UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

~~x QUARTERLY~~S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~THE~~For ~~SECURITIES~~the ~~EXCHANGE~~Quarterly Period ~~ACT~~Ended OFJune ~~1934~~30, 2012

For the Quarterly Period Ended March 31, 2013

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _________ to _________

Commission file number: 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)

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

Indicate by check mark whether the 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-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 S No o

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

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

On ~~June~~July 1017, 2013, 36,419,706 shares of the registrant’s Common Stock, $0.002 par value and 1,000,000 shares of the registrant’s Class A Preferred Stock, $0.001 par value were outstanding.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

	Page
PART I - FINANCIAL INFORMATION	3
PART I – FINANCIAL INFORMATION	3
ITEM 1 - Financial Statements	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 balance sheet as of June 30, 2012 and condensed consolidated balance sheet as of December 31, 2011	3
Unaudited condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2013 and 2012	5
Unaudited condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2012 and 2011	5
Unaudited condensed statements of cash flow for the three months ended March 31, 2013 and 2012	6
Unaudited condensed statements of cash flow for the six months ended June 30, 2012 and 2011	6
Notes to unaudited condensed consolidated financial statements - March 31, 2013	7
Notes to unaudited condensed consolidated financial statements - June 30, 2012	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	2932
ITEM 4 – Controls and Procedures	2932
PART II – OTHER INFORMATION	3033
ITEM 1 – Legal Proceedings	3033
ITEM 1A – Risk Factors	3034
ITEM 2 – Unregistered Sales of Equity Securities and Use of Proceeds	3034
ITEM 3 – Defaults upon Senior Securities	3034
ITEM 4 – Mine Safety Disclosures	3034
ITEM 5 – Other Information	3035
ITEM 6 – Exhibits	3135
Signatures	3236

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

	MARCH 31,		DECEMBER 31,
	JUNE 30,		DECEMBER 31,
	2013		2012
	2012		2011
	(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	647,~~415~~630,~~616~~035	$	752,~~097~~627,~~098~~928
Restricted cash		34,~~150~~086,~~665~~239		6264,~~514,224~~031
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
Accounts receivable, net of allowance for doubtful accounts of $17,582,516 and $16,354,873 as of June 30, 2012 and December 31, 2011, respectively		46,986,641		53,196,298
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
Bank acceptance notes from customers		4,780,485		27,848,917
Advances to suppliers and prepaid expenses		10,383,510		10,292,360
Inventories, net of provision for slow-moving inventories of $322,226 and $624,516 as of June 30, 2012 and December 31, 2011, respectively		24,452,460		18,889,930
Notes receivable		474,911		4,682,607
Advances to suppliers and prepaid expenses		18,862,185		16,535,191
Deferred tax assets		28,818		28,660
Receivable for disposal of NuoHua Affiliate		–		18,153,754
Other current assets		616,406		719,075
Deferred tax assets		3,197,635		3,225,803
Total current assets		74,786,873		95,448,481
Other current assets		1,311,840		5,168,742
Total current assets		151,307,520		195,910,594
LONG-TERM ASSETS
Property, plant and equipment, net		~~171~~176,~~060~~366,~~254~~854		~~171~~170,~~381~~534,~~389~~450
Land use rights, net		~~145~~157,~~269~~270,~~346~~277		~~145~~157,~~314,~~928,152
Capitalized agricultural costs		1725,~~539~~851,~~278~~659		1722,~~443~~333,~~475~~937
Acquired intangible assets, net		1210,~~607~~090,~~249~~466		1310,~~116~~728,~~380~~658
Investments in and advances to equity method investments		2,350,219		3,337,485
Deposit for intangible assets		3,895,755		–
Deferred financing costs and other		115,045		266,786
Investments in and advances to equity method investments		4,441,725		5,934,422
Total Long-Term Assets		348,941,391		350,860,443
Deferred tax assets		263,796		263,109
TOTAL ASSETS	$	423,728,264	$	446,308,924
Deferred financing costs		968,968		1,347,735
Total long-term assets		379,149,500		369,070,463
TOTAL ASSETS	$	530,457,020	$	564,981,057

See accompanying notes to the condensed consolidated financial statements.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS’ EQUITY

	MARCH 31,			DECEMBER 31,
	JUNE 30,			DECEMBER 31,
	2013			2012
	2012			2011
	(Unaudited)
CURRENT LIABILITIES
Accounts payable	$	922,~~583~~665,~~307~~985		$	1122,~~005~~085,~~423~~545
Accrued expenses and other payables		2017,~~081~~176,~~465~~057			1621,~~339~~201,~~129~~533
Taxes payable		268,559			762,943
Bank acceptance notes to vendors		7,561,991			502,912
Accrued taxes		11,356,056			11,015,810
Taxes payable		–			580,293
Convertible notes, in default		49,161,000			49,161,000
Accrued taxes		9,992,649			8,849,004
Short-term notes payable		6,066,997			11,054,449
Convertible notes, in default		108,500,000			108,500,000
Short-term bank loans		6,~~845~~804,~~390~~120			6,~~807~~756,~~999~~014
Current portion of long-term bank loan		65,108			64,811
Current portion of long-term bank loans		63,980			63,070
Total current liabilities		103,427,882			106,211,564
Deferred tax liabilities		63,833			90,070
Total current liabilities		172,828,615			168,628,441
LONG-TERM LIABILITIES
Long-term bank loan, net of current portion		537,242			554,590
Long-term bank loans, net of current portion		586,753			618,030
Deferred tax liabilities		1214,~~047~~689,~~971~~887			1114,~~956~~572,~~064~~492
Total Long-Term Liabilities		12,585,213			12,510,654
Total long-term liabilities		15,276,640			15,190,522
TOTAL LIABILITIES		~~116~~188,~~013~~105,~~095~~255			~~118~~183,~~722~~818,~~218~~963
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
Preferred stock, $0.001 par value; 2,000,000 shares authorized; 1,000,000 shares issued and outstanding at June 30, 2012 and December 31, 2011, 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, $0.002 par value; 75,000,000 shares authorized; 38,472,938 and 39,476,274 shares issued as of June 30, 2012 and December 31, 2011, respectively; 38,248,356 and 39,251,692 shares outstanding as of June 30, 2012 and December 31, 2011, respectively		77,021			78,952
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
Common stock to be issued (419,082 shares and 132,247 shares as of June 30, 2012 and December 31, 2011, respectively)		388,858			291,333
Additional paid-in capital		~~178~~206,~~497~~653,~~616~~495			~~177~~206,~~974~~591,~~127~~730
Retained earnings		5694,~~982,~~866,631			78137,~~097~~810,~~723~~753
Less: Treasury stock, at cost (224,582 shares as of March 31, 2013 and December 31, 2012)		(799,999	)		(799,999	)
Less: Treasury stock, at cost (224,582 shares as of June 30, 2012 and December 31, 2011)		(799,999	)		(799,999	)
Accumulated other comprehensive income		72,472,289			71,789,958
Less: Prepaid forward repurchase contract		(29,998,616	)		(29,998,616	)
TOTAL SHAREHOLDERS’ EQUITY		307,715,169			327,586,706
Accumulated other comprehensive income		71,710,497			67,723,161
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	423,728,264		$	446,308,924
Total American Oriental Bioengineering, Inc. Shareholders’ Equity		342,898,887			381,698,314
Non-controlling interests		(547,122	)		(536,220	)
TOTAL SHAREHOLDERS' EQUITY		342,351,765			381,162,094
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	530,457,020		$	564,981,057

See accompanying notes to the ~~condensed~~ condensed consolidated financial statements

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012
	2012			2011			2012			2011
Revenues	$	2127,~~006~~446,~~763~~926		$	2554,~~745~~051,~~276~~796		$	53,192,202		$	106,053,906
Cost of sales		1624,~~505~~254,~~888~~680			1828,~~063~~206,~~454~~945			42,318,134			55,133,145
GROSS PROFIT		43,~~500~~192,~~875~~246			725,~~681~~844,~~822~~851			10,874,068			50,920,761
Selling, general and administrative expenses		12,~~476~~060,~~722~~135			11,~~982~~258,~~069~~098			24,042,204			22,497,345
Advertising costs		37,~~645~~976,~~454~~078			63,~~156~~399,~~353~~355			14,132,431			7,220,503
Research and development costs		1,~~407~~729,~~045~~301			13,~~566~~125,~~933~~276			3,296,234			5,826,488
Depreciation and amortization expenses		1,~~864~~578,~~207~~733			21,~~080~~784,~~699~~380			3,659,432			3,555,091
Provision for doubtful accounts		1,763,952			985,786
Provision for reserves and doubtful accounts		2,067,462			–			3,053,248			–
Long term crop inventory costs		2,361,383			–
Total operating expenses		25,411,709			19,567,109			48,183,549			39,099,427
Total operating expenses		23,518,763			22,771,840
INCOME (LOSS) FROM OPERATIONS		(22,219,463	)		6,277,742			(37,309,481	)		11,821,334
LOSS FROM OPERATIONS		(19,017,888	)		(15,090,018	)
Equity in losses from equity method investments		(1,297,597	)		460,900			(1,489,047	)		(61,084	)
Equity in losses from equity method investments		(968,232	)		(191,450	)
Gain on changes in ownership of unconsolidated entities		–			658,540			–			658,540
Interest expense, net		(~~763~~1,~~691~~808,010	)		(1,~~743~~534,~~270~~112	)		(3,551,280	)		(3,047,697	)
Other income (expense), net		~~(13~~67,~~801~~702	)		~~281~~11,~~047~~887			348,749			437,767
LOSS BEFORE INCOME TAX		(20,763,612	)		(16,743,691	)
INCOME (LOSS) BEFORE INCOME TAX		(25,257,368	)		5,874,957			(42,001,059	)		9,808,860
Provision for income taxes		~~351~~510,~~245~~897			~~443~~3,~~068~~169,813			953,965			6,294,668
NET LOSS		(21,114,857	)		(17,186,759	)
NET INCOME (LOSS)		(25,768,265	)		2,705,144			(42,955,024	)		3,514,192
Loss attributable to non-controlling interest		–			29,834
(Income) loss attributable to non-controlling interest		(18,932	)		10,673			10,902			13,679
NET LOSS ATTRIBUTABLE TO AMERICAN ORIENTAL BIOENGINEERING, INC.		(21,114,857	)		(17,156,925	)
NET INCOME (LOSS) ATTRIBUTABLE TO AMERICAN ORIENTAL BIOENGINEERING, INC. COMMON SHAREHOLDERS		(25,787,197	)		2,715,817			(42,944,122	)		3,527,871
OTHER COMPREHENSIVE INCOME
Foreign currency translation gain		~~682~~1,~~331~~395,552			28,~~591~~230,~~784~~413			3,987,336			11,347,751
COMPREHENSIVE LOSS	$	(20,432,526	)	$	(14,565,141	)
COMPREHENSIVE INCOME (LOSS)	$	(24,391,645	)	$	10,946,230		$	(38,956,786	)	$	14,875,622
LOSS PER COMMON SHARE, basic and diluted	$	(0.58	)	$	(0.43	)
EARNINGS (LOSS) PER COMMON SHARE
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, basic and diluted		36,644,288			39,476,274
Basic	$	(0.66	)	$	0.07		$	(1.09	)	$	0.09
Diluted	$	(0.66	)	$	0.07		$	(1.09	)	$	0.09
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		39,310,889			37,337,568			39,393,125			37,394,317
Diluted		39,310,889			38,310,941			39,393,125			38,164,121

See accompanying notes to the ~~condensed~~ condensed consolidated financial statements

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended March 31,
	Six Months Ended June 30,
	2013			2012
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(21,114,857	)	$	(17,186,759	)
Net (loss) income	$	(42,955,024	)	$	3,514,192
Adjustments to reconcile net loss to net cash used in operating activities:
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		35,~~035~~922,~~131~~899			36,~~038~~187,~~486~~334
Amortization of deferred financing costs		97437,~~680~~103			~~218~~464,~~552~~144
Provision for doubtful accounts		1,763,952			985,786
Loss on property, plant and equipment		1,707			9,314
Deferred taxes		91,749			64,512
Provision (recovery) for reserves and doubtful accounts		2,780,471			(147,903	)
Stock-based consulting expenses		–			25,000
Deferred taxes		118,639			(197,610	)
Stock-based compensation expenses		523,489			645,887
Stock-based consulting expenses		32,500			17,796
Independent director stock compensation		37,500			53,250
Stock-based compensation expenses		1,297,935			1,480,721
Equity in losses from equity method investments		968,232			191,450
Independent director stock compensation		97,525			157,333
Equity in (earnings) losses from equity method investments		1,489,047			61,084
Gain on changes in ownership of unconsolidated entities		–			(658,540	)
Changes in operating assets and liabilities:
Accounts receivable		114,~~689~~897,~~541~~830			~~574~~19,~~204~~158,493
Inventories		(15,~~200~~301,~~990~~147	)		(911,~~674~~873,~~838~~125	)
Advances to suppliers and prepaid expenses		(912,~~150~~326,994	)		~~805~~(3,~~386~~814,473	)
Other current assets		~~200~~1,~~668~~951,304			1118,~~912,872~~747
Accounts payable		(1622,~~423,722~~928	)		1,~~300~~322,~~082~~295
Accrued expenses and other payables		3(4,~~723~~135,~~706~~928	)		(4,~~413~~390,~~697~~734	)
Taxes payable		(~~494~~512,~~384~~029	)		~~(648~~1,~~557~~312,983	)
Accrued taxes		340,246			580,408
Other liabilities		–			(2,176,508	)
Net cash used in operating activities		(1,853,209	)		(21,527,976	)
Accrued taxes		1,143,645			1,631,292
Net cash provided by (used in) operating activities		(34,437,589	)		12,176,835
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(~~357~~8,~~988~~034,542	)		(18,~~607~~792,~~702~~954	)
Purchase of intangible assets		–			(52,145	)
Capitalized agricultural costs		(3,395,407	)		–
Capitalized agricultural costs		–			(3,395,407	)
Proceeds from payment of bank acceptance notes from customers		23,068,432			–
Proceeds from repayment of notes receivable		4,207,696			18,078,344
Cash proceeds from disposal of NuoHua affiliate		18,278,815			–
Cash proceeds from disposal of NuoHua affiliate		–			16,495,493
Deposit for long-term assets		(3,895,508	)		(26,902,061	)
Deposit for long-term assets		–			(3,895,508	)
Investments in and advances to equity investments		151			22,986
Investments in and advances to equity investments		21,079			44,319
Proceeds from disposal of property, plant and equipment		–			228
Net cash provided by investing activities		3,870,787			25,667,394
Other		(870	)		–
Net cash provided by (used in) investing activities		26,021,071			(35,671,801	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash		(3,~~363~~822,~~559~~208	)		~~(1,636,032~~–	)
Proceeds from bank loans		–			3,385,401
Proceeds from bank loans and bank acceptance notes to vendors		7,322,431			5,798,115
Repayment of bank loans		(5,060,885	)		(305,502	)
Repayment of bank loans and bank acceptance notes to vendors		(305,502	)		(4,800,875	)
Repurchase of common stock		–(1,270,603	)		(1799,~~270,603~~999	)
Net cash provided by (used in) financing activities		(1,697,326	)		173,264
Net cash provided by financing activities		1,924,118			197,241
Effect of exchange rate changes on cash and cash equivalents		(1,~~001~~494,~~734~~507	)		~~362~~3,~~837~~759,731
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(681,482	)		4,675,519
NET DECREASE IN CASH AND CASH EQUIVALENTS		(4,997,893	)		(19,537,994	)
Cash and cash equivalents, beginning of the period		752,~~097~~627,~~098~~928			5294,~~627~~568,~~928~~520
CASH AND CASH EQUIVALENTS, END OF THE PERIOD	$	647,~~415~~630,~~616~~035		$	5775,~~303~~030,~~447~~526
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest	$	~~111~~3,~~989~~050,773		$	23,~~827~~087,~~561~~991
Cash paid for income taxes	$	~~495~~235,~~052~~864		$	~~192~~2,~~133~~839,910
Non-cash investing and financing activities:
Transfer from construction in progress to property, plant and equipment	$	–		$	122,167
Retirement of treasury shares		1,270,603			–

See accompanying notes to the ~~condensed~~ condensed consolidated financial statements

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED ~~MARCH~~JUNE 3130, ~~2013 AND~~ 2012 AND 2011

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

American Oriental Bioengineering, Inc. (“AOB” or “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”).

Basis of presentation

The accompanying unaudited interim condensed consolidated financial statements of the Company and its subsidiaries as of and for the three ~~months~~and ~~ended~~six ~~March~~months 31ended June 30, ~~2013~~2012 and ~~2012~~2011 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~~June 3130, ~~2013~~2012 and for all periods presented. Information as of December 31, ~~2012~~2011 has been derived from the audited consolidated financial statements of the Company for the year ended December 31, ~~2012~~2011. 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~~2011 filed with the SEC on ~~June~~January 117, 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 consolidated financial statements include the financial statements of American Oriental Bioengineering, Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated 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.

Going Concern

The accompanying consolidated financial statements are prepared under a going concern basis in accordance with USU.S. generally accepted accounting principles (“GAAP”) which contemplates the realization of assets and discharge of liabilities and commitments in the normal course of business. For the ~~three~~six months ended ~~March~~June 3130, ~~2013~~2012, the Company recorded a loss from operations of $1937,~~017~~309,~~888~~481 and utilized cash in operations of $134,~~853~~437,~~209~~589. As of ~~March~~June 3130, ~~2013~~2012, the Company had a working capital deficit of $2821,~~641~~521,~~009~~095. In addition, the Company was in default of ~~$49,161,000 of~~ its convertible notes (the “Notes”) due July 15, 2015 (see Note 1312), which had a balance of $108,500,000 as of June 30, 2012 and $49,161,000 as of the date of this filing. On April 8, 2013, four of the holders of the Notes (the “Plaintiffs”) filed ~~this~~an 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~~which ~~that~~ action was withdrawn and the present action ~~was~~ interposed. The action seeks ~~payment~~ payment of $20,378,608 plus prejudgment interest and other fees and costs. The Company has been served with the complaint, ~~and~~ and Plaintiffs agreed to extend the Company’s time to answer. When that time passed on June 3, 2013, Plaintiffs refused to to grant additional time and have now made a motion seeking entry of a default. The Company filed its answer on June 5, 2013 (see Note 14). The Company presently does not have the ability to pay these ~~notes~~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 financing or capital. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. As a result, the Company’s independent registered public accounting firm, in their report on the Company’s 2012 consolidated financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. The Company’s financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Historically, 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~~ 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 of 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 Company believes it it can utilize its currently unencumbered buildings and land use rights located in Beijing, PRC with an aggregate net book ~~value~~ value of approximately $105,000,000 at(as of March 31, 2013) to secure financing. No assurance can be given that the ~~financing~~ financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on its operations, in the case of debt financing or cause substantial dilution to shareholders, in the case of equity financing.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED ~~MARCH~~JUNE 3130, ~~2013 AND~~ 2012 AND 2011

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~~agricultural 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

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 ~~Level~~carrying 2amounts of -financial ~~defined~~assets and liabilities, such as ~~inputs~~cash and cash equivalents, accounts and notes receivable, short-term bank loans, accounts payable, notes payable and other ~~than~~payables, ~~quoted~~approximate ~~prices~~their infair ~~active~~values ~~markets~~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 ~~either~~reset each ~~directly~~year orbased ~~indirectly~~on ~~observable;~~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 ~~Level~~per ~~3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions~~share

~~The~~Basic ~~carrying~~earnings ~~amounts~~per ofshare ~~financial~~is ~~assets~~computed ~~and~~by ~~liabilities,~~dividing ~~such~~income asavailable ~~cash~~to ~~and~~common ~~cash~~shareholders ~~equivalents,~~by ~~accounts~~the ~~and~~weighted ~~notes~~average ~~receivable,~~number ~~short-term~~of ~~bank~~common ~~loans,~~shares ~~accounts~~outstanding ~~payable,~~during ~~notes payable and other payables, approximate their fair values because of~~ the ~~short maturity of these instruments~~year. The ~~carrying~~ ~~values~~diluted ofearnings ~~long-term~~per ~~loans~~share ~~approximate~~calculation ~~their~~gives ~~fair~~effect ~~values due~~ to ~~the~~all ~~fact~~potentially ~~that~~dilutive ~~the~~common ~~interest~~shares ~~rates on these loans are reset~~outstanding ~~each~~during ~~year~~the ~~based on prevailing market interest rates~~year. The ~~convertible~~following ~~notes~~is ~~are~~a ~~initially~~reconciliation ~~recognized~~of ~~based on residual proceeds after allocation to~~ the ~~derivative~~numerator ~~financial liabilities, if any, at fair value~~ and ~~subsequently~~denominator ~~carried~~used atin ~~amortized cost using~~ the ~~effective~~calculation ~~interest~~of ~~rate~~basic ~~method, with any accrued~~ and ~~unpaid~~diluted earnings ~~interest~~per ~~included~~share ~~under~~available ~~other~~to ~~payables~~common ~~and accrued expenses.~~shareholders:

Earnings per share

	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
EPS Numerator:
Net income (loss), as adjusted	$	(25,787,197	)	$	2,714,880	$	(42,944,122	)	$	3,526,934

EPS Denominator:
Weighted average common shares outstanding - basic		39,310,889			37,337,568		39,393,125			37,394,317
Effect of common stock awards to be issued		–			973,373		–			769,804
Weighted average common shares outstanding - diluted		39,310,889			38,310,941		39,393,125			38,164,121

Earnings (loss) per share - Basic	$	(0.66	)	$	0.07	$	(1.09	)	$	0.09
Earnings (loss) per share - Diluted	$	(0.66	)	$	0.07	$	(1.09	)	$	0.09

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~~June 3130, ~~2013~~2012, common stock equivalents were composed of options convertible into 883,639 shares of the Company’s common stock and notes convertible into 613,~~084~~428,~~282~~218 shares of the Company’s common stock~~. For the three months ended March 31~~, ~~2013~~which ~~and 2012, common stock equivalents~~ have been excluded from the calculation of earnings per share as their effect is anti-dilutive.

~~Impairment~~8

InAMERICAN ~~evaluating~~ORIENTAL ~~long-lived assets for recoverability~~BIOENGINEERING, ~~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~~INC. ~~To the extent that estimated future, undiscounted~~ ~~cash~~AND 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.SUBSIDIARIES

InNOTES ~~evaluating~~TO ~~capitalized agriculture~~THE ~~costs,~~UNAUDITED ~~the~~CONDENSED ~~Company uses its best estimate of the future cash flows expected to result from future market values, yields~~CONSOLIDATED ~~and~~FINANCIAL 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.STATEMENTS

~~The Company’s~~THREE ~~annual~~AND ~~impairment~~SIX ~~testing~~MONTHS isENDED ~~performed~~JUNE in30, ~~the~~2012 AND ~~fourth quarter of each year.~~ 2011

8Impairment

~~AMERICAN~~In ~~ORIENTAL~~evaluating ~~BIOENGINEERING~~long-lived assets for recoverability, ~~INC~~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 ~~AND~~cash ~~SUBSIDIARIES~~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.

~~NOTES~~In TOevaluating ~~THE~~capitalized agriculture ~~UNAUDITED~~costs, ~~CONDENSED~~the ~~CONSOLIDATED~~Company uses its best estimate of the future cash flows expected to result from future market values, yields ~~FINANCIAL~~and ~~STATEMENTS~~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.

~~THREE~~The ~~MONTHS~~Company’s annual ~~ENDED~~impairment ~~MARCH~~testing ~~31,~~is ~~2013~~performed ~~AND 2012~~in the fourth quarter of each year.

~~Newly~~In ~~Adopted~~the ~~Accounting~~fourth ~~Pronouncements~~quarter of 2012, the Company had impairment write-offs to property and equipment and land use rights of $12,577,507 and $10,255,550, respectively, based on their annual review. Also in the fourth quarter of 2012, the Company recorded a write-off related to the estimated recoverability of capitalized agriculture costs of $8,525,587.

In ~~July~~the ~~2012,~~fourth ~~FASB~~quarter ~~issued~~of ~~ASU No. 2012-02~~2011, ~~“Intangibles – Goodwill and Other”. This update presents an entity with~~ the ~~option~~Company ~~to first~~had toimpairment ~~assess qualitative factors to determine whether it is more likely than not that an indefinite~~write-~~lived~~offs ~~intangible asset is impaired as a basis for determining whether it is necessary~~ to ~~perform~~property ~~the~~and ~~quantitative~~equipment, ~~impairment test in accordance with Subtopic 350-30~~goodwill, ~~“Intangibles – Goodwill~~ and ~~Other~~acquired –intangible ~~General~~assets ~~Intangibles~~of ~~Other than Goodwill”. The more-likely-than-not~~$733,688, ~~threshold~~$33,164,121, ~~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~~$6,928,064, ~~2012~~respectively, ~~with~~based ~~early adoption permitted. The Company’s adoption of this update did not have a material effect~~ on ~~its~~their ~~consolidated~~annual ~~financial statements~~review.

InRecent ~~February~~Accounting 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.Pronouncements

~~NOTE~~In 3July 2012, FASB issued ASU No. 2012-02, “Intangibles – ~~CONCENTRATION~~Goodwill OFand ~~RISKS~~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.

~~Concentration~~In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of ~~credit~~Disclosures ~~risks~~about Offsetting Assets and Liabilities. This ASU clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11. This guidance is effective for annual and interim reporting periods beginning January 1, 2013. We do not believe the adoption of this update will have a material effect on our financial position and results of operations.

~~Assets~~In ~~that~~February ~~potentially subject~~2013, the FASB ~~Company~~issued toASU ~~significant~~No. ~~concentration~~2013-02, of“Comprehensive ~~credit~~Income ~~risk~~(Topic ~~primarily~~220): ~~consist~~Reporting of ~~cash~~Amounts ~~and~~Reclassified ~~cash~~Out ~~equivalents,~~of ~~accounts~~Accumulated ~~receivable~~Other ~~and~~Comprehensive ~~prepaid~~Income.” ~~forward~~The ~~repurchase~~new ~~contract.~~guidance Asrequires ofentities ~~March~~to ~~31,~~report ~~2013,~~the ~~substantially~~effect ~~all~~ of ~~the~~significant ~~Company’s~~reclassifications ~~cash~~out ~~and~~of ~~cash equivalents~~accumulated ~~were~~other ~~deposited~~comprehensive inincome ~~financial~~on ~~institutions~~the ~~located~~respective line items in ~~PRC,~~net ~~which~~income ~~management~~unless ~~believes~~the amounts are ofnot ~~high~~reclassified ~~credit~~in ~~quality~~their entirety to net income. ~~Accounts~~For ~~receivable~~ amounts that are ~~typically~~not ~~unsecured~~required ~~and~~to ~~mainly~~be ~~derived~~reclassified ~~from~~in ~~revenue~~their ~~earned~~entirety ~~from~~to ~~customers~~net income in the ~~PRC,~~same ~~which~~reporting period, entities are ~~exposed~~required to ~~credit~~cross-reference ~~risk~~other disclosures that provide additional detail about those amounts. The ~~risk~~ new guidance is ~~mitigated~~effective byprospectively ~~credit~~for ~~evaluations~~all ~~the~~interim ~~Company~~and ~~performs~~annual onperiods ~~its~~beginning ~~customers~~after ~~and~~December ~~its~~15, ~~ongoing~~2012, ~~monitoring~~with ~~process~~early ofadoption ~~outstanding balances~~permitted. The Company’s ~~maintains~~adoption ~~reserves~~of ~~for~~this ~~estimated~~update ~~credit~~did ~~losses,~~not ~~which~~ have ~~generally~~a ~~been~~material ~~within~~effect on its ~~expectations~~consolidated financial statements.

~~Current~~Other ~~vulnerability~~recent ~~due~~accounting pronouncements toissued ~~certain~~by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed ~~other~~by ~~concentrations~~management to have a material impact on the Company's present or future consolidated financial statements.

~~The~~NOTE ~~Company’s operations~~3 ~~may~~– beCONCENTRATION ~~adversely~~OF 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.RISKS

~~Currency~~Concentration ~~convertibility~~of ~~risk~~credit risks

~~The~~Assets ~~Company~~that ~~transacts~~potentially subject the ~~majority~~Company ofto ~~its~~significant ~~business~~concentration inof ~~the~~credit ~~Renminbi~~risk ~~(“RMB”),~~primarily ~~which~~consist isof ~~not~~cash ~~freely~~and ~~convertible~~cash ~~into foreign currencies. On January 1~~equivalents, ~~1994,~~accounts ~~the PRC government abolished the dual rate system~~ receivable and ~~introduced~~prepaid aforward ~~single~~repurchase ~~rate~~contract. ofAs ~~exchange as quoted daily by the People’s Bank~~ of ~~China~~June ~~(the~~30, ~~“PBOC”). However~~2012, ~~the~~substantially ~~unification~~all of the ~~exchange~~Company’s ~~rates~~cash ~~does~~and ~~not~~cash ~~imply that~~equivalents ~~the~~were ~~RMB~~deposited ~~may~~in befinancial ~~readily~~institutions ~~convertible~~located ~~into~~in ~~United~~PRC, ~~States~~which ~~dollars~~management orbelieves ~~other~~are ~~foreign~~of ~~currencies.~~high ~~All~~credit ~~foreign~~quality. ~~exchange~~Accounts ~~transactions continue~~receivable toare ~~take~~typically ~~place~~unsecured ~~either~~and ~~through~~mainly ~~the~~derived ~~PBOC~~from orrevenue ~~other~~earned ~~banks~~from ~~authorized~~customers toin ~~buy~~the ~~and~~PRC, ~~sell~~which ~~foreign~~are ~~currencies~~exposed atto ~~the~~credit ~~exchange~~risk. ~~rates quoted~~The byrisk ~~the~~is ~~PBOC.~~mitigated ~~Approval~~by ofcredit ~~foreign~~evaluations ~~currency payments by~~ the ~~PBOC~~Company orperforms ~~other~~on ~~institutions~~its ~~requires~~customers ~~submitting a payment application form together with suppliers’ invoices, shipping documents~~ and ~~signed~~its ~~contracts.~~ongoing ~~Additionally,~~monitoring ~~the~~process ~~value~~ of ~~the RMB is subject~~outstanding tobalances. ~~changes~~The inCompany ~~central~~maintains ~~government~~reserves ~~policies~~for ~~and~~estimated ~~international~~credit ~~economic~~losses, ~~and~~which ~~political~~have ~~developments~~generally ~~affecting~~been ~~supply~~within ~~and~~its ~~demand in the PRC foreign exchange trading system market~~expectations.

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED ~~MARCH~~JUNE 3130, ~~2013 AND~~ 2012 AND 2011

~~NOTE~~Current 4vulnerability –due ~~ACCOUNTS~~to ~~RECEIVABLE~~certain other concentrations

~~Accounts~~The ~~receivable~~Company’s ~~consist~~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 ~~following:~~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.

	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

Currency convertibility risk

~~Provision~~The ~~for~~Company ~~doubtful~~transacts the ~~accounts~~majority ~~activity~~ 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 ~~follows:~~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.

	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

NOTE 4 – ACCOUNTS RECEIVABLE

Accounts receivable ~~arise~~consist 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.~~following:

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.

	June 30,			December 31,
	2012			2011
Accounts receivable	$	64,569,157		$	69,551,171
Allowance for doubtful accounts		(17,582,516	)		(16,354,873	)
Accounts receivable, net	$	46,986,641		$	53,196,298

~~NOTE~~Accounts 5receivable arise –from ~~INVENTORIES~~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, and reputation among peers 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. The Company estimates that the remaining net receivables will be collected.

~~Inventories~~From time to time we receive bank acceptance notes that are ~~summarized~~payable to the Company from our customers, for goods we sell to those customers. If asthe ~~follows:~~notes are not yet due and payable, we may exchange them at a bank in exchange for notes payable to our suppliers, and deliver those notes to our vendors.

	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

NOTE 5 – INVENTORIES

~~Capitalized~~Inventories ~~agricultural costs~~ are summarized as follows:

	March 31,			December 31,
	June 30,			December 31,
	2013			2012
	2012			2011
Growing crops	$	6,716,785		$	6,643,146
Raw materials	$	6,780,523		$	6,228,319
Payments for long-term crop contracts		6,659,131			6,622,758
Work in process		3,791,975			3,652,867
Prepaid land leasing costs for long-term supply contracts		4,163,362			4,177,571
Finished goods		14,202,188			9,633,260
Capitalized agricultural costs	$	17,539,278		$	17,443,475
Total inventories		24,774,686			19,514,446
Less: provision against slow-moving inventories		(322,226	)		(624,516	)
Inventories, net	$	24,452,460		$	18,889,930

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.10

10AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

~~AMERICAN~~NOTES ~~ORIENTAL~~TO ~~BIOENGINEERING,~~THE ~~INC.~~UNAUDITED CONDENSED CONSOLIDATED ~~AND~~FINANCIAL ~~SUBSIDIARIES~~STATEMENTS

~~NOTES~~THREE TOAND ~~THE~~SIX ~~UNAUDITED~~MONTHS ~~CONDENSED~~ENDED ~~CONSOLIDATED~~JUNE 30, 2012 ~~FINANCIAL~~AND ~~STATEMENTS~~2011

~~THREE~~Capitalized ~~MONTHS~~agricultural ~~ENDED~~costs ~~MARCH~~are ~~31, 2013 AND~~summarized ~~2012~~as follows:

NOTE 6 – ADVANCES TO SUPPLIERS AND PREPAID EXPENSES

	June 30,		December 31,
	2012		2011
Growing crops	$	13,369,623	$	993,126
Payments for long-term crop contracts		–		17,012,586
Prepaid land leasing costs for long-term supply contracts and others		12,482,036		4,328,225
Capitalized agricultural costs	$	25,851,659	$	22,333,937

	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

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. These pre-harvest agricultural costs usually require substantial investment in the early stages, gradually decreasing to maintenance costs during the growing stage. During the six months ended June 30, 2012 and 2011, pre-harvest agricultural costs incurred during the period of $3,395,407 and nil, respectively, were capitalized.

~~Advances~~NOTE to6 ~~suppliers mainly~~– ~~represent~~ADVANCES ~~interest-free~~TO ~~cash deposits paid to suppliers for future purchases of raw materials. Prepaid expenses mainly relate~~SUPPLIERS toAND ~~the~~PREPAID ~~prepaid research and development expenses to external contractors.~~EXPENSES

NOTE 7– PROPERTY, PLANT AND EQUIPMENT

	June 30,		December 31,
	2012		2011
Advances to suppliers	$	14,679,242	$	15,591,318
Prepaid expenses		4,182,943		943,873
Advances to suppliers and prepaid expenses	$	18,862,185	$	16,535,191

~~Property,~~Advances ~~plant~~to ~~and~~suppliers ~~equipment~~mainly ~~consist~~represent interest-free cash deposits paid to suppliers for future purchases of raw materials. Prepaid expenses mainly relate to the ~~following:~~prepaid research and development expenses to external contractors.

	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

NOTE 7 – PROPERTY, PLANT AND EQUIPMENT

~~Depreciation expense for the three months ended March 31~~Property, ~~2013 and 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~~consist ~~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.following:

NOTE 8 – LAND USE RIGHTS

	June 30,			December 31,
	2012			2011
Original cost:
Buildings	$	144,269,955		$	146,410,665
Machinery and equipment		26,948,344			25,851,084
Motor vehicles		2,110,819			2,105,105
Office equipment		3,256,550			3,162,305
Other equipment		5,662,648			1,812,266
Construction in progress		31,805,537			25,264,200
		214,053,853			204,605,625
Less: Accumulated depreciation		(37,686,999	)		(34,071,175	)
Property, plant and equipment, net	$	176,366,854		$	170,534,450

~~Land~~Depreciation ~~use~~expense for ~~rights~~the ~~consist~~six months ended June 30, 2012 and 2011 was $3,390,361 and $2,797,630, respectively. As of June 30, 2012 and December 31, 2011, the net book value of property, plant and equipment pledged as collateral for bank loans was $4,945,396 and $6,249,074, respectively (see Note 11). As of June 30, 2012, the ~~following:~~Company had entered into capital commitments for $16,452,627 within one year and $6,804,120 after one year but within three years (see Note 14).

	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

~~Amortization~~AMERICAN ~~expense for~~ORIENTAL ~~the three months ended March 31~~BIOENGINEERING, ~~2013 and 2012 was $843,122 and $891,151, respectively~~INC. As ofAND 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.SUBSIDIARIES

11NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~AMERICAN~~THREE ~~ORIENTAL~~AND ~~BIOENGINEERING~~SIX MONTHS ENDED JUNE 30, ~~INC.~~2012 AND ~~SUBSIDIARIES~~2011

~~NOTES~~NOTE TO8 ~~THE~~– ~~UNAUDITED~~LAND ~~CONDENSED~~USE ~~CONSOLIDATED FINANCIAL STATEMENTS~~RIGHTS

~~THREE~~Land ~~MONTHS~~use ~~ENDED~~rights ~~MARCH~~consist of ~~31,~~the ~~2013 AND 2012~~following:

NOTE 9– ACQUIRED INTANGIBLE ASSETS

	June 30,			December 31,
	2012			2011
Cost of land use rights	$	173,280,989		$	172,055,852
Less: Accumulated amortization		(16,010,712	)		(14,127,700	)
Land use rights, net	$	157,270,277		$	157,928,152

~~Acquired~~Amortization ~~intangible~~expense ~~assets~~for ~~are~~the ~~summarized~~six months ended June 30, 2012 and 2011 was $1,780,782 and $1,718,737, respectively. As of June 30, 2012 and December 31, 2011, the net book value of land use rights pledged as ~~follows:~~collateral was $20,911,383 and $21,020,381, respectively (see Note 11).

	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

NOTE 9 – ACQUIRED INTANGIBLE ASSETS

~~Amortization~~Acquired ~~expense~~intangible ~~for~~assets ~~the~~are ~~three~~summarized ~~months~~as ~~ended March 31, 2013 and 2012 was $580,781 and $425,804, respectively.~~follows:

The Company conducts impairment tests on a regular basis to determine if the carrying values of acquired intangible assets are in excess of the fair value, and that such assets are active, being used in production of products, or are intended 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.

	June 30,			December 31,
	2012			2011
At cost:
Product licenses	$	9,537,457		$	9,470,024
Trademarks		6,700,182			6,652,810
Patents		3,407,477			3,383,385
Software		187,362			134,259
Liaoning Baicao pharmaceutical trade license		5,560,391			5,521,077
		25,392,869			25,161,555
Less: Accumulated amortization
Product licenses		(7,557,509	)		(7,195,886	)
Trademarks		(5,139,404	)		(4,791,570	)
Patents		(2,501,708	)		(2,400,412	)
Software		(103,782	)		(45,029	)
Liaoning Baicao pharmaceutical trade license		–			–
		(15,302,403	)		(14,432,897	)
Acquired intangible assets, net	$	10,090,466		$	10,728,658

~~NOTE~~Amortization 10expense for –the ~~INVESTMENTS~~six INmonths ~~AND~~ended ~~ADVANCES TO~~June ~~EQUITY~~30, ~~METHOD~~2012 ~~INVESTMENTS~~and 2011 was $714,829 and $1,666,617, respectively.

AtThe Company ~~March~~conducts ~~31,~~impairment ~~2013, the~~tests ~~Company~~on ~~owned~~ a ~~33.7%~~regular ~~equity~~basis ~~interest~~to indetermine ~~AXN,~~if athe ~~49%~~carrying ~~equity~~values ~~interest~~of acquired intangible assets are in ~~Yushuntang~~excess of the fair value, and athat ~~40%~~such ~~equity~~assets ~~interest~~are inactive, ~~Jinji.~~being ~~For the~~used ~~three~~in ~~months~~production ~~ended~~of ~~March 31~~products, ~~2013,~~or ~~the~~are ~~changes~~intended to be utilized in ~~investments~~future production. No impairment charges were recognized in ~~and~~the ~~advances~~six tomonths ~~equity~~ended ~~method~~June ~~investments~~30, ~~are~~2012 ~~summarized~~or ~~as follows:~~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

NOTE 10 – INVESTMENTS IN AND ADVANCES TO EQUITY METHOD INVESTMENTS

~~The~~At ~~Company~~June ~~had previously consolidated the financial statements of Yushuntang as a 55% majority owned subsidiary. Effective December 31~~30, 2012, the ~~Company’s~~ ~~ownership~~Company ~~decreased~~owned ~~below~~a 5033.7% toequity ~~49%~~interest ~~and~~in ~~this~~AXN ~~entity no longer qualified for consolidation~~ and ~~is treated as~~ a ~~long~~40% ~~term~~equity ~~investment using~~interest ~~the~~in ~~equity method~~Jinji. For the ~~three~~six months ended ~~March~~June 3130, 2012, ~~Yushuntang~~the ~~reported revenues of $4,239,862, gross profit of~~changes ~~$324,863,~~in ~~loss~~investments ~~from~~in ~~operations of $67,177,~~ and ~~net~~advances ~~loss~~to ofequity ~~$66,298,~~method ~~which~~investments are ~~included~~summarized inas ~~the accompanying consolidated statement of operations.~~follows:

	AXN			Jinji			Total
Balance, December 31, 2011	$	5,751,495		$	182,927		$	5,934,422
Advances		19,800			(24,485	)		(4,685	)
Income (loss)		(1,489,839	)		792			(1,489,047	)
Foreign currency translations		–			1,035			1,035
Balance, June 30, 2012	$	4,281,456		$	160,269		$	4,441,725

~~AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES~~12

~~NOTES~~AMERICAN TOORIENTAL ~~THE~~BIOENGINEERING, ~~UNAUDITED CONDENSED CONSOLIDATED~~INC. ~~FINANCIAL~~AND ~~STATEMENTS~~SUBSIDIARIES

~~THREE~~NOTES ~~MONTHS~~TO ~~ENDED~~THE ~~MARCH~~UNAUDITED ~~31,~~CONDENSED ~~2013 AND~~CONSOLIDATED ~~2012~~FINANCIAL STATEMENTS

~~NOTE~~THREE 11AND –SIX ~~DEBT~~MONTHS ENDED JUNE 30, 2012 AND 2011

~~At March~~NOTE ~~31, 2013 and December 31, 2012, short-term notes payable due to various banks in the PRC 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 credit extended by the 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 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 $3,150,665 and 6,514,224, respectively.DEBT

At ~~March~~June 3130, ~~2013~~2012 and ~~December~~ December 31, ~~2012~~2011, ~~short-term~~bank ~~loans~~acceptance ~~obtained~~notes ~~from~~to ~~local~~vendors ~~banks~~ were $67,~~845~~561,~~390~~991 and $6502,~~807~~912,~~999,~~ respectively and due at various dates from August 2012 to December 2012. ~~The~~These short-term ~~loans~~notes payable are ~~due~~lines onof ~~various~~credit ~~dates~~extended ~~through~~by ~~November~~the 15banks, ~~2013,~~which in ~~with~~turn ~~interest~~issue ~~ranging~~to ~~from~~the ~~6.00%~~Company a bank acceptance note that can be endorsed and assigned to 6vendors as payments for purchases.~~56%~~ ~~per~~The short-term ~~annum~~notes payable are generally payable within three to six months, and ~~secured~~guaranteed by ~~property,~~the bank. The banks do not charge ~~plant~~interest ~~and~~on ~~equipment~~these ~~and~~notes, ~~land~~but ~~use~~usually ~~rights~~charge ~~owned~~a bytransaction ~~the~~fee ~~Company~~of 0.05% Atof ~~March~~the ~~31,~~total ~~2013~~note ~~and~~value. ~~December~~In 31addition, ~~2012,~~the banks usually require the ~~short-term~~Company ~~loans~~to ~~are secured~~deposit bya ~~property,~~certain ~~plant~~amount ~~and~~of ~~equipment~~cash ~~owned~~at bythe bank as a guarantee deposit which is classified on the ~~Company~~balance ofsheet as $6restricted cash. At June 30,~~124,558~~ 2012 and $6December 31,~~099,734,~~ ~~respectively~~2011, ~~and~~restricted ~~land~~cash ~~use~~as ~~rights~~a ~~owned by~~guarantee for the ~~Company~~notes ofpayable amounted to $204,~~777~~086,~~972~~ 239 and $20264,~~664~~031,~~778,~~ respectively.

At ~~March~~June 3130, ~~2013~~2012 and ~~December~~ December 31, ~~2012~~2011, ~~the~~short-term ~~Company~~loans ~~has~~obtained anfrom ~~outstanding~~local ~~long-term~~banks ~~bank~~were ~~loan of~~ $~~602~~6,~~350~~804,120 and $~~619~~6,~~401~~756,014, respectively. The ~~long~~short-term ~~bank~~loans payable ~~loan~~are ~~bears~~ due on various dates through June 17, 2013, with interest atranging 2from 6.5031% to 6.56% per annum, isand ~~due~~secured by property, plant and equipment and land use rights owned by the Company. At June 30, 2012 and December 31, ~~2021~~2011, ~~and~~the isshort-term loans are secured by property, plant, and equipment ~~with~~owned aby ~~net~~the ~~book~~Company ~~value~~ of $14,~~226~~945,~~600~~396 atand ~~March~~$6,249,074, 31respectively, ~~2013~~and land use rights owned by the Company of $20,911,383 and $21,020,381, respectively.

~~NOTE~~At 12June –30, ~~CONVERTIBLE~~2012 ~~NOTES~~and December 31, 2011, the Company had an outstanding long-term bank loan of $586,753 and $618,030, respectively. The long-term bank loan bears interest at 2.50% per annum, is due December 31, 2021, and is secured by property, plant, and equipment with a net book value of $1,255,164 at June 30, 2012.

OnNOTE ~~July~~12 ~~15,~~– ~~2008~~CONVERTIBLE the Company issued $115,000,000, 5% unsecured senior convertible notes (the “Notes”), due July 15, 2015, for net proceeds of $110,358,550. At March 31, 2013, the Notes are in default, which was caused by the delisting of the Company’s common stock by the New York Stock Exchange (“NYSE”) as described in Form 25NSE filed on April 16, 2012 by NYSE; and by the non-payment of the semiannual interest payment due on July 15, 2012 and January 15, 2013.NOTES

On ~~February~~July 1915, ~~2013, the~~2008 the Company ~~received~~issued a$115,000,000, ~~notice~~5% ofunsecured ~~acceleration~~senior ~~under~~convertible ~~the~~notes ~~terms of~~ (the “Notes.”), ~~The~~due ~~notice~~July ~~was~~15, ~~sent~~2015, byfor ~~certain~~net ~~holders~~ proceeds of ~~the~~$110,358,550. ~~Senior~~ The Notes ~~that~~are ~~together~~in ~~hold~~default, ~~more~~which ~~than~~was ~~25%~~caused ofby the ~~aggregate~~delisting ~~principal amount~~ of the ~~Notes.~~Company’s Ascommon ofstock ~~March~~by ~~31, 2013,~~ the ~~aggregate~~New ~~principal~~York ~~amount~~Stock ofExchange ~~the~~(“NYSE”) ~~Notes,~~as ~~and~~described ~~unpaid,~~in ~~but~~the ~~accrued~~Form ~~interest~~25NSE ~~was~~filed ~~$52~~on April 16,~~330,329.~~ ~~The~~2012 ~~notice~~by ofthe ~~acceleration~~NYSE; ~~resulted~~and inby the ~~principal amount~~non-payment of the ~~Notes~~semiannual ~~plus accrued and all unpaid~~ interest ~~and~~payment ~~accrued~~due ~~and unpaid additional interest~~ on ~~the~~July ~~Notes through February 19~~15, ~~2013,~~ to2012 ~~become~~and ~~immediately~~January ~~due~~15, ~~and payable~~2013.

OnThe ~~April 8,~~Notes ~~2013~~are convertible, at ~~four of~~ the ~~holders~~option of the ~~Notes filed this action claiming a default under the Notes~~holder, ~~which~~at ~~allegedly resulted in~~ an ~~acceleration~~ ofinitial ~~the~~conversion ~~maturity~~price of ~~the Notes~~$9.29 ~~The~~per ~~Plaintiffs~~share, ~~had~~adjusted ~~previously~~to ~~commenced~~$8.08 aon ~~similar~~January 15, ~~action~~2009. inThe conversion ~~federal~~rate ~~court~~is insubject ~~New~~to ~~Jersey, but~~certain ~~that~~adjustments. ~~action~~Holders ~~was~~may ~~withdrawn~~require ~~and~~ the ~~present~~Company ~~action~~to ~~was~~repurchase ~~interposed.~~all ~~The~~or ~~action~~a ~~seeks~~portion ~~payment~~ of ~~$20,378,608~~their ~~plus prejudgment~~Notes ~~interest~~on ~~and~~July 15, ~~other~~2013 ~~fees~~for ~~and~~cash ~~costs.~~at ~~The~~a ~~Company~~price ~~has~~equal ~~been~~to ~~served~~100% ~~with~~of the ~~complaint,~~principal ~~and~~amount ~~Plaintiffs~~of ~~agreed to extend~~ the ~~Company’s time~~notes to ~~answer.~~be ~~When that time passed on June 3~~purchased, ~~2013,~~plus ~~Plaintiffs~~accrued ~~refused to grant additional time~~ and ~~have now made a motion~~ ~~seeking~~unpaid ~~entry~~interest, ofif aany, ~~default.~~up ~~The~~to, ~~Company~~but ~~filed~~excluding, ~~its~~the ~~answer~~repurchase ~~on June 5, 2013~~date.

The ~~Notes are convertible,~~effective atinterest ~~the~~rate ~~option~~ of the ~~holder,~~Notes atfor anthe ~~initial~~six ~~conversion~~months ~~price~~ended ofJune ~~$9.29 per share~~30, ~~adjusted~~2012 toand ~~$8.08~~2011 onwas ~~January 15, 2009~~5. ~~The conversion rate is subject to certain adjustments~~94%. ~~Holders~~Interest ~~may~~cost ~~require~~recognized ~~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 six ~~principal~~months ~~amount~~ended ofJune ~~the notes to be purchased~~30, ~~plus~~2012 ~~accrued~~ and ~~unpaid~~ ~~interest,~~2011 ifwas ~~any~~$2, ~~up to~~712,500 ~~but~~and ~~excluding~~$2,875,000, ~~the repurchase date~~respectively.

~~Through~~Note ~~December~~issuance ~~31,~~costs ~~2012,~~incurred by the Company ~~had~~were ~~repurchased~~deferred aand ~~total~~are ofrecognized ~~$65,839,000~~using inthe ~~principal~~effective ~~amount~~interest ofrate method over the ~~Notes~~term ~~for~~of ~~cash~~the ~~consideration~~Notes. As of ~~$21~~June 30,~~638,892, leaving~~ an2012 ~~aggregate~~and ofDecember ~~$49~~31,~~161~~ 2011,~~000~~ inthe ~~principal~~unamortized ~~amount~~portion ~~outstanding.~~of ~~During~~ the ~~three~~deferred ~~months~~financing ~~ended~~fees ~~March~~was 31$910,632 ~~2013~~ and ~~2012~~$1,347,735, ~~there were no repurchases of Notes~~respectively.

~~The~~NOTE ~~effective~~13 ~~interest rate~~– ~~on the convertible notes for the three months ended March 31, 2013 and 2012 was 5.94% and interest cost recognized~~SHAREHOLDERS’ ~~for the three months ended March 31, 2013 and 2012 was $614,513 and $1,356,250, respectively.~~EQUITY

~~Note~~Common ~~issuance~~Stock 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.Awards

13During the six months ended June 30, 2012 and 2011, the Company recorded selling, general and administrative expenses of $709,555 and $531,445, respectively, of stock based compensation cost based on the vesting of the common stock awards granted to employees in prior periods. The total fair value of the stock awards granted to employees at the respective grant dates was $5,665,538, of which the unrecognized portion of $3,012,482 at June 30, 2012 is expected to be recognized following the straight-line method over the remaining weighted average vesting period of 2.9 years.

~~AMERICAN~~During ~~ORIENTAL~~the ~~BIOENGINEERING~~six months ended June 30, ~~INC~~2012 and 2011, the Company recorded research and development costs of $32,500 and $17,796, respectively, of stock based compensation cost based on the vesting of the common stock awards granted to consultants in prior periods. The unamortized ~~AND~~value ~~SUBSIDIARIES~~of $1,250 as of June 30, 2012 will be fully amortized in the third fiscal quarter of 2012.

~~NOTES~~During TOthe ~~THE~~six ~~UNAUDITED~~months ended ~~CONDENSED~~June ~~CONSOLIDATED~~30, 2012 and 2011, the Company recorded selling, general and administrative expenses of $97,525 and $157,333, respectively ~~FINANCIAL~~of ~~STATEMENTS~~earned director share-based compensation. Independent directors earned common stock awards on a monthly basis, with grants generally made in the following year for shares earned. Shares earned but not granted are reflected in “Common Stock to be issued” on the accompanying condensed consolidated financial statements. During the six months ended June 30, 2012 and 2011, the Company did not issue any shares of common stock related to the director awards.

~~THREE MONTHS ENDED MARCH 31, 2013 AND 2012~~13

~~NOTE~~AMERICAN 13ORIENTAL –BIOENGINEERING, ~~SHAREHOLDERS’~~INC. ~~EQUITY~~AND SUBSIDIARIES

~~Common~~NOTES ~~Stock~~TO ~~Awards~~THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~During~~THREE ~~the~~AND ~~three~~SIX ~~months ended~~MONTHS ~~March~~ENDED ~~31,~~JUNE ~~2013 and 2012~~30, ~~the Company recorded selling, general and administrative expenses of $352,097 and $351,697, respectively,~~2012 ofAND stock based compensation cost based on the vesting of the common stock awards granted to employees in prior periods. The total fair value of the stock awards granted to employees at the respective grant dates was $5,665,538, of which the unrecognized portion of $2,165,306 at March 31, 2013 is expected to be recognized following the straight-line method over the remaining weighted average vesting period of 2.4 years. 2011

~~During~~Stock the three months ended March 31, 2013 and 2012, the Company recorded research and development costs of nil and $25,000, respectively, of stock based compensation cost based on the vesting of the common stock awards granted to consultants in prior periods. At March 31, 2013, these common stock awards were fully amortized. options

~~During~~The Company calculates the ~~three~~estimated ~~months~~fair value of granted options on the grant date, using the Black-Scholes-Merton Option Pricing Model. During the six months ended ~~March~~June 3130, ~~2013~~2012 and ~~2012~~2011, the Company recorded selling, general and administrative expenses of $37588,~~500~~380 and $53949,~~250~~276, ~~respectively~~ respectively, of ~~earned~~stock ~~director share-~~based compensation. ~~Independent~~based ~~directors~~on ~~earned~~the ~~common~~vesting ~~stock~~of ~~awards~~options ongranted ato ~~monthly~~employees ~~basis,~~in ~~with~~prior ~~grants~~periods. ~~generally~~The total fair ~~made~~value inof the ~~following~~options ~~year~~granted ~~for~~to ~~shares~~employees ~~earned.~~at ~~Shares~~the ~~earned~~respective ~~but~~grant ~~not~~dates ~~granted~~was ~~are~~$9,194,987, ~~reflected~~of inwhich ~~“Common~~the ~~Stock~~unrecognized toportion beof ~~issued”~~$894,007 onis ~~the~~expected ~~accompanying~~to ~~condensed~~be ~~consolidated~~recognized ~~financial~~following ~~statements. During~~ the ~~three~~straight-line ~~months~~method ~~ended~~over ~~March 31, 2013 and 2012,~~ the ~~Company did~~remaining ~~not~~weighted ~~issue~~average ~~any~~vesting ~~shares~~period of ~~common~~0.7 ~~stock~~years as ~~related~~of toJune ~~the~~30, ~~director awards~~2012.

~~Stock~~The ~~options~~following table summarizes the stock option activities of the Company:

The Company calculates the estimated fair value of granted 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.

			Weighted
			Average
	Activity		Exercise Price
Outstanding as of January 1, 2012		883,639		15.70
Granted		–		–
Exercised/ Cancelled/Forfeited		–		–
Outstanding as of June 30, 2012		883,639	$	15.70

Vested and expected to vest as of June 30, 2012		883,639

The following table summarizes ~~the~~information about stock ~~option~~options ~~activities~~outstanding as of ~~the~~June ~~Company~~30, 2012:

						Weighted
		Options Outstanding					Options Exercisable
						Average
					Weighted
			Activity			Exercise Price
			Weighted		Average			Weighted
	Outstanding as of January 1, 2012			883,639		$	15.70
			Average		Remaining			Average
	Granted			–			–
		Number of	Exercise		Contractual Life		Number of	Exercise
	Exercised			–			–
Range of Exercise Prices		Shares	Price		(in years)		Shares	Price
	Cancelled/Forfeited			–			–
$17.08 - 21.48		416,350	$	20.04	4.92		389,080	$	20.04
	Outstanding as of December 31, 2012			883,639			15.70
$9.90 - 16.70		323,040	$	13.53	6.07		228,402	$	13.53
	Granted			–			–
$8.02		144,249	$	8.02	6.54		86,549	$	8.02
	Exercised			–			–
		883,639					704,031
	Cancelled/Forfeited			–			–
	Outstanding as of March 31, 2013			883,639		$	15.70
	Vested and expected to vest as of March 31, 2013			883,639

14Options granted have no intrinsic value at the grant date and at the date of these financial statements as the exercise price of all vested and unvested options was greater than the market price of the Company’s Common Stock.

~~AMERICAN~~The ~~ORIENTAL~~weighted ~~BIOENGINEERING~~average value per share of the 883,639 ~~INC~~options issued under the Company’s 2006 Plan is $10. ~~AND~~41 ~~SUBSIDIARIES~~per share.

~~NOTES~~Treasury ~~TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~Stock

~~THREE~~During ~~MONTHS~~the ~~ENDED~~six ~~MARCH~~months ended 31June 30, ~~2013~~2012, ~~AND~~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.

~~The~~NOTE ~~following~~14 ~~table summarizes~~– ~~information~~COMMITMENTS ~~about~~AND ~~stock options outstanding as of March 31, 2013:~~CONTINGENCIES

	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

Commitments

~~Options~~As ~~granted~~of ~~have~~June 30, 2012, nothe ~~intrinsic~~Company ~~value~~had atentered ~~grant~~into ~~date~~capital ~~and~~commitments atfor the ~~date~~manufacturing facilities under construction in the People’s Republic of ~~these~~China. ~~financial~~The ~~statements~~capital ascommitments were $16,452,627 within one year and $6,804,120 after one year but within three years. In addition, the ~~exercise~~Company ~~price~~had research and development commitments of $6,644,619, all ~~vested~~within one year, and ~~unvested~~purchase commitments for ~~options~~Millettia ~~was~~of ~~higher~~$2,348,716 ~~than~~within ~~the~~one ~~market~~year ~~price~~and of$4,445,334 ~~the~~after ~~Company’s~~one ~~Common~~year ~~Stock~~but within three years.

The ~~weighted~~Company ~~average~~also has ~~value~~an ~~per~~unconditional ~~share~~purchase ofcommitment in connection with the ~~883~~Millettia long-term supply contracts,~~639~~ ~~options~~which ~~issued~~is ~~under~~not expected to be harvested until after 2018 (See 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 June 30, 2012, the Company’s ~~2006~~had ~~Plan~~a iscommitment to pay maintenance fees of approximately $~~10.41~~111,000 (RMB 700,000) per ~~share~~year from 2013 to 2019 related to the XSB long-term supply contract.

~~Treasury Stock~~14

~~During~~AMERICAN ~~the~~ORIENTAL ~~three months ended March 31~~BIOENGINEERING, ~~2012, 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~~INC. ~~During 2011, the Company repurchased 224,582 shares of its common stock at a total cost of $799,999 that were retired~~ inAND ~~May 2013.~~ SUBSIDIARIES

~~NOTE~~NOTES 14TO –THE ~~COMMITMENTS~~UNAUDITED ~~AND~~CONDENSED ~~CONTINGENCIES~~CONSOLIDATED FINANCIAL STATEMENTS

~~Commitments~~THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011

AsLegal 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.proceedings

~~The~~As ~~Company~~of ~~also~~June ~~has~~30, 2012 anand ~~unconditional~~December ~~purchase~~31, ~~commitment~~2011, inthe ~~connection~~Company ~~with~~was ~~the~~subject ~~Millettia~~to ~~long-term~~various ~~supply~~legal ~~contracts,~~proceedings ~~which~~and isclaims. ~~not~~Management ~~expected~~continues to beevaluate ~~harvested~~the lawsuits ~~until~~discussed ~~after~~below ~~2018~~and ~~(note~~based ~~5).~~on ~~The~~the ~~purchase~~stage ~~amount~~of ~~will~~these beproceedings, ~~based~~management onis ~~fair~~unable ~~value~~to ~~discounted~~reasonably atestimate athe ~~pre-determined~~likelihood ~~rate~~of ~~pursuant~~any loss toor the ~~long-term~~ ~~supply~~amount ~~contracts~~or range of any potential loss that could result from the litigation. Therefore, Atat ~~March~~June 30, 2012 and December 31, ~~2013~~2011, no accrual has been established for any potential loss in connection with these lawsuits. Should the Company fail ~~had~~to aprevail ~~commitment~~in toany ~~pay~~of ~~maintenance~~these ~~fees~~legal matters or should several of ~~approximately~~these ~~$111,000~~legal ~~(RMB~~matters be resolved against the Company in the same ~~700~~reporting period,~~000)~~ ~~per~~the ~~year~~operating ~~from~~results ~~2013~~of toa ~~2019~~particular ~~related~~reporting toperiod ~~the~~could ~~XSB~~be ~~long-term~~materially ~~supply~~adversely ~~contract~~affected.

~~Legal~~On ~~proceedings~~June 23, 2010, Haining Zhang asserted breach of contract, fraudulent dealing, and breach of fiduciary duty claims against the Company and its Chief Executive Officer, Shu Jun Liu (together “Defendants”). Zhang’s claims arose out of an alleged 2003 investment banking advisory and consultant agreement, whereby Zhang allegedly arranged for the Company to receive an equity line of credit and was allegedly given the exclusive right to arrange financing transactions for the Company for a period of one year. Zhang sought damages for allegedly unpaid financing commission and advisory compensation in the amount of $2,410,000, plus interest and expenses. On September 12, 2011, the District Court granted a motion by Defendants to dismiss Zhang’s claims as either barred by the applicable statute of limitations or as failing to state a claim. Zhang filed a notice of appeal on October 11, 2011. On April 23, 2013, the Second Circuit Court of Appeals affirmed the District Court’s dismissal of Zhang’s claims. Although Zhang has 90 days from the date of the Second Circuit’s decision in which to seek an appeal to the United States Supreme Court, the Company does not believe the Supreme Court would hear an appeal of Zhang’s case.

AsOn ~~of March~~June 3122, ~~2013~~2012, ~~and~~a putative ~~December~~class ~~31,~~action ~~2012,~~complaint ~~the~~was ~~Company~~filed ~~was~~by ~~subject~~Kevin toMcGee ~~various~~against ~~legal~~American ~~proceedings~~Oriental ~~and~~Bioengineering ~~claims~~Inc., ~~Management~~Eileen ~~continues~~Brody, toBinsheng ~~evaluate~~Li, ~~the~~Yangchun ~~lawsuits~~Li, ~~discussed~~Tony ~~below~~Liu, Cosimo Patti, Xianmin Wang, and ~~based~~Lawrence onWizel alleging violations of Section 10b of the ~~stage~~Securities Exchange Act of ~~these~~1934 ~~proceedings~~and liability pursuant to Section 20(a) thereunder. The complaint, ~~management~~as issubsequently ~~unable~~amended to(see ~~reasonably~~below) ~~estimate~~centers on the ~~likelihood~~accounting treatment of ~~any~~the ~~loss~~sale orof ~~the~~an ~~amount~~interest orheld ~~range~~by ofthe ~~any~~Company’s ~~potential~~subsidiary, ~~loss~~Nuo ~~that~~Hua ~~could~~Investment ~~result~~Company ~~from~~Limited and the ~~litigation~~Company’s Restatement filed on November 14, 2011. ~~Therefore~~ Several motions were filed for appointment as lead plaintiff, and aton ~~March~~October 3116, ~~2013~~2012, the Court appointed lead plaintiff, consolidated the cases, and ~~December~~ordered 31that a consolidated complaint be filed, which occurred on November 19, 2012. The served defendants (AOB, noBrody, ~~accrual~~Wizel ~~has~~and ~~been~~Patti) ~~established~~moved ~~for~~to ~~any~~dismiss ~~potential~~the ~~loss~~consolidated incomplaint, and ~~connection~~on March 25, 2013 those motions were granted with ~~these~~leave ~~lawsuits~~to amend. On April 15, 2013, Plaintiffs filed a Second Amended Complaint, ~~Should~~which the ~~Company~~served ~~fail~~Defendants moved to ~~prevail~~dismiss inon ~~any~~May of15, ~~these~~2013. ~~legal~~In ~~matters~~the orinterim, ~~should~~the ~~several~~Court granted Plaintiffs’ motion for leave to serve most of ~~these~~the ~~legal~~remaining ~~matters~~Defendants beby ~~resolved~~alternative ~~against~~means, and on May 15, 2013, the parties entered into a stipulation consenting to the ~~Company~~filing inof a Third Amended Complaint (“TAC,” setting forth no new paragraphs), deeming the ~~same~~TAC ~~reporting~~served ~~period~~on all defendants, deeming the ~~operating~~motion ~~results~~to ofdismiss athe ~~particular~~Second ~~reporting~~Amended ~~period~~Complaint ~~could~~interposed beagainst ~~materially~~the ~~adversely~~TAC, and reserving all rights of ~~affected~~the un-served Defendants.

15See Note 17 for a description of additional legal proceedings against the Company initiated subsequent to June 30, 2012.

~~AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES~~15

~~NOTES~~AMERICAN TOORIENTAL ~~THE~~BIOENGINEERING, ~~UNAUDITED CONDENSED CONSOLIDATED~~INC. ~~FINANCIAL~~AND ~~STATEMENTS~~SUBSIDIARIES

~~THREE~~NOTES ~~MONTHS~~TO ~~ENDED~~THE ~~MARCH~~UNAUDITED ~~31,~~CONDENSED ~~2013 AND~~CONSOLIDATED ~~2012~~FINANCIAL STATEMENTS

OnTHREE ~~June~~AND ~~22,~~SIX ~~2012, a~~MONTHS ~~putative~~ENDED ~~class~~JUNE ~~action complaint was filed by Kevin McGee against American Oriental Bioengineering Inc~~30, 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(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~~AND 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.2011

OnNOTE ~~October~~15 1,– ~~2012, Peter~~SEGMENT Barbato 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. REPORTING

OnFor 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~~three ~~sets forth a~~months ~~shareholder~~ended ~~derivative~~June 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~~2012 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~~segments ~~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. follows:

On April 8, 2013, four of 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.

	Three Months Ended June 30,
	2012			2011
Manufacturing Segment
Revenue from pharmaceutical products	$	15,887,829		$	40,731,379
Revenue from nutraceutical products		1,285,884			9,549,718
Total manufacturing revenue		17,173,713			50,281,097
Cost of sales		14,668,068			24,551,570
Depreciation and amortization expense		1,064,123			1,316,189
Selling, general and administrative expenses, research and development costs and advertising costs		17,935,432			14,108,181
Provision for reserves and doubtful accounts-manufacturing segment		1,315,842			–
Operating (loss) income of manufacturing segment		(17,793,664	)		7,892,526
Distribution Segment
Distribution revenue		10,273,213			3,770,699
Cost of sales		9,586,612			3,655,375
Depreciation and amortization expense-distribution segment		47,911			(25,147	)
Provision for reserves and doubtful accounts-distribution segment		713,150			–
Operating (loss) income of distribution segment		(777,573	)		769,372

Reconciliation to Consolidated Net Income Attributable to Controlling Interest:
Net (loss) income for reportable segments		(18,571,237	)		8,661,898
Net loss for non segment subsidiaries		(7,215,960	)		(5,947,018	)
Consolidated Net (Loss) Income Attributable to Controlling Interest	$	(25,787,197	)	$	2,714,880

~~There~~For ~~are~~the nosix ~~other known~~months ~~legal~~ended ~~proceedings~~June ~~against~~30, 2012 and 2011, the Company.’s segments were as follows:

	Six Months Ended June 30,
	2012			2011
Manufacturing Segment
Revenue from pharmaceutical products	$	30,111,084		$	79,693,360
Revenue from nutraceutical products		3,211,136			19,335,518
Total manufacturing revenue		33,322,220			99,028,878
Cost of sales		23,951,747			48,386,723
Depreciation and amortization expense		2,626,337			2,625,860
Selling, general and administrative expenses, research and development costs and advertising costs		34,148,569			30,031,860
Provision for reserves and doubtful accounts-manufacturing segment		1,981,978			–
Operating (loss) income of manufacturing segment		(29,370,323	)		14,897,241
Distribution Segment
Distribution revenue		19,869,982			7,025,028
Cost of sales		18,366,387			6,746,422
Depreciation and amortization expense-distribution segment		97,252			50,019
Provision for reserves and doubtful accounts-distribution segment		713,150			–
Operating (loss) income of distribution segment		(835,755	)		835,288

Reconciliation to Consolidated Net Income Attributable to Controlling Interest:
Net (loss) income for reportable segments		(30,206,078	)		15,732,529
Net loss for non segment subsidiaries		(12,738,044	)		(12,205,595	)
Consolidated Net (Loss) Income Attributable to Controlling Interest	$	(42,944,122	)	$	3,526,934

~~AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES~~16

~~NOTES~~AMERICAN TOORIENTAL ~~THE~~BIOENGINEERING, ~~UNAUDITED CONDENSED CONSOLIDATED~~INC. ~~FINANCIAL~~AND ~~STATEMENTS~~SUBSIDIARIES

~~THREE~~NOTES ~~MONTHS~~TO ~~ENDED~~THE ~~MARCH~~UNAUDITED ~~31,~~CONDENSED ~~2013 AND~~CONSOLIDATED ~~2012~~FINANCIAL STATEMENTS

~~NOTE~~THREE 15AND –SIX ~~SEGMENT~~MONTHS ~~REPORTING~~ENDED JUNE 30, 2012 AND 2011

~~For~~All ~~the~~operating ~~three months~~revenues ~~ended~~comprise ~~March~~amounts ~~31,~~received ~~2013~~from ~~and~~external ~~2012,~~third party customers. All of the Company’s ~~segments~~operations ~~were~~are aslocated ~~follows:~~in the PRC.

	Three Months Ended March 31,
	2013			2012
Manufacturing Segment
Revenue from pharmaceutical products	$	11,742,769		$	14,223,255
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	)

As of June 30, 2012 and December 31, 2011, total assets of the manufacturing and distribution segments are as follows:

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

	June 30,		December 31,
	2012		2011
Manufacturing	$	322,780,973	$	396,854,361
Distribution		19,874,358		51,672,762
Corporate		187,801,689		116,453,934
Total assets	$	530,457,020	$	564,981,057

AsNOTE of16 ~~March~~– ~~31,~~INCOME ~~2013 and December 31, 2012, total assets of the manufacturing and distribution segments are as follows:~~TAX

	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

The provisions for income taxes for the six months ended June 30, 2012 and 2011 are summarized as follows:

NOTE 16 – INCOME TAX

	Six Months Ended June 30,
	2012		2011
Current tax provision-PRC	$	835,326	$	6,492,278
Deferred taxes-PRC		118,639		(197,610	)
Total provision for income taxes	$	953,965	$	6,294,668

The reconciliation ~~provisions~~of ~~for~~tax ~~income~~computed ~~taxes~~by ~~for~~applying the ~~three~~statutory ~~months~~income ~~ended~~tax ~~March~~rate ~~31,~~applicable ~~2013~~to ~~and~~the ~~2012~~PRC ~~are~~operations ~~summarized~~to income tax expenses was as follows:

	Three Months Ended March 31,
	Six Months Ended June 30,
	2013			2012
	2012			2011
Current tax provision-PRC	$	259,496		$	378,556
Income tax provision (benefit) at PRC statutory tax rate of 25%	$	(10,500,265	)	$	2,451,981
Deferred taxes-PRC		91,749			64,512
Preferential PRC tax rate of 10%		2,923,955			205,349
Total provision for income taxes	$	351,245		$	443,068
Effect of different tax rates on non-PRC operations		1,434,595			984,932
Non-recognition of income tax benefit for current year losses		4,315,479			1,480,818
Provision for taxes on deemed interest income		752,374			946,212
Non-deductible expenses in current year		956,016			–
Other permanent differences		1,071,811			225,376
Total provision for income taxes	$	953,965		$	6,294,668

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED ~~MARCH~~JUNE 3130, ~~2013 AND~~ 2012 AND 2011

The ~~reconciliation~~ tax effects of ~~tax~~temporary ~~computed~~differences that bygive ~~applying~~rise to the ~~statutory~~Company’s ~~income~~net deferred tax ~~rate~~liabilities ~~applicable~~as toof ~~the~~June ~~PRC~~30, ~~operations~~2012 toand ~~income~~December ~~tax~~31, ~~expenses~~2011 ~~was~~were as follows:

	Three Months Ended March 31,
	June 30,			December 31,
	2013			2012
	2012			2011
Income tax benefit at PRC statutory tax rate of 25%	$	(5,190,903	)	$	(4,185,923	)
Deferred tax assets
Preferential PRC tax rate of 10%		1,593,723			1,124,263
Current
Effect of different tax rates on non-PRC operations		488,773			572,665
Provision for doubtful accounts receivable	$	2,632,028		$	2,751,092
Non-recognition of income tax benefit for current year losses		2,147,901			1,950,513
Expenses deductible in current period		565,607			474,711
Provision for taxes on deemed interest income		323,917			364,925
Total current deferred tax assets		3,197,635			3,225,803
Non-deductible expenses in current year		1,022,724			165,480
Non-current
Other permanent differences		(34,890	)		451,145
Amortization		41,924			79,151
Total provision for income taxes	$	351,245		$	443,068
Impairment of fixed assets		221,872			183,958
Total non-current deferred tax assets		263,796			263,109
Total deferred tax assets		3,461,431			3,488,912
Deferred tax liabilities
Current
Excess accrual of welfare		(63,833	)		(63,382	)
Other		–			(26,688	)
Total current deferred tax liabilities		(63,833	)		(90,070	)
Non-current
Amortization		(7,082,928	)		(948,322	)
Depreciation		(682,885	)		(128,771	)
Step up of acquired assets		(6,924,074	)		(13,495,399	)
Total non-current deferred tax liabilities		(14,689,887	)		(14,572,492	)
Total deferred tax liabilities		(14,753,720	)		(14,662,562	)
Net deferred tax liabilities	$	(11,292,289	)	$	(11,173,650	)

The Company has not recorded a provision for U.S. federal income tax ~~effects~~for ofthe ~~temporary~~six ~~differences that~~months ~~give~~ended ~~rise~~June 30, 2012 and 2011 due to the cumulative tax net operating losses in the United States. As of June 30, 2012, the Company’s had net ~~deferred~~operating tax ~~liabilities~~losses ascarried forward of ~~March~~approximately $49,000,000, 31$43,000,000 ~~2013~~and $8,000,000 in the U.S., PRC, and ~~December~~Hong 31Kong, respectively. Those losses carried forward in the U.S. 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 June 30, 2012, ~~were~~the astax ~~follows:~~benefit of the loss carryforwards had not been recorded and therefore is not presented in the table above.

	March 31,			December 31,
	2013			2012
Deferred tax assets
Current
Provision for doubtful accounts receivable	$	25,753		$	25,386
Other costs		3,065			3,274
Total current deferred tax assets		28,818			28,660
Deferred tax liabilities
Non-current
Amortization		(1,213,446	)		(1,156,516	)
Depreciation		(326,633	)		(323,750	)
Step up of acquired assets		(10,507,892	)		(10,475,798	)
Total non-current deferred tax liabilities		(12,047,971	)		(11,956,064	)
Net deferred tax liabilities	$	(12,019,153	)	$	(11,927,404	)

The Company’s PRC subsidiaries that are deemed “high technology” enterprises are subject to preferred tax rates (tax holiday). The table below shows the effect of using the higher rates and earnings per share.

The Company has not recorded a provision for U.S. federal income tax for the three months ended March 31, 2013 and 2012 due to the cumulative tax net operating losses in the United States. As of March 31, 2013, the Company had net operating tax losses carried forward of approximately $22,000,000, $71,000,000 and $8,000,000 in the US, PRC, and Hong Kong, respectively. Those losses carried 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.

	Six Months Ended June 30,
	2012			2011
Income (loss) per common share-basic	$	(1.09	)	$	0.09
Effect of tax holiday		0.00			0.00
Pro forma income (loss) per common share-basic	$	(1.09	)	$	0.09

~~The~~Accrued Company’s PRC subsidiaries that are deemed “high technology” enterprises are subject to preferred tax rates (tax holiday). The table below shows the effect of using the higher rates and earnings per share.Taxes

	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	)

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 June 30, 2012, the Company has recorded an accrued tax of $9,992,649 mainly related to tax positions 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.

18The Company has various open tax years between 2007 and 2012 in its significant operating jurisdictions.

~~AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES~~18

~~NOTES~~AMERICAN TOORIENTAL ~~THE~~BIOENGINEERING, ~~UNAUDITED CONDENSED CONSOLIDATED~~INC. ~~FINANCIAL~~AND ~~STATEMENTS~~SUBSIDIARIES

~~THREE~~NOTES ~~MONTHS~~TO ~~ENDED~~THE ~~MARCH~~UNAUDITED ~~31,~~CONDENSED ~~2013 AND~~CONSOLIDATED ~~2012~~FINANCIAL STATEMENTS

~~Accrued~~THREE ~~Taxes~~AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011

~~Effective~~All of the Company’s ~~January~~operations 1are conducted in the PRC. At June 30, ~~2007~~2012, the Company’s ~~adopted~~unremitted ~~guidance~~foreign earnings ~~for~~of ~~accounting~~its ~~for~~PRC ~~uncertainty~~subsidiaries intotaled ~~income~~approximately ~~taxes~~$167 ~~which~~million ~~prescribes~~and ~~a more-likely-than-not~~the ~~threshold~~Company ~~for~~held ~~financial~~approximately ~~statement~~$52 million ~~recognition~~of cash and ~~measurement~~cash ofequivalents ain ~~tax~~the ~~position~~PRC. These ~~taken~~unremitted inearnings are planned to be reinvested indefinitely into the ~~tax~~operations ~~return~~of the Company in the PRC. As While repatriation of ~~March~~some ~~31,~~cash ~~2013,~~held in the ~~Company~~PRC ~~has~~may ~~recorded~~be anrestricted ~~accrued~~by ~~tax~~local PRC laws, most of ~~$11,015,810~~the ~~mainly~~Company's ~~related~~foreign cash balances could be repatriated to ~~tax~~the ~~positions~~United ~~associated~~States ~~with~~but, under current U.S. income ~~deemed~~tax ~~interest~~laws, oncould ~~non-trade~~be ~~intercompany~~subject ~~transactions~~to U.S. Itfederal isincome ~~possible~~taxes ~~that~~less applicable foreign tax credits. Determination of the amount of ~~accrued~~unrecognized ~~will~~deferred ~~change~~U.S. inincome tax liability on the ~~next~~unremitted ~~12 months;~~earnings ~~however,~~is annot ~~estimate~~practicable because of the ~~range~~complexities ofassociated with this hypothetical calculation, and as the ~~possible~~Company ~~change~~does ~~cannot~~not beplan ~~made~~to atrepatriate ~~this~~any ~~time.~~cash ~~The~~in ~~accrued~~the ~~taxes~~PRC to the United States, ifno ~~ultimately~~deferred ~~recognized~~tax ~~will~~liability ~~impact~~has ~~the~~not ~~effective~~been ~~tax~~accrued ~~rate~~for cash to be repatriated.

~~The~~NOTE ~~Company~~17 ~~has~~– ~~various open~~SUBSEQUENT ~~tax years between 2007 and 2012 in its significant operating jurisdictions.~~EVENTS

AtOn ~~March~~October 311, ~~2013~~2012, ~~$300~~Peter Barbato filed a shareholder derivative Complaint against Tony Liu,~~000~~ isYanchun ~~included~~Li, inBinsheng ~~taxes~~Li, ~~payable~~Lawrence ~~for~~Wizel, ~~the~~Cosimo USPatti, Xianmin ~~for~~Wang, ~~what~~Eileen ~~the~~Brody, ~~Company~~Jun ~~believes~~Min, toand beBaiqing ~~the~~Zhang ~~potential~~(collectively, ~~liabilities~~“Defendants”), ~~for~~and the ~~untimely~~Company as a nominal Defendant. ~~filing~~The ofComplaint ~~IRS~~asserts ~~Forms~~causes ~~5471~~of ~~and~~action ~~IRS~~for ~~Report~~Breach of ~~Foreign~~Fiduciary ~~Bank~~Duty and ~~Financial~~Unjust ~~Accounts~~Enrichment. These ~~However,~~claims similarly arise out of alleged accounting errors that were made the ~~potential~~Company’s ~~liabilities~~financial ~~could~~statements befor ~~greater~~in the periods between the third quarters ifending September 30, 2009 and September 30, 2011, which were filed with the ~~IRS~~SEC. The alleged accounting errors were related to sothe ~~determine~~Company’s sale of an interest held by the Company’s ~~failure~~subsidiary, toNuo ~~file~~Hua ~~was~~Investment ~~willful.~~Company ~~The~~Limited, ~~Company~~and ~~believes~~were disclosed in the ~~likelihood~~Company’s Restatement filed on November 14, 2011. The Complaint also alleges that its claims arise out of alleged inconsistencies that the ~~IRS~~Company’s then auditor, Ernst and Young Hua Ming, discovered throughout the course ~~considering~~of ~~our~~the ~~failure~~Company’s audit for the year ending 2011. The Parties have agreed that Defendants need not respond to ~~file~~the ascomplaint until ~~being~~motions ~~willful~~to isdismiss ~~remote~~the class action Complaint filed against the Company in the Central District of California are resolved.

~~All~~On ofDecember ~~the~~6, ~~Company’s~~2012, ~~operations~~David ~~are~~Bravetti ~~conducted~~filed ina ~~the~~shareholder ~~PRC.~~derivative AtComplaint ~~March~~against 31Tony Liu, ~~2013~~Yanchun Li, Binsheng Li, Jun Min, Lawrence Wizel, Cosimo Patti, Xianmin Wang, Baiqing Zhang, Eileen Brody (collectively, “Defendants”). Because the ~~Company’s~~complaint ~~unremitted~~sets ~~foreign~~forth a shareholder ~~earnings~~derivative ofclaim, ~~its~~the ~~PRC~~Company ~~subsidiaries~~is ~~totaled~~named ~~approximately~~as ~~$128~~a ~~million~~nominal ~~and~~Defendant, although no relief is sought for the Company ~~held~~and ~~approximately~~any ~~$9.6~~relief obtained ~~million~~from ofthe ~~cash~~Defendants ~~and~~would ~~cash~~inure ~~equivalents~~to inthe benefit of the ~~PRC~~Company. ~~These~~The ~~unremitted~~Complaint ~~earnings~~asserts ~~are~~causes ~~planned~~of toaction befor ~~reinvested~~breach ~~indefinitely~~of fiduciary ~~into~~duty, ~~the~~waste ~~operations~~ of ~~the~~corporate ~~Company~~assets, inand ~~the~~unjust ~~PRC~~enrichment. ~~While~~Bravetti’s ~~repatriation~~claims arose out of ~~some~~alleged ~~cash~~accounting ~~held~~errors that were made in the ~~PRC~~Company’s ~~may~~financial bestatements ~~restricted~~for bythe ~~local~~periods between the third quarters ending September 30, 2009 and ~~PRC~~September ~~laws~~30, ~~most~~2011, ofwhich ~~the~~financial ~~Company's~~statements ~~foreign~~were ~~cash~~included ~~balances~~in ~~could~~filings bemade ~~repatriated~~with the SEC. The alleged accounting errors were related to the ~~United~~Company’s ~~States~~sale ~~but,~~of ~~under~~an ~~current~~interest ~~U.S.~~held ~~income tax~~by ~~laws~~the Company’s subsidiary, ~~could~~Nuo beHua ~~subject~~Investment toCompany ~~U.S.~~Limited and ~~federal~~were ~~income~~disclosed ~~taxes~~in ~~less~~the ~~applicable~~Company’s ~~foreign~~Restatement ~~tax~~filed ~~credits~~on November 14, 2011. ~~Determination~~The Complaint also alleges that its claims arise out of alleged inconsistencies that the ~~amount~~Company’s then auditor, Ernst and Young Hua Ming, discovered throughout the course of ~~unrecognized~~the ~~deferred~~Company’s ~~U.S.~~audit ~~income~~for ~~tax~~the ~~liability~~year onending 2011. Although the ~~unremitted~~Complaint ~~earnings~~claims that jurisdiction is ~~not~~proper ~~practicable~~in federal court in New Jersey because of ~~the~~diversity ~~complexities~~of ~~associated with~~citizenship, ~~this~~according ~~hypothetical~~to ~~calculation~~the Complaint, ~~and~~Bravetti is a New Jersey citizen, as is one of the Defendants. The Company ~~does~~did not ~~plan~~file a responsive pleading to ~~repatriate~~Bravetti’s ~~any~~Complaint, ~~cash~~and insubsequent to seeking and obtaining a default against the ~~PRC~~Company, Bravetti agreed to ~~the~~dismiss ~~United~~his ~~States~~claim and file elsewhere. Subsequently, nohowever, Bravetti ~~deferred~~“corrected” ~~tax~~his ~~liability~~complaint ~~has~~now ~~not~~to claim to be a Florida citizen. On March 26, 2013, Bravetti undertook to provide Defendants proof of his citizenship. That proof has been ~~accrued~~provided, ~~for~~and ~~cash~~Defendants have not come to bea ~~repatriated~~conclusion whether this was sufficient.

On February 19, 2013, the Company received a notice of acceleration under the terms of the Company’s 5.00% Convertible Senior Notes due 2015 (the “Senior Notes”) issued pursuant to an Indenture, dated as of July 15, 2008, between the Company and Wells Fargo Bank, National Association, as Indenture Trustee (the “Indenture”). The notice was sent by certain holders of the Senior Notes that together hold more than 25% of the aggregate principal amount of the Senior Notes. The notice states that the default is the result of the Company’s failure to (A) pay to the holders under the terms of the Indenture accrued interest due and payable on each of July 16, 2012 and January 15,2013, which failure to pay continued for a period of thirty (30) days after July 16, 2012 and January 15, 2013, respectively, and (B) provide, pursuant to the terms of the Indenture, a notice of the termination of trading and delisting of the Company’s common stock by the New York Stock Exchange. As of March 4, 2013, the aggregate principal amount of the Senior Notes, and unpaid, but accrued interest was $53,010,424. The notice of acceleration resulted in the principal amount of the Senior Convertible Notes plus accrued and all unpaid interest and accrued and unpaid Additional Interest (as defined in the Indenture) on the Notes through February 19, 2013, to become immediately due and payable.

~~ITEM~~On ~~2 – MANAGEMENT~~April 8, 2013, four of the holders of the Company’Ss 5% senior convertible notes issued July 15, 2008 (the “Notes”) filed this action ~~DISCUSSION~~claiming ~~AND~~a ~~ANALYSIS~~default OFunder ~~FINANCIAL~~the ~~CONDITION~~Notes, ~~AND~~which ~~RESULTS~~allegedly OFresulted ~~OPERATIONS~~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.

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, 2012. Readers should carefully review the risk factors disclosed in the Company’s Form 10-K for the year ended December 31, 2012 filed by the Company with the Securities and Exchange Commission (“SEC”).19

AsITEM ~~used~~2. inMANAGEMENT’S ~~this~~DISCUSSION ~~report, the~~AND ~~terms~~ANALYSIS ~~“Company,”~~OF ~~“we,”~~FINANCIAL ~~“our,”~~CONDITION ~~“us,”~~AND ~~and~~RESULTS ~~“AOB”~~OF ~~refer to American Oriental Bioengineering, Inc., a Nevada corporation.~~OPERATIONS

~~PRELIMINARY~~The ~~NOTE~~following ~~REGARDING~~discussion should ~~FORWARD~~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-~~LOOKING~~K for the year ended December 31, 2011. Readers should carefully review the risk ~~STATEMENTS~~factors disclosed in the Company’s Form 10-K for the year ended December 31, 2011 filed by the Company with the Securities and Exchange Commission (“SEC”).

~~This~~As ~~quarterly~~used ~~report contains~~in ~~forward-looking~~this ~~statements within the meaning of the federal securities laws. These include statements about our expectations~~report, ~~beliefs, intentions or strategies for~~ the ~~future,~~terms ~~which we indicate by words or phrases such as~~ “~~anticipate~~Company,” “~~expect~~we,” ~~“intend,”~~ “~~plan~~our,” “~~will~~us,” ~~“we~~and ~~believe,”~~ “AOB ~~believes,~~” ~~“management believes”~~refer ~~and~~to ~~similar language. The forward-looking statements are based on the current expectations of AOB and are subject~~American toOriental ~~certain risks~~Bioengineering, ~~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~~Inc. ~~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~~a weNevada ~~assume no obligation to update them~~corporation.

~~Investors~~PRELIMINARY ~~are~~NOTE ~~also~~REGARDING ~~advised to refer to the information in our previous filings with the SEC, especially on Forms 10~~FORWARD-~~K, 10-Q, and 8-K, in which we discuss~~LOOKING 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.STATEMENTS

~~BUSINESS~~This ~~OVERVIEW~~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.

~~Global~~Investors ~~economic~~are ~~challenges~~also advised ~~and~~to ~~uncertainties~~refer ~~have~~to ~~impacted~~the information in our ~~business~~previous infilings ~~2011~~with the SEC, ~~2012~~especially on Forms 10-K, 10-Q, and ~~the~~8-K, ~~first~~in ~~half~~which ofwe ~~2013.~~discuss in ~~These~~more ~~challenges~~detail ~~and~~various ~~uncertainties~~important ~~have~~factors that could cause actual results to differ from expected or historic results. It is not ~~negatively~~possible ~~affected~~to ~~consumers’~~foresee ~~demands~~or ~~for~~identify ~~both~~all ~~pharmaceutical~~such ~~and~~factors. ~~nutraceutical~~As ~~products~~such, ~~which~~investors ~~contributed~~should not consider any list of such factors to ~~the~~be ~~overall~~an exhaustive ~~decline~~statement inof ~~sales~~all ofrisks ~~our~~and ~~manufacturing~~uncertainties ~~segments~~or potentially inaccurate assumptions.

InBUSINESS 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.OVERVIEW

~~The~~Global ~~continuous~~economic ~~increase~~challenges and uncertainties have impacted our business in ~~cost~~2011, 2012 and the first half of ~~raw~~2013. ~~material~~These ~~also~~challenges ~~impacted~~and ~~our~~uncertainties ~~business~~have negatively asaffected ~~gross~~consumers’ ~~profit~~demands ~~has~~for ~~declined~~both ~~since~~pharmaceutical and nutraceutical products, which contributed to the ~~end~~overall decline in sales of ~~2010~~our manufacturing segments.

In addition, to the ~~ongoing~~establishment ~~economic~~of ~~challenges~~price ~~and~~controls ~~uncertainties,~~over ~~our~~prescription ~~business~~and ~~was~~over-the-counter medicines negatively impacted byour ~~the~~business. ~~toxic~~There ~~drug~~were ~~capsules~~two ~~incident~~price ~~in 2012. Incidents~~adjustments ~~like~~by ~~that shook~~ the ~~pharmaceutical~~Price ~~industry~~Control ~~and~~Office ~~resulted~~ in a2011 ~~decline~~and in2012, ~~market~~respectively ~~demand.~~that ~~Although~~lowered wecertain ~~were~~prices ~~not~~of ~~directly~~prescription ~~involved in~~and over-the-counter ~~scandal~~medicines. As ~~and~~a ~~our~~result, ~~facilities~~we ~~were~~lost ~~inspected and passed the safety requirements,~~ our ~~subsequent~~ability ~~sales~~to ~~have~~compete ~~been~~effectively ~~impacted significantly~~ due to the ~~loss~~pricing ofadjustments, ~~consumer~~particularly ~~confidence~~when inwe ~~pharmaceutical~~entered ~~products~~the ~~and~~state-owned hospitals’ ~~huge~~purchase ~~decline~~of inmedicine ~~market~~tendering ~~demand~~process. ~~All~~As ofa ~~these challenges~~result, ~~uncertainties and~~sales ~~incidents~~in ~~may~~our ~~continue~~manufacturing tosegments ~~have~~fell ~~an adverse impact on our future performance~~sharply.

WeThe ~~are~~continuous ~~taking actions~~increase toin ~~mitigate~~cost ~~the impact~~ of ~~these~~raw ~~economic~~material ~~conditions~~also ~~by:~~impacted ~~1) focusing on~~ our ~~well-recognized~~business ~~brand~~as ~~names,~~gross ~~including~~profit ~~AOBO~~has ~~and~~declined ~~our Jinji~~since ~~products;~~the 2)end ~~diversifying~~of ~~our products through products line extension; and 3) developing and introducing new products~~2010.

ToIn ~~mitigate~~addition ~~the~~to ~~impact~~the ofongoing ~~the~~economic ~~increasing~~challenges ~~cost~~ and ~~supply~~uncertainties, ofour ~~the~~business ~~raw~~was ~~material~~negatively ~~needed~~impacted ~~for~~by ~~our~~the ~~products,~~toxic wedrug ~~entered~~capsules ~~into~~incident ~~long-term~~in ~~supply contracts with~~2012. ~~various~~Incidents ~~third~~like ~~parties~~that toshook ~~grow~~the ~~Millettia~~pharmaceutical industry and ~~Xanthoceras~~resulted ~~Sorbifolia~~in ~~Bge~~a ~~(“XSB”),~~decline ~~which~~in ~~are~~market ~~major raw materials~~demand. ~~We bear~~Although ~~the~~we ~~cultivation~~were ~~cost~~not ~~for~~directly involved ~~these~~in ~~raw materials, including leasing~~ the ~~land~~scandal ~~use~~and ~~rights.~~our Infacilities ~~return,~~were weinspected ~~are~~and ~~entitled~~passed ~~to purchase~~ the ~~raw~~safety ~~material at a pre-determined discounted price. In 2012~~requirements, ~~the~~our ~~Company~~subsequent ~~recorded~~sales anhave ~~impairment~~been ~~of approximately $8.5 million~~impacted ofsignificantly ~~its~~due ~~capitalized~~to ~~agricultural~~the ~~costs.~~loss ~~Through~~of ~~these~~consumer ~~supply~~confidence ~~contracts,~~in wepharmaceutical ~~believe~~products ~~that~~and wehuge ~~can~~decline ~~stabilize~~in ~~the~~market ~~supply~~demand. All of ~~our major~~these ~~raw~~challenges, ~~materials~~uncertainties inand ~~the~~incidents ~~long~~may ~~run~~continue ~~and~~to ~~reduce~~have ~~the~~an ~~risk~~adverse ofimpact ~~increasing~~on ~~costs~~our in future ~~periods~~performance.

~~CRITICAL~~We ~~ACCOUNTING~~are ~~POLICIES~~taking ~~AND~~actions to ~~ESTIMATES~~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.

~~This~~To ~~section~~mitigate ~~should~~the impact beof ~~read~~the ~~together~~increasing ~~with~~cost ~~the~~and ~~Summary~~supply of ~~Significant~~the ~~Accounting~~raw ~~Policies~~material ~~included~~needed asfor ~~Note~~our 3products, towe ~~the~~entered ~~consolidated~~into ~~financial~~long-term ~~statements~~supply contracts with ~~included~~various inthird ~~our~~parties ~~amended~~to ~~Annual~~grow ~~Report~~Millettia onand ~~Form~~Xanthoceras ~~10-K~~Sorbifolia Bge (“XSB”), which are major raw materials. We bear the cultivation cost for these raw materials, including leasing the ~~year~~land ~~ended~~use ~~December~~rights. 31In return, ~~2012~~we ~~filed~~are ~~with~~entitled to purchase the raw ~~SEC~~material onat a pre-determined discounted price. Through these supply contracts, we believe that we can stabilize the supply of our major raw materials in the long term and reduce the risk of increasing costs in future periods. Subsequent to June 1130, ~~2013~~2012, in the fourth quarter of 2012, we recorded an impairment of approximately $8.5 million of our capitalized agricultural costs.

20CRITICAL ACCOUNTING POLICIES AND ESTIMATES

~~Estimates~~This ~~affecting~~section ~~accounts~~should be ~~receivable~~read ~~and~~together ~~inventories~~with the Summary of Significant Accounting Policies included as Note 3 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on January 7, 2013.

The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect our reporting of assets and liabilities (and contingent assets and liabilities). These estimates are particularly significant where they affect the reported net realizable value of the Company’s accounts receivable and inventories.20

AtEstimates ~~March 31,~~affecting ~~2013 and December 31, 2012, we provided a reserve of $20,039,711 and $18,134,912, respectively, against~~ accounts receivable~~. Our~~ ~~estimate of the appropriate reserve on accounts receivable at March 31, 2013~~ and December 31, 2012 was based on the aged nature of these accounts receivable. In making our judgment, we assessed our 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

AtThe ~~March~~preparation ~~31, 2013~~of ~~and~~our ~~December~~consolidated ~~31,~~financial ~~2012,~~statements werequires ~~provided~~management ~~an allowance against inventories amounting~~ to ~~$51,440~~make estimates and ~~$47,281,~~assumptions ~~respectively.~~that ~~Our~~affect ~~determination of~~our ~~this~~reporting ~~allowance was based on potential impairments to the current carrying value~~ of ~~the~~assets and ~~inventories~~liabilities ~~due~~(and tocontingent ~~potential~~assets ~~obsolescence of~~and ~~aged inventories~~liabilities). InThese ~~making~~estimates ~~our~~are ~~estimate,~~particularly wesignificant ~~considered~~where ~~the~~they ~~probable~~affect ~~demand for our products in~~ the ~~future~~reported net ~~and~~realizable ~~historical~~value ~~trends in~~of the ~~turnover~~Company’s ofaccounts ~~our~~receivable and inventories.

~~While~~At ~~we currently~~June ~~believe~~30, ~~that~~2012 ~~there~~and December is31, ~~little~~2011, ~~likelihood~~we ~~that~~provided ~~actual~~a ~~results~~reserve ~~will~~of ~~differ~~$17,582,516 ~~materially~~and ~~from~~$16,354,873, ~~these~~respectively, ~~current~~against ~~estimates,~~accounts ifreceivable. ~~customer~~Our estimate ~~demand~~of ~~for~~the ~~our~~appropriate ~~products~~reserve ~~decreases~~on ~~significantly~~accounts inreceivable ~~the~~at ~~near~~June ~~future~~30, or2012 ifand December 31, 2011 was based on the ~~financial~~aged ~~condition~~nature of these accounts receivable. In making our judgment, we assessed our customers’ ~~deteriorates~~ability to continue to pay their outstanding invoices inon ~~the~~a ~~near~~timely ~~future~~basis, weand ~~could~~whether ~~realize~~their ~~significant~~financial ~~write~~position ~~downs~~might ~~for~~deteriorate ~~slow-moving~~significantly ~~inventories~~in orthe ~~uncollectible~~future, ~~accounts~~which ~~receivable~~would ~~and~~result in their ~~notes~~inability ~~receivable~~to pay their debts to the Company.

~~Policy~~At ~~affecting~~June ~~recognition~~30, 2012 and December 31, 2011, we provided an allowance against inventories amounting to $322,226 and $624,516, respectively. Our determination of ~~revenue~~this allowance was based on potential impairments to the current carrying value of the inventories due to potential obsolescence of aged inventories. In making our estimate, we considered the probable demand for our products in the future and historical trends in the turnover of our inventories.

~~Among~~While ~~the~~we ~~most important~~currently ~~accounting~~believe ~~policies~~that ~~affecting~~there ~~our~~is ~~consolidated~~little ~~financial~~likelihood ~~statements~~that isactual ~~our~~results ~~policy~~will ofdiffer ~~recognizing~~materially ~~revenue~~from inthese ~~accordance~~current ~~with~~estimates, ~~the Financial~~if ~~Accounting~~customer ~~Standards~~demand for ~~Board~~our ~~(“FASB”)~~products ~~Accounting~~decreases ~~Standards~~significantly ~~Codification~~in ~~(“ASC”)~~the ~~605~~near ~~“Revenue Recognition”.~~future, ~~Under~~or ~~this~~if ~~policy,~~the ~~all~~financial condition of our customers deteriorates in the near ~~following~~future, ~~criteria~~we ~~must~~could berealize ~~met~~significant inwrite ~~order~~downs for usslow-moving toinventories ~~recognize~~or ~~revenue:~~uncollectible accounts receivable and notes receivable.

1.Policy ~~Persuasive~~affecting ~~evidence~~recognition of ~~an arrangement exists;~~revenue

2.Among ~~Delivery~~the ~~has~~most ~~occurred~~important accounting orpolicies affecting our consolidated financial statements is our policy of recognizing revenue in accordance with the ~~services~~Financial ~~have~~Accounting ~~been~~Standards ~~rendered;~~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:

31. ~~The~~Persuasive ~~seller’s~~evidence ~~price~~of an toarrangement ~~the buyer is fixed or determinable~~exists; ~~and~~

42. ~~Collectability~~Delivery ishas ~~reasonably~~occurred or ~~assured.~~services have been rendered;

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

~~Investment~~4. inCollectability ~~equity~~is ~~method investment~~reasonably assured.

WeThe ~~account~~majority ~~for~~of our ~~equity~~revenue ~~investment~~results infrom ~~accordance~~sales contracts with ~~FASB~~distributors ~~ASC 323, “Investments–Equity Method~~ and ~~Joint~~revenue ~~Ventures”.~~is ~~Under~~recorded ~~FASB ASC~~upon ~~323,~~ the ~~equity~~shipment ~~method~~ of ~~accounting~~goods. isManagement ~~used~~conducts credit ~~for~~background ~~investments~~checks infor ~~entities~~new incustomers ~~which~~as wea ~~have~~means ~~the ability~~ to ~~exercise~~reduce ~~significant influence~~the ~~but~~subjectivity doof ~~not~~assuring ~~own a majority equity interest or otherwise control~~collectability. ~~Under~~Based ~~the~~on ~~equity~~these ~~method~~factors, we ~~initially~~believe ~~record~~that ~~our~~we ~~investment at~~can ~~cost~~apply ~~and adjust~~ the ~~carrying~~provisions ~~amount~~ of ~~the~~FASB ~~investment~~ASC to605 ~~recognize~~with ~~our~~minimal ~~proportionate share of each equity investee’s net income or loss into consolidated statements of income after the date of acquisition~~subjectivity.

WeInvestment ~~monitor our~~in ~~investments~~equity ~~for~~method 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. We perform an impairment assessment by comparing fair value of the investment ~~to readily available market information, or if not available, to discounted cash flow models.~~

~~Impairment~~We account for our equity investment in accordance with FASB ASC 323, “Investments–Equity Method and Joint Ventures”. Under FASB ASC 323, the equity method of accounting is used for investments in entities in which we have the ability to exercise significant influence but do not own a majority equity interest or otherwise control. Under the equity method, we initially record our 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.

InWe ~~evaluating~~monitor ~~long-lived assets~~our investments for ~~recoverability, including finite~~other-~~lived~~than-temporary ~~intangibles~~impairment ~~and~~by ~~property~~considering ~~and~~factors ~~equipment~~including, webut ~~use~~not ~~our~~limited ~~best estimate of future cash flows expected~~ to, ~~result~~current ~~from~~economic ~~the use of the asset~~ and ~~eventual~~market ~~disposition. To the extent that estimated future~~conditions, ~~undiscounted~~ ~~cash~~the ~~inflows~~operating ~~attributable~~performance toof the ~~asset,~~investee ~~less~~companies ~~estimated~~including ~~future,~~current ~~undiscounted~~earnings ~~cash~~trends ~~outflows,~~and ~~are~~other ~~less~~company-specific ~~than~~information. ~~the carrying amount, an~~We ~~impairment~~perform ~~loss is recognized in~~ an ~~amount~~impairment ~~equal~~assessment toby ~~the~~comparing ~~difference~~fair ~~between the carrying~~ value of ~~such~~the ~~asset~~investment ~~and its fair value. Assets~~ to bereadily ~~disposed~~available ofmarket ~~and for which there is a committed plan of disposal~~information, ~~whether through sale~~ or ~~abandonment,~~if ~~are~~not ~~reported~~available, atto ~~the~~discounted ~~lower~~cash offlow ~~carrying value or fair value less costs to sell~~models.

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.Impairment

~~The~~In evaluating long-lived ~~Company’s~~assets ~~annual~~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 ~~testing~~loss is ~~performed~~recognized in an amount equal to the ~~fourth~~difference ~~quarter~~between the carrying value of ~~each~~such ~~year~~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.

21In 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.

~~Share-based~~The ~~Compensation~~Company’s annual impairment testing is performed in the fourth quarter of each year.

We periodically issue stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. We account for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the FASB whereas the value of the award is measured on the date of grant and recognized over the vesting period. We account for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.21

~~The fair value of our common stock option grant is estimated using the Black~~Share-Scholes-Merton option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton option pricing model, and based on actual experience. The assumptions used in the Black-Scholes-Merton option pricing model could materially affect compensation expense recorded in future periods.Compensation

~~Accounting~~We periodically issue stock options and warrants to employees and non-employees in non-capital raising transactions for ~~Income~~services ~~Taxes~~and for financing costs. We account for stock option and ~~Uncertain~~warrant grants issued and vesting to employees based on the authoritative guidance provided by ~~Income~~the ~~Tax~~FASB ~~Positions~~whereas the value of the award is measured on the date of grant and recognized over the vesting period. We account for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

WeThe ~~use~~fair anvalue ~~asset~~of ~~and~~our ~~liability~~common ~~approach~~stock ~~for~~option ~~financial~~grant ~~accounting~~is ~~and~~estimated ~~reporting~~using ~~for~~the ~~income~~Black-Scholes-Merton ~~taxes~~option ~~that~~pricing ~~allows~~model, ~~recognition~~which ~~and~~uses ~~measurement~~certain ofassumptions ~~deferred~~related ~~tax~~to ~~assets~~risk-free ~~based~~interest ~~upon~~rates, ~~the~~expected ~~likelihood~~volatility, ofexpected ~~realization~~life of ~~tax benefits in future years. Under~~ the ~~asset~~common ~~and~~stock ~~liability approach~~options, ~~deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets~~ and ~~liabilities~~future ~~for financial reporting purposes and the amounts used for income tax purposes~~dividends. ~~A valuation allowance is provided for deferred tax assets~~Compensation ifexpense it is ~~more~~recorded ~~likely~~based ~~than~~upon ~~not~~the ~~these~~value ~~items~~derived ~~will~~from ~~either~~the ~~expire~~Black-Scholes-Merton ~~before~~option wepricing ~~are able to realize their benefits~~model, orand ~~that~~based ~~future~~on ~~deductibility is~~actual ~~uncertain~~experience. The Weassumptions ~~account~~used ~~for uncertainty~~ in ~~income~~the ~~taxes in accordance with FASB ASC 740~~Black-10Scholes-Merton ~~which~~option ~~prescribes~~pricing amodel ~~recognition~~could ~~threshold and~~materially aaffect ~~measurement~~compensation ~~attribute~~expense ~~for~~recorded ~~the financial statement recognition and measurement of tax positions taken or expected to be taken~~ in future ~~a tax return~~periods. ~~Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense.~~

~~Newly~~Accounting ~~Adopted~~for ~~Accounting~~Income ~~Pronouncements~~Taxes and Uncertain Income Tax Positions

InWe ~~July~~use ~~2012,~~an ~~FASB~~asset and ~~issued~~liability ~~ASU~~approach ~~No.~~for ~~2012-02,~~financial ~~“Intangibles~~accounting ~~– Goodwill~~ and ~~Other”.~~reporting ~~This~~for ~~update~~income ~~presents~~taxes anthat ~~entity~~allows ~~with~~recognition ~~the~~and ~~option~~measurement toof deferred ~~first~~tax toassets ~~assess~~based ~~qualitative~~upon ~~factors~~the tolikelihood ~~determine~~of ~~whether~~realization itof istax ~~more~~benefits ~~likely~~in ~~than~~future ~~not~~years. ~~that~~Under anthe ~~indefinite-lived~~asset ~~intangible~~and ~~asset~~liability isapproach, deferred ~~impaired~~taxes asare aprovided ~~basis~~ for ~~determining~~the ~~whether~~net ittax iseffects ~~necessary~~of totemporary ~~perform~~differences between the ~~quantitative~~carrying ~~impairment~~amounts ~~test~~of inassets ~~accordance~~and ~~with~~liabilities ~~Subtopic~~for ~~350-30,~~financial ~~“Intangibles~~reporting –purposes ~~Goodwill~~ and ~~Other~~the –amounts ~~General~~used ~~Intangibles~~for ~~Other~~income ~~than~~tax ~~Goodwill”~~purposes. ~~The~~A ~~more-likely-than-not threshold~~valuation allowance is ~~defined~~provided asfor ~~having~~deferred atax ~~likelihood~~assets if ofit is more likely than ~~fifty~~not ~~percent.~~these ~~ASU~~items ~~No.~~will ~~2012-02~~either ~~will~~expire bebefore ~~effective~~we ~~for~~are ~~annual~~able ~~and~~to ~~impairment~~realize their benefits, or that future deductibility ~~tests~~is ~~performed~~uncertain. ~~for~~We ~~fiscal~~account ~~years~~for ~~beginning~~uncertainty ~~after~~in 15income ~~September~~taxes ~~2012,~~in accordance with ~~early~~FASB ~~adoption~~ASC ~~permitted.~~740-10 ~~The~~which ~~Company~~prescribes ~~does~~a ~~not~~recognition ~~expect~~threshold and a measurement attribute for the ~~adoption~~financial statement recognition and measurement of ~~this~~tax ~~update~~positions ~~will~~taken ~~have~~or expected to be taken in a ~~material~~tax ~~effect~~return. onOur ~~its~~policy ~~consolidated~~is ~~financial~~to ~~statements~~recognize interest and/or penalties related to income tax matters in income tax expense.

InNewly ~~February 2013,~~Adopted ~~the~~Accounting 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 does not expect the adoption of this update will have a material effect on its consolidated financial statements.Pronouncements

~~Other~~In ~~recent~~July ~~accounting pronouncements~~2012, FASB issued byASU No. 2012-02, “Intangibles – Goodwill and Other”. This update presents an entity with the ~~FASB~~option ~~(including~~to first ~~its~~to ~~Emerging~~assess ~~Issues~~qualitative ~~Task~~factors ~~Force),~~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 ~~AICPA~~quantitative impairment test in accordance with Subtopic 350-30, “Intangibles – Goodwill and ~~the~~Other ~~Securities~~– ~~Exchange~~General ~~Commission (the~~Intangibles ~~"SEC")~~Other ~~did~~than Goodwill”. The more-likely-than-not threshold oris ~~are~~defined ~~not~~as ~~believed~~having bya ~~management~~likelihood toof ~~have~~more athan ~~material~~fifty ~~impact~~percent. onASU ~~the~~No. 2012-02 will be effective for annual and impairment tests performed for fiscal years beginning after 15 September 2012, with early adoption permitted. The Company's ~~present~~does ornot ~~future~~expect the adoption of this update will have a material effect on its consolidated financial statements.

22In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying Scope of Disclosures Offsetting Assets and Liabilities. This ASU clarifies which instruments and transactions are subject to the offsetting disclosure requirements by ASU 2011-11. This guidance is effective for annual and interim reporting periods beginning January 1, 2013. We do not believe the adoption of this update will have a material effect on our financial position and results of operations.

~~RESULTS~~In OFFebruary ~~OPERATIONS~~2013, –the FASB ~~THREE~~issued ~~MONTHS~~ASU ~~ENDED~~No. ~~MARCH~~2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other 31Comprehensive 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 ~~2013~~are ASrequired ~~COMPARED~~to TOcross-reference ~~THREE~~other ~~MONTHS~~disclosures ~~ENDED~~that ~~MARCH~~provide 31additional 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 does not expect the adoption of this update will have a material effect on its consolidated financial statements.

~~The~~Other recent accounting ~~following~~pronouncements ~~table~~issued ~~sets~~by ~~forth~~the FASB (including its Emerging Issues Task Force), the ~~amounts~~AICPA, and the ~~percentage~~SEC ~~relationship~~did tonot ~~revenues~~or ofare ~~certain~~not ~~items~~believed by inmanagement ~~our~~to ~~condensed consolidated~~have ~~statements~~a ofmaterial ~~income~~impact ~~for~~on the ~~three~~Company's ~~months~~present ~~ended~~or ~~March~~future ~~31,~~consolidated ~~2013~~financial ~~and 2012:~~statements.

	Three Months Ended March 31,
	Results						% of Revenue
	2013			2012			2013		2012
Statement of Operations Data:
Revenues	$	21,006,763		$	25,745,276			100%		100%
Cost of sales		16,505,888			18,063,454			79%		70%
GROSS PROFIT		4,500,875			7,681,822			21%		30%
Selling, general and administrative expenses		12,476,722			11,982,069			59%		47%
Advertising costs		3,645,454			6,156,353			17%		24%
Research and development costs		1,407,045			1,566,933			7%		6%
Depreciation and amortization		1,864,207			2,080,699			9%		8%
Provision for doubtful accounts		1,763,952			985,786			8%		4%
Long term crop inventory maintenance costs		2,361,383			–			11%		0%
LOSS FROM OPERATIONS		(19,017,888	)		(15,090,018	)		-91%		-59%
Equity in earnings (losses) from equity method investments		(968,232	)		(191,450	)		-5%		-1%
Interest expense, net		(763,691	)		(1,743,270	)		-4%		-7%
Other income (expenses), net		(13,801	)		281,047			0%		1%
LOSS BEFORE INCOME TAX		(20,763,612	)		(16,743,691	)		-99%		-65%
Provision for income taxes		351,245			443,068			2%		2%
NET LOSS		(21,114,857	)		(17,186,759	)		-101%		-67%
Net loss(income) attributable to non-controlling interest		–			29,834			0%		0%
NET LOSS ATTRIBUTABLE TO AMERICAN ORIENTAL BIOENGINEERING, INC.	$	(21,114,857	)	$	(17,156,925	)		-101%		-67%
LOSS PER COMMON SHARE - basic and diluted	$	(0.58	)	$	(0.43	)

~~Revenues~~RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 30, 2012 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2011

WeThe ~~classify~~following table ~~our~~sets ~~revenues~~forth ~~into~~the ~~two~~amounts ~~segments:~~and ~~manufacturing~~the ~~revenue~~percentage ~~and~~relationship ~~distribution~~to ~~revenue.~~revenues ~~The~~of ~~manufacturing~~certain ~~revenue~~items ~~comprises~~in ~~revenue~~our ~~from pharmaceutical~~condensed ~~and~~consolidated ~~nutraceutical~~statements ~~products.~~of income ~~Revenues~~for bythe ~~segments~~three ~~and~~months ~~product~~ended ~~categories~~June ~~were~~30, as2012 ~~follows~~and 2011:

	Three Months Ended March 31,						Increase/			Increase/
	Three Months Ended June 30,
	2013			2012			(Decrease)			(Decrease)
	Results						% of Revenue
Revenue from pharmaceutical products	$	11,742,769		$	14,223,255		$	(2,480,486	)		-17%
	2012			2011			2012			2011
Revenue from nutraceutical products		1,693,222			1,925,252			(232,030	)		-12%
Statement of Operations Data:
Total manufacturing revenue		13,435,991			16,148,507			(2,712,516	)		-17%
Revenues	$	27,446,926		$	54,051,796			100%			100%
Distribution revenue		7,570,772			9,596,769			(2,025,997	)		-21%
Cost of sales		24,254,680			28,206,945			88%			52%
Total revenues	$	21,006,763		$	25,745,276		$	(4,738,513	)		-18%
GROSS PROFIT		3,192,246			25,844,851			12%			48%
Selling, general and administrative expenses		12,060,135			11,258,098			44%			21%
Advertising costs		7,976,078			3,399,355			29%			6%
Research and development costs		1,729,301			3,125,276			6%			6%
Depreciation and amortization		1,578,733			1,784,380			6%			3%
Provision for reserves and doubtful accounts		2,067,462			–			8%			0%
(LOSS) INCOME FROM OPERATIONS		(22,219,463	)		6,277,742			-81%			12%
Equity in earnings (losses) from equity method investments		(1,297,597	)		460,900			-5%			1%
Gain on changes in ownership of unconsolidated entities		–			658,540			0%			1%
Interest expense, net		(1,808,010	)		(1,535,049	)		-7%			-3%
Other income (expenses), net		67,702			11,887			0%			0%
(LOSS) INCOME BEFORE INCOME TAX		(25,257,368	)		5,874,020			-92%			11%
Provision for income taxes		510,897			3,169,813			2%			6%
NET (LOSS) INCOME		(25,768,265	)		2,704,207			-94%			5%
Net loss (income) attributable to non-controlling interest		(18,932	)		10,673			0%			0%
NET (LOSS) INCOME ATTRIBUTABLE TO AMERICAN ORIENTAL BIOENGINEERING, INC.	$	(25,787,197	)	$	2,714,880			-94%			5%
EARNINGS (LOSS) PER COMMON SHARE
Basic	$	(0.66	)	$	0.07
Diluted		(0.66	)		0.07

23Revenues

~~Revenue from~~We classify our ~~pharmaceutical~~revenues ~~products~~into ~~decreased~~two ~~from~~segments: ~~$14,223,255~~manufacturing ~~for~~revenue ~~three~~and ~~months~~distribution ~~ended~~revenue. ~~March~~The ~~31,~~manufacturing ~~2012 to~~revenue ~~$11,742,769~~comprises ~~for~~revenue ~~the~~from pharmaceutical ~~same~~and ~~period~~nutraceutical ~~of 2013, or a 17% decrease~~products. ~~The~~Revenues ~~decrease~~by ~~was~~segments ~~primarily~~and ~~due~~product tocategories ~~the~~were ~~following~~as ~~factors~~follows:

· Rapidly evolving Chinese government healthcare policies have a material impact on the entire pharmaceutical industry in China. In April 2009, the State Council issued “Opinions of the State Council on Deepening the Reform of the Medical and Health Care System,” a major public health initiative, the goal of which is to provide access to basic medical care for every person in China by 2020. In the implementation of this plan, we witnessed increased dispensing of drugs that were listed on the government-published essential drug list, and of products covered by the National Medical Insurance Catalog. This nationwide trend has exerted a continuous and powerful downward pressure on the pricing of all generic 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.

	Three Months Ended June 30,				Increase/			Increase/
	2012		2011		(Decrease)			(Decrease)
Revenue from pharmaceutical products	$	15,887,829	$	40,731,379	$	(24,843,550	)		-61%
Revenue from nutraceutical products		1,285,884		9,549,718		(8,263,834	)		-87%
Total manufacturing revenue		17,173,713		50,281,097		(33,107,384	)		-66%
Distribution revenue		10,273,213		3,770,699		6,502,514			172%
Total revenues	$	27,446,926	$	54,051,796	$	(26,604,870	)		-49%

· 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.23

·Revenue from ~~Because~~our ~~of the actual and potential size of the Chinese~~ pharmaceutical ~~market,~~products wedecreased ~~face intense competition~~ from ~~companies that manufacture products similar to ours~~$40, ~~which has had a negative impact on our revenues. Many of these manufacturers are more established than we are~~731,379 ~~have~~for ~~greater~~three ~~brand~~months ~~recognition~~ended ofJune ~~products that compete with ours~~30, ~~have~~2011 to ~~more financial~~$15, ~~technical~~887,829 ~~marketing~~for ~~and~~the ~~other~~same ~~resources~~period ~~than~~of ~~we presently possess~~2012, ~~and~~or ~~have~~ a ~~larger~~61% ~~customer base~~decrease. ~~These~~The ~~competitors~~decrease ~~are~~was ~~often~~primarily ~~able~~due to ~~respond~~the ~~more~~following quickly to new or changing opportunities and customer requirements, and are able to undertake more extensive promotional activities, offer more attractive terms to customers, or adopt more aggressive pricing policies.factors:

· ~~Because~~Rapidly ~~traditional~~evolving Chinese ~~medicine~~government ~~injection~~healthcare ~~products~~policies ~~are~~have ~~not~~a ~~covered~~material ~~under~~impact on the ~~new~~entire pharmaceutical industry in China. In April 2009, the State Council issued “Opinions of the State Council on Deepening the Reform of the Medical and Health Care System,” a major public health initiative, the goal of which is to provide access to basic medical care for every person in China by 2020. In the implementation of this plan, we witnessed increased dispensing of drugs that were listed on the government-published essential drug list, ~~sales~~and of ~~SHL~~products ~~powder~~covered by the National Medical Insurance Catalog. This nationwide trend has exerted a continuous and powerful downward pressure on the pricing of all generic drugs, ~~one~~whether branded or not, resulting in a significant shrinkage of ~~our~~profit ~~two~~margins ~~flagship~~for manufacturers of these products,. ~~declined~~Our ~~materially~~profit margins from ~~2012~~our manufacturing segment decreased from 51% in 2011 to ~~2013~~15% in 2012, principally as a result of this pricing pressure.

~~Revenue in~~· ~~connection~~Negative ~~with~~publicity ~~our~~surrounding ~~nutraceutical~~the ~~products~~discovery ~~decreased~~of ~~from~~toxic ~~$1,925,252~~substances in drug capsules in China in 2012 tohas ~~$1,693,222~~resulted in ~~2013,~~an aoverall ~~12%~~decline ~~decrease~~in demand in the pharmaceutical market. ~~Revenues~~ Although we were ~~adversely~~not ~~affected~~directly byinvolved in the ~~food~~scandal ~~safety~~ and ~~drug~~we ~~problem~~have inpassed ~~2012.~~safety ~~The~~inspections, ~~decrease~~our ~~was~~sales ~~mainly~~have been impacted significantly due to the ~~decrease~~widespread inloss ~~sales~~of ~~from our~~confidence ~~Soy~~by ~~Peptide~~consumers ~~tablets~~in ~~and~~pharmaceutical ~~Soy Peptide drinks~~products.

~~Distribution revenue~~· ~~decreased~~Because byof ~~$2,025,997~~the oractual ~~21%,~~and topotential $7size of the Chinese pharmaceutical market,~~570,772~~ inwe ~~2013~~face asintense ~~compared~~competition from companies that manufacture products similar to $9ours,~~596,769~~ inwhich ~~2012.~~has ~~Sales~~had ~~from~~a negative impact on our ~~former Yushuntang~~revenues. ~~subsidiary~~Many ~~were~~of ~~$4,239,862~~these inmanufacturers ~~2012,~~are ~~but~~more ~~due~~established tothan ~~the~~we ~~sale~~are, have greater brand recognition of ~~our~~ ~~interest~~products inthat ~~Yushuntang~~compete inwith ~~December~~ours, ~~2012~~have more financial, ~~which resulted~~technical, inmarketing ~~the~~and ~~deconsolidation~~other ofresources ~~this~~than ~~subsidiary~~we presently possess, ~~Yushuntang’s~~and ~~sales~~have a larger customer base. These competitors are nooften ~~longer~~able ~~consolidated~~to inrespond ~~our~~more ~~consolidated statement~~quickly ofto ~~operations~~new ~~for~~or ~~2013.~~changing ~~Net~~opportunities ofand ~~Yushuntang~~customer requirements, ~~sales~~and ofare ~~the~~able ~~balance~~to ofundertake ~~our~~more ~~distribution~~extensive ~~business~~promotional ~~increased from $5~~activities,~~365,907~~ inoffer ~~2012~~more attractive terms to $7customers,~~570,772~~ inor ~~2013~~adopt more aggressive pricing policies.

~~Cost~~· Because traditional Chinese medicine injection products are not covered under the new essential drug list, sales of ~~Sales~~SHL ~~and~~powder, ~~Gross~~one ~~Profit~~of our two flagship products, declined materially from 2011 to 2012.

~~Cost~~Revenue ofin connection ~~sales~~with ~~was~~our nutraceutical products decreased from $169,~~505~~549,~~888~~718 in ~~2013,~~2011 ~~compared~~ to $181,~~203~~285,~~986~~884 in 2012, an 87% decrease. ~~Cost~~Revenues ofwere ~~sales~~adversely affected by ~~segments~~the food safety and ~~product~~drug ~~categories~~problem ~~were~~in as2012. ~~follows:~~The decrease was mainly due to the decrease in sales from our Soy Peptide tablets and Soy Peptide drinks.

	Three Months Ended March 31,				Increase/			Increase/
	2013		2012		(Decrease)			(Decrease)
Pharmaceutical products	$	8,286,060	$	8,079,845	$	206,215			3%
Nutraceutical products		1,145,195		1,203,834		(58,639	)		-5%
Total manufacturing cost		9,431,255		9,283,679		147,576			2%
Distribution cost		7,074,633		8,779,775		(1,705,142	)		-19%
Total cost	$	16,505,888	$	18,063,454	$	(1,557,566	)		-9%

Distribution revenue increased by $6,502,514 or 172%, to $10,273,213 for the three months ended June 30, 2012 from $3,770,699 for the same period of 2011, primarily as a result of the acquisition of Liaoning Baicao, which occurred at the end of 2011.

Cost of ~~sales~~ inSales ~~the~~and ~~manufacturing segment remained consistent despite a decrease in revenues for this segment, as a result of decreasing profit margins resulting from the pricing pressures described above.~~ Gross ~~profit as a percentage of revenues for the manufacturing segment was 30% in 2013, down from 43% in 2012. Cost of Sales from our former Yushuntang subsidiary were $3,915,000 in 2012.~~Profit

Cost of sales inwas $24,254,680 for the ~~distribution~~three ~~segment~~months ~~decreased~~ended ~~proportionally~~June to30, ~~the~~2012, ~~decrease~~compared into ~~sales~~$28,206,945 ~~from~~for ~~2012~~the tothree ~~2013,~~months ~~with~~ended ~~gross~~June ~~profit~~30, as2011. aCost ~~percentage~~ of ~~revenues~~sales ~~decreasing~~by ~~slightly~~segments and ~~from~~product 9%categories towere ~~7%.~~as follows:

	Three Months Ended June 30,				Increase/			Increase/
	2012		2011		(Decrease)			(Decrease)
Pharmaceutical products	$	12,973,803	$	19,367,436	$	(6,393,633	)		-33%
Nutraceutical products		1,694,265		5,184,134		(3,489,869	)		-67%
Total manufacturing cost		14,668,068		24,551,570		(9,883,502	)		-40%
Distribution cost		9,586,612		3,655,375		5,931,237			162%
Total cost	$	24,254,680	$	28,206,945	$	(3,952,265	)		-14%

~~Selling~~Cost of sales in the manufacturing segment decreased with the corresponding drop in revenues for this segment,. ~~General~~Gross ~~and~~profit ~~Administrative~~as ~~Expenses~~a percentage of revenues for the manufacturing segment was 7% in 2012, down from 51% in 2011.

~~Selling, general~~Cost ~~and~~of ~~administrative~~sales ~~expenses,~~in the distribution segment increased ~~from~~proportionally ~~$11,982,069~~to the increase in ~~2012~~sales from 2011 to ~~$12~~2012,~~476,722~~ inwith ~~2013,~~gross ~~representing~~profit as a 4%percentage ~~increase. The~~of ~~details~~revenues ofalso ~~our~~increasing ~~sales~~from ~~and~~3% ~~marketing~~to ~~expenses were as follows:~~7%.

	Three Months Ended March 31,				Increase/			Increase/
	2013		2012		(Decrease)			(Decrease)
Promotional materials and fees	$	2,186,010	$	1,255,985	$	930,025			74%
Payroll		3,444,846		3,147,784		297,062			9%
Shipping		297,212		449,768		(152,556	)		-34%
Trips and traveling		568,568		1,136,317		(567,749	)		-50%
Professional fees		1,388,185		868,119		520,066			60%
Staff welfare and insurance		1,204,090		1,519,790		(315,700	)		-21%
Stock based compensation		560,990		664,135		(103,145	)		-16%
Miscellaneous		2,826,821		2,940,171		(113,350	)		-4%
Total	$	12,476,722	$	11,982,069	$	494,653			4%

~~The increase~~Selling, inGeneral ~~promotional~~and ~~fees~~Administrative ~~resulted from more promotional expense by us in an effort to generate additional sales in the highly competitive Chinese pharmaceutical marketplace.~~Expenses

~~The~~Selling, general and ~~decrease~~administrative expenses increased from $11,258,098 in ~~shipping~~the ~~costs~~three ~~was~~months ~~primarily~~ended ~~due~~June 30, 2011 to $12,060,135 in the ~~reduction~~three inmonths ~~sales~~ended June ~~volume~~30, 2012, representing a 7% increase. The details of our ~~products.~~sales and marketing expenses were as follows:

The decrease in trips and traveling is a direct result of overhead cost reduction efforts.

	Three Months Ended June 30,				Increase/			Increase/
	2012		2011		(Decrease)			(Decrease)
Promotional materials and fees	$	1,194,219	$	2,024,554	$	(830,335	)		-41%
Payroll		3,308,956		3,017,104		291,852			10%
Shipping		445,855		921,256		(475,401	)		-52%
Trips and traveling		1,425,902		1,024,292		401,610			39%
Professional fees		1,331,863		664,305		667,558			100%
Staff welfare and insurance		1,323,151		710,820		612,331			86%
Stock based compensation		696,323		851,005		(154,682	)		-18%
Miscellaneous		2,333,866		2,044,762		289,104			14%
Total	$	12,060,135	$	11,258,098	$	802,037			7%

~~Increased professional~~The decrease in promotional fees resulted ~~primarily~~ from ~~audit~~fewer ~~fees~~marketing ~~incurred~~and inpromotional ~~2013~~activities carried out during the second quarter of 2012 as compared with the same period of 2011.

~~Stock~~Increased ~~based compensation~~professional ~~decreased~~fees asresulted aprimarily ~~result~~from ofcosts ~~fewer~~associated ~~directors~~with ~~receiving~~the ~~stock~~audit ~~based~~committee’s ~~compensation~~internal ininvestigation ~~2012,~~related asto ~~well~~our ~~the~~prior ~~completion~~auditors’ resignation ofand ~~amortization~~the cost of ~~previously~~ re-~~issued~~auditing ~~consultant~~the ~~shares~~prior ~~and~~year ~~employee~~financial ~~stock~~statements, ~~options~~which were conducted in 2012.

~~Advertising~~The ~~Costs~~increase in staff welfare and insurance expenses was primarily due to the increase of our staff welfare and insurance coverage level as required by Chinese labor law.

~~Advertising costs~~The ~~decreased~~decrease ~~by $2,510,899, or 41%, from $6,156,353~~ in ~~2012~~shipping costs towas ~~$3,645,454 in 2013,~~ primarily asdue ato ~~result of~~ the ~~initial implementation of our cost~~ reduction ~~measures started~~ in ~~2012,~~sales asvolume ~~further discussed in the “Liquidity” section. Advertising costs as a percentage~~ of ~~revenue~~our ~~decreased from 24% for 2012 to 17% for 2013~~products.

~~Research~~Advertising ~~and Development~~ Costs

~~Research and~~Advertising ~~development~~ costs ~~decreased~~ increased by $~~159~~4,~~888~~576,723, or 135%, from $13,~~566~~399,~~933~~355 in ~~2012~~the three months ended June 30, 2011 to $17,~~407~~976,~~045~~078 in ~~2013~~the three months ended June 30, 2012, primarily as a result of ~~the~~more ~~initial implementation~~promotional ofexpense ~~our~~by ~~cost~~us ~~reduction~~in ~~measures~~an ~~started~~effort into ~~2012,~~generate asadditional ~~further~~sales ~~discussed~~ in the ~~“Liquidity”~~highly ~~section~~competitive Chinese pharmaceutical marketplace. ~~Expressed~~ Advertising costs as a percentage of revenue, ~~research~~increased ~~and~~from ~~development~~6% ~~costs~~in ~~were~~2011 7%to ~~and 6~~29% ~~for~~in ~~2013 and~~ 2012~~, respectively~~.

~~Our~~Research ~~research~~ and ~~development~~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.Costs

~~Depreciation~~Research and ~~Amortization~~development costs decreased by $1,395,975 from $3,125,276 in the three months ended June 30, 2011 to $1,729,301 in the three months ended June 30, 2012, primarily as a result of the initial implementation of our cost reduction measures started in 2012, as further discussed in the “Liquidity” section. Expressed as a percentage of revenue, research and development costs were 6% and 6% in 2012 and 2011, respectively.

~~Depreciation~~ Our research and ~~amortization~~development activities ~~expenses~~consist ~~decreased~~of bynear ~~$216~~term,~~492,~~ ormiddle ~~10%,~~term inand ~~2013~~long asterm ~~compared~~stages which contribute to ~~2012~~both our current and future business strategies. Our ~~This~~key ~~was~~research ~~mainly~~and ~~due~~development toprograms include the ~~recognized~~improvement ~~impairment~~ of ~~property,~~our ~~plant~~existing products and ~~equipment~~development ~~and~~of ~~land~~new ~~use~~products ~~rights~~such as inSHL ~~the~~Lyophilized ~~fourth~~Injection ~~quarter~~Powder, Cease Enuresis Soft Gel and Jinji series products. The majority of ~~2012~~our research and development expenditures are on pharmaceutical products.

~~Provision~~Depreciation ~~for~~and ~~doubtful accounts~~Amortization

~~Provision for~~Depreciation ~~doubtful~~and ~~accounts~~amortization expenses ~~increased~~decreased ~~from~~by $~~985~~205,~~786~~647, inor ~~2012 to $1~~12%,~~763,952~~ in ~~2013,~~the ~~due~~three tomonths ~~continued~~ended ~~deterioration~~June of30, ~~our~~2012 ~~customers’ ability~~as tocompared ~~continue~~ to ~~pay~~the ~~their~~same ~~outstanding~~period ~~invoices~~of ~~on a timely basis~~2011. WeThis ~~evaluate~~was mainly ~~the~~due ~~provision~~to ~~for doubtful accounts on~~ an ~~ongoing~~ ~~basis,~~impairment ~~based~~charge ~~upon~~related ~~our~~to ~~customers’~~acquired ~~ability~~intangible toassets ~~continue~~that towas ~~pay~~recognized ~~their~~in ~~outstanding~~the ~~invoices~~fourth onquarter aof ~~timely basis~~2011, ~~and whether~~resulting ~~their financial position might deteriorate significantly~~ in ~~the~~lower ~~future,~~amortization ~~which would result~~ in ~~their inability to pay their debts to the Company~~2012.

25Provision for reserves and doubtful accounts

~~Long~~Provision for ~~term~~doubtful ~~crop~~accounts ~~inventory~~increased ~~costs~~from nil in the three months ended June 30, 2011 to $2,067,462 in the three months ended June 30, 2012, due to continued deterioration of our customers’ ability to continue to pay their outstanding invoices on a timely basis. We evaluate the provision for doubtful accounts on an ongoing basis, based upon our 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 us.

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. 25

Equity in Losses from Equity Method Investments

Equity in in losses from equity method investments ~~increased~~decreased from aincome ~~loss~~ of $~~191~~460,~~450~~900 in ~~2012~~the three months ended June 30, 2011 to a loss of $~~968~~1,~~232~~ 297,597 in ~~2013~~the three months ended June 30, 2012. The increased loss was mainly due to ~~the~~a ~~recognition~~substantial ofloss ~~the~~realized ~~share~~by ofAXN ~~equity losses from investment~~ in ~~AXN,~~the asthree ~~well as a loss from our share of~~months ~~Yushuntang’s~~ended ~~loss~~June in30, ~~2013~~2012.

Interest Expense, Net

Net interest expense was $~~763~~1,~~691~~808,010 in ~~2013~~the three months ended June 30, 2012, compared to net interest expense of $1,~~743~~535,~~270~~049 for ~~2012~~the three months ended June 30, 2011. The ~~decrease~~increase was mainly due to ~~lower~~higher average balances of ~~convertible~~bank acceptance notes ~~resulting~~to ~~from early retirements in the second half of 2012~~vendors.

Income Tax

The Company’s effective tax rate for ~~2013~~the three months ended June 30, 2012 was 2%, compared to 347% in ~~2012~~the three months ended June 30, 2011. The higher effective tax rate in 2011 was mainly due to an increase in valuation allowance change because some of the entities within the group realized a relatively larger accounting loss for 2011 compared to 2010, for which a valuation allowance was fully provided. For additional information, see “Item 1. Financial Statements – Note 1916. Income Tax”.”

~~FINANCIAL~~RESULTS ~~POSITION~~OF OPERATIONS – SIX MONTHS ENDED JUNE 30, 2012 ~~LIQUIDITY~~AS ~~AND~~COMPARED ~~CAPITAL~~TO ~~RESOURCES~~SIX MONTHS ENDED JUNE 30, 2011

~~Cash~~The following table sets forth the amounts and the percentage relationship to revenues of certain items in our condensed consolidated statements of income for the six months ended June 30, 2012 and 2011:

Our cash position at March 31, 2013 was $6,415,616, representing a decrease of $681,482, or 10%, compared with our cash position of $7,097,098 at December 31, 2012. The decrease was mainly attributable to approximately $1.8 million cash used in operating activities.

	Six Months Ended June 30,
	Results						% of Revenue
	2012			2011			2012		2011

Statement of Operations Data:
Revenues	$	53,192,202		$	106,053,906			100%		100%
Cost of sales		42,318,134			55,133,145			80%		52%

GROSS PROFIT		10,874,068			50,920,761			20%		48%
Selling, general and administrative expenses		24,042,204			22,497,345			45%		21%
Advertising costs		14,132,431			7,220,503			27%		7%
Research and development costs		3,296,234			5,826,488			6%		5%
Depreciation and amortization		3,659,432			3,555,091			7%		3%
Provision for reserves and doubtful accounts		3,053,248			–			6%		–
(LOSS) INCOME FROM OPERATIONS		(37,309,481	)		11,821,334			-70%		11%

Equity in losses from equity method investments		(1,489,047	)		(61,084	)		-3%		0%
Gain on changes in ownership of unconsolidated entities		–			658,540			0%		1%
Interest expense, net		(3,551,280	)		(3,048,634	)		-7%		-3%
Other income (expenses), net		348,749			437,767			1%		0%
(LOSS) INCOME BEFORE INCOME TAX		(42,001,059	)		9,807,923			-79%		9%
Provision for income taxes		953,965			6,294,668			2%		6%
NET (LOSS) INCOME		(42,955,024	)		3,513,255			-81%		3%
Net loss attributable to non-controlling interest		10,902			13,679			0%		0%
NET (LOSS) INCOME ATTRIBUTABLE TO AMERICAN ORIENTAL BIOENGINEERING, INC.	$	(42,944,122	)	$	3,526,934			-81%		3%

EARNINGS (LOSS) PER COMMON SHARE
Basic	$	(1.09	)	$	0.09
Diluted		(1.09	)		0.09

We manage our cash based on thorough consideration of our corporate strategy as well as macroeconomic considerations, and we take into account such factors as interest income and foreign currency fluctuation.26

~~Liquidity~~Revenues

~~Our~~We ~~financial statements~~classify 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~~revenues ofinto ~~the~~two ~~Notes~~segments: ~~filed~~manufacturing ~~this~~revenue 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~~distribution ~~present action was interposed~~revenue. The ~~action~~manufacturing ~~seeks~~revenue ~~payment~~comprises ofrevenue ~~$20,378,608~~from ~~plus prejudgment interest and other fees and costs.~~pharmaceutical ~~The Company has been served with the complaint,~~ and ~~Plaintiffs~~nutraceutical ~~agreed to extend the Company’s time to answer~~products. ~~When~~Revenues ~~that time~~by ~~passed~~segments ~~on June 3, 2013, Plaintiffs refused to grant additional time~~ and ~~have~~product ~~now~~categories ~~made~~were 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.follows:

Historically, our main source of cash was through the sales of our products, Common Stock sales and debt financing. However, due to the decrease in sales, our ability to meet contractual obligations and payables depends on our ability to implement cost reductions effectively and obtain additional financing. We believe 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, we expect that for 2013 we will continue to generate losses from operations, and our operating cash flows will not be sufficient to cover operating expense; therefore, we expect to continue to incur net losses

	Six Months Ended June 30,				Increase/			Increase/
	2012		2011		(Decrease)			(Decrease)
Revenue from pharmaceutical products	$	30,111,084	$	79,693,360	$	(49,582,276	)		-62%
Revenue from nutraceutical products		3,211,136		19,335,518		(16,124,382	)		-83%
Total manufacturing revenue		33,322,220		99,028,878		(65,706,658	)		-66%
Distribution revenue		19,869,982		7,025,028		12,844,954			183%
Total revenues	$	53,192,202	$	106,053,906	$	(52,861,704	)		-50%

ToRevenue from ~~meet~~ our ~~capital needs,~~pharmaceutical weproducts ~~are~~decreased ~~considering~~from ~~multiple alternatives~~$79, ~~including~~693,360 ~~but~~for ~~not~~the ~~limited~~six ~~to,~~months ~~additional debt~~ended ~~financing~~June ~~and credit lines~~30, ~~delaying capital~~ ~~spending for future periods, and/or operating cost reductions. We believe we can utilize our~~2011 ~~properties~~to ~~and land use rights located in Beijing~~$30,111,084 ~~China~~for ~~to secure such financing. No assurance can be given that~~ the ~~financing~~ ~~will~~same beperiod ~~available~~of or2012, ifor ~~available,~~a ~~that~~62% ~~it will be on terms that are satisfactory to us~~decrease. ~~Even~~The ifdecrease wewas ~~are~~primarily ~~able~~due to ~~obtain additional financing, it may contain undue restrictions on our operations, in~~ the ~~case~~following ~~of debt financing or cause substantial dilution to shareholders, in case or equity financing.~~factors:

We· Rapidly evolving Chinese government healthcare policies have ~~implemented~~ a ~~cost~~ ~~reduction~~material ~~plan~~impact ~~that~~on ~~includes~~the ~~decreasing~~entire ~~our~~pharmaceutical ~~overhead~~industry in China. In April 2009, ~~research~~the State Council issued “Opinions of the State Council on Deepening the Reform of the Medical and ~~development~~Health Care System,” ~~and~~a ~~advertising~~major ~~costs~~public health initiative, ~~which~~the wegoal ~~estimate~~of ~~will save~~which usis ~~10%~~to provide access to ~~15%~~basic ~~overall~~medical ~~compared~~care tofor ~~2012~~every person in China by 2020. WeIn dothe ~~not~~implementation ~~believe that~~of this ~~initiative~~plan, ~~will~~we ~~jeopardize~~witnessed ~~our current operations or~~increased ~~future~~dispensing ~~growth~~of ~~plans~~drugs ~~materially~~that were listed on the government-published essential drug list, and of products covered by the National Medical Insurance Catalog. WeThis ~~also~~nationwide ~~plan~~trend tohas ~~delay~~exerted ~~our capital spending~~a continuous and ~~additional~~powerful ~~expansion~~downward topressure ~~future~~on ~~periods~~the pricing of all generic drugs, ~~including~~ ~~investments~~whether branded or not, resulting in ~~construction~~a significant shrinkage of profit margins for manufacturers of these products. Our profit margins from our manufacturing segment decreased from 51% in ~~progress~~2011 to 28% in 2012, principally as a result of this pricing pressure.

26· 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.

~~Our~~· ~~plan~~Because toof ~~delay our capital spending~~the toactual ~~future~~and ~~periods~~potential ~~includes~~size ~~renegotiating~~of the ~~terms~~Chinese ofpharmaceutical ~~our capital expenditure commitments~~market, ~~and~~ we doface ~~not believe such~~intense ~~deferrals~~competition ~~would~~from ~~cause~~companies usthat ~~material~~manufacture ~~contractual~~products ~~penalties~~similar asto weours, ~~believe~~which ~~the~~has ~~contracts~~had ~~can~~a benegative ~~renegotiated~~impact on our revenues. We ~~have~~Many ~~also~~of ~~examined~~these ~~the~~manufacturers ~~structural~~are ~~effect~~more established than we are, have greater brand recognition of aproducts ~~delay~~that oncompete ~~the~~with ~~buildings~~ours, have more financial, technical, marketing and weother ~~believe~~resources ~~that~~than ~~they~~we ~~could~~presently ~~sustain~~possess, and have a ~~delay~~larger ~~of at least~~customer ~~2-3~~base. ~~years~~These ~~without~~competitors ~~comprising overall~~are ~~structural~~often ~~integrity. We~~able ~~have~~to ~~also~~respond ~~evaluated~~more ~~our~~quickly ~~current production lines~~ to new or changing opportunities and ~~expect~~customer ~~that~~requirements, ~~they~~and ~~will~~are ~~continue~~able to ~~function~~undertake ~~through~~more ~~their~~extensive ~~estimated~~promotional ~~useful~~activities, ~~lives~~offer more attractive terms to customers, or adopt more aggressive pricing policies.

~~Furthermore,~~· asBecause ~~of March~~traditional ~~31,~~Chinese ~~2013,~~medicine weinjection ~~had~~products ~~invested~~are ~~in capitalized~~not ~~agricultural~~covered ~~cost~~under ~~for~~the ~~$17,539,278. These~~new ~~pre-harvest~~essential ~~agriculture~~drug ~~costs usually~~list, ~~require~~sales ~~substantial~~of ~~investment~~SHL ~~in the early stages~~powder, ~~gradually~~one 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~~our ~~for~~two ~~internal~~flagship ~~use~~products, asdeclined ~~well~~materially ~~as profit~~ from ~~selling~~2011 to ~~the market in 2018~~2012.

~~We have also~~Revenue ~~reviewed~~in ~~all~~connection ofwith our ~~current~~nutraceutical ~~material~~products ~~obligations~~decreased ~~and~~from ~~expect~~$19,335,518 ~~that~~in wethe ~~could fulfill all~~six ofmonths ~~our material~~ended ~~commitments~~June 30, 2011 ~~with~~to $3,211,136 in the ~~exception~~six ofmonths ~~construction~~ended ~~contracts~~June ~~which~~30, we2012, ~~believe~~an ~~can~~83% bedecrease. ~~renegotiated~~Revenues were adversely affected by the food safety and drug problem in 2012. The decrease was mainly due to the decrease in sales from our Soy Peptide tablets and Soy Peptide drinks.

WeDistribution dorevenue increased ~~not~~by ~~plan~~$12,844,954 ~~to further downsize~~or ~~our~~183%, ~~operations~~to ~~beyond~~$19,869,982 for the ~~cost~~six ~~reductions~~months ~~discussed~~ended ~~herein~~June 30, ~~including~~ ~~selling~~2012 orfrom ~~closing~~$7,025,028 ~~any~~for ofthe ~~our~~same period of ~~subsidiaries~~2011, orprimarily ~~suspending~~as ~~any~~a ~~ongoing~~result ~~operations~~of the acquisition of Liaoning Baicao, which occurred at the end of 2011.

~~Total~~Cost ~~Debt~~of Sales and Gross Profit

WeCost ~~had~~of ~~total~~sales ofwas $6242,~~675~~318,~~737~~134 in ~~debt~~the assix ofmonths ~~March~~ended 31June 30, ~~2013~~2012, as compared to $6755,~~642~~133,~~849~~145 asin ofthe six ~~December~~months ~~31,~~ended ~~2012.~~June ~~The decrease of $4~~30,~~708,448~~ ~~was~~2011. ~~mainly~~Cost ~~due to a repayment~~ of ~~notes~~sales ~~payable~~by ~~during~~segments ~~the~~and ~~first~~product ~~quarter~~categories ofwere ~~2013.~~as follows:

Cash Flow

	Six Months Ended June 30,				Increase/			Increase/
	2012		2011		(Decrease)			(Decrease)
Pharmaceutical products	$	21,053,648	$	37,970,193	$	(16,916,545	)		-45%
Nutraceutical products		2,898,099		10,416,530		(7,518,431	)		-72%
Total manufacturing cost		23,951,747		48,386,723		(24,434,976	)		-50%
Distribution cost		18,366,387		6,746,422		11,619,965			172%
Total cost	$	42,318,134	$	55,133,145	$	(12,815,011	)		-23%

~~Operating Activities~~27

~~Cash~~Cost ~~flows used~~of bysales ~~operations~~in ~~during~~ the ~~three months ended March 31, 2013 amounted to $1,853,209, representing a decrease in cash used of~~manufacturing ~~$19,674,767~~segment ~~compared~~decreased with ~~cash~~the ~~flows~~corresponding ~~used~~drop ~~for~~in ~~operations~~revenues ~~of $21,527,976~~ for ~~three~~this ~~months ended March 31~~segment, ~~2012~~. ~~The~~Gross ~~decrease~~profit ~~in net~~as ~~cash used by operating activities was primarily attributable to: (i)~~ a ~~decrease~~percentage ~~in accounts receivable~~ of ~~$11.7~~revenues ~~million~~for in the manufacturing ~~first~~segment ~~quarter~~was of28% ~~2013, (ii) an increase of $9.7 million~~ in ~~inventories during the first quarter of~~ 2012, asdown ~~the~~from ~~company~~51% ~~accumulated stock using the proceeds of collected notes receivable and the sale of the NuoHua affiliate that occurred during the same period, and (iii) a decrease~~ in ~~accrued expenses and other payables of $4~~2011.~~4 million in 2012.~~

~~Investing~~Cost ~~Activities~~of sales in the distribution segment increased proportionally to the increase in sales from 2011 to 2012, with gross profit as a percentage of revenues also increasing from 3% to 7%.

~~Our net cash provided by investing activities amounted to $3~~Selling,~~870,787~~ inGeneral the three months ended March 31, 2013, compared to $25,667,394 in the three months ended March 31, 2012. As reflected in our statement of cash flows, the changes mainly included: (i) the collection of notes receivable in the first quarter of 2012 in the amount of $18,078,344, as compared to $4,207,696 collected in 2013; and ~~(ii)~~Administrative ~~cash inflow from the collection of receivable for the sale of the NuoHua affiliate in the amount of $16,495,493 in the first quarter of 2012.~~Expenses

~~Financing~~Selling, ~~Activities~~general and administrative expenses increased from $22,497,345 in the six months ended June 30, 2011 to $24,042,204 in the six months ended June 30, 2012, representing a 7% increase. The details of our sales and marketing expenses were as follows:

Our net cash used in financing activities was $1,697,326 in the three months ended March 31, 2013, compared to cash provided of $173,264 in the three months ended March 31, 2012. The difference is primarily due to the repayment of bank loans in the amount of $5,060,685 during the first quarter of 2013, as compared to bank loans funded in the amount of $3,385,401 in the first quarter of 2012.

	Six Months Ended June 30,				Increase/			Increase/
	2012		2011		(Decrease)			(Decrease)
Promotional materials and fees	$	2,450,204	$	3,573,606	$	(1,123,402	)		-31%
Payroll		6,456,740		6,272,885		183,855			3%
Shipping		895,623		1,836,585		(940,962	)		-51%
Trips and traveling		2,562,219		2,008,694		553,525			28%
Professional fees		2,199,982		1,315,077		884,905			67%
Staff welfare and insurance		2,842,941		1,833,927		1,009,014			55%
Stock based compensation		1,360,458		1,663,272		(302,814	)		-18%
Miscellaneous		5,274,037		3,993,299		1,280,738			32%
Total	$	24,042,204	$	22,497,345	$	1,544,859			7%

~~Issuance~~The decrease in promotional fees resulted from fewer marketing and promotional activities carried out during the first half of ~~Common~~2012 ~~Stock~~as compared with the same period of 2011.

~~See~~The ~~Part~~increase ~~II,~~in ~~Item~~staff welfare 2and ~~for~~insurance ~~issuance~~expenses was primarily due to the increase of ~~unregistered~~our staff welfare and insurance coverage level as required ~~shares~~by ofChinese ~~common~~labor ~~stock~~law.

~~Inflation~~The decrease in shipping costs was primarily due to the reduction in sales volume of our products.

~~Inflation~~Increased ~~has~~professional fees ~~not~~resulted ~~had~~primarily afrom ~~material~~costs ~~impact~~associated onwith the audit committee’s internal investigation related to our ~~business~~prior auditors’ resignation and the cost of re-auditing the prior year financial statements, which were conducted in 2012.

~~Currency~~Advertising ~~Exchange Fluctuations~~Costs

~~The~~Advertising ~~Company's~~costs increased ~~operations~~by ~~are~~$6,911,928, ~~exposed~~or to96%, afrom ~~variety of global market risks~~$7,220,503 ~~including~~in the ~~effect~~six ofmonths ~~changes~~ended inJune ~~foreign~~30, ~~currency~~2011 ~~exchange~~to ~~rates.~~$14,132,431 in ~~These~~the ~~exposures~~six ~~are~~months ~~managed,~~ended inJune ~~part~~30, ~~with~~2012, ~~the~~primarily ~~use~~as of a ~~financial~~result ~~derivative.~~of ~~The~~more ~~Company~~promotional ~~does~~expense ~~not~~by ~~use~~us ~~financial~~in an ~~derivatives~~effort to ~~hedge~~ ~~exposures~~generate additional sales in the ~~ordinary~~highly ~~course~~competitive Chinese pharmaceutical marketplace. Advertising costs as a percentage of ~~business~~revenue orincreased from 7% for ~~speculative~~2011 ~~purposes~~to 27% for 2012.

27Research and Development Costs

WeResearch ~~currently~~and development ~~conduct~~costs ~~substantially~~decreased ~~all~~by of$2,530,254 ~~our~~from ~~operations~~$5,826,488 ~~through~~in ~~our PRC subsidiaries. The functional currency of our PRC subsidiaries is~~ the ~~Chinese~~ ~~RMB.~~six ~~The~~months ~~financial~~ended ~~statements~~June of30, ~~our~~2011 ~~PRC subsidiaries are translated~~ to ~~U.S. dollars using year-end exchange rates as to~~$3,296,234 ~~assets~~in ~~and~~the ~~liabilities~~six ~~and~~months ~~average~~ended ~~exchange~~June ~~rates as to revenues~~30, ~~expenses~~2012, ~~and~~primarily ~~cash~~as ~~flows.~~a ~~Capital~~result ~~accounts~~of ~~are translated at their historical exchange rates when~~ the ~~capital~~initial ~~transaction~~implementation ~~occurred.~~of our ~~Translation~~cost ~~adjustments~~reduction ~~resulting~~measures ~~from~~started ~~this process are included~~ in ~~accumulated~~2012, ~~other~~as ~~comprehensive~~further ~~income~~discussed in the ~~statement~~“Liquidity” ~~of shareholders’ equity~~section. ~~Transaction~~Expressed ~~gains~~as ~~and~~a ~~losses~~percentage ~~that~~of ~~arise~~revenue, ~~from~~research ~~exchange~~and ~~rate~~development ~~fluctuations~~costs onwere ~~transactions~~6% ~~denominated~~and in5% afor ~~currency~~2012 ~~other~~and ~~than~~2011, ~~the functional currency are included in the results of operations as incurred~~respectively.

AsOur ~~the majority~~research ~~of our assets~~ and ~~substantially~~development activities ~~all~~consist of ~~our~~near ~~revenue~~term, ~~costs~~middle term and ~~expenses~~long ~~are~~term ~~denominated~~stages inwhich ~~RMB,~~contribute ~~any~~to ~~significant~~both ~~revaluation of~~our ~~the~~current ~~RMB may materially~~ and ~~adversely~~future ~~affect~~business ~~our~~strategies. Our ~~cash~~key ~~flows,~~research ~~revenues~~ and ~~financial~~development ~~condition.~~programs ~~For~~include ~~example, if~~ the ~~RMB~~improvement ~~depreciates against the U.S. dollar, the value~~ of our ~~RMB~~existing ~~revenues,~~products ~~earnings,~~ and ~~assets,~~development ~~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~~new ~~payments~~products ~~for business purposes,~~such ~~the~~as ~~U.S.~~SHL ~~dollar~~Lyophilized ~~equivalent~~Injection ~~of the RMB we convert would be reduced. On the other hand~~Powder, toCease ~~the~~Enuresis ~~extent~~Soft ~~that~~Gel weand ~~need~~Jinji toseries ~~convert U~~products.~~S. dollars~~ weThe ~~receive~~majority ~~from an offering~~ of our ~~securities~~research ~~into~~and ~~RMB for our operations, appreciation of the RMB against the U.S. dollar~~development ~~could~~expenditures ~~reduce~~are ~~the~~on ~~amount~~pharmaceutical ~~of the U~~products.~~S. dollars available.~~

~~The~~Depreciation ~~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.Amortization

~~The~~Depreciation ~~PRC~~and amortization ~~government~~expenses ~~imposes~~increased ~~control~~by ~~over~~$104,341, ~~the~~or ~~conversion of RMB~~3%, ~~into~~in ~~foreign currencies. Under~~ the ~~current~~six ~~unified~~months ~~floating~~ended ~~exchange~~June ~~rate system~~30, ~~the~~2012 ~~People’s~~as ~~Bank~~compared ofto ~~China~~the six ~~publishes~~months anended ~~exchange~~June ~~rate~~30, ~~which~~2011. weThis ~~refer~~was tomainly asdue ~~the~~to ~~PBOC~~an ~~exchange~~increase ~~rate,~~in ~~based~~property onand ~~the previous~~equipment ~~day’s dealings~~ in the ~~inter-bank~~final ~~foreign~~three ~~exchange market. Financial institutions authorized to deal in foreign currency~~quarters ~~may~~of ~~enter~~2011, ~~into~~offset ~~foreign~~by ~~exchange~~an ~~transactions~~impairment atcharge ~~exchange~~related ~~rates~~to ~~within~~acquired anintangible ~~authorized~~assets ~~range~~that ~~above~~was orrecognized ~~below~~in the ~~PBOC~~fourth ~~exchange~~quarter ~~rate~~of 2011, ~~according~~resulting toin ~~market~~lower ~~conditions~~amortization in 2012.

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.28

~~Enterprises in~~Provision ~~China, including FIEs, which require foreign exchange~~ for ~~transactions~~reserves ~~relating to current account items, if within a certain~~and ~~limited~~doubtful 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.accounts

~~Convertibility~~Provision for doubtful ofaccounts ~~foreign~~increased ~~exchange~~from nil in ~~respect~~the ofsix ~~capital~~months ~~account~~ended ~~items~~June 30, ~~such~~2011 asto ~~direct~~$3,053,248 ~~investment~~in ~~and~~the six ~~capital~~months ~~contribution~~ended June 30, is2012, ~~still~~due ~~subject~~to continued deterioration of our customers’ ability to continue to pay their ~~certain~~outstanding ~~restrictions~~invoices on a timely basis. We evaluate the provision for doubtful accounts on an ongoing basis, based upon our customers’ ability to continue to pay their outstanding invoices on a timely basis, and ~~prior~~whether ~~approval~~their ~~from~~financial position might deteriorate significantly in the ~~SAFE~~future, orwhich ~~its~~would ~~relevant~~result ~~branches~~in ~~must~~their beinability ~~sought~~to pay their debts to us.

~~Between 1994~~Equity ~~and 2004, the exchange rate for RMB against the U.S. dollar remained relatively stable, most of the time~~ in ~~the~~Losses ~~region~~from ~~of approximately~~Equity ~~RMB8.28~~Method ~~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.~~Investments

~~Since~~Equity ~~a significant~~in ~~amount~~losses offrom equity ~~our~~method ~~future~~investments ~~revenues~~decreased ~~are~~from ~~expected~~$61,084 ~~to be denominated~~ in ~~RMB,~~the ~~any~~six ~~existing~~months ~~and~~ended ~~future~~June ~~restrictions~~30, on2011 ~~currency exchange may limit our ability~~ to ~~utilize~~a ~~revenue generated in China to fund our business activities outside~~ loss of ~~China~~$1, ~~if any~~489, or047 ~~expenditures denominated~~ in ~~foreign~~the ~~currencies,~~six ormonths ~~our~~ended ~~ability~~June ~~to meet our foreign currency obligations~~30, ~~which could have a material adverse effect on our business, financial condition and results of operations~~2012. WeThe ~~cannot~~increased beloss ~~certain~~was ~~that~~mainly ~~the~~due ~~PRC~~to ~~regulatory~~a substantial ~~authorities~~loss ~~will~~realized ~~not~~by ~~impose~~AXN ~~more~~in ~~stringent restrictions on~~ the ~~convertibility~~six ofmonths ~~RMB~~ended ~~with~~June ~~respect~~30, ~~to foreign exchange transactions~~2012.

WeInterest ~~recognized a foreign currency translation adjustment of $0.7 million and $2.6 million for the three months ended March 31~~Expense, 2013 and 2012, respectively. The balance sheet amounts with the exception of equity at March 31, 2013 were translated at 6.2816 RMB to $1.00 USD as compared to 6. 3161 RMB at December 31, 2012. The equity accounts were stated at their historical rate.Net

~~The~~Net ~~average~~interest ~~translation~~expense ~~rates~~was ~~applied~~$3,551,280 toin the ~~income~~six ~~and cash flow statement amounts for the three~~ months ended ~~March~~June 3130, ~~2013 and~~ 2012, ~~were~~compared ~~6.2858~~to ~~RMB and~~net ~~6.3201~~interest ~~RMB~~expense toof $~~1.00 USD~~3,032,395 for ~~respectively.~~the Wesix domonths ~~not~~ended ~~hedge~~June ~~our exposure to foreign exchange risk; as such~~30, we2011. ~~may~~The inincrease ~~the~~was ~~future experience~~mainly ~~economic~~due ~~loss~~to ashigher aaverage ~~result~~ balances of ~~any~~bank ~~foreign~~acceptance ~~currency~~notes ~~exchange~~to ~~rate fluctuations~~vendors.

28Income Tax

The Company’s effective tax rate for the six months ended June 30, 2012 was 2%, compared to 58% in the six months ended June 30, 2011. The higher effective tax rate in 2011 was mainly due to an increase in valuation allowance change because some of the entities within the group realized a relatively larger accounting loss for 2011 compared to 2010, for which a valuation allowance was fully provided. For additional information, see “Item 1. Financial Statements – Note 16. Income Tax.”

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

Cash

Our cash position at June 30, 2012 was $47,630,035, representing a decrease of $4,997,893, or 9%, compared with our cash position of $52,627,928 at December 31, 2011. The decrease was mainly attributable to net cash used in operations of $34.4 million in the six months ended June 30, 2012, due in large part to our lower sales and larger operating losses.

Liquidity

Our 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 six months ended June 30, 2012, we recorded a loss from operations of $37,309,481 and utilized cash in operations of $34,437,589. As of June 30, 2012, we had a working capital deficit of $21,521,095. In addition, subsequent to June 30, 2012 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.

Historically, our main source of cash was through the sales of our products, common stock sales and debt financing. However, due to the decrease in sales, our ability to meet contractual obligations and payables depends on our ability to implement cost reductions effectively and obtain additional financing. We believe that the ongoing economic challenges and uncertainties experienced in 2012 and the first quarter of 2013 will continue to negatively impact our business in the remainder 2013. Thus, we expect that for 2013 we will continue to generate losses from operations, and our operating cash flows will not be sufficient to cover operating expense; therefore, we expect to continue to incur net losses.

To 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 June 30, 2012, we had invested in capitalized agricultural cost for $25,831,222. 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 our operations 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 a total of $123,516,844 in debt as of June 30, 2012, as compared to $116,440,026 as of December 31, 2011. The increase of $7,076,818 was mainly due to an increase in bank acceptance notes to vendors in the first half of 2012.

Cash Flow

Operating Activities

Cash flows used by operations during the six months ended June 30, 2012 amounted to $34,437,589, representing an increase in cash used of $46,615,871 compared with cash flows provided by operations of $12,176,835 for six months ended June 30, 2011. The increase in net cash used by operating activities was primarily attributable to: (i) lower sales and resulting increased losses in 2012 as compared to 2011, and (ii) a large decrease in accounts receivable of $19,158,493 in 2011, with a corresponding decrease of accounts receivable of only $4,982,013 in 2012.

Investing Activities

Our net cash provided by investing activities amounted to $26,021,071 in the six months ended June 30, 2012, as compared to net cash used in investing activities of $35,671,801 in the six months ended June 30, 2011. The changes mainly included: (i) the collection of notes receivable in the first half of 2012 in the amount of $23,068,432, (ii) cash inflow from the collection of receivable for the sale of the NuoHua affiliate in the amount of $18,278,815 in 2012, and (iii) deposits made against long term assets in the amount of $26,902,061 in 2011.

Financing Activities

Our net cash provided by financing activities was $1,924,118 in the six months ended June 30, 2012, compared to cash provided by financing activities of $197,241 in the six months ended June 30, 2011. The difference is primarily due to (i) increases in restricted cash in 2012 resulting from an increased use of bank acceptance notes which require restricted cash deposits, and (ii) proceeds from bank loans (net of repayments) of $7,016,929 in 2012 as compared to $997,240 in 2011.

Issuance of Common Stock

See Part II, Item 2 for issuance of unregistered shares of common stock.

Inflation

Inflation has not had a material impact on our business.

Currency Exchange 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 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.

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 $4.0 million and $11.4 million for the six months ended June 30, 2012 and 2011, respectively. The balance sheet amounts with the exception of equity at June 30, 2012 were translated at 6.3197 RMB to $1.00 USD as compared to 6.3647 RMB at December 31, 2011. The equity accounts were stated at their historical rate.

The average translation rates applied to the income and cash flow statement amounts for the six months ended June 30, 2012 and 2011 were 6.3309 RMB and 6.5379 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes in the Company’s market risk components since December 31, ~~2012~~2011. For a discussion of our market risk, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our ~~2012~~2011 Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation in accordance with the requirements of 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.

Based upon our evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the 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.

Description of Material Weakness

A material weakness in internal control over financial reporting is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Management is continuing its review of the Company’s internal control over financial reporting as it believes the following material weaknesses still exist: (i) a lack of senior management personnel who have the requisite U.S. GAAP experience to prepare financial statements in accordance with U.S. GAAP; (ii) the Company did not maintain an adequate financial reporting organizational structure to support the complexity and operating activities of the Company resulting in a weakness in efficiency and controls related to the financial statement closing process. However, the Company has taken steps described ~~above~~below to remediate these deficiencies.

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

Changes in Internal Control over Financial Reporting

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

Remediation plans

In response to the material weaknesses identified above, management commenced to implement the measures described below to remediate the material weaknesses:

· Management revised 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~~Officer, 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~~transactions are captured and reflected in the Company’s financial statements onin a timely and accurate manner.

Management established a reporting threshold for significant and material transactions to those who are responsible for oversight the financial reporting, particularly to the Audit Committee.

Management established a threshold for significant and material transactions that would require approval from the board of directors.

Management designed controls to obtain internal certifications from operational management to ensure all important transactions, contracts and agreements have been appropriately disclosed to the Disclosure Committee.

The 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.

PART II – OTHER INFORMATION

ITEM 1. – LEGAL PROCEEDINGS

OnAs ~~December 6,~~of ~~2012,~~June ~~David Bravetti filed a shareholder derivative Complaint against Tony Liu~~30, ~~Yanchun Li, Binsheng Li, Jun Min, Lawrence Wizel,~~2012 ~~Cosimo~~and ~~Patti,~~December ~~Xianmin Wang~~31, ~~Baiqing Zhang~~2011, ~~Eileen Brody (collectively, “Defendants”). Because~~ the ~~complaint sets forth a shareholder derivative claim, the~~ Company iswas ~~named~~subject asto avarious ~~nominal~~legal ~~Defendant,~~proceedings ~~although~~and noclaims. ~~relief~~Management iscontinues ~~sought~~to ~~for~~evaluate the ~~Company and any~~lawsuits ~~relief~~discussed ~~obtained~~below ~~from~~and ~~the~~based ~~Defendants~~on ~~would inure to~~ the ~~benefit~~stage of ~~the~~these ~~Company. The Complaint asserts causes of action for breach of fiduciary duty~~proceedings, ~~waste~~management ofis ~~corporate~~unable ~~assets,~~to ~~and~~reasonably ~~unjust~~estimate ~~enrichment. Bravetti’s~~the ~~claims~~likelihood ~~arose out~~ of ~~alleged~~any ~~accounting~~loss ~~errors~~or ~~that~~the ~~were~~amount ~~made~~or inrange ~~the~~of ~~Company’s~~any ~~financial~~potential ~~statements~~loss ~~for~~that ~~the~~could ~~periods~~result ~~between~~from the ~~third~~litigation. Therefore, ~~quarters~~at ~~ending September~~June 30, ~~2009~~2012 and December ~~September 30~~31, 2011, ~~which~~no ~~financial~~accrual ~~statements~~has ~~were~~been ~~included~~established infor ~~filings~~any ~~made~~potential ~~with~~loss ~~the~~in ~~SEC. The~~connection ~~alleged accounting~~with ~~errors~~these ~~were~~lawsuits. ~~related~~Should to the Company~~’s sale of an interest held by the Company’s subsidiary, Nuo Hua Investment~~ ~~Company~~fail ~~Limited~~to ~~and~~prevail ~~were disclosed~~ in ~~the~~any ~~Company’s~~of ~~Restatement~~these ~~filed~~legal onmatters ~~November~~or ~~14,~~should ~~2011. The~~several ~~Complaint also alleges that its claims arise out~~ of ~~alleged~~these ~~inconsistencies~~legal ~~that~~matters ~~the~~be ~~Company’s~~resolved ~~then~~against ~~auditor, Ernst and Young Hua Ming, discovered throughout~~ the ~~course of the~~ Company’s ~~audit~~in ~~for~~ the ~~year ending 2011. Although the Complaint claims that jurisdiction~~same isreporting ~~proper in federal court in New Jersey because of diversity of citizenship~~period, ~~according to~~ the ~~Complaint,~~operating ~~Bravetti~~results ~~is a New Jersey citizen, as is one~~ of ~~the Defendants. The Company did not file~~ a ~~responsive~~particular ~~pleading~~reporting toperiod ~~Bravetti’s~~could 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 amaterially ~~Florida~~adversely ~~citizen~~affected. ~~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~~On ~~are~~June no23, ~~other~~2010, ~~known~~Haining ~~legal~~Zhang ~~proceedings~~asserted breach of contract, fraudulent dealing, and breach of fiduciary duty claims against the Company and its Chief Executive Officer, Shu Jun Liu (together “Defendants”). Zhang’s claims arose out of an alleged 2003 investment banking advisory and consultant agreement, whereby Zhang allegedly arranged for the Company to receive an equity line of credit and was allegedly given the exclusive right to arrange financing transactions for the Company for a period of one year. Zhang sought damages for allegedly unpaid financing commission and advisory compensation in the amount of $2,410,000, plus interest and expenses. On September 12, 2011, the District Court granted a motion by Defendants to dismiss Zhang’s claims as either barred by the applicable statute of limitations or as failing to state a claim. Zhang filed a notice of appeal on October 11, 2011. On April 23, 2013, the Second Circuit Court of Appeals affirmed the District Court’s dismissal of Zhang’s claims. Although Zhang has 90 days from the date of the Second Circuit’s decision in which to seek an appeal to the United States Supreme Court, the Company does not believe the Supreme Court would hear an appeal of Zhang’s case.

~~ITEM~~On 1AJune –22, ~~RISK~~2012, ~~FACTORS~~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(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.

~~There have been no material changes or new risks since our Annual Report on Form 10-K for the year ended December 31, 2012.~~33

~~ITEM~~On 2October –1, ~~UNREGISTERED~~2012, Peter ~~SALES~~Barbato OFfiled a shareholder derivative Complaint against Tony Liu, Yanchun Li, Binsheng Li, Lawrence Wizel, Cosimo Patti, ~~EQUITY~~Xianmin ~~SECURITIES~~Wang, ~~AND~~Eileen ~~USE~~Brody, OFJun ~~PROCEEDS~~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.

~~None~~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.

~~ITEM~~On April 8, 2013, four of 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 ~~DEFAULTS~~refused ~~UPON~~to ~~SENIOR~~grant additional time and have now made a motion seeking entry of a default. The Company filed its answer ~~SECURITIES~~on June 5, 2013.

OnThere ~~July~~are ~~15,~~no ~~2008 the~~other ~~Company~~known ~~issued~~legal ~~$115,000,000~~proceedings ofagainst ~~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.

~~This~~ITEM liability of the Company is in default, which was caused by the delisting of the Company’s common stock by the NYSE as described in Form 25NSE filed on April 16, 2012 by NYSE; and by the non-payment of the interest due on July 15, 20121A. OnRISK 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.FACTORS

~~ITEM~~There 4have –been ~~MINE~~no material ~~SAFETY~~changes ~~DISCLOSURES~~or new risks since our Annual Report on Form 10-K for the year ended December 31, 2011.

~~Not~~ITEM ~~applicable~~2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~ITEM 5 – OTHER INFORMATION~~None.

~~Not~~ITEM ~~applicable~~3. DEFAULTS UPON SENIOR SECURITIES

On July 15, 2008 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 June 30, 2013.

~~ITEM~~The 6Company –is ~~EXHIBITS~~in default of the Notes, which was caused by the delisting of the Company’s common stock by the NYSE as described in the Form 25NSE filed on April 16, 2012 by the NYSE; and by the non-payment of the interest due on July 15, 2012. On April 8, 2013, the Plaintiffs filed an 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, which action was withdrawn and the present action 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 effect on our liquidity.

~~The~~ITEM ~~following~~4. ~~exhibits are~~MINE ~~filed~~SAFETY ~~as part of this Quarterly Report on Form 10-Q:~~DISCLOSURES

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.

3134

~~SIGNATURES~~ITEM 5. OTHER INFORMATION

~~Pursuant~~Not ~~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~~applicable.

~~AMERICAN~~ITEM ~~ORIENTAL BIOENGINEERING, INC~~6. EXHIBITS

~~/s/~~The ~~Tony~~following ~~Liu~~exhibits are ~~TONY~~filed ~~LIU~~as ~~CHAIRMAN~~part ~~AND~~of ~~CHIEF~~this ~~EXECUTIVE~~Quarterly ~~OFFICER~~Report ~~DATED:~~on ~~July~~Form 10~~, 2013 /s/ Yanchun Li YANCHUN LI CHIEF FINANCIAL OFFICER DATED~~-Q: ~~July 10, 2013~~

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
101.SCH		Document, XBRL Taxonomy Extension
101.CAL		Calculation Linkbase, XBRL Taxonomy Extension Definition
101.DEF		Linkbase, XBRL Taxonomy Extension Labels
101.LAB		Linkbase, XBRL Taxonomy Extension
101.PRE		Presentation Linkbase

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: August 2, 2013

/s/ Yanchun Li

YANCHUN LI

CHIEF FINANCIAL OFFICER

DATED: August 2, 2013

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