, or a 49% decrease. This was mainly due to the decreased sales volume of GLP’s generic OTC drugs.

We decreased the manufacturing of certain generic drugs since the TCM raw material price for these drugs has continued to increase during this year. Accordingly, we shifted the products mix toward higher-margin products from lower margin products to minimize the impact from the increased cost of certain raw materials and the continuing government price cut on certain products.

Revenue in connection with our nutraceutical products decreased by 6% compared to the same period of 2010. The decrease was mainly due to the decrease in sales from our Soy Peptide tablets and partially offset by the increase in sales from our Soy Peptide drinks which we launched commercially in late 2009. We decreased the advertising for certain old nutraceutical products and focused on new products to achieve optimum efficiency while maintaining strict advertising cost control.

The distribution revenue from Nuo Hua's majority owned subsidiary increased by 10%, to $11,908,640. This increase was mainly attributed to Nuo Hua's expanding market coverage.

Cost of Sales and Gross Profit

Cost of sales was $83,863,569 for the nine months ended September 30, 2011, compared to $107,219,753 in the same period of 2010. Cost of sales in the nine months ended September 30, 2011 and 2010 by segments and product categories were as follows:

	Nine months Ended September 30,				Increase/		Increase/
	2011		2010		(Decrease)		(Decrease)
Pharmaceutical products	$	57,172,135	$	81,646,090	$	(24,473,955)		(30)%
Nutraceutical products		15,396,392		15,029,240		367,152		2%
Total manufacturing cost		72,568,527		96,675,330		(24,106,803)		(25)%
Distribution cost		11,295,042		10,544,423		750,619		7%
Total cost	$	83,863,569	$	107,219,753	$	(23,356,184)		(22)%

Gross profit decreased by $39,234,332, or 34%, for the nine months ended September 30, 2011 compared to the same period of 2010. Gross profit as a percentage of revenues decreased from 52% for the nine months ended September 30, 2010 to 48% in the same period of 2011 mainly due to the new levied urban construction and maintenance tax and educational surcharge.

From December of 2010, the urban construction and maintenance tax and educational surcharge were levied on foreign investment enterprises and foreign enterprises who previously enjoyed the exemption. We recognized the urban construction and maintenance tax and educational surcharge in cost of sales. As a result of the regulation change, our gross margin for the nine months ended September 30, 2011 was affected by approximately 2%.

We continued our efforts to manage the margin pressure although the increased purchase prices of certain raw materials increased the cost of sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased from $48,326,800 for the nine months ended September 30, 2010 to $34,577,769 in the same period of 2011, representing a 28% decrease. The details of our sales and marketing expenses were as follows:

	Nine months Ended September 30,				Increase/		Increase/
	2011		2010		(Decrease)		(Decrease)
Payroll	$	9,511,771	$	9,194,059	$	317,712		3%
Staff welfare and insurance		2,706,948		1,949,786		757,162		39%
Promotional materials and fees		5,913,443		17,884,830		(11,971,387)		(67)%
Trips and traveling		3,116,518		2,866,185		250,333		9%
Shipping		2,714,747		4,045,843		(1,331,096)		(33)%
Stock based compensation		2,514,251		2,311,921		202,330		9%
Professional fees		1,849,396		2,675,680		(826,284)		(31)%
Miscellaneous		6,250,695		7,398,496		(1,147,801)		(16)%
TOTAL	$	34,577,769	$	48,326,800	$	(13,749,031)		(28)%

The decrease in selling, general and administrative expenses for the nine months ended September 30, 2011 compared to the same period of 2010 was primarily due to the following factors:

● the decrease of promotional materials and fees by $11,971,387, or 67%, as compared to the same period of 2010. This was primarily due to the reduction of our promotional activities in relation to SHL powder and generic prescription and OTC drugs;

● the decrease of shipping costs by $1,331,096, or 33%, as compared to the same period of 2010. This was primarily due to the reduction of sales volume of our products; and

● The decrease in selling, general and administrative expenses was partially offset by the increase of payroll expenses and staff welfare and insurance expenses by $317,712 and $757,162, respectfully, which was mainly due to the increase of the average salaries for our staff as a result of China’s increased labor costs and the increase of our staff welfare and insurance coverage and level as required by Chinese labor law.

Advertising Costs

Advertising costs decreased by $16,764,283, or 62%, from $26,949,663 in the nine months ended September 30, 2010 to $10,185,380 in the same period of 2011. Advertising costs as a percentage of revenue decreased from 12% for the nine months ended September 30, 2010 to 6% for the same period of 2011.

We decreased the advertising costs related to some of our OTC generic drugs during the nine months ended September 30, 2011. We continued to invest in advertising to create a unified megabrand for AOBO so that we can leverage on the establishment of all our individual brands to increase brand awareness and market shares.

Research and Development Costs

Research and development costs decreased by $2,101,939, or 20%, from $10,754,394 for the nine months ended September 30, 2010 to $8,652,455 in the same period of 2011. Expressed as a percentage of revenue, research and development costs were 6% and 5% for the nine months ended September 30, 2011 and 2010, respectively.

Depreciation and Amortization

Depreciation and amortization expenses increased by $457,974, or 9%, for the nine months ended September 30, 2011 as compared to the same period of 2010. This was mainly due to the increase of the property, plant and equipment and land use rights during the second half of 2010.

Debt Extinguishment Gain

During the third quarter of 2011, the Company repurchased a total $5,500,000 in principal amount of our convertible Notes for $2,750,000. A gain of debt extinguishment of $2,666,829 was recognized representing the difference between the net carrying value of the notes repurchased and the repurchase price. For additional information, see “Item 1. Financial Statements — Note 16. Convertible Notes”.

Gain (loss) on Changes in Ownership of Unconsolidated Entities

Gain (loss) on changes in ownership of unconsolidated entities includes gain on changes in ownership of AXN.

On June 26, 2011, AXN and six note holders reached an agreement to settle certain outstanding notes and accrued interest there on totaling 42,449,722.63 RMB (approximately USD$6,567,199) by issuing 2,432,296 shares of AXN's common stock at $2.70 per share. As a result, equity interest of AXN owned by the Company decreased from 36.10% to 34.11% while the Company retained a significant influence. A gain of $0.66 million was recognized in the second quarter of 2011 resulting from a reduction in the Company’s ownership interest.

Equity in (Losses) Earnings from Unconsolidated Entities

Equity in (losses) earnings from unconsolidated entities decreased from a gain of $201,097 in the nine months ended September 30, 2010 to a loss of $857,811 in the same period of 2011. The increased loss was mainly due to the recognition of the share of equity losses from investment in AXN. On October 18, 2010, the Nuo Hua Affiliate was disposed to an unrelated third party; as a result, the Company was no longer entitled to recognize its equity earnings from the Nua Hua Affiliate.

Interest Expense, Net

Net interest expense was $4,850,651 for the nine months ended September 30, 2011 compared to net interest expense of $4,393,093 for the same period of 2010. The increase was mainly due to the increase proceeds from short-term loans in the nine months ended September 30, 2011 as compared to the same period of 2010.

Income Tax

The Company’s effective tax rate for the nine months ended September 30, 2011 was 27%, which is a decrease of 8% from 35% in the same period of 2010. The decrease in effective tax rate for the third quarter of 2011was mainly due to the reverse of the provision for income taxes for the applicable tax rate change of its PRC subsidiaries, GLP, BOKE, Three Happiness, HSPL and CCXA. For additional information, see “Item 1. Financial Statements — Note 23. Taxes”.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

Cash

Our cash position at ~~September~~March 3031, ~~2011~~2013 was $836,~~018~~415,~~431~~616, representing a decrease of $11681,~~550~~482,~~089,~~ or 1210%, compared with our cash position of $947,~~568~~097,~~520~~098 at December 31, ~~2010~~2012. The decrease was mainly attributable to ~~the~~approximately ~~decrease of investing activities of~~ $~~39,616,540~~1.8 ~~and~~million ~~partially~~cash ~~offset~~used byin ~~the~~ operating ~~and financing~~ activities ~~of $ 20,787,291 and $1,956,053~~.

We ~~currently generate~~ manage our cash ~~flow~~based ~~through~~on ~~operations.~~thorough Weconsideration ~~expect~~of our ~~existing~~corporate ~~cash~~strategy ~~and~~as ~~cash~~well ~~flow~~as ~~generated~~macroeconomic ~~from operations will be sufficient to sustain our working capital~~considerations, ~~capital expenditures,~~ and ~~milestone payments for the next twelve months. From time to time,~~ we ~~may~~take ~~identify~~into ~~new~~account such ~~expansion~~factors ~~opportunities~~as ~~for~~interest ~~which~~income ~~there~~and ~~will~~foreign becurrency ~~a need to use cash~~fluctuation.

We manage our cash based on thorough consideration of our corporate strategy as well as macroeconomic considerations. Factors we take into account when managing our cash include interest income, foreign currency fluctuation as well as the flexibility in executing our acquisition strategy.Liquidity

~~Working~~Our ~~Capital~~financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. For the three months ended March 31, 2013, we recorded a loss from operations of $19,017,888 and utilized cash in operations of $1,853,209. As of March 31, 2013, we had a working capital deficit of $28,641,009. In addition, we were in default of $49,161,000 of our convertible notes due July 15, 2015. On April 8, 2013, four of the holders of the Notes filed this action claiming a default under the Notes, which allegedly resulted in an acceleration of the maturity of the Notes. The Plaintiffs had previously commenced a similar action in federal court in New Jersey, but that action was withdrawn and the present action was interposed. The action seeks payment of $20,378,608 plus prejudgment interest and other fees and costs. The Company has been served with the complaint, and Plaintiffs agreed to extend the Company’s time to answer. When that time passed on June 3, 2013, Plaintiffs refused to grant additional time and have now made a motion seeking entry of a default. The Company filed its answer on June 5, 2013. We presently do not have the ability to pay these notes. These factors, among others, raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm, in its report on our 2012 financial statements, has raised substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to return to profitability or to develop additional sources of financing or capital. No assurances can be given that we will be successful in obtaining additional financing in the future and any future financing that we may obtain may cause significant dilution to existing stockholders.

WeHistorically, ~~maintain~~our main asource ~~significant~~of ~~level~~cash was through the sales of ~~working~~our ~~capital.~~products, ~~Our~~Common ~~working~~Stock ~~capital~~sales ~~decreased~~and bydebt ~~$16~~financing. However,~~178,910~~ due to ~~$184~~the decrease in sales,~~563,691~~ atour ~~September~~ability to ~~30,~~meet contractual ~~2011,~~obligations asand payables depends ~~compared~~on our ability to ~~$200,742,601~~implement cost atreductions ~~December~~effectively ~~31,~~and ~~2010,~~obtain ~~mainly~~additional ~~due~~financing. toWe abelieve that ~~decrease~~the ongoing economic challenges and uncertainties experienced in ~~cash~~2012 and ~~cash~~the ~~equivalents~~first byquarter ~~$11,550,089,~~of a2013 ~~decrease~~will continue to negatively impact its business in ~~net~~the ~~accounts~~remainder ~~and~~2013. Thus, ~~notes~~we expect ~~receivable~~that byfor ~~$16~~2013 we will continue to generate losses from operations,~~481,681~~ and ~~partially~~our ~~offset~~operating bycash anflows ~~increase~~will ofnot ~~net~~be ~~inventories~~sufficient ofto cover $operating 11expense; therefore,~~535,480.~~ we expect to continue to incur net losses

37To meet our capital needs, we are considering multiple alternatives, including, but not limited to, additional debt financing and credit lines, delaying capital spending for future periods, and/or operating cost reductions. We believe we can utilize our properties and land use rights located in Beijing, China to secure such financing. No assurance can be given that the financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution to shareholders, in case or equity financing.

We have implemented a cost reduction plan that includes decreasing our overhead, research and development, and advertising costs, which we estimate will save us 10% to 15% overall compared to 2012. We do not believe that this initiative will jeopardize our current operations or future growth plans materially. We also plan to delay our capital spending and additional expansion to future periods, including investments in construction in progress.

Our plan to delay our capital spending to future periods includes renegotiating the terms of our capital expenditure commitments, and we do not believe such deferrals would cause us material contractual penalties as we believe the contracts can be renegotiated. We have also examined the structural effect of a delay on the buildings and we believe that they could sustain a delay of at least 2-3 years without comprising overall structural integrity. We have also evaluated our current production lines and expect that they will continue to function through their estimated useful lives.

Furthermore, as of March 31, 2013, we had invested in capitalized agricultural cost for $17,539,278. These pre-harvest agriculture costs usually require substantial investment in the early stages, gradually decreasing to maintenance costs during the growing stage. We expect that the cost required for these crops will be around $2.5 million per year. We anticipate that the crops will benefit the Company’s operation in terms of raw material supply for internal use, as well as profit from selling to the market in 2018.

We have also reviewed all of our current material obligations and expect that we could fulfill all of our material commitments, with the exception of construction contracts which we believe can be renegotiated.

We do not plan to further downsize our operations beyond the cost reductions discussed herein, including selling or closing any of our subsidiaries or suspending any ongoing operations.

Total Debt

We had total of $62,675,737 in debt as of March 31, 2013, as compared to $67,642,849 as of December 31, 2012. The decrease of $4,708,448 was mainly due to a repayment of notes payable during the first quarter of 2013.

Cash Flow

Operating Activities

Cash flows used ~~from~~by operations during the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2013 amounted to $ 201,~~787~~853,~~291~~209, representing ana ~~increase~~decrease ofin cash used of $1319,~~452~~674,~~758~~767 compared with cash flows ~~from~~used for operations of $721,~~334~~527,~~533~~976 for ~~the~~three ~~same~~months ~~period~~ended ofMarch ~~2010~~31, 2012. The ~~increase~~decrease in net cash ~~provided~~used by operating activities was primarily attributable to: ~~the~~(i) ~~increase~~a decrease in ~~changes~~accounts inreceivable ~~operating~~of ~~assets~~$11.7 ~~and~~million ~~liabilities~~in the ~~which~~first ~~aggregated~~quarter toof a2013, ~~net~~(ii) ~~cash~~an ~~inflow~~increase of $~~1,246,431,~~9.7 anmillion ~~increase~~in byinventories ~~$19~~during the first quarter of 2012,~~421,921~~ ~~from~~as athe ~~net~~company ~~cash~~accumulated stock ~~outflow~~using the proceeds of ~~$18,175,490~~collected notes receivable and the sale of the NuoHua affiliate that occurred during the same period, and of(iii) ~~2010.~~a Asdecrease ~~reflected~~ in ~~our~~accrued ~~cash~~expenses ~~flows,~~and ~~the~~other ~~changes~~payables ~~included:~~of $4.4 million in 2012.

● cash inflow from accounts and notes receivable amounted to $16,554,608 mainly affected by the timing of collection of our sales revenue during the fourth quarter of 2010;

● cash outflows from inventories amounted to $11,521,442 and cash outflows from advances to suppliers amounted to $5,326,505 were mainly due to the increased purchases of raw materials for planned inventory buildup; and

● cash outflows from other payables and accrued expenses amounted to $3,853,121 mainly attributed to the timing of payments to the promotion fee accrued in 2010.

Investing Activities

Our net cash ~~used~~provided by in investing activities amounted to $393,~~616~~870,~~540~~787 ~~during~~in the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2013, compared to ~~net~~$25,667,394 in the three months ended March 31, 2012. As reflected in our statement of cash ~~used~~flows, the changes mainly included: (i) the collection of notes receivable in ~~investing~~the ~~activities~~first quarter of 2012 in the amount of $518,~~407~~078,~~949~~344, ~~for~~as compared to $4,207,696 collected in 2013; and (ii) cash inflow from the ~~same~~collection ~~period~~of receivable for the sale of ~~2010.~~the AsNuoHua ~~reflected~~affiliate in ~~our~~the ~~cash~~amount ~~flows~~of $16,495,493 in the ~~changes~~first ~~mainly~~quarter ~~included:~~of 2012.

● cash outflows for the deposit of a long-lived asset acquired, which allow us to have the right to establish a TCM raw material trading center in Northeast China approved by the China’s SFDA amounted to $26,503,473. The investment is intended to be integrated with our competitive infrastructure and whole supply chain management, providing foundation for the Company to start a TCM raw material trading business, offering a long term steadier supply of qualified raw materials with manageable costs.

● cash outflows for purchases of construction in progress of $8,950,290 during the nine months ended September 30, 2011 for the expansion and upgrade of our manufacturing facilities to complement capacity improvement and efficiency enhancement.

Financing Activities

Our net cash ~~provided~~used in ~~from~~ financing activities was $1,~~956~~697,~~053~~326 in the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2013, compared to cash ~~outflow~~provided of $3173,~~848,082~~264 in the ~~same~~three months ~~period~~ended ofMarch ~~2010~~31, 2012. ~~During~~The difference is primarily due to the ~~period,~~repayment weof ~~repaid~~bank loans in the amount of $75,~~157~~060,~~474~~685 during the first quarter of 2013, as compared to bank loans ~~and~~funded ~~received~~in the amount of $123,~~663~~385,~~526~~401 ~~short-term~~in ~~loans~~the first quarter of 2012.

WeIssuance ~~repurchased a total $5,500,000 in principal amount~~ of ~~our~~Common ~~convertible Notes for $2,750,000; we also repurchased 449,163 shares of our common stock at a total cost of $799,999 pursuant to the Share Buyback Program.~~Stock

~~Off~~See ~~-balance~~Part ~~Sheet~~II, ~~Arrangements~~Item 2 for issuance of unregistered shares of common stock.

~~We do not have any off -balance sheet arrangements as of September 30, 2011.~~ Inflation

Contractual Obligations

During the three months ended September 30, 2011, there have been no material changes outside the ordinary course of the Company’s business to the contractual obligations previously disclosed in PART II: ITEM 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

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

We rely largely on operating cash flow to fund our capital expenditure needs. Due to our significant operating cash flow, we believe we have the ability to meet our capital expenditure needs and foresee no delays to planned capital expenditures.

ISSUANCE OF COMMON STOCK

See Part II Item 2.

INFLATION

Inflation has not had a material impact on our business.

~~CURRENCY~~Currency ~~EXCHANGE~~Exchange ~~FLUCTUATIONS~~Fluctuations

The Company's operations are exposed to a variety of global market risks, including the effect of changes in foreign currency exchange rates. These exposures are managed, in part, with the use of a financial derivative. The Company does not use financial derivatives to hedge exposures in the ordinary course of business or for speculative purposes.

We currently conduct substantially all of our operations through our PRC subsidiaries. The functional currency of our PRC subsidiaries is the Chinese RMB. The financial statements of our PRC subsidiaries are translated to U.S. dollars using period-end exchange rates as to assets and liabilities and average exchange rates as to revenues, expenses, and cash flows. Capital accounts are translated at their historical exchange rates when the capital transaction occurred. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity.27

We currently conduct substantially all of our operations through our PRC subsidiaries. The functional currency of our PRC subsidiaries is the Chinese RMB. The financial statements of our PRC subsidiaries are translated to U.S. dollars using year-end exchange rates as to assets and liabilities and average exchange rates as to revenues, expenses, and cash flows. Capital accounts are translated at their historical exchange rates when the capital transaction occurred. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

As the majority of our assets and substantially all of our revenue, costs and expenses are denominated in RMB, any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues and financial condition. For example, if the RMB depreciates against the U.S. dollar, the value of our RMB revenues, earnings, and assets, as expressed in our U.S. dollar financial statements could decline. In addition, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for business purposes, the U.S. dollar equivalent of the RMB we convert would be reduced. On the other hand, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into RMB for our operations, appreciation of the RMB against the U.S. dollar could reduce the amount of the U.S. dollars available.

The local currencies in the countries in which we sell our products may fluctuate in value in relation to other currencies. Such fluctuations may affect the costs of our products sold and the value of our local currency profits. While we are not conducting any operations in countries other than China at the present time, we may expand to other countries and may then have an increased risk of exposure of our business to currency fluctuation.

The PRC government imposes control over the conversion of RMB, into foreign currencies. Under the current unified floating exchange rate system, the People’s Bank of China publishes an exchange rate, which we refer to as the PBOC exchange rate, based on the previous day’s dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency may enter into foreign exchange transactions at exchange rates within an authorized range above or below the PBOC exchange rate according to market conditions.

Pursuant to the Foreign Exchange Control Regulations of the PRC issued by the State Council which came into effect on April 1, 1996, and the Regulations on the Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which came into effect on July 1, 1996, regarding foreign exchange control, conversion of RMB into foreign exchange by Foreign Investment Enterprises, or FIEs, for use on current account items, including the distribution of dividends and profits to foreign investors, is permissible. FIEs are permitted to convert their after-tax dividends and profits to foreign exchange and remit such foreign exchange to their foreign exchange bank accounts in China. Conversion of RMB into foreign currencies for capital account items, including direct investment, loans, and security investment, is still under certain restrictions. On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and added, among other things, an important provision, which provides that the PRC government shall not impose restrictions on recurring international payments and transfers under current account items.

Enterprises in China, including FIEs, which require foreign exchange for transactions relating to current account items, if within a certain limited amount may, without approval of the State Administration of Foreign Exchange, or SAFE, effect payment from their foreign exchange account or convert and pay at the designated foreign exchange banks by providing valid receipts and proofs.

Convertibility of foreign exchange in respect of capital account items, such as direct investment and capital contribution, is still subject to certain restrictions, and prior approval from the SAFE or its relevant branches must be sought.

Between 1994 and 2004, the exchange rate for RMB against the U.S. dollar remained relatively stable, most of the time in the region of approximately RMB8.28 to US$1.00. However, in 2005, the Chinese government announced that it would begin pegging the exchange rate of the RMB against a number of currencies, rather than just the U.S. dollar.

Since a significant amount of our future revenues are expected to be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in China to fund our business activities outside of China, if any, or expenditures denominated in foreign currencies, or our ability to meet our foreign currency obligations, which could have a material adverse effect on our business, financial condition and results of operations. We cannot be certain that the PRC regulatory authorities will not impose more stringent restrictions on the convertibility of RMB with respect to foreign exchange transactions.

We recognized a foreign currency translation adjustment of $160.57 million and $92.76 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2013 and ~~2010~~2012, respectively. The balance sheet amounts with the exception of equity at ~~September~~March 3031, ~~2011~~2013 were translated at 6.~~4018~~2816 RMB to $1.00 USD as compared to 6.~~6118RMB~~ 3161 RMB at December 31, ~~2010~~2012. The equity accounts were stated at their historical rate. The average translation rates applied to the income and cash flow statement amounts for the nine months ended September 30, 2011 and 2010 were 6.5068 RMB and 6.7677 RMB to $1.00 USD, respectively. We do not hedge our exposure to foreign exchange risk; as such, we may in the future experience economic loss as a result of any foreign currency exchange rate fluctuations.

~~ITEM~~The ~~3 –~~average ~~QUANTITATIVE~~translation rates ~~AND~~applied ~~QUALITATIVE~~to ~~DISCLOSURES~~the ~~ABOUT~~income ~~MARKET~~and ~~RISK~~cash flow statement amounts for the three months ended March 31, 2013 and 2012 were 6.2858 RMB and 6.3201 RMB to $1.00 USD, respectively. We do not hedge our exposure to foreign exchange risk; as such, we may in the future experience economic loss as a result of any foreign currency exchange rate fluctuations.

There were no material changes in the Company’s market risk components since December 31, 2010. For a discussion of our market risk, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our 2010 Annual Report on Form 10-K.28

ITEM ~~4 –~~3. ~~CONTROLS~~QUANTITATIVE AND ~~PROCEDURES~~QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~Evaluation~~There were no material changes in the Company’s market risk components since December 31, 2012. For a discussion of ~~Disclosure~~our ~~Controls~~market risk, see “Item 7A. Quantitative and ~~Procedures~~Qualitative Disclosures About Market Risk” in our 2012 Annual Report on Form 10-K.

AsITEM ~~of the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation in accordance with the requirements of applicable U~~4.S. ~~rules. The~~CONTROLS ~~Company’s management,~~AND which includes its Chief Executive Officer and Chief Financial Officer, 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 SEC. The internal audit group made its evaluation pursuant to Rule 13a-15 under the Exchange Act.PROCEDURES

~~Based~~Evaluation ~~upon our evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as~~ of ~~the~~Disclosure Controls ~~Evaluation Date, the Company's disclosure controls~~ and procedures were not effective to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure.Procedures

~~Background~~As of ~~Restatement~~the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation in accordance with the requirements of applicable U.S. rules. The Company’s management, which includes its Chief Executive Officer and Chief Financial Officer, 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 SEC. The internal audit group made its evaluation pursuant to Rule 13a-15 under the Exchange Act.

~~Subsequent~~Based toupon ~~the~~our ~~issuance~~evaluation, our ofChief ~~the~~Executive ~~consolidated~~Officer ~~financial~~and ~~statements~~our Chief Financial Officer concluded that, as of ~~and~~the ~~for~~Evaluation Date, the ~~year~~Company's ~~ended~~disclosure controls ~~December~~and 31procedures were not effective to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, ~~2010~~processed, summarized, and reported within the ~~Company~~time periods specified in the SEC’s ~~Independent~~rules ~~Registered~~and ~~Public~~forms, ~~Accounting~~and ~~Firm~~that such ~~identified~~information ~~accounting~~is ~~errors~~accumulated ~~related~~and communicated to ~~the~~our ~~Company’s~~Chief ~~equity~~Executive ~~investment~~Officer inand ~~Nuo~~Chief ~~Hua~~Financial ~~Affiliate~~Officer to allow timely decisions regarding required disclosure.

~~The~~Description ~~Company and the Audit Committee undertook a review to determine the total amount~~ of the errors and the accounting periods in which the errors occurred and concluded that the Company’s previously-issued 2010 consolidated financial statements and unaudited interim condensed consolidated financial statements as of September 30, 2010, March 31, 2011 and June 30, 2011, should be and, accordingly, have been restated as described in Note 3 to the condensed consolidated financial statements included in Item 1 of the quarterly report on Form 10-Q.Material Weakness

~~The~~A ~~Audit~~material ~~Committee~~weakness in ~~and~~internal ~~the~~control ~~Company’s~~over ~~management~~financial ~~requested~~reporting ~~outside~~is ~~legal~~defined ~~counsel to perform a review of the matter and~~ as a ~~result~~deficiency, itor ~~was~~a ~~determined~~combination ~~that~~of ~~the above-mentioned accounting errors occurred because the Company’s Chief Accounting Officer did not provide adequate disclosures with respect to the transaction at the outset~~deficiencies, ~~received~~in ~~knowingly-falsified~~internal ~~documentation~~control over ~~from~~financial ~~the~~reporting ~~legal~~such ~~representative for Nuo Hua with respect to the transaction, and subsequently provided~~ that ~~documentation~~there tois ~~the~~a ~~Company’s~~reasonable ~~Independent~~possibility ~~Registered Public Accounting Firm in an attempt to provide evidential matter~~ that would appear to appropriately support the transaction to the Company’s Independent Registered Public Accounting Firm with respect to the accounting treatment adopted by the Company for the Nuo Hua Affiliate. The incident and these accounting errors resulted from a ~~design~~material ~~deficiency~~misstatement inof the Company’s ~~controls~~ ~~over~~annual or ~~the~~interim ~~implications~~financial ofstatements ~~and~~will accounting for significant contracts and transactions for which the Chief Accounting Officer had, without oversight, the sole authority. In addition, a design deficiency existed as transactions over a specified threshold were not ~~required to~~ be ~~reported~~prevented toor ~~those~~detected ~~with~~on ~~oversight~~a oftimely ~~the financial reporting process~~basis. ~~Due to the resulting restatement, these deficiencies were determined to be material weaknesses.~~

Management is ~~has~~continuing ~~suspended~~its review of the ~~Chief~~Company’s ~~Accounting~~internal ~~Officer~~control ~~from~~over ~~all~~financial ~~accounting~~reporting ~~and~~as ~~finance~~it ~~responsibilities,~~believes ~~pending~~the ~~completion~~following material weaknesses still exist: (i) a lack of senior management personnel who have the ~~investigation,~~requisite ~~and~~U.S. GAAP experience to prepare financial statements in accordance with U.S. GAAP; (ii) the Company’s ~~legal~~did ~~representative~~not ~~for~~maintain ~~Nuo~~an ~~Hua~~adequate ~~was~~financial ~~terminated~~reporting organizational structure to support the complexity and operating activities of the Company resulting in ~~October~~a ~~2011~~weakness in efficiency and controls related to the financial statement closing process. However, the Company has taken steps described above to remediate these deficiencies.

40In response to the material weakness identified above, management, under the supervision of the Chief Executive Officer and Chief Financial Officer, commenced to implement the measures described below to address the material weakness. This remediation effort is both to address the identified material weakness and to enhance the Company’s overall financial control environment. The material weaknesses identified by management have been remediated.

~~Description~~Changes ofin ~~Material~~Internal Control ~~Weakness~~over Financial Reporting

AThere ~~material~~was ~~weakness~~no change in our internal control over financial reporting isthat ~~defined~~occurred asduring athe ~~deficiency,~~first orquarter ~~a combination~~ of ~~deficiencies,~~the infiscal ~~internal~~year ~~control~~that ~~over~~has ~~financial~~materially affected, ~~reporting~~or ~~such that there~~ is areasonably ~~reasonable~~likely ~~possibility~~to ~~that~~materially aaffect, ~~material~~our ~~misstatement~~internal ofcontrol ~~the~~over ~~Company’s annual or interim~~ financial ~~statements will not be prevented or detected on a timely basis~~reporting.

~~Management~~Remediation ~~identified the following control deficiencies as of December 31, 2010 that constituted material weaknesses:~~plans

·In Aresponse ~~design~~to ~~deficiency in~~ the ~~Company’s~~material weaknesses ~~controls~~identified ~~over~~above, ~~the~~management ~~implications~~commenced ofto ~~and~~implement ~~accounting for significant contracts and transactions for which~~ the ~~Chief~~measures ~~Accounting~~described ~~Officer~~below ~~had,~~to ~~without~~remediate ~~oversight,~~ the ~~sole~~material ~~authority .~~weaknesses:

· ~~The~~Management ~~design~~revised ~~deficiency~~its ~~resulting~~policies ~~from~~and procedures relating to the ~~lack~~identification of significant transactions that will impact its financial accounting and disclosures. This includes the establishment of a ~~threshold~~Disclosure ~~for~~Committee ~~reporting~~consisting ~~significant~~of ~~transactions~~the toChief ~~those~~Executive ~~responsible~~Office, ~~for~~Chief ~~oversight~~Financial Officer, other accounting and operational management as deemed necessary and the Audit Committee financial expert. The responsibility of the Disclosure Committee is to assist the Company’s financial reporting ~~process~~team in ensuring that the accounting consequences of the Company’s material transaction are captured and reflected in the Company’s financial statements on a timely and accurate manner.

~~Each~~· ofManagement ~~these~~established ~~design~~a ~~deficiencies~~reporting ~~was~~threshold ~~determined~~for significant and material transactions to bethose awho ~~material~~are ~~weakness~~responsible for oversight the financial reporting, particularly to the Audit Committee.

~~Our~~· ~~Independent~~Management ~~Registered~~established ~~Public~~a ~~Accounting~~threshold ~~Firm,~~for ~~Ernst~~significant &and ~~Young~~material ~~Hua~~transactions ~~Ming,~~that ~~who~~would ~~also~~require ~~audited~~approval ~~our~~from ~~consolidated financial statements, has issued an adverse opinion on~~ the ~~Company’s~~board ~~internal control over financial reporting, included in Item 9A~~ of ~~the amended annual report on Form 10-K/A~~directors.

~~Changes~~· inManagement ~~Internal~~designed ~~Control~~controls ~~over~~to ~~Financial~~obtain ~~Reporting~~internal certifications from operational management to ensure all important transactions, contracts and agreements have been appropriately disclosed to the Disclosure Committee.

There was no change in our internal control over financial reporting that occurred during the third quarter of the fiscal year that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.29

~~Remediation~~The ~~plans~~material weaknesses identified by management are not remediated as of the date of the filing of this quarterly report on Form 10-Q. The Company has performed additional substantive procedures to ensure that the financial information reflected in this report is supported and the financial statements are fairly presented as of the date of this amended report. The Audit Committee has directed management to develop a detailed plan and timetable for the implementation of the above-referenced remediation measures. In addition, with the oversight of the Audit Committee, management will continue to review and make necessary changes to the overall design of the system of internal controls and the control environment, as well as policies and procedures to improve the overall effectiveness of internal control over financial reporting.

InPART ~~response~~II to– ~~the~~OTHER ~~material weaknesses identified above, management commenced to implement the measures described below to remediate the material weaknesses:~~ INFORMATION

·ITEM ~~Management~~1 is– inLEGAL the process of revising its policies and procedures relating to the identification of significant transactions that will impact its financial accounting and disclosures. This includes the establishment of a Disclosure Committee consisting of the Chief Executive Office, Chief Financial Officer, other accounting and operational management as deemed necessary and the Audit Committee financial expert. The responsibility of the Disclosure Committee is to assist the Company’s financial reporting team in ensuring that the accounting consequences of the Company’s material transaction are captured and reflected in the Company’s financial statements on a timely and accurate manner.PROCEEDINGS

·On ~~Management~~December 6, is2012, inDavid Bravetti filed a shareholder derivative Complaint against Tony Liu, Yanchun Li, Binsheng Li, Jun Min, Lawrence Wizel, Cosimo Patti, Xianmin Wang, Baiqing Zhang, Eileen Brody (collectively, “Defendants”). Because the ~~process~~complaint ofsets ~~establishing~~forth a shareholder derivative claim, the Company is named as a ~~reporting~~nominal ~~threshold~~Defendant, although no relief is sought for ~~significant~~the Company and ~~material~~any relief ~~transactions~~obtained from the Defendants would inure to ~~those~~the ~~who~~benefit ~~are~~of ~~responsible~~the Company. The Complaint asserts causes of action for breach ~~oversight~~of fiduciary duty, waste of corporate assets, and unjust enrichment. Bravetti’s claims arose out of alleged accounting errors that were made in the Company’s financial ~~reporting~~statements for the periods between the third quarters ending September 30, ~~particularly~~2009 and September 30, 2011, which financial statements were included in filings made with the SEC. The alleged accounting errors were related to the ~~Audit~~Company’s ~~Committee~~sale of an interest held by the Company’s subsidiary, Nuo Hua Investment Company Limited and were disclosed in the Company’s Restatement filed on November 14, 2011. The Complaint also alleges that its claims arise out of alleged inconsistencies that the Company’s then auditor, Ernst and Young Hua Ming, discovered throughout the course of the Company’s audit for the year ending 2011. Although the Complaint claims that jurisdiction is proper in federal court in New Jersey because of diversity of citizenship, according to the Complaint, Bravetti is a New Jersey citizen, as is one of the Defendants. The Company did not file a responsive pleading to Bravetti’s Complaint, and subsequent to seeking and obtaining a default against the Company, Bravetti agreed to dismiss his claim and file elsewhere. Subsequently, however, Bravetti “corrected” his complaint now to claim to be a Florida citizen. On March 26, 2013, Bravetti undertook to provide Defendants proof of his citizenship. That proof has been provided, and Defendants have not come to a conclusion whether this was sufficient.

·There ~~Management~~are isno inother ~~the~~known legal ~~process~~proceedings ofagainst ~~designing controls to obtain internal certifications from operational management to ensure all important transactions, contracts and agreements have been appropriately disclosed to~~ the ~~Disclosure Committee~~Company.

~~The~~ITEM ~~material~~1A ~~weaknesses~~– ~~identified~~RISK by management are not remediated as of the date of the filing of this quarterly report on Form 10-Q. The Company has performed additional substantive procedures to ensure that the financial information reflected in this report is supported and the financial statements are fairly presented as of the date of this amended report. The Audit Committee has directed management to develop a detailed plan and timetable for the implementation of the above-referenced remediation measures. In addition, with the oversight of the Audit Committee, management will continue to review and make necessary changes to the overall design of the system of internal controls and the control environment, as well as policies and procedures to improve the overall effectiveness of internal control over financial reporting.FACTORS

41There have been no material changes or new risks since our Annual Report on Form 10-K for the year ended December 31, 2012.

~~PART~~ITEM II2 – ~~OTHER~~UNREGISTERED ~~INFORMATION~~SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~ITEM 1 – LEGAL PROCEEDINGS~~None.

WeITEM ~~are~~3 ~~not~~– ~~currently~~DEFAULTS ~~involved~~UPON 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.SENIOR SECURITIES

~~ITEM~~On 1AJuly –15, ~~RISK~~2008 ~~FACTORS~~the Company issued $115,000,000 of its 5% senior convertible notes. The net proceeds from the sale of the convertible notes were $110,358,550. During the years ended December 31, 2012 and 2011, the Company repurchased a total of $59,339,000 and $6,500,000, respectively, in principal amount of the convertible notes for cash consideration of $18,478,888 and $3,160,004, respectively, leaving an aggregate of $49,161,000 in principal amount outstanding as of March 31, 2013.

~~There~~This ~~have~~liability ~~been~~of nothe Company ~~material~~is ~~changes~~in ordefault, ~~new~~which ~~risks~~was ~~since~~caused ~~our~~by ~~Annual~~the ~~Report~~delisting onof the Company’s common stock by the NYSE as described in Form 1025NSE filed on April 16, 2012 by NYSE; and by the non-Kpayment ~~for~~of the ~~year~~interest ~~ended~~due ~~December~~on 31July 15, ~~2010~~2012. On April 8, 2013, four of the holders of the Notes filed a action claiming a default under the Notes, which allegedly resulted in an acceleration of the maturity of the Notes. The Plaintiffs had previously commenced a similar action in federal court in New Jersey, but that action was withdrawn and the present action was interposed. The action seeks payment of $20,378,608 plus prejudgment interest and other fees and costs. An adverse judgment related to this proceeding would have a material adverse affect on our liquidity.

ITEM 24 – ~~UNREGISTERED~~MINE ~~SALES~~SAFETY ~~OF EQUITY SECURITIES AND USE OF PROCEEDS~~DISCLOSURES

~~The~~Not ~~following summarizes the issuance of our equity securities during the three month ended September 30, 2011:~~applicable.

·ITEM ~~37,030~~5 ~~shares~~– ofOTHER ~~common stock to a consultant for advisory services rendered in 2010.~~INFORMATION

~~The~~Not ~~issuance of the foregoing shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended~~applicable.

~~ITEM 3 – DEFAULTS UPON SENIOR SECURITIES~~30

~~There~~ITEM ~~have~~6 ~~been~~– ~~no material defaults.~~EXHIBITS

~~ITEM~~The 4following –exhibits are ~~(REMOVED~~filed ~~AND~~as ~~RESERVED)~~part of this Quarterly Report on Form 10-Q:

ITEM 5 – OTHER INFORMATION

Exhibit No.		Description

31.1		Certification of Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a – 14(a) of the Securities Exchange Act, as amended

31.2		Certification of Chief Financial Officer (Principal Financial Officer) pursuant to Rule 13a – 14(a) of the Securities Exchange Act, as amended

32		Certification of Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) pursuant to 18 U.S.C. 1350, as adopted.

101.INS		XBRL Instance Document, filed herewith

101.SCH		Document, XBRL Taxonomy Extension, filed herewith

101.CAL		Calculation Linkbase, XBRL Taxonomy Extension Definition, filed herewith

101.DEF		Linkbase, XBRL Taxonomy Extension Labels, filed herewith

101.LAB		Linkbase, XBRL Taxonomy Extension, filed herewith

101.PRE		Presentation Linkbase, filed herewith

~~Not applicable.~~31

~~ITEM 6 – EXHIBITS~~SIGNATURES

~~The~~Pursuant ~~following~~to ~~exhibits~~the ~~are~~requirements ~~filed~~of asthe ~~part~~Securities Exchange Act of 1934, the registrant has duly caused this ~~Quarterly~~report ~~Report~~to be signed on ~~Form~~its ~~10-Q:~~behalf by the undersigned, thereunto duly authorized.

Exhibit No.	Description
31.1	Certification of Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a – 14(a) of the Securities Exchange Act, as amended
31.2	Certification of Chief Financial Officer (Principal Financial Officer) pursuant to Rule 13a – 14(a) of the Securities Exchange Act, as amended
32.1	Certification of Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) pursuant to 18 U.S.C. 1350, as adopted.
101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*

AMERICAN ORIENTAL BIOENGINEERING, INC.

~~_______________~~/s/ Tony Liu TONY LIU CHAIRMAN AND CHIEF EXECUTIVE OFFICER DATED: July 10, 2013 /s/ Yanchun Li YANCHUN LI CHIEF FINANCIAL OFFICER DATED: July 10, 2013

* To be filed by amendment.32

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

AMERICAN ORIENTAL BIOENGINEERING, INC.

/s/ Tony Liu

TONY LIU

CHAIRMAN AND CHIEF EXECUTIVE OFFICER

DATED: November 14, 2011

/s/ Yanchun Li

YANCHUN LI

CHIEF FINANCIAL OFFICER

DATED: November 14, 2011

EXHIBIT INDEX

Exhibit No.	Description
31.1	Certification of Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a – 14(a) of the Securities Exchange Act, as amended
31.2	Certification of Chief Financial Officer (Principal Financial Officer) pursuant to Rule 13a – 14(a) of the Securities Exchange Act, as amended
32.1	Certification of Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) pursuant to 18 U.S.C. 1350, as adopted.
101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*

_______________

* To be filed by amendment.

Filing Compare · AMERICAN ORIENTAL BIOENGINEERING INC