UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended ~~September~~June 30, ~~2012~~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 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 ~~July~~October 1728, 2013, 36,~~419~~566,~~706~~765 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 September 30, 2012 and condensed consolidated balance sheet as of December 31, 2011	3
Unaudited condensed consolidated balance sheet as of June 30, 2013 and condensed consolidated balance sheet as of December 31, 2012	3
Unaudited condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2012 and 2011	5
Unaudited condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2013 and 2012	5
Unaudited condensed statements of cash flow for the nine months ended September 30, 2012 and 2011	6
Unaudited condensed statements of cash flow for the six months ended June 30, 2013 and 2012	6
Notes to unaudited condensed consolidated financial statements - September 30, 2012	8
Notes to unaudited condensed consolidated financial statements - June 30, 2013	7
ITEM 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations	2219
ITEM 3 – Quantitative and Qualitative Disclosures About Market Risk	3531
ITEM 4 – Controls and Procedures	3531
PART II – OTHER INFORMATION	3632
ITEM 1 – Legal Proceedings	3632
ITEM 1A – Risk Factors	3734
ITEM 2 – Unregistered Sales of Equity Securities and Use of Proceeds	3734
ITEM 3 – Defaults upon Senior Securities	3734
ITEM 4 – Mine Safety Disclosures	3734
ITEM 5 – Other Information	3834
ITEM 6 – Exhibits	3834
Signatures	3935

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

	SEPTEMBER 30,		DECEMBER 31,
	JUNE 30,		DECEMBER 31,
	2012		2011
	2013		2012
	(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	267,~~432~~004,~~161~~814	$	527,~~627~~097,~~928~~098
Restricted cash		72,~~045~~055,~~083~~175		~~264~~6,~~031~~514,224
Accounts receivable, net of allowance for doubtful accounts of $17,873,220 and $16,354,873 as of September 30, 2012 and December 31, 2011, respectively		42,342,354		53,196,298
Accounts receivable, net of allowance for doubtful accounts of $17,599,876 and $18,134,912 as of June 30, 2013 and December 31, 2012, respectively		29,239,741		45,543,611
Bank acceptance notes from customers		3115,~~570,033~~156		274,~~848~~682,~~917~~607
Inventories, net of provision for slow-moving inventories of $317,290 and $624,516 as of September 30, 2012 and December 31, 2011, respectively		27,533,816		18,889,930
Inventories, net of provision for slow-moving inventories of $45,952 and $47,281 as of June 30, 2013 and December 31, 2012, respectively		21,337,078		20,570,846
Advances to suppliers and prepaid expenses		147,~~274~~591,~~929~~431		1610,~~535~~292,~~191~~360
Receivable for disposal of NuoHua Affiliate		–		18,153,754
Deferred tax assets		33,616		28,660
Deferred tax assets		3,192,688		3,225,803
Other current assets		327,395		719,075
Other current assets		935,790		5,168,742
Total current assets		67,704,406		95,448,481
Total current assets		125,326,854		195,910,594
LONG-TERM ASSETS
Property, plant and equipment, net		~~175~~172,~~595~~982,~~692~~812		~~170~~171,~~534~~381,~~450~~389
Land use rights, net		~~156~~146,~~026~~574,~~020~~962		~~157~~145,~~928~~314,~~152~~928
Capitalized agricultural costs		2517,~~900~~804,~~652~~002		2217,~~333~~443,~~937~~475
Acquired intangible assets, net		1312,~~516~~217,~~978~~588		1013,~~728~~116,~~658~~380
Investments in and advances to equity method investments		41,~~161~~504,~~515~~579		53,~~934~~337,~~422~~485
Deferred tax assets		263,201		263,109
Deferred financing costs		16,279		266,786
Deferred financing costs		370,130		1,347,735
Total long-term assets		351,100,222		350,860,443
Total long-term assets		375,834,188		369,070,463
TOTAL ASSETS	$	418,804,628	$	446,308,924
TOTAL ASSETS	$	501,161,042	$	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

	JUNE 30,		DECEMBER 31,
	2013		2012

CURRENT LIABILITIES
Accounts payable	$	7,874,890	$	11,005,423
Accrued expenses and other payables		19,684,117		16,339,129
Bank acceptance notes to vendors		4,110,349		11,054,449
Taxes payable		266,498		762,943
Accrued taxes		11,829,261		11,015,810
Convertible notes, in default		49,161,000		49,161,000
Short-term bank loans		10,827,058		6,807,999
Current portion of long-term bank loans		65,578		64,811
Total current liabilities		103,818,751		106,211,564

LONG-TERM LIABILITIES
Long-term bank loans, net of current portion		521,198		554,590
Deferred tax liabilities		12,571,241		11,956,064
Total long-term liabilities		13,092,439		12,510,654
TOTAL LIABILITIES		116,911,190		118,722,218

COMMITMENTS AND CONTINGENCIES


SHAREHOLDERS’ EQUITY
Preferred stock, $0.001 par value; 2,000,000 shares authorized; 1,000,000 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively		1,000		1,000
Common stock, $0.002 par value; 75,000,000 shares authorized; 36,419,706 and 36,644,288 shares issued as of June 30, 2013 and December 31, 2012, respectively; 36,419,706 shares outstanding as of June 30, 2013 and December 31, 2012		72,887		73,336
Common stock to be issued (766,205 shares and 611,971 shares as of June 30, 2013 and December 31, 2012, respectively) 525,561 450,561
Additional paid-in capital		177,978,746		177,974,127
Retained earnings		44,141,967		78,097,723
Less: Treasury stock, at cost (224,582 shares as of December 31, 2012)		–		(799,999	)
Accumulated other comprehensive income		79,173,277		71,789,958
TOTAL SHAREHOLDERS' EQUITY		301,893,438		327,586,706
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	418,804,628	$	446,308,924

	SEPTEMBER 30,			DECEMBER 31,
	2012			2011
	(Unaudited)
CURRENT LIABILITIES
Accounts payable	$	24,005,147		$	22,085,545
Accrued expenses and other payables		23,110,078			21,201,533
Bank acceptance notes to vendors		10,629,172			502,912
Taxes payable		72,433			580,293
Accrued taxes		10,562,815			8,849,004
Convertible notes, in default		49,161,000			108,500,000
Short-term bank loans		6,788,759			6,756,014
Current portion of long-term bank loans		64,395			63,070
Deferred tax liabilities		63,689			90,070
Total current liabilities		124,457,488			168,628,441
LONG-TERM LIABILITIES
Long-term bank loans, net of current portion		570,733			618,030
Deferred tax liabilities		14,630,285			14,572,492
Total long-term liabilities		15,201,018			15,190,522
TOTAL LIABILITIES		139,658,506			183,818,963
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Preferred stock, $0.001 par value; 2,000,000 shares authorized; 1,000,000 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively		1,000			1,000
Common stock, $0.002 par value; 75,000,000 shares authorized; 36,616,588 and 39,476,274 shares issued as of September 30, 2012 and December 31, 2011, respectively; 36,392,006 and 39,251,692 shares outstanding as of September 30, 2012 and December 31, 2011, respectively		73,308			78,952
Common stock to be issued (529,377 shares and 132,247 shares as of September 30, 2012 and December 31, 2011, respectively)		426,358			291,333
Additional paid-in capital		177,308,810			206,591,730
Retained earnings		113,984,082			137,810,753
Less: Treasury stock, at cost (224,582 shares as of September 30, 2012 and December 31, 2011)		(799,999	)		(799,999	)
Less: Prepaid forward repurchase contract		–			(29,998,616	)
Accumulated other comprehensive income		71,040,779			67,723,161
Total American Oriental Bioengineering, Inc. Shareholders’ Equity		362,034,338			381,698,314
Non-controlling interests		(531,802	)		(536,220	)
TOTAL SHAREHOLDERS' EQUITY		361,502,536			381,162,094
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		501,161,042			564,981,057

See accompanying notes to the condensed consolidated financial statements

~~See accompanying notes to the condensed consolidated financial statements~~4

4AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

~~AMERICAN~~UNAUDITED ~~ORIENTAL~~CONDENSED ~~BIOENGINEERING,~~CONSOLIDATED ~~INC.~~STATEMENTS OF OPERATIONS AND ~~SUBSIDIARIES~~COMPREHENSIVE LOSS

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012

Revenues	$	20,224,137		$	27,446,926		$	41,230,900		$	53,192,202
Cost of sales		15,238,203			24,254,680			31,744,091			42,318,134
GROSS PROFIT		4,985,934			3,192,246			9,486,809			10,874,068

Selling, general and administrative expenses		11,018,304			12,060,135			23,495,026			24,042,204
Advertising costs		2,708,324			7,976,078			6,353,778			14,132,431
Research and development costs		1,722,671			1,729,301			3,129,716			3,296,234
Depreciation and amortization expenses		1,855,076			1,578,733			3,719,283			3,659,432
Provision for reserves and doubtful accounts		(1,998,441	)		2,067,462			(234,489	)		3,053,248
Long term crop inventory costs		–			–			2,361,383			–
Total operating expenses		15,305,934			25,411,709			38,824,697			48,183,549

LOSS FROM OPERATIONS		(10,320,000	)		(22,219,463	)		(29,337,888	)		(37,309,481	)

Equity in losses from equity method investments		(1,004,141	)		(1,297,597	)		(1,972,373	)		(1,489,047	)
Interest expense, net		(1,003,307	)		(1,808,010	)		(1,766,998	)		(3,551,280	)
Other income (expense), net		185,630			67,702			171,829			348,749
LOSS BEFORE INCOME TAX		(12,141,818	)		(25,257,368	)		(32,905,430	)		(42,001,059	)
Provision for income taxes		699,081			510,897			1,050,326			953,965
NET LOSS		(12,840,899	)		(25,768,265	)		(33,955,756	)		(42,955,024	)
(Income) loss attributable to non-controlling interest		–			(18,932	)		–			10,902
NET LOSS ATTRIBUTABLE TO AMERICAN
ORIENTAL BIOENGINEERING, INC. COMMON SHAREHOLDERS		(12,840,899	)		(25,787,197	)		(33,955,756	)		(42,944,122	)

OTHER COMPREHENSIVE INCOME
Foreign currency translation gain		6,700,988			1,395,552			7,383,319			3,987,336

COMPREHENSIVE LOSS	$	(6,139,911	)	$	(24,391,645	)	$	(26,572,437	)	$	(38,956,786	)

LOSS PER COMMON SHARE, BASIC AND DILUTED	$	(0.35	)	$	(0.66	)	$	(0.93	)	$	(1.09	)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC AND DILUTED		36,494,567			39,310,889			36,569,427			39,393,125

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenues	$	29,493,459		$	53,934,602		$	82,685,661		$	159,988,508
Cost of sales		23,037,097			28,730,424			65,355,231			83,863,569
GROSS PROFIT		6,456,362			25,204,178			17,330,430			76,124,939
Selling, general and administrative expenses		12,005,502			12,080,424			36,047,706			34,577,769
Advertising costs		9,385,016			2,964,877			23,517,447			10,185,380
Research and development costs		1,681,649			2,825,967			4,977,883			8,652,455
Depreciation and amortization expenses		1,803,167			1,804,888			5,462,599			5,359,979
Provision for reserves and doubtful accounts		777,947			–			3,831,195			–
Total operating expenses		25,653,281			19,676,156			73,836,830			58,775,583
INCOME (LOSS) FROM OPERATIONS		(19,196,919	)		5,528,022			(56,506,400	)		17,349,356
Gain on extinguishment of convertible notes		40,413,555			2,666,829			40,413,555			2,666,829
Equity in losses from equity method investments		(267,470	)		(796,727	)		(1,756,517	)		(857,811	)
Gain on changes in ownership of unconsolidated entities		–			–			–			658,540
Interest expense, net		(1,423,839	)		(1,802,954	)		(4,975,119	)		(4,850,651	)
Other income (expense), net		94,724			(116,196	)		443,473			321,571
INCOME (LOSS) BEFORE INCOME TAX		19,620,051			5,478,974			(22,381,008	)		15,287,834
Provision for income taxes		487,280			(2,203,013	)		1,441,245			4,091,655
NET INCOME (LOSS)		19,132,771			7,681,987			(23,822,253	)		11,196,179
Income attributable to non-controlling interest		(15,320	)		(28,446	)		(4,418	)		(14,767	)
NET INCOME (LOSS) ATTRIBUTABLE TO AMERICAN ORIENTAL BIOENGINEERING, INC.		19,117,451			7,653,541			(23,826,671	)		11,181,412
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation gain (loss)		(669,718	)		5,020,779			3,317,618			16,368,530
COMPREHENSIVE INCOME (LOSS)	$	18,447,733		$	12,674,320		$	(20,509,053	)	$	27,549,942
EARNINGS (LOSS) PER COMMON SHARE
Basic	$	0.51		$	0.20		$	(0.62	)	$	0.30
Diluted		0.50			0.20			(0.62	)		0.29
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		37,403,519			37,422,928			38,722,635			37,400,560
Diluted		38,287,158			38,262,002			38,722,635			38,153,522

See accompanying notes to the condensed consolidated financial statements

~~See accompanying notes to the condensed consolidated financial statements~~5

5AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

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

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended June 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(33,955,756	)	$	(42,955,024	)

Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		6,121,201			5,922,899
Amortization of deferred financing costs		196,445			437,103
Loss on property, plant and equipment		–			1,707
Provision (recovery) for reserves and doubtful accounts		(241,482	)		2,780,471
Deferred taxes		610,221			118,639
Stock-based consulting expenses		–			32,500
Stock-based compensation expenses		804,168			1,297,935
Independent director stock compensation		75,000			97,525
Losses from equity method investments		1,972,373			1,489,047
Changes in operating assets and liabilities:
Accounts receivable		16,838,907			4,897,830
Inventories		(764,903	)		(5,301,147	)
Advances to suppliers and prepaid expenses		2,700,929			(2,326,994	)
Other current assets		278,237			1,951,304
Accounts payable		(3,152,521	)		622,928
Accrued expenses and other payables		3,326,358			(4,135,928	)
Taxes payable		(496,445	)		(512,029	)
Accrued taxes		813,451			1,143,645
Net cash used in operating activities		(4,873,817	)		(34,437,589	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(1,376,141	)		(8,034,542	)
Capitalized agricultural costs		–			(3,395,407	)
Proceeds from payment of bank acceptance notes from customers		4,567,451			23,068,432
Cash proceeds from disposal of NuoHua affiliate		–			18,278,815
Purchase of land use rights and other intangible assets		–			(870	)
Deposit for long-term assets		–			(3,895,508	)
Investments in and advances to equity investments		(596,837	)		151
Net cash provided by investing activities		2,594,473			26,021,071
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash		4,459,049			(3,822,208	)
Proceeds from bank loans and bank acceptance notes to vendors		9,743,101			7,322,431
Repayment of bank loans and bank acceptance notes to vendors		(12,995,352	)		(305,502	)
Repurchase of common stock		–			(1,270,603	)
Net cash provided by financing activities		1,206,798			1,924,118
Effect of exchange rate changes on cash and cash equivalents		980,262			1,494,507
NET DECREASE IN CASH AND CASH EQUIVALENTS		(92,284	)		(4,997,893	)
Cash and cash equivalents, beginning of the period		7,097,098			52,627,928
CASH AND CASH EQUIVALENTS, END OF THE PERIOD	$	7,004,814		$	47,630,035

SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest	$	223,362		$	3,050,773
Cash paid for income taxes		538,052			235,864
Non-cash investing and financing activities:
Transfer from construction in progress to property, plant and equipment		420,860			122,167
Retirement of treasury shares		799,999			1,270,603

	Nine Months Ended September 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(23,822,253	)	$	11,196,179
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		8,955,563			9,288,606
Amortization of deferred financing costs		591,871			695,510
Loss on property, plant and equipment		(6,424	)		9,712
Provision for reserves and doubtful accounts		3,552,655			(79,935	)
Deferred taxes		64,435			(1,712,491	)
Stock-based consulting expenses		33,750			64,813
Stock-based compensation expenses		1,946,902			2,258,850
Independent director stock compensation		135,025			224,333
Equity in losses from equity method investments		1,756,517			857,811
Gain on changes in ownership of unconsolidated entities		–			(658,540	)
Gain on extinguishment of convertible notes		(40,413,555	)		(2,666,829	)
Changes in operating assets and liabilities:
Accounts receivable		9,251,412			16,554,608
Inventories		(8,376,013	)		(11,521,442	)
Advances to suppliers and prepaid expenses		2,260,262			(5,326,505	)
Other current assets		1,879,237			1,562,285
Accounts payable		1,978,576			3,622,793
Accrued expenses and other payables		1,798,093			(3,853,121	)
Taxes payable		(439,596	)		(391,416	)
Other liabilities		–			662,070
Accrued taxes		1,713,811			–
Net cash provided by (used in) operating activities		(37,139, 732)			20,787,291
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(9,347,876	)		(9,328,768	)
Capitalized agricultural costs		(3,502,810	)		–
Proceeds from payment of bank acceptance notes from customers		24,278,884			–
Cash proceeds from disposal of NuoHua affiliate		18,278,815			–
Deposit for long-term assets		(3,911,303	)		(30,353,949	)
Investments in and advances to equity investments		12,533			65,949
Proceeds from disposal of property, plant and equipment		–			228
Other		(870	)		–
Net cash provided by (used in) investing activities		25,807,373			(39,616,540	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash		(6,781,052	)		–
Proceeds from bank loans and bank acceptance notes to vendors		13,914,228			12,663,526
Repayment of bank loans and bank acceptance notes to vendors		(3,827,075	)		(7,157,474	)
Repurchase of convertible notes		(18,478,888	)		(2,750,000	)
Repurchase of common stock		(1,270,603	)		(799,999	)
Net cash provided by (used in) financing activities		(16,443,390	)		1,956,053
Effect of exchange rate changes on cash and cash equivalents		1,579,982			5,323,107
NET DECREASE IN CASH AND CASH EQUIVALENTS		(26,195,767	)		(11,550,089	)
Cash and cash equivalents, beginning of the period		52,627,928			94,568,520
CASH AND CASH EQUIVALENTS, END OF THE PERIOD	$	26,432,161		$	83,018,431

See accompanying notes to the condensed consolidated financial statements

~~(continued)~~6

6AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

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

~~UNAUDITED~~THREE ~~CONDENSED~~AND ~~CONSOLIDATED~~SIX ~~STATEMENTS OF~~MONTHS ~~CASH~~ENDED ~~FLOWS~~JUNE ~~(Continued)~~30, 2013 AND 2012

	Nine Months Ended September 30,
	2012		2011
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest	$	3,050,773	$	6,071,526
Cash paid for income taxes		375,316		3,756,508
Non-cash investing and financing activities:
Deposit used to acquire other intangible assets		3,888,617		–
Retirement of treasury shares		1,270,603		–
Retirement of prepaid forward purchase contract		29,998,616		–

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

~~See~~American ~~accompanying~~Oriental ~~notes~~Bioengineering, Inc. (“AOB” or “the Company”) is a fully integrated pharmaceutical company dedicated to improving health through the ~~condensed~~development, manufacture, commercialization and distribution of a broad range of pharmaceutical and healthcare products ~~consolidated~~in ~~financial~~the ~~statements~~People’s Republic of China (the “PRC”).

7Basis of presentation

~~AMERICAN~~The ~~ORIENTAL~~accompanying ~~BIOENGINEERING~~unaudited interim condensed consolidated financial statements of the Company and its subsidiaries as of and for the three and six months ended June 30, ~~INC~~2013 and 2012 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) that permit reduced disclosure for interim periods and include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the financial position, results of operations and cash flows as of June 30, 2013 and for all periods presented. Information as of December 31, 2012 has been derived ~~AND~~from ~~SUBSIDIARIES~~the audited consolidated financial statements of the Company for the year ended December 31, 2012. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on June 11, 2013. The results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the operating results to be expected for the full year ending December 31, 2013.

~~NOTES~~Basis TOof ~~THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~Consolidation

~~THREE~~The ~~AND~~unaudited ~~NINE~~consolidated financial ~~MONTHS~~statements ~~ENDED~~include ~~SEPTEMBER 30~~the financial statements of American Oriental Bioengineering, ~~2012~~Inc. ~~AND~~and ~~2011~~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.

~~NOTE~~Going 1Concern ~~– DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION~~

~~American~~The ~~Oriental~~accompanying ~~Bioengineering,~~consolidated ~~Inc~~financial statements are prepared under a going concern basis in accordance with U.S. generally accepted accounting principles (“~~AOB~~GAAP”) orwhich “contemplates the realization of assets and discharge of liabilities and commitments in the normal course of business. For the six months ended June 30, 2013, the Company recorded a loss from operations of $29,337,888 and utilized cash in operations of $4,873,817. As of June 30, 2013, the Company had a working capital deficit of $36,114,345. In addition, the Company was in default of its convertible notes (the “Notes”) isdue July 15, 2015 (see Note 12), which had a ~~fully~~balance ~~integrated~~of ~~pharmaceutical~~$49,161,000 ~~company~~as ~~dedicated~~of toJune ~~improving~~30, 2013. ~~health~~On April 8, 2013, four of the holders of the Notes (the “Plaintiffs”) filed an action claiming a default under ~~through~~the Notes, which allegedly resulted in an acceleration of the ~~development~~maturity of the Notes. The Plaintiffs had previously commenced a similar action in federal court in New Jersey, ~~manufacture~~which action was withdrawn and the present action interposed. The action seeks payment of $20,378,608 ~~commercialization~~plus prejudgment interest and ~~distribution~~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 ~~broad~~default. ~~range~~The Company filed its answer on June 5, 2013 (see Note 14). The Company presently does not have the ability to pay the 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 ~~pharmaceutical~~financing ~~and~~or ~~healthcare~~capital. ~~products~~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 ~~People~~Company’s ~~Republic~~2012 ofconsolidated ~~China~~financial (statements, raised substantial doubt about the ~~“PRC”)~~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.

~~Basis~~Historically, the Company’s main source of ~~presentation~~cash was through the sales of its products, proceeds from the issuance of common stock, and debt financing. However, due to the decrease in sales, the Company’s ability to meet contractual obligations and payables depends on its ability to implement cost reductions effectively and obtain additional financing. The Company believes that the ongoing economic challenges and uncertainties experienced in 2012 and the first half 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.

~~The~~To ~~accompanying~~meet ~~unaudited~~its ~~interim~~capital ~~condensed~~needs, ~~consolidated financial statements of~~ the Company ~~and~~is ~~its~~considering ~~subsidiaries~~multiple asalternatives, ~~of and for the three and nine months ended September 30~~including, ~~2012~~but ~~and~~not ~~2011~~limited ~~have been prepared pursuant~~ to, ~~the~~additional ~~rules~~debt ~~and~~financing ~~regulations of the Securities~~ and ~~Exchange Commission~~ ~~(the~~credit ~~“SEC”)~~lines, ~~that~~delaying ~~permit~~capital ~~reduced~~spending ~~disclosure~~ for ~~interim~~future periods, and/or ~~include,~~operating incost ~~the~~reductions. ~~opinion~~The ofCompany ~~management,~~believes ~~all~~it ~~adjustments~~can ~~(consisting~~utilize ofits ~~normal~~currently ~~recurring~~unencumbered ~~adjustments~~buildings and ~~reclassifications)~~land ~~necessary~~use torights ~~present~~located ~~fairly~~in ~~the financial position~~Beijing, ~~results of~~PRC ~~operations~~with ~~and~~an ~~cash~~aggregate ~~flows~~net asbook value of approximately ~~September~~$103,000,000 at June 30, ~~2012~~2013 ~~and~~to ~~for~~secure ~~all~~financing. ~~periods~~No ~~presented.~~assurance ~~Information~~can asbe ofgiven ~~December~~that ~~31,~~the ~~2011~~financing ~~has~~will ~~been~~be ~~derived~~available ~~from~~or, ~~the~~if ~~audited~~available, ~~consolidated~~that ~~financial~~it ~~statements~~will ofbe ~~the~~on ~~Company~~terms ~~for~~that ~~the~~are ~~year~~satisfactory ~~ended~~to ~~December~~the ~~31, 2011~~Company. ~~These~~Even ~~unaudited condensed~~if ~~consolidated~~the ~~financial~~Company ~~statements~~is ~~should~~able beto obtain ~~read~~additional infinancing, ~~conjunction~~it ~~with~~may ~~the~~contain ~~audited~~undue ~~consolidated~~restrictions ~~financial~~on ~~statements~~its ~~and notes~~operations, ~~thereto included~~ in ~~our~~the ~~Annual~~case ~~Report~~of ondebt ~~Form~~financing ~~10-K~~or ~~for~~cause substantial ~~the~~dilution ~~year~~to ~~ended December 31~~shareholders, ~~2011~~in ~~filed with~~ the ~~SEC~~case onof ~~January~~equity ~~7, 2013~~financing.

~~Basis of Consolidation~~7

~~The~~AMERICAN ~~unaudited~~ORIENTAL ~~consolidated financial statements include the financial statements of American Oriental Bioengineering~~BIOENGINEERING, ~~Inc~~INC. ~~and its wholly owned subsidiaries.~~ ~~Intercompany~~AND 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.SUBSIDIARIES

~~Going~~NOTES ~~Concern~~TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~The~~THREE ~~accompanying~~AND ~~consolidated financial~~SIX ~~statements~~MONTHS ~~are~~ENDED ~~prepared~~JUNE under a going concern basis in accordance with US 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 nine months ended September 30, 2012, the Company recorded a loss from operations of $56,506,400 and utilized cash in operations of $37,139,732. As of September 30, 2012, the Company had working capital of $869,366. In addition, the Company was in default of its convertible notes (the “Notes”) due July 15, 2015 (see Note 12), which had a balance of $49,161,000 as of September 30, 2012. On April 8, 2013~~, four of the holders of the Notes (the “Plaintiffs”) filed an action claiming a default under the Notes,~~ ~~which~~AND 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 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 (see Note 14). The Company presently does not have the ability to pay these Notes. The Company’s ability to continue as a going concern is dependent upon its ability to return to profitability or to develop additional sources of 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,~~Use ~~the Company’s main source~~ of cash was through the sales of its products, proceeds from the issuance of common stock, and debt financing. However, due to the decrease in sales, the Company’s ability to meet contractual obligations and payables depends on its ability to implement cost reductions effectively and obtain additional financing. The Company believes that the ongoing economic challenges and uncertainties experienced in 2012 and the first quarter of 2013 will continue to negatively impact its business in the remainder 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. Estimates

ToThe ~~meet~~preparation ~~its capital~~of ~~needs,~~financial ~~the~~statements ~~Company~~in isconformity ~~considering~~with ~~multiple~~generally ~~alternatives,~~accepted ~~including,~~accounting ~~but~~principles ~~not~~in ~~limited~~the ~~to,~~United ~~additional debt~~States ~~financing~~of ~~and~~America ~~credit~~requires management ~~lines,~~to ~~delaying capital~~make ~~spending~~estimates ~~for future periods,~~ and~~/or~~ ~~operating~~assumptions ~~cost~~that ~~reductions. The~~affect ~~Company~~the ~~believes~~reported ~~it can~~amounts ~~utilize its~~of ~~currently~~assets ~~unencumbered~~and ~~buildings~~liabilities and ~~land~~disclosure ~~use~~of ~~rights~~contingent ~~located~~assets and inliabilities ~~Beijing,~~at ~~PRC~~the ~~with~~date anof ~~aggregate~~the ~~net~~consolidated ~~book~~financial ~~value of~~statements, ~~approximately~~and ~~$105,000,000~~the ~~(as~~reported amounts of ~~March~~revenue ~~31,~~and ~~2013)~~expenses toduring ~~secure financing~~the reporting period. No ~~assurance~~Significant ~~can~~estimates bereflected ~~given~~in ~~that~~ the ~~financing will~~consolidated befinancial ~~available~~statements orinclude, ifbut ~~available,~~are ~~that~~not itlimited ~~will~~to, bethe recoverability onof ~~terms~~the ~~that~~carrying ~~are~~amount ~~satisfactory~~of toproperty, ~~the~~plant, ~~Company.~~and ~~Even~~equipment ifand ~~the~~intangible ~~Company~~assets, isallowance ~~able~~for accounts receivable, torealizable ~~obtain~~values ~~additional~~for ~~financing,~~inventories itand ~~may~~capitalized ~~contain~~agricultural ~~undue~~costs, ~~restrictions~~valuation onallowance ~~its~~of ~~operations,~~deferred intax ~~the~~assets, ~~case~~and valuation of ~~debt~~share-based ~~financing~~compensation orexpenses. ~~cause~~Changes ~~substantial dilution~~in tofacts ~~shareholders,~~and circumstances may result in ~~the~~revised ~~case~~estimates. ofActual ~~equity~~results ~~financing~~could differ from these estimates.

8NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

~~AMERICAN~~Fair ~~ORIENTAL~~Value ~~BIOENGINEERING,~~of ~~INC. AND~~Financial ~~SUBSIDIARIES~~Instruments

~~NOTES~~FASB TOASC ~~THE~~820 ~~UNAUDITED~~“Fair Value ~~CONDENSED~~Measurements ~~CONSOLIDATED~~and Disclosures” establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring ~~FINANCIAL~~fair ~~STATEMENTS~~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.

~~THREE~~These ~~AND~~tiers ~~NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011~~include:

~~Use~~· ofLevel ~~Estimates~~1 - defined as observable inputs such as quoted prices in active markets;

~~The~~· ~~preparation~~Level ~~of financial~~2 ~~statements~~- indefined ~~conformity~~as ~~with~~inputs ~~generally~~other ~~accepted~~than ~~accounting~~quoted ~~principles~~prices in ~~the~~active ~~United~~markets ~~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~~either ~~limited~~directly ~~to,~~or ~~the recoverability~~indirectly ofobservable; ~~the carrying amount of property, plant,~~ and equipment and intangible assets, allowance for accounts receivable, realizable values for inventories and capitalized 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~~· 2Level ~~– SUMMARY~~3 ~~OF SIGNIFICANT~~- ~~ACCOUNTING~~defined ~~POLICIES~~as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions

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

~~FASB~~Earnings ~~ASC~~per 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.share

~~These~~Basic ~~tiers~~earnings ~~include:~~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 June 30, 2013, common stock equivalents were composed of options convertible into 850,539 shares of the Company’s common stock and notes convertible into 6,084,282 shares of the Company’s common stock. For the three and six months ended June 30, 2013 and 2012, common stock equivalents have been excluded from the calculation of earnings per share as their effect is anti-dilutive.

· 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 assumptionsImpairment

~~The~~In ~~carrying~~evaluating ~~amounts~~long-lived ~~of financial~~ assets ~~and~~for ~~liabilities~~recoverability, ~~such~~including asfinite-lived ~~cash~~intangibles and ~~cash~~property ~~equivalents, accounts~~ and ~~notes receivable~~equipment, ~~short-term~~the ~~bank~~Company ~~loans,~~uses ~~accounts payable,~~its ~~notes~~best ~~payable~~estimate ~~and~~of future ~~other~~cash ~~payables,~~flows ~~approximate~~expected ~~their~~to ~~fair~~result ~~values~~from ~~because~~the use of the ~~short~~asset ~~maturity~~and ofeventual ~~these instruments~~disposition. ~~The carrying~~To ~~values~~the ofextent ~~long-term~~that ~~loans~~estimated ~~approximate~~future, ~~their~~undiscounted cash ~~fair~~inflows ~~values~~attributable ~~due~~ to the ~~fact~~asset, ~~that~~less ~~the~~estimated ~~interest~~future, ~~rates~~undiscounted oncash ~~these~~outflows, ~~loans~~ are ~~reset each~~less ~~year~~than ~~based~~the oncarrying ~~prevailing~~amount, ~~market~~an impairment ~~interest~~loss ~~rates.~~is ~~The~~recognized ~~convertible~~in ~~notes~~an ~~are~~amount ~~initially~~equal ~~recognized~~to ~~based~~the ondifference ~~residual~~between ~~proceeds after allocation to~~ the ~~derivative~~carrying ~~financial~~value ~~liabilities,~~of ifsuch ~~any,~~asset atand its fair value. Assets to be disposed of and ~~subsequently~~for ~~carried~~which atthere ~~amortized~~is ~~cost~~a ~~using the~~committed ~~effective~~plan ~~interest~~of ~~rate~~disposal, ~~method~~whether through sale or abandonment, ~~with~~are ~~any~~reported at ~~accrued~~the ~~and~~lower ~~unpaid~~of ~~interest~~carrying ~~included~~value ~~under~~or ~~other~~fair ~~payables~~value ~~and~~less ~~accrued~~costs ~~expenses~~to sell.

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

~~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~~Company’s ~~during~~annual ~~the~~impairment ~~year.~~testing ~~The following~~ is aperformed ~~reconciliation of the numerator and denominator used~~ in the ~~calculation~~fourth quarter of ~~basic~~each ~~and diluted earnings per share available to common shareholders:~~year.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012			2011
EPS Numerator:
Net income (loss), as adjusted	$	19,117,451	$	7,653,541	$	(23,826,671	)	$	11,181,412
EPS Denominator:
Weighted average common shares outstanding - basic		37,403,519		37,422,928		38,722,635			37,400,560
Effect of common stock awards to be issued		883,639		839,074		–			752,962
Weighted average common shares outstanding - diluted		38,287,158		38,262,002		38,722,635			38,153,522
Earnings (loss) per share - Basic	$	0.51	$	0.20	$	(0.62	)	$	0.30
Earnings (loss) per share - Diluted	$	0.50	$	0.20	$	(0.62	)	$	0.29

In the fourth 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.

As of September 30, 2012, common stock equivalents were composed of options convertible into 883,639 shares of the Company’s common stock and notes convertible into 6,084,282 shares of the Company’s common stock, which have been excluded from the calculation of earnings per share as their effect is anti-dilutive.8

9AMERICAN 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, 2013 ~~FINANCIAL~~AND ~~STATEMENTS~~2012

~~THREE~~Recent ~~AND~~Accounting ~~NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011~~Pronouncements

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

In ~~evaluating~~January ~~long-lived~~2013, the ~~assets~~FASB ~~for~~issued ~~recoverability,~~ASU ~~including finite~~2013-~~lived~~01, ~~intangibles~~Balance ~~and~~Sheet ~~property~~(Topic ~~and~~210): ~~equipment,~~Clarifying the ~~Company~~Scope ~~uses its best estimate~~ of ~~future~~ ~~cash~~Disclosures ~~flows~~about ~~expected~~Offsetting toAssets ~~result from the use of the asset~~ and ~~eventual disposition~~Liabilities. This ToASU ~~the~~clarifies ~~extent~~which ~~that~~instruments ~~estimated~~and ~~future,~~transactions ~~undiscounted cash~~are ~~inflows~~subject ~~attributable~~ to the ~~asset,~~offsetting ~~less~~disclosure ~~estimated~~requirements ~~future,~~established ~~undiscounted~~by ~~cash~~ASU 2011-11. ~~outflows,~~This ~~are~~guidance ~~less~~is ~~than~~effective ~~the~~for ~~carrying~~annual ~~amount,~~and ~~an impairment~~interim ~~loss~~reporting isperiods ~~recognized~~beginning inJanuary an1, ~~amount~~2013. ~~equal~~We todo ~~the~~not ~~difference~~believe ~~between~~ the ~~carrying value of such asset and its fair value.~~adoption ~~Assets to be disposed~~ of ~~and~~this ~~for~~update ~~which~~will ~~there~~have is a ~~committed~~material ~~plan~~effect ofon ~~disposal,~~our ~~whether~~financial ~~through~~position ~~sale~~and orresults ~~abandonment, are reported at the lower~~ of ~~carrying value or fair value less costs to sell~~operations.

In ~~evaluating~~February ~~capitalized~~2013, the ~~agriculture~~FASB ~~costs~~issued ASU No. 2013-02, ~~the~~“Comprehensive ~~Company~~Income ~~uses~~(Topic ~~its~~220): ~~best~~Reporting ~~estimate~~of Amounts Reclassified Out of ~~the~~Accumulated ~~future~~Other Comprehensive ~~cash~~Income.” ~~flows~~The ~~expected~~new guidance requires entities to ~~result~~report ~~from~~the ~~future~~effect ~~market~~of ~~values,~~significant ~~yields~~reclassifications out of accumulated ~~and~~other ~~costs~~comprehensive toincome ~~harvest.~~on Tothe respective line items in net income unless the ~~extent~~amounts are not reclassified in their entirety to net income. For amounts that ~~estimated~~are ~~future~~not ~~cash~~required ~~inflows~~to ~~attributable~~be reclassified in their entirety to ~~the~~net ~~asset,~~income ~~less~~in ~~estimated~~the ~~future,~~same ~~cash~~reporting ~~outflows~~period, entities are ~~less~~required ~~than~~to ~~the~~cross-reference ~~carrying~~other ~~amount,~~disclosures anthat ~~impairment~~provide ~~loss~~additional detail about those amounts. The new guidance is ~~recognized~~effective inprospectively anfor ~~amount~~all ~~equal~~interim toand ~~the~~annual ~~excess~~periods ofbeginning ~~the~~after ~~carrying~~December ~~value~~15, ~~over the~~2012, ~~estimated~~with ~~fair~~early ~~values~~adoption permitted. The Company’s adoption of ~~the~~this ~~capitalized~~update ~~agricultural~~did ~~costs~~not have a material effect on its consolidated financial statements.

~~The~~Other ~~Company’s~~recent accounting ~~annual~~pronouncements ~~impairment~~issued ~~testing~~by isthe ~~performed~~FASB in(including its Emerging Issues Task Force), the ~~fourth~~AICPA, ~~quarter~~and ofthe ~~each~~SEC ~~year~~did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

InNOTE ~~the~~3 ~~fourth~~– ~~quarter of~~CONCENTRATION ~~2012,~~OF 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.RISKS

InConcentration ~~the fourth quarter~~ of ~~2011,~~credit ~~the Company had impairment write-offs to property and equipment, goodwill, and acquired intangible assets of $733,688, $33,164,121, and $6,928,064, respectively, based on their annual review.~~risks

~~Reclassifications~~Assets that potentially subject the Company to significant concentration of credit risk primarily consist of cash and cash equivalents, accounts receivable and prepaid forward repurchase contract. As of June 30, 2013, substantially all of the Company’s cash and cash equivalents were deposited in financial institutions located in the PRC, which management believes are of high credit quality. Accounts receivable are typically unsecured and mainly derived from revenue earned from customers in the PRC, which are exposed to credit risk. The risk is mitigated by credit evaluations the Company performs on its customers and its ongoing monitoring process of outstanding balances. The Company maintains reserves for estimated credit losses, which have generally been within its expectations.

InCurrent ~~presenting~~vulnerability ~~the~~due ~~Company’s condensed~~to ~~consolidated statement of operations and comprehensive loss for the three and nine months ended September 30, 2011, the~~certain ~~Company~~other presented $2,666,829 of gain on extinguishment of convertible notes as part of Income From Operations. In presenting the Company’s condensed consolidated statement of operations and comprehensive loss for the three and nine months ended September 30, 2012, the Company has reclassified the gain on extinguishment of convertible notes to Other Income (Expense).concentrations

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

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

InThe Company transacts the majority of its business in the Renminbi (“RMB”), which is not freely convertible into foreign currencies. On January 1, ~~2013~~1994, the ~~FASB~~ ~~issued~~PRC ~~ASU~~government ~~2013-01,~~abolished ~~Balance~~the ~~Sheet~~dual rate system and introduced a single rate of exchange as quoted daily by the People’s Bank of China (~~Topic~~the ~~210~~“PBOC”):. ~~Clarifying~~However, the ~~Scope~~unification of ~~Disclosures~~the ~~about~~exchange ~~Offsetting~~rates ~~Assets~~does ~~and~~not ~~Liabilities.~~imply that the RMB may be readily ~~This~~convertible ~~ASU~~into ~~clarifies~~United ~~which~~States ~~instruments~~dollars ~~and~~or ~~transactions~~other ~~are~~foreign ~~subject~~currencies. All foreign exchange transactions continue to take place either through the ~~offsetting~~Peoples ~~disclosure~~Bank ~~requirements~~of ~~established~~China by(PBOC) ~~ASU~~or other banks authorized to buy and sell foreign currencies at the exchange rates quoted ~~2011-11~~by the PBOC. ~~This~~Approval ~~guidance~~of isforeign ~~effective~~currency ~~for~~payments ~~annual~~by ~~and~~the ~~interim~~PBOC ~~reporting~~or ~~periods~~other ~~beginning~~institutions ~~January~~requires 1submitting a payment application form together with suppliers’ invoices, ~~2013~~shipping documents and signed contracts. WeAdditionally, dothe ~~not~~value ~~believe~~of the ~~adoption~~RMB is subject ofto ~~this~~changes ~~update~~in ~~will~~central ~~have~~government apolicies ~~material~~and ~~effect~~international oneconomic ~~our~~and ~~financial~~political ~~position~~developments affecting supply and ~~results~~demand ofin the ~~operations~~PRC foreign exchange trading system market.

In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The new guidance requires entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income unless the amounts are not reclassified in their entirety to net income. For amounts that are not required to be reclassified in their entirety to net income in the same reporting period, entities are required to cross-reference other disclosures that provide additional detail about those amounts. The new guidance is effective prospectively for all interim and annual periods beginning after December 15, 2012, with early adoption permitted. The Company’s adoption of this update did not have a material effect on its consolidated financial statements.9

~~Other~~AMERICAN ~~recent~~ORIENTAL ~~accounting pronouncements issued by the FASB (including its Emerging Issues Task Force)~~BIOENGINEERING, ~~the AICPA, and the SEC did not or are not believed~~INC. byAND ~~management to have a material impact on the Company's present or future consolidated financial statements.~~ SUBSIDIARIES

10NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~AMERICAN~~THREE ~~ORIENTAL~~AND ~~BIOENGINEERING~~SIX MONTHS ENDED JUNE 30, ~~INC.~~2013 AND ~~SUBSIDIARIES~~2012

~~NOTES~~NOTE TO4 ~~THE~~– ~~UNAUDITED~~ACCOUNTS ~~CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~RECEIVABLE

~~THREE~~Accounts ~~AND NINE MONTHS ENDED SEPTEMBER~~receivable ~~30,~~consist ~~2012~~of ~~AND~~the ~~2011~~following:

NOTE 3 – CONCENTRATION OF RISKS

	June 30,			December 31,
	2013			2012
Accounts receivable	$	46,839,617		$	63,678,523
Allowance for doubtful accounts		(17,599,876	)		(18,134,912	)
Accounts receivable, net	$	29,239,741		$	45,543,611

~~Concentration~~Accounts ofreceivable arise from sales to our customers and are generally due on terms ranging from 30 to 180 days beginning after the invoice date. The Company assessed distributors’ credit ~~risks~~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.

~~Assets~~From ~~that~~time ~~potentially subject the Company~~ to ~~significant~~time ~~concentration of credit risk primarily consist of cash and cash equivalents, accounts receivable~~we ~~and~~receive ~~prepaid~~bank ~~forward~~acceptance ~~repurchase~~notes ~~contract.~~that Asare ofpayable ~~September~~to ~~30, 2012, substantially all of~~ the Company’s ~~cash and cash equivalents were deposited in financial institutions located in PRC, which management believes are of high credit quality. Accounts receivable are typically unsecured and mainly derived~~ from ~~revenue~~our ~~earned from~~ customers ~~in the PRC~~, ~~which~~for ~~are~~goods ~~exposed~~we sell to ~~credit~~those ~~risk~~customers. ~~The~~If ~~risk is mitigated by credit evaluations~~ the ~~Company~~notes ~~performs~~are onnot ~~its~~yet ~~customers~~due and ~~its~~payable, ~~ongoing~~we ~~monitoring~~may ~~process~~exchange ofthem ~~outstanding balances.~~at ~~The~~a ~~Company~~bank ~~maintains~~in ~~reserves~~exchange for ~~estimated~~notes ~~credit~~payable ~~losses,~~to ~~which~~our ~~have~~suppliers, ~~generally~~and ~~been~~deliver those ~~within~~notes ~~its~~to ~~expectations~~our vendors.

~~Current~~NOTE ~~vulnerability~~5 ~~due~~– ~~to certain other concentrations~~INVENTORIES

~~The~~Inventories ~~Company’s operations~~are ~~may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government~~summarized ~~has~~as 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.follows:

Currency convertibility risk

	June 30,			December 31,
	2013			2012
Raw materials	$	9,643,157		$	6,390,360
Work in process		1,627,634			4,042,287
Finished goods		10,112,239			10,185,480
Total inventories		21,383,030			20,618,127
Less: provision against slow-moving inventories		(45,952	)		(47,281	)
Inventories, net	$	21,337,078		$	20,570,846

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

NOTE 4 – ACCOUNTS RECEIVABLE

	June 30,		December 31,
	2013		2012
Growing crops	$	6,818,162	$	6,643,146
Payments for long-term crop contracts		6,759,639		6,622,758
Prepaid land leasing costs for long-term supply contracts and others		4,226,201		4,177,571
Capitalized agricultural costs	$	17,804,002	$	17,443,475

~~Accounts~~The ~~receivable~~Company has reflected ~~consist~~capitalized ofagriculture 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 ~~following:~~stages, gradually decreasing to maintenance costs during the growing stage. During the six months ended June 30, 2013, pre-harvest agricultural costs incurred during the period of $2,361,383 were expensed.

	September 30,			December 31,
	2012			2011
Accounts receivable	$	60,215,574		$	69,551,171
Allowance for doubtful accounts		(17,873,220	)		(16,354,873	)
Accounts receivable, net	$	42,342,354		$	53,196,298

NOTE 6 – ADVANCES TO SUPPLIERS AND PREPAID EXPENSES

Accounts receivable arise from sales to our customers and are generally due on terms ranging from 30 to 180 days beginning after the invoice date. The Company assessed distributors’ credit history, operation performance, financial position, 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.

	June 30,		December 31,
	2013		2012
Advances to suppliers	$	5,057,213	$	10,065,358
Prepaid expenses		2,534,218		227,002
Advances to suppliers and prepaid expenses	$	7,591,431	$	10,292,360

~~From~~Advances ~~time~~ to ~~time~~suppliers wemainly ~~receive~~represent ~~bank~~interest-free ~~acceptance~~cash ~~notes~~deposits ~~that~~paid ~~are payable~~ to ~~the~~suppliers ~~Company from our customers,~~ for ~~goods~~future wepurchases ~~sell~~of toraw ~~those customers~~materials. ~~If the~~ ~~notes~~Prepaid ~~are~~expenses ~~not~~mainly ~~yet due and payable, we may exchange them at a bank in exchange for notes payable~~ relate to ~~our~~the ~~suppliers,~~prepaid research and ~~deliver those~~development ~~notes~~expenses to ~~our~~external ~~vendors~~contractors.

1110

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~ JUNE 30, ~~2012~~ 2013 AND ~~2011~~2012

NOTE 5 7– ~~INVENTORIES~~PROPERTY, PLANT AND EQUIPMENT

~~Inventories~~Property, ~~are~~plant ~~summarized~~and asequipment ~~follows~~consist of the following:

	September 30,			December 31,
	June 30,			December 31,
	2012			2011
	2013			2012
Raw materials	$	6,170,974		$	6,228,319
Original cost:
Work in process		4,152,725			3,652,867
Buildings	$	142,140,262		$	139,294,146
Finished goods		17,527,407			9,633,260
Machinery and equipment		29,247,762			28,451,421
Total inventories		27,851,106			19,514,446
Motor vehicles		2,143,734			2,091,043
Less: provision against slow-moving inventories		(317,290	)		(624,516	)
Office equipment		3,804,814			3,168,422
Inventories, net	$	27,533,816		$	18,889,930
Other equipment		2,441,565			2,392,323
Construction in progress		34,639,070			33,389,418
		214,417,207			208,786,773
Less: Accumulated depreciation		(41,434,395	)		(37,405,384	)
Property, plant and equipment, net	$	172,982,812		$	171,381,389

~~Capitalized~~Depreciation ~~agricultural~~expense for ~~costs~~the ~~are~~six ~~summarized~~months ended June 30, 2013 and 2012 was $3,234,708 and $3,390,361, respectively. As of June 30, 2013 and December 31, 2012, the net book value of property, plant and equipment pledged as ~~follows:~~collateral for bank loans was $8,701,259 and $6,099,734, respectively (see Note 11). As of June 30, 2013, the Company had entered into capital commitments for $36,585,847 due within one year and $6,948,709 due after one year but within three years (see Note 14).

	September 30,		December 31,
	2012		2011
Growing crops	$	13,376,285	$	993,126
Payments for long-term crop contracts		–		17,012,586
Prepaid land leasing costs for long-term supply contracts and others		12,524,367		4,328,225
Capitalized agricultural costs	$	25,900,652	$	22,333,937

NOTE 8 – LAND USE RIGHTS

~~The~~Land ~~Company~~use ~~has~~rights ~~reflected~~consist ~~capitalized~~of agricultural 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 agriculture costs usually require substantial investment in the ~~early~~ stages, gradually decreasing to maintenance costs during the growing stage. During the nine months ended September 30, 2012 and 2011, pre-harvest agricultural costs incurred during the period of $3,502,810 and nil, respectively, were capitalized.following:

NOTE 6 – ADVANCES TO SUPPLIERS AND PREPAID EXPENSES

	June 30,			December 31,
	2013			2012
Cost of land use rights	$	161,733,404		$	158,458,327
Less: Accumulated amortization		(15,158,442	)		(13,143,399	)
Land use rights, net	$	146,574,962		$	145,314,928

	September 30,		December 31,
	2012		2011
Advances to suppliers	$	9,816,236	$	15,591,318
Prepaid expenses		4,458,698		943,873
Advances to suppliers and prepaid expenses	$	14,274,929	$	16,535,191

Amortization expense for the six months ended June 30, 2013 and 2012 was $1,727,477 and $1,780,782, respectively. As of June 30, 2013 and December 31, 2012, the net book value of land use rights pledged as collateral was $25,887,350 and $20,664,778, respectively (see Note 11).

~~Advances~~NOTE to9– ~~suppliers mainly~~ACQUIRED ~~represent~~INTANGIBLE ~~interest-free cash deposits paid to suppliers for future purchases of raw materials. Prepaid expenses mainly relate to the prepaid research and development expenses to external contractors.~~ASSETS

~~NOTE~~Acquired 7intangible assets –are ~~PROPERTY,~~summarized ~~PLANT~~as ~~AND EQUIPMENT~~follows:

Property, plant and equipment consist of the following:

	June 30,			December 31,
	2013			2012
At cost:
Product licenses	$	13,718,668		$	13,440,868
Trademarks		6,842,561			6,704,001
Patents		3,479,887			3,409,420
Software		191,343			187,469
Liaoning Baicao pharmaceutical trade license		5,678,549			5,563,560
		29,911,008			29,305,318
Less: Accumulated amortization
Product licenses		(8,499,310	)		(7,947,887	)
Trademarks		(5,997,327	)		(5,514,005	)
Patents		(2,785,984	)		(2,616,351	)
Software		(126,872	)		(110,695	)
Liaoning Baicao pharmaceutical trade license		(283,927	)		–
		(17,693,420	)		(16,188,938	)
Acquired intangible assets, net	$	12,217,588		$	13,116,380

	September 30,			December 31,
	2012			2011
Original cost:
Buildings	$	143,950,499		$	146,410,665
Machinery and equipment		27,155,564			25,851,084
Motor vehicles		2,106,054			2,105,105
Office equipment		3,260,899			3,162,305
Other equipment		5,662,643			1,812,266
Construction in progress		32,767,422			25,264,200
		214,903,081			204,605,625
Less: Accumulated depreciation		(39,307,389	)		(34,071,175	)
Property, plant and equipment, net	$	175,595,692		$	170,534,450

Amortization expense for the six months ended June 30, 2013 and 2012 was $1,159,016 and $714,829, respectively.

1211

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~ JUNE 30, ~~2012~~ 2013 AND ~~2011~~2012

~~Depreciation expense~~At ~~for~~December 31, 2012, the ~~nine~~Liaoning ~~months~~Baicao ~~ended~~pharmaceutical ~~September~~trade ~~30,~~license ~~2012~~was ~~and~~accounted ~~2011~~for ~~was~~as ~~$5,095,598~~an ~~and~~indefinite ~~$4,214,570,~~lived ~~respectively~~intangible asset. The AsCompany’s assessment of ~~September~~indefinite ~~30,~~life ~~2012~~is ~~and~~ reviewed annually. At December 31, ~~2011~~2012, the ~~net~~Company ~~book~~determined ~~value~~that ofbased on ~~property~~various factors, ~~plant~~including ~~and~~the ~~equipment~~changing ~~pledged~~nature asof ~~collateral~~the ~~for~~pharmaceutical ~~bank~~industry ~~loans~~in ~~was $4~~China,~~895,834~~ ~~and~~it would reclassify the Liaoning Baicao ~~$6,249,074,~~pharmaceutical ~~respectively~~trade ~~(see~~license ~~Note~~to ~~11).~~a Asfinite lived asset to be amortized over an estimated useful life of ~~September~~10 30years. Beginning January 1, ~~2012~~2013, the ~~Company~~formally ~~had~~indefinite ~~entered~~lived ~~into~~intangible ~~capital~~asset ~~commitments~~was ~~for~~reclassified ~~$15,612,562 within~~to ~~one~~definite ~~year~~lived ~~and~~intangible $6asset,~~788,759~~ ~~after~~and ~~one~~the ~~year~~change ~~but~~in amortization ~~within~~is ~~three~~being ~~years~~made ~~(see~~on ~~Note~~a ~~14)~~prospective basis.

~~NOTE~~The Company 8conducts –impairment ~~LAND~~tests ~~USE~~on ~~RIGHTS~~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 six months ended June 30, 2013 or 2012.

~~Land~~NOTE ~~use~~10 ~~rights~~– ~~consist~~INVESTMENTS IN AND ADVANCES ofTO ~~the~~EQUITY ~~following:~~METHOD INVESTMENTS

	September 30,			December 31,
	2012			2011
Cost of land use rights	$	172,889,781		$	172,055,852
Less: Accumulated amortization		(16,863,761	)		(14,127,700	)
Land use rights, net	$	156,026,020		$	157,928,152

At June 30, 2013, the Company owned a 33.7% equity interest in AXN, a 49% equity interest in Yushuntang, and a 40% equity interest in Jinji. For the six months ended June 30, 2013, the changes in investments in and advances to equity method investments are summarized as follows:

Amortization expense for the nine months ended September 30, 2012 and 2011 was $2,670,357 and $2,594,261, respectively. As of September 30, 2012 and December 31, 2011, the net book value of land use rights pledged as collateral was $20,735,126 and $21,020,381, respectively (see Note 11).

	AXN		Jinji		Yushuntang		Total
Balance, December 31, 2012	$	2,957,077	$	147,512	$	232,896	$	3,337,485
Advances (net of repayments)		(6,600)		140,902		462,535		596,837
Provision for uncollectible advances		–		–		(462,535)		(462,535)
Income (loss)		(1,919,878)		62		(52,557)		(1,972,373)
Foreign currency translations		–		3,919		1,246		5,165
Balance, June 30, 2013	$	1,030,599	$	292,395	$	181,585	$	1,504,579

~~NOTE~~The 9Company –had ~~ACQUIRED~~previously consolidated ~~INTANGIBLE~~the financial statements of Yushuntang as a 55% majority owned subsidiary. Effective December 31, 2012, the Company’s ~~ASSETS~~ownership decreased below 50% to 49% and this entity no longer qualified for consolidation and is treated as a long term investment using the equity method. For the six months ended June 30, 2012, Yushuntang reported revenues of $7,997,571, gross profit of $577,250, loss from operations of $25,027, and net loss of $24,227, which are included in the accompanying consolidated statement of operations. The provision for uncollectible advances is against advances made to Yushuntang during 2013.

~~Acquired~~NOTE ~~intangible assets~~11 ~~are~~– ~~summarized as follows:~~DEBT

	September 30,			December 31,
	2012			2011
At cost:
Product licenses	$	13,402,883		$	9,470,024
Trademarks		6,685,055			6,652,810
Patents		3,399,784			3,383,385
Software		186,939			134,259
Liaoning Baicao pharmaceutical trade license		5,547,837			5,521,077
		29,222,498			25,161,555
Less: Accumulated amortization
Product licenses		(7,732,936	)		(7,195,886	)
Trademarks		(5,313,111	)		(4,791,570	)
Patents		(2,552,509	)		(2,400,412	)
Software		(106,964	)		(45,029	)
		(15,705,520	)		(14,432,897	)
Acquired intangible assets, net	$	13,516,978		$	10,728,658

At June 30, 2013 and December 31, 2012, bank acceptance notes to vendors were $4,110,349 and $11,054,449, respectively and due at various dates from July 6, 2013 to November 30, 2013. These short-term notes payable are lines of credit extended by the banks, which in turn issue to 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 June 30, 2013 and December 31, 2012, restricted cash as a guarantee for the notes payable amounted to $2,055,175 and $6,514,224, respectively.

~~Amortization~~At ~~expense~~June 30, 2013 and ~~for~~December ~~the~~31, ~~nine~~2012, ~~months~~short-term ~~ended~~loans ~~September~~obtained from local banks were $10,827,058 and $6,807,999, respectively. The short-term loans payable are due on various dates through June 26, 2014, with interest ranging from 6.00% to 6.56% per annum, and secured by property, plant and equipment and land use rights owned by the Company. At June 30, 2013 and December 31, 2012, the short-term loans are secured by property, plant and ~~2011~~equipment ~~was~~owned by the Company of $17,~~152~~491,~~681~~801 and $26,~~475~~099,~~425~~734, respectively, and land use rights owned by the Company of $25,887,350 and $20,664,778, respectively.

~~NOTE~~At 10June –30, ~~INVESTMENTS~~2013 INand December ~~AND~~31, ~~ADVANCES~~2012, the Company had an outstanding long-term bank loan of $586,776 and $619,401, respectively. The long-term bank TOloan ~~EQUITY~~bears ~~METHOD~~interest ~~INVESTMENTS~~at 2.50% per annum, is due December 31, 2021, and is secured by property, plant, and equipment with a net book value of $1,209,458 at June 30, 2013.

AtNOTE ~~September~~12 ~~30,~~– ~~2012, the~~CONVERTIBLE Company owned a 33.7% equity interest in AXN, and a 40% equity interest in Jinji. For the nine months ended September 30, 2012, the changes in investments in and advances to equity method investments are summarized as follows:NOTES

	AXN			Jinji			Total
Balance, December 31, 2011	$	5,751,495		$	182,927		$	5,934,422
Advances		19,800			(36,892	)		(17,092	)
Income (loss)		(1,757,398	)		881			(1,756,517	)
Foreign currency translations		–			702			702
Balance, September 30, 2012	$	4,013,897		$	147,618		$	4,161,515

On July 15, 2008 the Company issued $115,000,000, 5% unsecured senior convertible notes (the “Notes”), due July 15, 2015, for net proceeds of $110,358,550. 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 the Form 25NSE filed on April 16, 2012 by the NYSE; and by the non-payment of the semiannual interest payment due on July 15, 2012 and January 15, 2013. Through December 31, 2012, the Company had repurchased a total of $65,839,000 in principal amount of the Notes for cash consideration of $21,638,892, leaving an aggregate of $49,161,000 in principal amount outstanding. During the three and six months ended June 30, 2013 and 2012, there were no repurchases of Notes.

1312

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~ JUNE 30, ~~2012~~ 2013 AND ~~2011~~2012

~~NOTE~~On 11February –19, ~~DEBT~~2013, the Company received a notice of acceleration under the terms of the Notes. The notice was sent by certain holders of the Senior Notes that together hold more than 25% of the aggregate principal amount of the Notes. As of March 31, 2013, the aggregate principal amount of the Notes, and unpaid, but accrued interest was $52,536,329. The notice of acceleration resulted in the principal amount of the Notes plus accrued and all unpaid interest and accrued and unpaid additional interest on the Notes through February 19, 2013, to become immediately due and payable.

AtOn ~~September~~April 308, ~~2012 and December 31~~2013, ~~2011,~~four of ~~bank~~the ~~acceptance~~holders ~~notes~~of tothe ~~vendors~~Notes ~~were~~filed ~~$10,629,172~~this ~~and~~action ~~$502,912,~~claiming ~~respectively~~a ~~and~~default ~~due~~under atthe ~~various dates~~Notes, ~~from~~which ~~October~~allegedly ~~2012~~resulted toin ~~March~~an ~~2013.~~acceleration ~~These~~of the ~~short-term~~maturity ~~notes~~of ~~payable~~the ~~are~~Notes. ~~lines~~The ofPlaintiffs ~~credit~~had ~~extended~~previously bycommenced ~~the~~a ~~banks,~~similar ~~which~~action in ~~turn~~ ~~issue~~federal ~~the~~court ~~Company~~in aNew ~~bank~~Jersey, ~~acceptance~~but ~~note~~ that ~~can~~action was bewithdrawn ~~endorsed~~ and ~~assigned~~the topresent ~~vendors~~action aswas ~~payments for purchases~~interposed. The ~~short-term notes~~action ~~payable~~seeks ~~are~~payment ~~generally~~of ~~payable~~$20,378,608 ~~within~~plus ~~three~~prejudgment tointerest ~~nine~~and ~~months,~~other fees and ~~guaranteed by the bank~~costs. The ~~banks~~Company dohas ~~not~~been ~~charge~~served ~~interest~~with ~~on these notes, but usually charge a transaction fee of 0.05% of~~ the ~~total note value. In addition~~complaint, ~~the~~and ~~banks~~Plaintiffs ~~usually~~agreed ~~require the Company~~ to ~~deposit~~extend ~~a certain amount of cash at~~ the ~~bank~~Company’s astime ato ~~guarantee~~answer. When ~~deposit~~that ~~which~~time ispassed ~~classified~~ on ~~the~~June ~~balance~~3, ~~sheet~~2013, asPlaintiffs ~~restricted cash.~~refused Atto ~~September~~grant ~~30,~~additional ~~2012~~time and ~~December~~have ~~31,~~now ~~2011,~~made ~~restricted~~a ~~cash~~motion asseeking entry of a ~~guarantee~~default. ~~for~~The ~~the~~Company ~~notes~~filed ~~payable~~its ~~amounted~~answer toon ~~$7,045,083 and~~June ~~$264~~5,~~031,~~ ~~respectively~~2013.

AtThe ~~September~~Notes ~~30,~~are ~~2012~~convertible, ~~and~~at ~~December~~the ~~31,~~option ~~2011,~~of ~~short-term~~the ~~loans~~holder, ~~obtained~~at ~~from~~an ~~local~~initial ~~banks~~conversion ~~were~~price ~~$6,788,759~~of ~~and~~ $~~6,756,014, respectively~~9.29 ~~The~~per ~~short-term loans~~share, ~~payable~~adjusted ~~are~~to ~~due~~$8.08 on ~~various~~January 15, ~~dates~~2009. ~~through~~The conversion ~~August~~rate ~~14,~~is ~~2013,~~subject ~~with~~to ~~interest~~certain ~~ranging from 6~~adjustments.~~00%~~ Pursuant to ~~6.56%~~the ~~per~~terms ~~annum,~~of ~~and~~the ~~secured by property~~Notes, ~~plant~~holders ~~and~~may ~~equipment~~require ~~and~~the ~~land~~Company ~~use~~to ~~rights~~repurchase all ~~owned~~or bya ~~the~~portion ~~Company.~~of Attheir ~~September~~Notes 30on July 15, ~~2012~~2013 ~~and~~for ~~December~~cash ~~31,~~at ~~2011,~~a ~~the~~price ~~short-term loans~~equal ~~are~~to ~~secured~~100% byof ~~property,~~the ~~plant~~principal ~~and~~amount ~~equipment~~of ~~owned by~~ the ~~Company~~notes ofto be $4purchased,~~895,834~~ ~~and~~plus ~~$6,249,074,~~accrued ~~respectively,~~ and ~~land~~unpaid ~~use rights~~interest, ~~owned~~if byany, ~~the~~up ~~Company~~to, ofbut ~~$20~~excluding,~~735,126~~ ~~and~~the ~~$21,020,381,~~repurchase ~~respectively~~date.

AtThe ~~September 30, 2012~~effective ~~and~~interest ~~December~~rate ~~31,~~of ~~2011,~~ the ~~Company~~Notes ~~has~~for anthe ~~outstanding~~six ~~long-term~~months ~~bank~~ended ~~loan~~June ~~of $570~~30,~~733~~ 2013 and ~~$618,030,~~2012 ~~respectively.~~was ~~The long-term bank loan bears interest at 2~~5.5094%. ~~per~~Interest ~~annum,~~cost isrecognized ~~due~~for ~~December 31,~~the six ~~2021,~~months ~~and~~ended isJune ~~secured by property~~30, ~~plant,~~2013 and ~~equipment~~2012 ~~with a~~was ~~net book value of~~ $1,~~244~~435,~~486~~025 atand ~~September 30~~$2,712,500, ~~2012~~respectively.

~~NOTE~~Note 12issuance –costs incurred ~~CONVERTIBLE~~by ~~NOTES~~the Company were deferred and are recognized using the effective interest rate method over the term of the Notes. As of June 30, 2013 and December 31, 2012, the unamortized portion of the deferred financing fees was $16,279 and $212,724, respectively.

OnNOTE ~~July~~13 ~~15,~~– 2008, the Company issued $115,000,000, 5% unsecured senior convertible notes (the “Notes”), due July 15, 2015, for net proceeds of $110,358,550. The Notes are in default, which was caused by the delisting of the CompanySHAREHOLDERS’~~s common stock by the New York~~ Stock Exchange (“NYSE”) as described in the Form 25NSE filed on April 16, 2012 by the NYSE; and by the non-payment of the semiannual interest payment due on July 15, 2012, January 15, 2013, and July 15, 2013.EQUITY

~~The~~Common ~~Notes~~Stock are convertible, at the option of the holder, at an initial conversion price of $9.29 per share, adjusted to $8.08 on January 15, 2009. The conversion rate is subject to certain adjustments. Holders may require the Company to repurchase all or a portion of their Notes on July 15, 2013 for cash at a price equal to 100% of the principal amount of the notes to be purchased, plus accrued and unpaid interest, if any, up to, but excluding, the repurchase date.Awards

During the ~~three~~six months ended ~~September~~June 30, 2013 and 2012, the Company ~~repurchased~~recorded aselling, ~~total~~general and administrative expenses of $59544,~~339~~486 and $709,~~000~~555, respectively, of ~~principal~~stock ~~amount~~based compensation cost based on the vesting of the ~~Notes~~common ~~for~~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 $185,~~478~~665,~~888~~535, ~~cash consideration~~of ~~and~~which ~~expensed~~the unrecognized portion of $~~446~~1,~~557~~898,438 ofat ~~related~~June ~~unamortized~~30, ~~Notes~~2013 ~~issue~~is ~~cost~~expected ~~resulting~~to inbe arecognized ~~net~~following ~~gain~~the straight-line method over the remaining weighted average vesting period of ~~$40,413,555~~1.9 years.

During the ~~three~~six months ended ~~September~~ June 30, ~~2011~~2012, the Company ~~repurchased~~recorded aresearch ~~total~~and development costs of $532,500~~,000~~ ~~in principal amount~~ of ~~the~~stock ~~Notes~~based ~~for~~compensation ~~$2,750,000~~cost ~~cash~~based ~~consideration~~on ~~and~~the ~~expensed~~vesting ~~$83,171~~ of ~~related~~the ~~unamortized~~common ~~Notes~~stock ~~issue~~awards ~~cost~~granted ~~resulting~~to consultants in aprior ~~net~~periods. ~~gain~~At ofJune $230,~~666~~ 2013,~~829~~ these common stock awards were fully amortized.

~~The~~During ~~repurchases~~the ~~were~~six months ended June 30, 2013 and 2012, the Company recorded asselling, ~~follows:~~general and administrative expenses of $75,000 and $97,525, respectively of 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, 2013 and 2012, the Company did not issue any shares of common stock related to the director awards.

	September 30,
	2012			2011
Principal amount	$	59,339,000		$	5,500,000
Less: unamortized bond issue cost		(446,557	)		(83,171	)
Net Carrying Value		58,892,443			5,416,829
Repurchase Price		18,478,888			2,750,000
Gain on debt extinguishment of debt	$	40,413,555		$	2,666,829

Stock options

The ~~effective~~Company ~~interest~~calculates ~~rate~~the estimated fair value of granted options on the ~~Notes for~~ grant date, using the ~~nine~~Black-Scholes-Merton Option Pricing Model. During the six months ended ~~September~~June 30, 2013 and 2012, the Company recorded selling, general and ~~2011~~administrative ~~was~~expenses ~~5.94%.~~of ~~Interest~~$259,682 ~~cost~~and ~~recognized~~$588,380, respectively, ~~for~~of stock based compensation based on the ~~nine~~vesting of options granted to employees in prior periods. The total fair ~~months~~value ~~ended~~of ~~September~~the ~~30,~~options ~~2012~~granted ~~and~~to ~~2011~~employees at the respective grant dates was $49,~~253~~194,~~127~~987, ~~and~~of which the unrecognized portion of $4238,~~288~~184 is expected to be recognized following the straight-line method over the remaining weighted average vesting period of 0.2 years as of June 30,~~819,~~ ~~respectively~~2013.

Note issuance costs incurred by the Company were deferred and are recognized using the effective interest rate method over the term of the Notes. As of September 30, 2012 and December 31, 2011, the unamortized portion of the deferred financing fees was $312,575 and $1,347,735, respectively.13

14AMERICAN 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, 2013 ~~FINANCIAL~~AND ~~STATEMENTS~~2012

~~THREE~~The ~~AND~~following ~~NINE~~table summarizes ~~MONTHS~~the ~~ENDED~~stock ~~SEPTEMBER 30,~~option ~~2012~~activities ~~AND~~of ~~2011~~the Company:

NOTE 13 – SHAREHOLDERS’ EQUITY

			Weighted
			Average
	Activity		Exercise Price
Outstanding as of January 1, 2013		883,639	$	15.70
Granted		–		–
Forfeited		(33,100)		10.70
Outstanding as of June 30, 2013		850,539	$	15.90

Vested and expected to vest as of June 30, 2013		850,539

~~Common~~The ~~Stock~~following ~~Awards~~table summarizes information about stock options outstanding as of June 30, 2013:

During the nine months ended September 30, 2012 and 2011, the Company recorded selling, general and administrative expenses of $1,064,332 and $834,936, 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 $2,726,302 at September 30, 2012 is expected to be recognized following the straight-line method over the remaining weighted average vesting period of 2.7 years.

	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	409,850	$	20.09	3.91	409,850	$	20.09
$9.90 - 16.70	307,040	$	13.72	5.05	280,210	$	14.09
$8.02	133,649	$	8.02	5.78	106,919	$	8.02
	850,539				796,979

~~During~~Options ~~the~~granted ~~nine months~~have ~~ended~~no ~~September~~intrinsic ~~30,~~value ~~2012~~at ~~and 2011,~~ the ~~Company~~date ~~recorded research and development costs~~ of ~~$33,750~~these ~~and~~financial ~~$64,813,~~statements ~~respectively,~~as ~~of stock based compensation cost based on~~ the ~~vesting~~exercise price of ~~the~~all ~~common~~vested ~~stock~~and ~~awards~~unvested ~~granted~~options towas ~~consultants in prior periods. The value~~greater ofthan ~~these~~the ~~shares~~market ~~was~~price ~~fully amortized as~~ of ~~September~~the ~~30,~~Company’s ~~2012~~Common Stock.

~~During~~The ~~the~~weighted ~~nine months~~average ~~ended~~value ~~September~~per ~~30,~~share ~~2012~~of ~~and 2011,~~ the ~~Company recorded selling~~883,639 ~~general~~options and administrative expenses of $135,025 and $224,333, respectively of 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” onunder the ~~accompanying~~Company’s ~~condensed~~2006 ~~consolidated~~Plan ~~financial~~is ~~statements~~$10.41 ~~During~~per ~~the nine months ended September 30, 2012 and 2011, the Company did not issue any shares of common stock related to the director awards~~share.

~~Stock~~Treasury ~~options~~Stock

~~The Company calculates the estimated fair value of granted options on the grant date, using the Black-Scholes-Merton Option Pricing Model.~~ During ~~the nine months ended September 30, 2012 and~~ 2011, the Company repurchased ~~recorded selling~~224,582 ~~general~~shares ~~and administrative expenses~~ of ~~$882,570~~its ~~and $1,423,914,~~common ~~respectively, of~~ stock ~~based~~at ~~compensation~~a ~~based on the vesting of options granted to employees in prior periods. The~~ total ~~fair~~cost ~~value~~ of ~~the options granted to employees at the respective grant dates was~~ $9799,~~194,987,~~999 ofthat ~~which~~were ~~the~~retired ~~unrecognized~~in ~~portion of~~May ~~$669,257 is expected to be recognized following the straight-line method over the remaining weighted average vesting period of 0~~2013.~~5 years as of September 30, 2012.~~

~~The~~NOTE ~~following~~14 ~~table~~– COMMITMENTS ~~summarizes~~AND ~~the stock option activities of the Company:~~CONTINGENCIES

			Weighted
			Average
	Activity		Exercise Price
Outstanding as of January 1, 2012		883,639		15.70
Granted		–		–
Exercised/ Cancelled/Forfeited		–		–
Outstanding as of September 30, 2012		883,639	$	15.70
Vested and expected to vest as of September 30, 2012		883,639

Commitments

As of June 30, 2013, the Company had entered into capital commitments for the manufacturing facilities under construction in the PRC. The ~~following~~capital ~~table~~commitments ~~summarizes~~were $36,585,847 ~~information~~that ~~about~~are ~~stock~~due ~~options~~within ~~outstanding~~one asyear and $6,948,709 due after one year but within three years. In addition, the Company had research and development commitments of ~~September~~$5,611,002 30within one year and $698,103 ~~2012:~~after one year but within three years, and purchase commitments for Millettia of $2,398,626 within one year and $2,141,172 after one year but within three years.

	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	4.67	416,350	$	20.04
$9.90 - 16.70	323,040	$	13.53	5.82	228,402	$	13.53
$8.02	144,249	$	8.02	6.29	86,549	$	8.02
	883,639				731,301

The Company also has an unconditional purchase commitment in connection with the Millettia long-term supply contracts, which is not expected to be harvested until after 2018 (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, 2013, the Company had a commitment to pay maintenance fees of approximately $111,000 (RMB 700,000) per year from 2013 to 2019 related to the XSB long-term supply contract.

Options 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.14

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

15NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~AMERICAN~~THREE ~~ORIENTAL~~AND ~~BIOENGINEERING~~SIX MONTHS ENDED JUNE 30, ~~INC.~~2013 AND ~~SUBSIDIARIES~~2012

~~NOTES~~Legal ~~TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~proceedings

~~THREE~~On ~~AND~~June ~~NINE~~23, ~~MONTHS~~2010, Haining ~~ENDED~~Zhang ~~SEPTEMBER~~asserted breach of contract, fraudulent dealing, and breach of fiduciary duty claims against the Company and its 30Chief Executive Officer, ~~2012~~Shu ~~AND~~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. Zhang had 90 days from the date of the Second Circuit’s decision in which to seek an appeal to the United States Supreme Court. No such appeal was sought by Zhang and the period to do so has expired.

~~Treasury~~On ~~Stock~~June 22, 2012, a putative class action complaint was filed by Kevin McGee against American Oriental Bioengineering Inc, Eileen Brody, Binsheng Li, Yangchun Li, Tony Liu, Cosimo Patti, Xianmin Wang, and Lawrence Wizel alleging violations of Section 10b of the Securities Exchange Act of 1934 and liability pursuant to Section 20(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. The defendants have moved to dismiss the TAC, and the motion is scheduled to be heard on November 7, 2013.

~~During~~On October 1, 2012, Peter 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 ~~nine~~Company ~~months~~as a nominal ~~ended~~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, ~~2012~~2009 and September 30, 2011, which were filed with the SEC. The alleged accounting errors were related to the Company’s ~~repurchased~~sale 1of an interest held by the Company’s subsidiary,~~003~~ Nuo Hua Investment Company Limited,~~336~~ ~~shares~~and ofwere ~~its~~disclosed ~~common~~in ~~stock~~the atCompany’s aRestatement ~~total~~filed ~~cost~~on November 14, 2011. The Complaint also alleges that its claims arise out of $1alleged inconsistencies that the Company’s then auditor,~~270~~ Ernst and Young Hua Ming,~~603~~ discovered throughout the course of the Company’s audit for the year ending 2011. The Parties have agreed that ~~were~~Defendants need not respond ~~retired~~to the complaint until motions to dismiss the class action Complaint filed against the Company in ~~June~~the ~~2012~~Central District of California (discussed above) are resolved.

~~NOTE~~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 ~~COMMITMENTS~~Complaint ~~AND~~also ~~CONTINGENCIES~~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. Plaintiff has consented to the lifting of the default against the Company and to agree to a schedule for responses to the Complaint.

~~Commitments~~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. On August 9, 2013, Plaintiffs submitted to the Court a Request for Final Judgment by Default. The default judgment has been entered, and Plaintiffs have proceeded to domesticate the judgment in states in which Plaintiff believes assets can be found.

AsThere ofare ~~September~~no ~~30, 2012,~~other ~~the~~known ~~Company~~legal ~~had~~proceedings ~~entered~~against ~~into capital commitments for~~ the manufacturing facilities under construction in the People’s Republic of China. The capital commitments were $15,612,562 within one year and $6,788,759 after one year but within three years. In addition, the Company ~~had R&D commitments of $6,470,161, all within one year, and purchase commitments for Millettia of $2,343,413 within one year and $4,435,298 after one year but within three years~~.

The Company also has an unconditional purchase commitment in connection with the Millettia long-term supply contracts, which is not expected to be harvested until after 2018 (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 September 30, 2012, the Company had a commitment to pay maintenance fees of approximately $111,000 (RMB 700,000) per year from 2013 to 2019 related to the XSB long-term supply contract.15

~~Legal~~AMERICAN ~~proceedings~~ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

AsNOTES ofTO ~~September~~THE ~~30, 2012~~UNAUDITED ~~and~~CONDENSED ~~December 31, 2011, the Company was subject to various legal proceedings and claims. Management continues to evaluate the~~CONSOLIDATED ~~lawsuits~~FINANCIAL discussed below and based on the stage of these proceedings, management is unable to reasonably estimate the likelihood of any loss or the amount or range of any potential loss that could result from the litigation. Therefore, at September 30, 2012 and December 31, 2011, no accrual has been established for any potential loss in connection with these lawsuits. Should the Company fail to prevail in any of these legal matters or should several of these legal matters be resolved against the Company in the same reporting period, the operating results of a particular reporting period could be materially adversely affected. STATEMENTS

OnTHREE ~~June~~AND ~~23,~~SIX ~~2010,~~MONTHS ~~Haining Zhang~~ENDED ~~asserted~~JUNE ~~breach of contract~~30, 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~~AND 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.2012

OnNOTE June 22, 2012, a putative class action complaint was filed by Kevin McGee against American Oriental Bioengineering Inc, Eileen Brody, Binsheng Li, Yangchun Li, Tony Liu, Cosimo Patti, Xianmin Wang, and Lawrence Wizel alleging violations of Section 10b of the Securities Exchange Act of 1934 and liability pursuant to Section 20(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~~SEGMENT 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.REPORTING

~~See~~For ~~Note~~the 17three ~~for a description~~months ofended ~~additional~~June ~~legal~~30, ~~proceedings~~2013 ~~against~~and 2012, the Company’s ~~initiated~~segments ~~subsequent~~were toas ~~September 30, 2012.~~follows:

	Three Months Ended June 30,
	2013			2012
Manufacturing Segment
Revenue from pharmaceutical products	$	12,268,177		$	15,887,829
Revenue from nutraceutical products		1,838,307			1,285,884
Total manufacturing revenue		14,106,484			17,173,713
Cost of sales		9,429,046			14,668,068
Depreciation and amortization expense		1,194,275			1,064,123
Selling, general and administrative expenses, research and development
costs and advertising costs		12,222,619			17,935,432
Provision for reserves and doubtful accounts-manufacturing segment		2,954,946			(1,315,842	)
Operating loss of manufacturing segment		(5,780,571	)		(17,793,664	)
Distribution Segment
Distribution revenue		6,117,653			10,273,213
Cost of sales		5,809,157			9,586,612
Depreciation and amortization expense-distribution segment		176,827			47,911
Provision for reserves and doubtful accounts-distribution segment		(953,605	)		(713,150	)
Operating loss of distribution segment		(1,268,848	)		(777,573	)

Reconciliation to Consolidated Net Loss Attributable to Controlling Interest:
Net loss for reportable segments		(7,049,419	)		(18,571,237	)
Net loss for corporate segment		(5,791,480	)		(7,215,960	)
Consolidated Net Loss Attributable to Controlling Interest	$	(12,840,899	)	$	(25,787,197	)

~~AMERICAN~~For ~~ORIENTAL~~the ~~BIOENGINEERING,~~six ~~INC.~~months ~~AND~~ended ~~SUBSIDIARIES~~June 30, 2013 and 2012, the Company’s segments were as follows:

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Six Months Ended June 30,
	2013			2012
Manufacturing Segment
Revenue from pharmaceutical products	$	24,010,946		$	30,111,084
Revenue from nutraceutical products		3,531,529			3,211,136
Total manufacturing revenue		27,542,475			33,322,220
Cost of sales		18,860,301			23,951,747
Depreciation and amortization expense		2,400,865			2,626,337
Selling, general and administrative expenses, research and development
costs and advertising costs		29,191,644			34,148,569
Provision for reserves and doubtful accounts-manufacturing segment		926,302			(649,706	)
Operating loss of manufacturing segment		(21,980,094	)		(29,370,323	)
Distribution Segment
Distribution revenue		13,688,425			19,869,982
Cost of sales		12,883,790			18,366,387
Depreciation and amortization expense-distribution segment		356,643			97,252
Provision for reserves and doubtful accounts-distribution segment		(658,070	)		(713,150	)
Operating loss of distribution segment		(1,245,406	)		(835,755	)

Reconciliation to Consolidated Net Loss Attributable to Controlling Interest:
Net loss for reportable segments		(23,225,500	)		(30,206,078	)
Net loss for corporate segment		(10,730,256	)		(12,738,044	)
Consolidated Net Loss Attributable to Controlling Interest	$	(33,955,756	)	$	(42,944,122	)

~~THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011~~16

~~NOTE~~AMERICAN 15ORIENTAL –BIOENGINEERING, ~~SEGMENT~~INC. AND ~~REPORTING~~SUBSIDIARIES

~~For~~NOTES ~~the~~TO ~~three~~THE ~~months ended~~UNAUDITED ~~September~~CONDENSED ~~30,~~CONSOLIDATED FINANCIAL ~~2012 and 2011, the Company’s segments were as follows:~~STATEMENTS

	Three Months Ended September 30,
	2012			2011
Manufacturing Segment
Revenue from pharmaceutical products	$	14,860,925		$	40,276,279
Revenue from nutraceutical products		1,587,654			8,774,711
Total manufacturing revenue		16,448,579			49,050,990
Cost of sales		11,037,711			24,181,804
Depreciation and amortization expense		1,288,162			1,331,032
Selling, general and administrative expenses, research and development costs and advertising costs		19,314,424			15,188,293
Provision for reserves and doubtful accounts-manufacturing segment		686,289			(2,666,829	)
Operating income (loss) of manufacturing segment		(15,837,603	)		10,569,294
Distribution Segment
Distribution revenue		13,044,880			4,883,612
Cost of sales		11,999,386			4,548,620
Depreciation and amortization expense-distribution segment		48,352			23,322
Provision for reserves and doubtful accounts-distribution segment		39,469			–
Operating income of distribution segment		104,567			12,376
Reconciliation to Consolidated Net Income Attributable to Controlling Interest:
Net income (loss) for reportable segments		(15,733,036	)		10,581,670
Net loss for non segment subsidiaries		(5,563,068	)		(2,928,129	)
Gain on extinguishment of convertible notes		40,413,555			–
Consolidated net income attributable to controlling interest	$	19,117,451		$	7,653,541

THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012

17All operating revenues comprise amounts received from external third party customers. All of the Company’s operations are located in the PRC.

~~AMERICAN~~As ~~ORIENTAL~~of ~~BIOENGINEERING~~June 30, ~~INC.~~2013 and December 31, 2012, ~~AND~~total ~~SUBSIDIARIES~~assets of the manufacturing and distribution segments are as follows:

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	June 30,		December 31,
	2013		2012
Manufacturing	$	262,826,955	$	276,885,064
Distribution		2,501,501		8,741,917
Corporate		153,476,172		160,681,943
Total assets	$	418,804,628	$	446,308,924

~~THREE~~NOTE ~~AND~~16 ~~NINE~~– ~~MONTHS~~INCOME ~~ENDED SEPTEMBER 30, 2012 AND 2011~~TAX

~~For~~The provisions for income taxes for the ~~nine~~six months ended ~~September~~June 30, ~~2012~~2013 and ~~2011,~~2012 ~~the~~are ~~Company’s~~summarized ~~segments were~~ as follows:

	Nine Months Ended September 30,
	Six Months Ended June 30,
	2012			2011
	2013			2012
Manufacturing Segment
Current tax provision-PRC	$	440,105		$	835,326
Revenue from pharmaceutical products	$	44,972,009		$	119,969,639
Deferred taxes-PRC		610,221			118,639
Revenue from nutraceutical products		4,798,790			28,110,229
Total provision for income taxes	$	1,050,326		$	953,965
Total manufacturing revenue		49,770,799			148,079,868
Cost of sales		34,989,458			72,568,527
Depreciation and amortization expense		3,914,499			3,956,892
Selling, general and administrative expenses, research and development costs and advertising costs		53,462,993			45,220,153
Provision for reserves and doubtful accounts-manufacturing segment		2,668,267			(2,666,829	)
Operating income (loss) of manufacturing segment		(45,207,926	)		25,466,535
Distribution Segment
Distribution revenue		32,914,862			11,908,640
Cost of sales		30,365,773			11,295,042
Depreciation and amortization expense-distribution segment		145,604			73,341
Provision for reserves and doubtful accounts-distribution segment		752,619			–
Operating loss income of distribution segment		(731,188	)		(129,635	)
Reconciliation to Consolidated Net Income Attributable to Controlling Interest:
Net income (loss) for reportable segments		(45,939,114	)		25,336,900
Net loss for non segment subsidiaries		(18,301,112	)		(14,155,488	)
Gain on extinguishment of convertible notes		40,413,555			–
Consolidated net income (loss) attributable to controlling interest	$	(23,826,671	)	$	11,181,412

~~All~~The ~~operating revenues~~reconciliation ~~comprise~~of ~~amounts~~tax ~~received~~computed ~~from~~by ~~external~~applying ~~third~~the ~~party~~statutory ~~customers.~~income ~~All~~tax ofrate applicable to the ~~Company’s~~PRC operations ~~are~~to ~~located~~income intax ~~the~~expenses ~~PRC.~~ was as follows:

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

	Six Months Ended June 30,
	2013			2012
Income tax benefit at PRC statutory tax rate of 25%	$	(8,226,358	)	$	(10,500,265	)
Preferential PRC tax rate of 10%		2,178,372			2,923,955
Effect of prior year income tax		38,572			–
Effect of different tax rates on non-PRC operations		1,120,359			1,434,595
Non-recognition of income tax benefit for current year losses		4,116,826			4,315,479
Provision for taxes on deemed interest income		648,186			752,374
Non-deductible expenses in current year		1,104,079			956,016
Other permanent differences		70,290			1,071,811
Total provision for income taxes	$	1,050,326		$	953,965

	September 30,		December 31,
	2012		2011
Manufacturing	$	309,046,430	$	396,854,361
Distribution		23,365,840		51,672,762
Corporate		168,748,772		116,453,934
Total assets	$	501,161,042	$	564,981,057

The tax effects of temporary differences that give rise to the Company’s net deferred tax liabilities as of June 30, 2013 and December 31, 2012 were as follows:

NOTE 16 – INCOME TAX

	June 30,			December 31,
	2013			2012
Deferred tax assets
Current
Provision for doubtful accounts receivable	$	25,911		$	25,386
Expenses not deductible in current period		7,705			3,274
Total current deferred tax assets		33,616			28,660
Deferred tax liabilities
Non-current
Amortization		(1,144,120	)		(1,156,516	)
Depreciation		(778,620	)		(323,750	)
Step up of acquired assets		(10,648,501	)		(10,475,798	)
Total non-current deferred tax liabilities		(12,571,241	)		(11,956,064	)
Net deferred tax liabilities	$	(12,537,625	)	$	(11,927,404	)

~~The provisions for income taxes for the nine months ended September 30, 2012 and 2011 are summarized as follows:~~17

	Nine Months Ended September 30,
	2012		2011
Current tax provision	$	1,376,810	$	5,804,146
Deferred taxes		64,435		(1,712,491	)
Total provision for income taxes	$	1,441,245	$	4,091,655

AMERICAN ORIENTAL BIOENGINEERING, INC. AND SUBSIDIARIES

18NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~AMERICAN~~THREE ~~ORIENTAL~~AND ~~BIOENGINEERING~~SIX MONTHS ENDED JUNE 30, ~~INC.~~2013 AND ~~SUBSIDIARIES~~2012

~~NOTES~~The TOCompany ~~THE~~has ~~UNAUDITED~~not recorded ~~CONDENSED~~a ~~CONSOLIDATED~~provision for U.S. federal income tax for the six months ended June 30, 2013 and 2012 due to the cumulative tax net ~~FINANCIAL~~operating ~~STATEMENTS~~losses in the United States. As of June 30, 2013, the Company had net operating tax losses carried forward of approximately $26,000,000, $80,000,000 and $8,000,000 in the U.S., PRC, and Hong Kong, 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, 2013, the tax benefit of the loss carryforwards had not been recorded and therefore is not presented in the table above.

~~THREE~~The ~~AND~~Company’s ~~NINE~~PRC ~~MONTHS~~subsidiaries ~~ENDED~~that are ~~SEPTEMBER~~deemed “high technology” enterprises are subject to preferred tax rates (tax holiday). The table below shows the ~~30,~~effect ~~2012~~of ~~AND~~using ~~2011~~the higher rates and earnings per share.

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

	Six Months Ended June 30,
	2013			2012
Income (loss) per common share-basic	$	(0.93	)	$	(1.09	)
Effect of tax holiday		0.00			0.00
Pro forma income (loss) per common share-basic	$	(0.93	)	$	(1.09	)

	Nine Months Ended September 30,
	2012			2011
Income tax (benefit) provision at PRC statutory tax rate of 25%	$	(5,595,252	)	$	4,066,284
Preferential PRC tax rate of 10%		4,515,026			4,562,515
Effect of different tax rates on non-PRC operations		(4,403,678	)		1,222,046
Non-recognition of income tax benefit for current year losses		6,385,785			(7,516,572	)
Provision for taxes on deemed interest income		1,155,933			1,419,318
Non-deductible expenses in current year		1,505,449			–
Other permanent differences		(2,122,018	)		338,064
Total provision for income taxes	$	1,441,245		$	4,091,655

Accrued Taxes

~~The~~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 ~~effects~~position taken in the tax return. As of ~~temporary~~June ~~differences~~30, 2013, the Company ~~that~~has ~~give~~recorded ~~rise~~an accrued tax of $11,829,261 mainly related to tax positions associated with deemed interest on non-trade intercompany transactions. It is possible that the ~~Company’s~~amount ~~net~~accrued ~~deferred~~will ~~tax~~change ~~liabilities~~in asthe ofnext ~~September~~12 30months; however, ~~2012~~an ~~and~~estimate ~~December~~of 31the range of the possible change cannot be made at this time. The accrued taxes, ~~2011~~if ~~were~~ultimately asrecognized ~~follows:~~will impact the effective tax rate.

	September 30,			December 31,
	2012			2011
Deferred tax assets
Current
Provision for doubtful accounts receivable	$	1,997,523		$	2,751,092
Expenses not deductible in current period		1,195,165			474,711
Total current deferred tax assets		3,192,688			3,225,803
Non-current
Amortization		41,830			79,151
Impairment of fixed assets		221,371			183,958
Total non-current deferred tax assets		263,201			263,109
Total deferred tax assets		3,455,889			3,488,912
Deferred tax liabilities
Current
Excess accruals		(63,689	)		(63,382	)
Other		–			(26,688	)
Total current deferred tax liabilities		(63,689	)		(90,070	)
Non-current
Amortization		(7,097,316	)		(948,322	)
Depreciation		(765,268	)		(128,771	)
GLP step up of acquired assets		(6,767,701	)		(13,495,399	)
Total non-current deferred tax liabilities		(14,630,285	)		(14,572,492	)
Total deferred tax liabilities		(14,693,974	)		(14,662,562	)
Net deferred tax liabilities	$	(11,238,085	)	$	(11,173,650	)

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

~~The~~All of the Company’s ~~has~~operations ~~not recorded~~are aconducted ~~provision~~in ~~for~~the UPRC.S. ~~federal~~At ~~income~~June ~~tax~~30, ~~for~~2013, the ~~nine~~Company’s unremitted ~~months~~foreign ~~ended~~earnings ~~September~~of ~~30,~~its ~~2012~~PRC ~~and~~subsidiaries ~~2011~~totaled ~~due~~approximately to$124 million and the ~~cumulative~~Company ~~tax~~held approximately $9 ~~net~~million ~~operating~~of ~~losses~~cash and cash equivalents in the ~~United States~~PRC. AsThese ofunremitted ~~September~~earnings ~~30,~~are ~~2012,~~planned to be reinvested indefinitely into the ~~Company~~operations ~~had~~of ~~net~~the ~~operating~~Company ~~tax~~in ~~losses~~the ~~carried~~PRC. ~~forward~~While repatriation of ~~approximately~~ ~~$12,000,000,~~some ~~$56,000,000~~cash ~~and~~held ~~$9,000,000~~ in the ~~U.S.,~~ PRC, ~~and~~may ~~Hong~~be restricted ~~Kong,~~by ~~respectively.~~local ~~Those~~PRC ~~losses~~laws, ~~carried~~most ~~forward in~~of the ~~U.S.~~Company's ~~expire~~foreign ~~between~~cash ~~years~~balances ~~2025~~if ~~and~~be ~~2030~~repatriated to the United States then, ~~and~~under current inU.S. ~~the~~income ~~PRC~~tax ~~expire~~laws, ~~between~~could ~~years~~be ~~2015~~subject ~~and~~to ~~2018~~U.S. ~~Losses~~federal ~~incurred~~income intaxes ~~Hong~~less ~~Kong are~~applicable ~~carried~~foreign ~~forward~~tax ~~indefinitely~~credits. Determination Inof the ~~PRC~~amount ~~and~~of ~~Hong~~unrecognized ~~Kong~~deferred ~~the~~U.S. ~~subsidiaries~~income ~~with~~tax ~~loss~~liability ~~carryforwards~~on ~~are~~the ~~taxed~~unremitted onearnings ais ~~separate~~not ~~return~~practicable ~~basis~~because ~~and~~of the ~~Company~~complexities ~~has~~associated ~~determined~~with ~~all~~this ~~amounts~~hypothetical ~~should~~calculation, ~~have~~and ~~full~~as ~~valuation~~the ~~allowances.~~Company Atdoes ~~September~~not ~~30,~~plan ~~2012,~~to ~~the~~repatriate ~~tax benefit~~any ofcash in the ~~loss~~PRC ~~carryforwards~~to ~~had~~the ~~not~~United ~~been~~States, ~~recorded~~no ~~and~~deferred ~~therefore~~tax isliability has not ~~presented~~been inaccrued ~~the~~for ~~table~~cash ~~above~~to be repatriated.

19NOTE 17 – RELATED PARTY TRANSACTIONS

~~AMERICAN~~During ~~ORIENTAL~~the ~~BIOENGINEERING~~six months ended June 30, ~~INC.~~2013, the Company’s Chairman and Chief Executive Office made advances to the Company of $193,923, which were ~~AND~~repaid ~~SUBSIDIARIES~~in July, 2013.

~~NOTES~~NOTE TO18 ~~THE~~– ~~UNAUDITED~~SUBSEQUENT ~~CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~EVENTS

~~THREE~~On ~~AND~~October ~~NINE~~7, ~~MONTHS~~2013, ~~ENDED~~the Company ~~SEPTEMBER~~filed an Amendment to the Certificate of Designation of the Preferred Stock of the Company with the Secretary of State 30of Nevada. Paragraph 5 of the Certificate of Designation, ~~2012~~which ~~AND~~governs ~~2011~~the voting power with respect to the Company’s Preferred Stock, was amended to include a provision that allows the 1,000,000 issued and outstanding shares of Preferred Stock to have an aggregate voting power of 25% of the shares of the Company’s common stock with respect to any matters upon which only a vote of the holders of the Company’s Common stock is required. This right is in addition to the aggregate voting power of 25% of the combined voting power of the entire Company’s shares of Common Stock and Preferred Stock with respect to any matters upon which the Common Stock and Preferred Stock may vote, which is already provided for in Paragraph 5 of the Certificate of Designation.

~~The~~On October 31, 2013, the Board of Directors of the Company’s ~~PRC~~adopted ~~subsidiaries~~a ~~that~~resolution approving a 1-for-501 Reverse Stock split of the issued and outstanding ~~are~~shares ~~deemed~~of ~~“high~~Common ~~technology”~~Stock ~~enterprises~~of ~~are~~the ~~subject~~Company. Subsequently, on October 31, 2013, stockholders holding a majority of the voting power of the Common Shares then outstanding approved the Reverse Stock Split. The Reverse Stock Split is part of a transaction structured to ~~preferred~~reduce ~~tax~~the ~~rates~~number of record holders of Common Shares to less than 300, allowing the Company to suspend its reporting obligations under Section 13(~~tax~~a) ~~holiday~~of the Securities Exchange Act of 1934, as amended, and terminate registration of our Common Shares under Section 12(g) of the Exchange Act. ~~The~~This ~~table~~action ~~below~~is ~~shows~~being taken to eliminate the significant expense required to comply with the ~~effect~~reporting and related requirements of ~~using~~being a publicly traded company in the ~~higher~~U.S. ~~rates~~The ~~and~~Reverse ~~earnings~~Stock Split will become effective no earlier than 20 calendar days after an Information Statement on Schedule 14C is mailed to the Company’s stockholders. All references to quantities of common stock or per share amounts herein will not be adjusted until the Reverse Stock Split is effective.

	Nine Months Ended September 30,
	2012			2011
Income (loss) per common share-basic	$	(0.62	)	$	0.30
Effect of tax holiday		0.00			0.00
Pro forma income (loss) per common share-basic	$	(0.62	)	$	0.30

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

~~Effective~~The ~~January~~following discussion 1,should ~~2007,~~be ~~the~~read ~~Company~~in ~~adopted~~conjunction ~~guidance~~with ~~for~~the ~~accounting~~information ~~for~~contained ~~uncertainty~~ in ~~income~~the ~~taxes~~condensed ~~which~~consolidated ~~prescribes~~financial astatements ~~more-likely-than-not~~of ~~threshold~~the Company ~~for~~and ~~financial~~the ~~statement~~notes ~~recognition~~thereto ~~and~~appearing ~~measurement~~elsewhere ofherein aand ~~tax~~in ~~position~~conjunction ~~taken~~with in the ~~tax~~Management’s ~~return.~~Discussion Asand ofAnalysis ~~September~~set ~~30,~~forth in ~~2012,~~ the Company ~~has~~’s ~~recorded~~Annual anReport ~~accrued~~on ~~tax~~Form ~~of $~~10~~,562,815~~-K ~~mainly~~for ~~related~~the toyear ~~tax~~ended ~~positions~~December ~~associated~~31, ~~with~~2012. ~~deemed~~Readers ~~interest~~should oncarefully ~~non-trade~~review ~~intercompany~~the risk ~~transactions.~~factors Itdisclosed isin ~~possible that~~ the ~~amount~~Company’s ~~accrued~~Form ~~will~~10-K ~~change~~for in the ~~next~~year 12ended ~~months;~~December ~~however~~31, an2012 ~~estimate~~filed ofby the ~~range~~Company ofwith the Securities ~~possible~~and ~~change~~Exchange ~~cannot~~Commission ~~be made at this time~~(“SEC”). ~~The accrued taxes, if ultimately recognized will impact the effective tax rate.~~

~~The~~As ~~Company~~used ~~has~~in ~~various~~this report, ~~open~~the ~~tax~~terms ~~years~~“Company,” ~~between~~“we,” ~~2007~~“our,” “us,” and ~~2012~~“AOB” inrefer ~~its~~to ~~significant~~American Oriental ~~operating~~Bioengineering, ~~jurisdictions~~Inc., a Nevada corporation.

~~All~~PRELIMINARY ofNOTE ~~the~~REGARDING ~~Company’s~~FORWARD-LOOKING operations are conducted in the PRC. At September 30, 2012, the Company’s unremitted foreign earnings of its PRC subsidiaries totaled approximately $185 million and the Company held approximately $33 million of cash and cash equivalents in the PRC. These unremitted earnings are planned to be reinvested indefinitely into the operations of the Company in the PRC. While repatriation of some cash held in the PRC may be restricted by local PRC laws, most of the Company's foreign cash balances could be repatriated to the United States but, under current U.S. income tax laws, could be subject to U.S. federal income taxes less applicable foreign tax credits. Determination of the amount of unrecognized deferred U.S. income tax liability on the unremitted earnings is not practicable because of the complexities associated with this hypothetical calculation, and as the Company does not plan to repatriate any cash in the PRC to the United States, no deferred tax liability has not been accrued for cash to be repatriated. STATEMENTS

~~NOTE~~This 17quarterly –report contains ~~SUBSEQUENT~~forward-looking ~~EVENTS~~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.

OnInvestors ~~October~~are 1,also ~~2012,~~advised ~~Peter~~to ~~Barbato~~refer ~~filed~~to athe ~~shareholder~~information ~~derivative~~in ~~Complaint~~our ~~against~~previous ~~Tony~~filings ~~Liu,~~with ~~Yanchun~~the LiSEC, ~~Binsheng~~especially ~~Li,~~on ~~Lawrence~~Forms ~~Wizel~~10-K, ~~Cosimo Patti~~10-Q, ~~Xianmin~~ ~~Wang, Eileen Brody, Jun Min,~~ and ~~Baiqing Zhang (collectively~~8-K, ~~“Defendants”),~~in ~~and~~which ~~the~~we ~~Company~~discuss in asmore adetail ~~nominal~~various ~~Defendant. The~~important ~~Complaint~~factors ~~asserts~~that ~~causes~~could ofcause ~~action~~actual ~~for~~results ~~Breach~~to ofdiffer ~~Fiduciary~~from ~~Duty~~expected ~~and~~or ~~Unjust~~historic ~~Enrichment~~results. ~~These~~ ~~claims~~It ~~similarly~~is ~~arise out~~not ofpossible ~~alleged~~to ~~accounting~~foresee ~~errors~~or ~~that~~identify ~~were~~all ~~made~~such ~~the~~factors. ~~Company’s~~As ~~financial statements for in the periods between the third quarters ending September 30~~such, ~~2009~~investors ~~and~~should ~~September~~not ~~30,~~consider ~~2011,~~any ~~which~~list ~~were~~of ~~filed~~such ~~with~~factors ~~the SEC. The alleged accounting errors were related~~ to ~~the~~be ~~Company’s sale of~~ an ~~interest held by the Company’s subsidiary, Nuo Hua Investment Company Limited, and were~~exhaustive ~~disclosed~~statement ~~in the Company’s Restatement filed on November 14, 2011. The Complaint also alleges that its claims arise out~~ of ~~alleged~~all ~~inconsistencies~~risks ~~that the Company’s then auditor, Ernst~~ and ~~Young~~uncertainties ~~Hua~~or ~~Ming,~~potentially ~~discovered~~inaccurate ~~throughout the course of the Company’s audit for the year ending 2011~~assumptions. 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.

OnBUSINESS 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. OVERVIEW

20Global economic challenges and uncertainties have impacted our business in 2011, 2012 and the first half of 2013. These challenges and uncertainties have negatively affected consumers’ demands for both pharmaceutical and nutraceutical products, which contributed to the overall decline in sales of our manufacturing segments.

~~AMERICAN~~In ~~ORIENTAL~~addition, ~~BIOENGINEERING~~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, ~~INC~~respectively that lowered certain prices of prescription and over-the-counter medicines. ~~AND~~As ~~SUBSIDIARIES~~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.

~~NOTES~~The TOcontinuous ~~THE~~increase in ~~UNAUDITED~~cost ~~CONDENSED~~of ~~CONSOLIDATED FINANCIAL~~raw ~~STATEMENTS~~material also impacted our business as gross profit has declined since the end of 2010.

~~THREE~~In ~~AND~~addition ~~NINE~~to ~~MONTHS~~the ongoing ~~ENDED~~economic ~~SEPTEMBER 30~~challenges and uncertainties, our business was negatively impacted by the toxic drug capsules incident in 2012. Incidents ~~AND~~like ~~2011~~that shook the pharmaceutical industry and resulted in a decline in market demand. Although we were not directly involved in the scandal and our facilities were inspected and passed the safety requirements, our subsequent sales have been impacted significantly due to the loss of consumer confidence in pharmaceutical products and huge decline in market demand. All of these challenges, uncertainties and incidents may continue to have an adverse impact on our future performance.

OnWe ~~February~~are ~~19,~~taking ~~2013,~~actions ~~the~~to ~~Company~~mitigate ~~received a notice of acceleration under~~ the ~~terms~~impact of ~~the~~these ~~Company’s~~economic ~~5.00%~~conditions ~~Convertible~~by: ~~Senior Notes due 2015 (the “Senior Notes”~~1) ~~issued~~focusing ~~pursuant~~on toour anwell-recognized ~~Indenture,~~brand ~~dated as of July 15~~names, ~~2008,~~including ~~between~~AOBO ~~the Company~~ and ~~Wells Fargo Bank,~~our ~~National~~Jinji ~~Association,~~products; ~~as Indenture Trustee (the “Indenture”~~2). ~~The~~diversifying ~~notice~~our ~~was~~products ~~sent~~through byproducts ~~certain~~line ~~holders~~extension; 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~~3) ~~days~~developing ~~after July 16, 2012~~ and ~~January~~introducing ~~15,~~new ~~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~~products. 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.

OnTo ~~April~~mitigate 8,the ~~2013, four~~impact of the ~~holders~~increasing ofcost ~~the~~and ~~Company’s~~supply 5%of ~~senior~~the ~~convertible~~raw ~~notes~~material ~~issued~~needed ~~July~~for 15our products, ~~2008~~we ~~(the~~entered ~~“Notes”)~~into ~~filed~~long-term ~~this~~supply ~~action~~contracts with ~~claiming~~various athird ~~default~~parties ~~under~~to ~~the~~grow ~~Notes,~~Millettia ~~which~~and ~~allegedly~~Xanthoceras ~~resulted~~Sorbifolia inBge an(“XSB”), ~~acceleration~~which ofare ~~the~~major ~~maturity~~raw ~~of the Notes~~materials. ~~The~~We ~~Plaintiffs had~~bear ~~previously~~the ~~commenced~~cultivation acost ~~similar~~for ~~action~~these inraw ~~federal court in New Jersey~~materials, ~~but~~including ~~that~~leasing ~~action was withdrawn and~~ the ~~present~~land ~~action~~use ~~was interposed~~rights. ~~The~~In ~~action~~return, ~~seeks~~we ~~payment~~are ofentitled ~~$20,378,608~~to ~~plus~~purchase ~~prejudgment~~the raw ~~interest~~material ~~and~~at ~~other~~a ~~fees~~pre-determined ~~and~~discounted ~~costs~~price. ~~The~~Through ~~Company~~these ~~has~~supply ~~been~~contracts, ~~served with~~we ~~the~~believe ~~complaint,~~that ~~and~~we ~~Plaintiffs~~can ~~agreed~~stabilize tothe ~~extend~~supply of ~~the~~our ~~Company’s~~major ~~time~~raw tomaterials ~~answer.~~in ~~When~~the ~~that~~long ~~time~~term ~~passed~~and onreduce ~~June~~the 3,risk ~~2013, Plaintiffs~~of ~~refused~~increasing tocosts ~~grant~~in ~~additional~~future ~~time~~periods. ~~and~~In ~~have~~the ~~now~~fourth ~~made~~quarter aof 2012, ~~motion~~we ~~seeking~~recorded ~~entry~~an impairment of aapproximately ~~default~~$8.5 ~~The~~million ~~Company~~of ~~filed~~our ~~its~~capitalized ~~answer on~~agricultural ~~June 5, 2013~~costs.

2119

~~ITEM~~CRITICAL 2.ACCOUNTING ~~MANAGEMENT’S~~POLICIES ~~DISCUSSION~~ AND ~~ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~ESTIMATES

~~The~~This ~~following~~section ~~discussion~~ should be read intogether ~~conjunction~~ with the ~~information~~Summary ~~contained in the condensed consolidated financial statements~~ of ~~the~~Significant ~~Company and~~Accounting ~~the~~Policies ~~notes~~included ~~thereto~~as ~~appearing~~Note ~~elsewhere~~3 ~~herein~~to ~~and in conjunction with~~ the ~~Management’s~~consolidated ~~Discussion~~financial ~~and Analysis set forth~~statements included in ~~the~~our ~~Company’s~~amended Annual Report on Form 10-K for the year ended December 31, ~~2011.~~2012 ~~Readers should carefully review the risk factors disclosed in the Company’s Form 10-K for the year ended December 31, 2011~~ filed ~~by the Company~~ with the ~~Securities and~~SEC ~~Exchange~~on ~~Commission~~June ~~(“SEC”)~~11, 2013.

AsEstimates ~~used~~affecting inaccounts ~~this~~receivable ~~report, the terms “Company,” “we,” “our,” “us,”~~ and ~~“AOB” refer to American Oriental Bioengineering, Inc., a Nevada corporation.~~inventories

~~PRELIMINARY~~The ~~NOTE~~preparation ~~REGARDING~~of our ~~FORWARD-LOOKING~~consolidated financial statements requires management to make estimates and assumptions that affect our reporting of assets ~~STATEMENTS~~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.

~~This~~At ~~quarterly~~June ~~report~~30, 2013 and ~~contains~~December ~~forward-looking~~31, ~~statements~~2012, ~~within~~we ~~the~~have ~~meaning~~reserves of ~~the~~$17,599,876 ~~federal~~and ~~securities laws. These include statements about our expectations~~$18, ~~beliefs~~134,912, ~~intentions or strategies for the future~~respectively, ~~which~~against weaccounts ~~indicate~~receivable. byOur ~~words~~estimate orof the ~~phrases~~appropriate ~~such~~reserve ason ~~“anticipate,”~~accounts ~~“expect,” “intend,”~~receivable ~~“plan,”~~at ~~“will,”~~June ~~“we believe~~30,” ~~“AOB~~2013 ~~believes,” “management believes”~~ and ~~similar~~December ~~language.~~31, ~~The~~2012 ~~forward-looking~~was ~~statements are~~ based on the ~~current~~aged ~~expectations~~nature of ~~AOB~~these ~~and are subject~~accounts toreceivable. ~~certain~~In ~~risks,~~making ~~uncertainties~~our ~~and assumptions~~judgment, ~~including~~we ~~those~~assessed ~~set~~our ~~forth in the discussion under “Management~~customers’s ~~Discussion and~~ability ~~Analysis~~to ofcontinue ~~Financial~~to ~~Condition~~pay ~~and~~their ~~Results~~outstanding ofinvoices ~~Operations”~~on ina timely ~~this~~basis, ~~report.~~and ~~Actual~~whether ~~results~~their ~~may~~financial ~~differ~~position ~~materially~~might ~~from results~~deteriorate ~~anticipated~~significantly in ~~these forward-looking statements. We base~~ the ~~forward-looking~~future, ~~statements~~which onwould ~~information~~result ~~currently~~in ~~available~~their inability to ~~us,~~pay ~~and~~their wedebts ~~assume no obligation~~ to ~~update~~the ~~them~~Company.

~~Investors~~At ~~are~~June ~~also~~30, ~~advised~~2013 and toDecember ~~refer~~31, to2012, ~~the~~we ~~information~~have inallowance ~~our~~against ~~previous~~inventories ~~filings~~amounting ~~with~~to ~~the SEC~~$45,952 ~~especially~~and ~~on Forms 10-K~~$47, ~~10-Q~~281, ~~and~~respectively. ~~8-K,~~Our indetermination ~~which~~of ~~we discuss~~this inallowance ~~more~~was ~~detail~~based ~~various~~on ~~important~~potential ~~factors~~impairments ~~that could cause actual results~~ to ~~differ~~the ~~from~~current ~~expected~~carrying orvalue ~~historic~~of ~~results.~~the Itinventories isdue ~~not possible~~ to ~~foresee~~potential orobsolescence ~~identify~~of aged ~~all~~inventories. ~~such~~In ~~factors.~~making Asour ~~such~~estimate, ~~investors~~we ~~should~~considered ~~not~~the ~~consider~~probable ~~any~~demand ~~list~~for ofour ~~such~~products ~~factors~~in tothe befuture anand ~~exhaustive~~historical trends ~~statement~~in ofthe ~~all~~turnover ~~risks~~of ~~and~~our ~~uncertainties or potentially inaccurate assumptions~~inventories.

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

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

InAmong ~~addition,~~ the ~~establishment~~most important ofaccounting ~~price~~policies ~~controls~~affecting ~~over~~our ~~prescription~~consolidated ~~and~~financial ~~over-the-counter~~statements ~~medicines~~is ~~negatively impacted~~ our ~~business.~~policy ~~There~~of ~~were~~recognizing ~~two~~revenue ~~price adjustments by the Price Control Office~~ in ~~2011~~accordance ~~and~~with ~~2012, respectively that lowered certain prices of prescription and over-~~the~~-counter medicines.~~ AsFinancial aAccounting ~~result,~~Standards weBoard ~~lost~~(“FASB”) ~~our~~Accounting ~~ability~~Standards toCodification ~~compete~~(“ASC”) ~~effectively~~605 ~~due~~“Revenue Recognition”. toUnder ~~the~~this ~~pricing adjustments~~policy, ~~particularly~~all ~~when~~of ~~we entered~~ the ~~state-owned hospitals’~~following ~~purchase~~criteria ofmust ~~medicine~~be ~~tendering~~met ~~process. As a result, sales~~ in ~~our~~order ~~manufacturing~~for ~~segments~~us ~~fell~~to ~~sharply.~~recognize revenue:

~~The~~1. ~~continuous~~Persuasive ~~increase in~~evidence ~~cost~~ of ~~raw~~an arrangement ~~material also impacted our business as gross profit has declined since the end of 2010.~~exists;

~~In addition to the ongoing economic challenges and uncertainties, our business was negatively impacted by the toxic drug capsules incident in 2012~~2. ~~Incidents~~ ~~like~~Delivery ~~that~~has ~~shook~~occurred ~~the pharmaceutical industry and resulted in a decline in market demand. Although we were not directly~~or ~~involved~~services ~~in the scandal and our facilities were inspected and passed the safety requirements, our subsequent sales~~ have been impacted significantly due to the loss of consumer confidence in pharmaceutical products and huge decline in market demand. All of these challenges, uncertainties and incidents may continue to have an adverse impact on our future performance.rendered;

We3. ~~are~~The ~~taking~~seller’s ~~actions~~price to ~~mitigate~~ the ~~impact~~buyer ofis ~~these~~fixed ~~economic~~or ~~conditions by: 1) focusing on our well-recognized brand names, including AOBO and our Jinji products~~determinable; ~~2) diversifying our products through products line extension;~~ and ~~3) developing and introducing new products.~~

To mitigate the impact of the increasing cost and supply of the raw material needed for our products, we entered into long-term supply contracts with various third parties to grow Millettia and Xanthoceras Sorbifolia Bge (“XSB”), which are major raw materials4. WeCollectability ~~bear the~~is ~~cultivation cost for these raw materials, including leasing the land use rights. In return, we are entitled to purchase the~~reasonably ~~raw material at a pre-determined discounted price~~assured. 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 September 30, 2012, in the fourth quarter of 2012, we recorded an impairment of approximately $8.5 million of our capitalized agricultural costs.

~~CRITICAL~~The ~~ACCOUNTING~~majority ~~POLICIES~~of ~~AND~~our revenue ~~ESTIMATES~~results from sales contracts with distributors and revenue is recorded upon the shipment of goods. Management conducts credit background checks for new customers as a means to reduce the subjectivity of assuring collectability. Based on these factors, we believe that we can apply the provisions of FASB ASC 605 with minimal subjectivity.

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

22We 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.

~~Estimates~~We ~~affecting~~monitor ~~accounts~~our ~~receivable~~investments for other-than-temporary impairment by considering factors including, but not limited to, current economic and ~~inventories~~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.

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.Impairment

AtIn ~~September~~evaluating 30long-lived assets for recoverability, ~~2012~~ including finite-lived intangibles and ~~December~~property ~~31,~~and ~~2011~~equipment, we ~~provided~~use aour ~~reserve~~best estimate of ~~$17,873,220~~future ~~and~~cash flows ~~$16,354,873,~~expected ~~respectively,~~to ~~against~~result ~~accounts~~from ~~receivable.~~the ~~Our~~use ~~estimate~~ of the ~~appropriate~~asset ~~reserve~~and oneventual ~~accounts~~disposition. ~~receivable~~To atthe ~~September~~extent 30that estimated future, ~~2012~~undiscounted cash ~~and~~inflows ~~December~~attributable ~~31,~~to ~~2011~~the ~~was~~asset, ~~based~~less onestimated ~~the~~future, ~~aged~~undiscounted ~~nature~~cash ofoutflows, ~~these accounts~~are ~~receivable.~~less Inthan ~~making~~the ~~our~~carrying ~~judgment~~amount, wean impairment ~~assessed~~loss ~~our~~is ~~customers’~~recognized ~~ability~~in toan ~~continue~~amount equal to ~~pay~~the ~~their~~difference ~~outstanding~~between ~~invoices on~~the acarrying ~~timely~~value ~~basis,~~of such asset and ~~whether~~its ~~their~~fair ~~financial~~value. Assets ~~position~~to ~~might~~be ~~deteriorate~~disposed ~~significantly~~of inand ~~the~~for ~~future~~which there is a committed plan of disposal, ~~which~~whether ~~would~~through ~~result~~sale inor ~~their~~abandonment, are reported ~~inability~~at tothe ~~pay~~lower ~~their~~of ~~debts~~carrying tovalue ~~the~~or ~~Company~~fair value less costs to sell.

AtIn ~~September~~evaluating 30capitalized agriculture costs, ~~2012 and~~we ~~December~~use ~~31,~~our ~~2011,~~best weestimate ~~provided~~of anthe ~~allowance~~future ~~against~~cash ~~inventories~~flows ~~amounting~~expected to ~~$317~~result from future market values,~~290~~ yields and ~~$624,516,~~costs to ~~respectively~~harvest. ~~Our~~To ~~determination of~~the ~~this~~extent ~~allowance~~that ~~was~~estimated ~~based~~future oncash ~~potential~~inflows ~~impairments~~attributable to the ~~current~~asset, ~~carrying~~less ~~value~~estimated offuture, ~~the~~cash ~~inventories~~outflows, ~~due~~are less tothan ~~potential~~the ~~obsolescence of~~carrying ~~aged~~amount, ~~inventories.~~an Inimpairment ~~making~~loss ~~our~~is ~~estimate,~~recognized wein ~~considered~~an ~~the~~amount ~~probable~~equal ~~demand~~to ~~for~~the ~~our~~excess ~~products~~of in the ~~future~~carrying ~~and~~value ~~historical~~over ~~trends~~the inestimated ~~the~~fair ~~turnover~~values of ~~our~~the ~~inventories~~capitalized agricultural costs.

~~While~~The ~~we currently~~Company’s ~~believe~~annual ~~that~~impairment ~~there~~testing is ~~little~~performed ~~likelihood that actual results will differ materially from these current estimates, if customer demand for our products decreases significantly~~ in the ~~near~~fourth ~~future,~~quarter ~~or if the financial condition~~ of ~~our~~each ~~customers deteriorates in the near future, we could realize significant write downs for slow-moving inventories or uncollectible accounts receivable and notes receivable~~year.

~~Policy affecting recognition of revenue~~20

~~Among~~Share-based the most important accounting policies affecting our consolidated financial statements is our policy of recognizing revenue in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605 “Revenue Recognition”. Under this policy, all of the following criteria must be met in order for us to recognize revenue:Compensation

1We periodically issue stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. We ~~Persuasive~~account ~~evidence~~for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the FASB whereas the value of anthe award is measured on the date of grant and recognized over the vesting period. We account for ~~arrangement~~stock ~~exists;~~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.

2The fair value of our common stock option grant is estimated using the Black-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. ~~Delivery~~Compensation expense ~~has~~is ~~occurred~~recorded orbased upon the value derived from the Black-Scholes-Merton option pricing model, and based on actual experience. ~~services~~The ~~have~~assumptions ~~been~~used ~~rendered;~~in the Black-Scholes-Merton option pricing model could materially affect compensation expense recorded in future periods.

3.Accounting ~~The~~for ~~seller’s~~Income ~~price to~~Taxes ~~the~~and ~~buyer~~Uncertain Income isTax ~~fixed or determinable; and~~Positions

4We use an asset and liability approach for financial accounting and reporting for income taxes that allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. ~~Collectability~~Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is ~~reasonably~~provided for deferred tax assets ~~assured~~if it is more likely than not these items will either expire before we are able to realize their benefits, or that future deductibility is uncertain. We account for uncertainty in income taxes in accordance with FASB ASC 740-10 which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense.

~~The~~Newly ~~majority~~Adopted ofAccounting our revenue results from sales contracts with distributors and revenue is recorded upon the shipment of goods. Management conducts credit background checks for new customers as a means to reduce the subjectivity of assuring collectability. Based on these factors, we believe that we can apply the provisions of FASB ASC 605 with minimal subjectivity.Pronouncements

~~Investment~~In July 2012, FASB issued ASU No. 2012-02, “Intangibles – Goodwill and Other”. This update presents an entity with the option to first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in ~~equity~~accordance ~~method~~with ~~investment~~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 15 September 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.

~~We account~~In ~~for~~January ~~our~~2013, ~~equity investment in accordance with~~ the FASB ~~ASC~~issued ~~323~~ASU 2013-01, ~~“Investments–Equity~~Balance ~~Method~~Sheet ~~and~~(Topic ~~Joint~~210): ~~Ventures”. Under~~Clarifying ~~FASB~~Scope ~~ASC 323, the equity method~~ of ~~accounting~~Disclosures isOffsetting ~~used~~Assets ~~for~~and ~~investments~~Liabilities. inThis ~~entities~~ASU clarifies in which weinstruments ~~have~~and ~~the~~transactions ~~ability~~are subject to ~~exercise significant~~the ~~influence~~offsetting ~~but~~disclosure dorequirements ~~not~~by ~~own~~ASU ~~a majority equity interest or otherwise control~~2011-11. ~~Under~~This ~~the equity method, we initially record~~guidance ~~our~~is ~~investment~~effective atfor ~~cost~~annual and ~~adjust~~interim ~~the~~reporting ~~carrying~~periods ~~amount~~beginning ofJanuary ~~the~~1, ~~investment~~2013. toWe ~~recognize~~do ~~our~~not ~~proportionate~~believe ~~share~~the adoption of ~~each~~this ~~equity investee’s~~update ~~net~~will ~~income~~have ora ~~loss~~material ~~into~~effect ~~consolidated~~on ~~statements~~our offinancial ~~income~~position ~~after~~and ~~the~~results ~~date~~ of ~~acquisition~~operations.

WeIn ~~monitor~~February ~~our~~2013, ~~investments~~the ~~for~~FASB ~~other-than-temporary~~issued ~~impairment~~ASU byNo. ~~considering~~2013-02, ~~factors~~“Comprehensive ~~including,~~Income ~~but~~(Topic ~~not~~220): ~~limited~~Reporting ~~to,~~of ~~current~~Amounts ~~economic~~Reclassified ~~and~~Out ~~market~~of ~~conditions,~~Accumulated Other Comprehensive Income.” The new guidance requires entities to report the ~~operating~~effect ~~performance~~of significant reclassifications out of accumulated other comprehensive income on the ~~investee~~respective ~~companies~~line ~~including~~items ~~current~~in ~~earnings~~net ~~trends~~income ~~and~~unless ~~other~~the ~~company-specific~~amounts ~~information.~~are Wenot reclassified in their entirety ~~perform~~to annet ~~impairment~~income. ~~assessment~~For byamounts ~~comparing~~that ~~fair~~are ~~value~~not ofrequired ~~the~~to ~~investment~~be reclassified in their entirety to ~~readily~~net ~~available~~income ~~market~~in ~~information~~the same reporting period, entities orare ifrequired ~~not~~to ~~available~~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. toThe ~~discounted~~Company ~~cash~~does ~~flow~~not ~~models~~expect the adoption of this update will have a material effect on its consolidated financial statements.

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

In evaluating long-lived assets for recoverability, including finite-lived intangibles and property and equipment, we use our best estimate of future cash flows expected to result from the use of the asset and eventual disposition. To the extent that estimated future, undiscounted cash inflows attributable to the asset, less estimated future, undiscounted cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount equal to the difference between the carrying value of such asset and its fair value. Assets to be disposed of and for which there is a committed plan of disposal, whether through sale or abandonment, are reported at the lower of carrying value or fair value less costs to sell.21

InRESULTS ~~evaluating~~OF ~~capitalized agriculture~~OPERATIONS ~~costs,~~– ~~we use our best estimate of the future cash flows expected to result from future market values, yields and costs~~THREE toMONTHS ~~harvest.~~ENDED ToJUNE ~~the extent that estimated future cash inflows attributable to the asset~~30, ~~less~~2013 ~~estimated~~AS ~~future,~~COMPARED ~~cash~~TO ~~outflows,~~THREE ~~are less~~MONTHS ~~than~~ENDED ~~the~~JUNE ~~carrying amount~~30, ~~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.~~2012

The ~~Company’s~~following table ~~annual~~sets ~~impairment~~forth ~~testing~~the isamounts ~~performed~~and the percentage relationship to revenues of certain items in ~~the~~our ~~fourth~~condensed ~~quarter~~consolidated statements of income ~~each~~for ~~year.~~ the three months ended June 30, 2013 and 2012:

	Three Months Ended June 30,
	Results						% of Revenue
	2013			2012			2013			2012

Statement of Operations Data:
Revenues	$	20,224,137		$	27,446,926			100	%		100	%
Cost of sales		15,238,203			24,254,680			75	%		88	%

GROSS PROFIT		4,985,934			3,192,246			25	%		12	%
Selling, general and administrative expenses		11,018,304			12,060,135			54	%		44	%
Advertising costs		2,708,324			7,976,078			13	%		29	%
Research and development costs		1,722,671			1,729,301			9	%		6	%
Depreciation and amortization		1,855,076			1,578,733			9	%		6	%
Provision for reserves and doubtful accounts		(1,998,441	)		2,067,462			-10	%		8	%
LOSS FROM OPERATIONS		(10,320,000	)		(22,219,463	)		-51	%		-81	%

Equity in losses from equity method investments		(1,004,141	)		(1,297,597	)		-5	%		-5	%
Interest expense, net		(1,003,307	)		(1,808,010	)		-5	%		-7	%
Other income (expenses), net		185,630			67,702			1	%		0	%
LOSS BEFORE INCOME TAX		(12,141,818	)		(25,257,368	)		-60	%		-92	%
Provision for income taxes		699,081			510,897			3	%		2	%
NET LOSS		(12,840,899	)		(25,768,265	)		-63	%		-94	%
Net income attributable to non-controlling interest		–			(18,932	)		–			0	%
NET LOSS ATTRIBUTABLE TO
AMERICAN ORIENTAL BIOENGINEERING, INC.	$	(12,840,899	)	$	(25,787,197	)		-63	%		-94	%

LOSS PER COMMON SHARE, BASIC AND DILUTED	$	(0.35	)	$	(0.66	)

~~Share-based Compensation~~Revenues

We ~~periodically issue~~classify ~~stock~~our ~~options~~revenues ~~and~~into ~~warrants~~two tosegments: ~~employees~~manufacturing ~~and~~revenue ~~non-employees in non-capital raising transactions for services~~ and ~~for~~distribution ~~financing costs~~revenue. We ~~account~~The ~~for~~manufacturing ~~stock~~revenue ~~option~~comprises ~~and~~revenue ~~warrant grants issued and vesting to employees based on the authoritative guidance provided by~~from ~~the~~pharmaceutical ~~FASB whereas the value of the award is measured on the date of grant~~ and ~~recognized~~nutraceutical ~~over the vesting period~~products. WeRevenues ~~account~~by ~~for stock~~segments ~~option~~ and ~~warrant~~product ~~grants~~categories ~~issued~~were ~~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.follows:

The fair value of our common stock option grant is estimated using the Black-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.

	Three Months Ended June 30,				Increase/			Increase/
	2013		2012		(Decrease)			(Decrease)
Revenue from pharmaceutical products	$	12,268,177	$	15,887,829	$	(3,619,652	)		-23	%
Revenue from nutraceutical products		1,838,307		1,285,884		552,423			43	%
Total manufacturing revenue		14,106,484		17,173,713		(3,067,229	)		-18	%
Distribution revenue		6,117,653		10,273,213		(4,155,560	)		-40	%
Total revenues	$	20,224,137	$	27,446,926	$	(7,222,789	)		-26	%

~~Accounting for Income Taxes and Uncertain Income Tax Positions~~22

~~We use an asset and~~Revenue ~~liability~~from ~~approach~~our ~~for~~pharmaceutical ~~financial~~products ~~accounting~~decreased ~~and~~from ~~reporting~~$15,887,829 for ~~income taxes that allows recognition and measurement of deferred tax assets based upon~~ the ~~likelihood~~three ofmonths ~~realization~~ended ofJune ~~tax benefits in future years. Under the asset and liability approach~~30, ~~deferred~~2012 taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before we are able to ~~realize their benefits~~$12,268,177 ~~or that future deductibility is uncertain. We account~~ for ~~uncertainty in income taxes in accordance with FASB ASC 740-10 which prescribes a recognition threshold and a measurement attribute for~~ the ~~financial~~same ~~statement~~period ~~recognition and measurement~~ of ~~tax~~2013, ~~positions taken or expected to be taken in~~ a ~~tax~~23% ~~return~~decrease. ~~Our~~The ~~policy~~decrease iswas toprimarily ~~recognize~~due ~~interest and/or penalties related~~ to the ~~income~~following ~~tax matters in income tax expense.~~factors:

~~Newly~~· ~~Adopted~~Rapidly ~~Accounting~~evolving ~~Pronouncements~~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.

In· ~~July~~Negative ~~2012,~~publicity ~~FASB issued~~surrounding ~~ASU No. 2012-02, “Intangibles – Goodwill and Other”. This update presents an entity with~~ the ~~option~~discovery ~~to first~~of totoxic ~~assess~~substances ~~qualitative~~in ~~factors~~drug tocapsules ~~determine~~in ~~whether~~China itin is2012 ~~more~~has ~~likely~~resulted ~~than~~in ~~not that~~ an ~~indefinite-lived~~overall ~~intangible~~decline ~~asset~~in ~~is impaired~~demand asin ~~a basis for determining whether it is necessary to perform~~ the ~~quantitative~~pharmaceutical ~~impairment~~market. ~~test~~Although inwe ~~accordance~~were ~~with Subtopic 350-30, “Intangibles – Goodwill and Other – General Intangibles Other than Goodwill”. The more-likely-than-~~not ~~threshold~~ isdirectly ~~defined~~involved asin ~~having~~the ascandal ~~likelihood of more than fifty percent. ASU No. 2012-02 will be effective for annual~~ and ~~impairment tests~~we ~~performed~~have ~~for~~passed ~~fiscal~~safety ~~years beginning after 15 September 2012~~inspections, ~~with~~our ~~early~~sales ~~adoption~~have ~~permitted.~~been ~~The~~impacted ~~Company~~significantly ~~does~~due ~~not~~to ~~expect~~ the ~~adoption~~widespread loss of ~~this~~confidence ~~update~~by ~~will~~consumers ~~have~~in apharmaceutical ~~material effect on its consolidated financial statements~~products.

In· ~~January~~Because ~~2013,~~of the ~~FASB~~actual ~~issued~~and ~~ASU~~potential ~~2013-01~~size of the Chinese pharmaceutical market, ~~Balance~~we ~~Sheet~~face ~~(Topic 210):~~intense ~~Clarifying~~competition ~~Scope~~from ofcompanies ~~Disclosures~~that ~~Offsetting~~manufacture ~~Assets~~products ~~and~~similar ~~Liabilities~~to ours, which has had a negative impact on our revenues. ~~This~~Many ~~ASU~~of ~~clarifies~~these ~~which~~manufacturers ~~instruments~~are ~~and~~more ~~transactions~~ established than we are, ~~subject~~have togreater ~~the~~brand ~~offsetting~~recognition ~~disclosure~~of ~~requirements~~products bythat ~~ASU~~compete ~~2011-11.~~with ~~This~~ours, ~~guidance~~have ismore ~~effective~~financial, ~~for~~technical, ~~annual~~marketing and ~~interim~~other ~~reporting periods~~resources ~~beginning~~than ~~January~~we 1presently possess, ~~2013~~and have a larger customer base. WeThese docompetitors ~~not~~are ~~believe~~often ~~the~~able ~~adoption~~to ofrespond ~~this~~more ~~update~~quickly ~~will~~to ~~have~~new aor ~~material~~changing ~~effect~~opportunities onand ~~our~~customer ~~financial~~requirements, ~~position~~ and ~~results~~are ofable ~~operations~~to undertake more extensive promotional activities, offer more attractive terms to customers, or adopt more aggressive pricing policies.

In· ~~February~~Because ~~2013,~~traditional ~~the FASB~~Chinese ~~issued~~medicine ~~ASU~~injection ~~No.~~products 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~~covered inunder ~~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~~essential ~~effective~~drug ~~prospectively~~list, ~~for~~sales ~~all~~of ~~interim~~SHL ~~and annual periods beginning after December 15~~powder, ~~2012,~~one ~~with early adoption permitted. The Company does not expect the adoption~~ of ~~this~~our ~~update~~two ~~will~~flagship ~~have~~products, adeclined ~~material~~from ~~effect~~2012 onto ~~its consolidated financial statements~~2013.

~~Other~~Revenue in ~~recent~~connection ~~accounting pronouncements~~with ~~issued~~our bynutraceutical ~~the~~products ~~FASB~~increased ~~(including~~from ~~its~~$1,285,884 ~~Emerging~~in ~~Issues~~2012 ~~Task~~to ~~Force)~~$1,838,307 ~~the~~in ~~AICPA~~2013, a ~~and~~43% ~~the~~increase. ~~SEC~~We ~~did~~experienced ~~not~~material ordecreases ~~are~~in ~~not~~sales ~~believed by~~of ~~management~~our tonutraceutical ~~have~~products ain ~~material~~2012 ~~impact~~caused onby the ~~Company's~~2012 ~~present~~food orsafety and ~~future~~drug ~~consolidated~~problem ~~financial~~in ~~statements~~China, and have seen a rebound in sales in 2013.

24Distribution revenue decreased by $4,155,560 or 40%, to $6,117,653 for the three months ended June 30, 2013 from $10,273,213 for the same period of 2012. Sales from our former Yushuntang subsidiary were $3,757,709 in 2012, but due to the sale of our 6% interest in Yushuntang in December 2012, which resulted in the deconsolidation of this subsidiary, Yushuntang’s sales are no longer consolidated in our statement of operations for 2013. Net of Yushuntang, sales from the balance of our distribution business decreased from $6,515,504 in 2012 to $6,117,653 in 2013.

~~RESULTS~~Cost OFof ~~OPERATIONS~~Sales –and ~~THREE MONTHS~~Gross ~~ENDED SEPTEMBER 30, 2012 AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2011~~Profit

~~The~~Cost ~~following~~of ~~table sets~~sales ~~forth~~was ~~the~~$15,238,203 for ~~amounts and~~ the ~~percentage~~three ~~relationship~~months toended ~~revenues~~June of30, ~~certain~~2013, ~~items~~compared into ~~our~~$24,254,680 ~~condensed consolidated statements of income~~ for the three months ended ~~September~~June 30, 2012. Cost of sales by segments and ~~2011~~product categories were as follows:

	Three Months Ended September 30,
	Three Months Ended June 30,						Increase/			Increase/
	Results						% of Revenue
	2013			2012			(Decrease)			(Decrease)
	2012			2011			2012			2011
Pharmaceutical products	$	8,180,724		$	12,973,803		$	(4,793,079	)		-37	%
Statement of Operations Data:
Nutraceutical products		1,248,322			1,694,265			(445,943	)		-26	%
Revenues	$	29,493,459		$	53,934,602			100%			100%
Total manufacturing cost		9,429,046			14,668,068			(5,239,022	)		-36	%
Cost of sales		23,037,097			28,730,424			78%			53%
Distribution cost		5,809,157			9,586,612			(3,777,455	)		-39	%
GROSS PROFIT		6,456,362			25,204,178			22%			47%
Total cost	$	15,238,203		$	24,254,680		$	(9,016,477	)		-37	%
Selling, general and administrative expenses		12,005,502			12,080,424			41%			22%
Advertising costs		9,385,016			2,964,877			32%			5%
Research and development costs		1,681,649			2,825,967			6%			5%
Depreciation and amortization		1,803,167			1,804,888			6%			3%
Provision for reserves and doubtful accounts		777,947			(2,666,829	)		3%			-5%
(LOSS) INCOME FROM OPERATIONS		(19,196,919	)		8,194,851			-65%			15%
Gain on extinguishment of convertible notes		40,413,555			–			137%			–
Equity in losses from equity method investments		(267,470	)		(796,727	)		-1%			-1%
Interest expense, net		(1,423,839	)		(1,802,954	)		-5%			-3%
Other income (expenses), net		94,724			(116,196	)		0%			0%
INCOME BEFORE INCOME TAX		19,620,051			5,478,974			67%			10%
Provision for income taxes		487,280			(2,203,013	)		2%			-4%
NET INCOME		19,132,771			7,681,987			65%			14%
Net income attributable to non-controlling interest		(15,320	)		(28,446	)		0%			0%
NET INCOME ATTRIBUTABLE TO AMERICAN ORIENTAL BIOENGINEERING, INC.	$	19,117,451		$	7,653,541			65%			14%
EARNINGS PER COMMON SHARE
Basic	$	0.51		$	0.30
Diluted		0.51			0.29

~~Revenues~~Cost of sales in the manufacturing segment decreased with the corresponding drop in revenues for this segment. Gross profit as a percentage of revenues for the manufacturing segment was 33% in 2012, up from 15% in 2012.

WeCost ~~classify~~of sales in the ~~our~~distribution ~~revenues~~segment ~~into~~decreased ~~two~~along ~~segments:~~with ~~manufacturing~~sales ~~revenue~~from ~~and~~2012 ~~distribution~~to ~~revenue.~~2013 ~~The~~as ~~manufacturing~~a ~~revenue~~result ~~comprises~~of ~~revenue~~the ~~from~~deconsolidation of Yushuntang at the end of ~~pharmaceutical~~2012, ~~and~~with ~~nutraceutical~~gross ~~products.~~profit ~~Revenues~~as bya ~~segments~~percentage ~~and~~of ~~product~~revenues ~~categories~~also ~~were~~decreasing asfrom ~~follows:~~7% to 5%.

	Three Months Ended September 30,				Increase/			Increase/
	2012		2011		(Decrease)			(Decrease)
Revenue from pharmaceutical products	$	14,860,925	$	40,276,279	$	(25,415,354	)		-63%
Revenue from nutraceutical products		1,587,654		8,774,711		(7,187,057	)		-82%
Total manufacturing revenue		16,448,579		49,050,990		(32,602,411	)		-66%
Distribution revenue		13,044,880		4,883,612		8,161,268			167%
Total revenues	$	29,493,459	$	53,934,602	$	(24,441,143	)		-45%

25Selling, General and Administrative Expenses

~~Revenue from~~Selling, ~~our~~general ~~pharmaceutical~~and administrative ~~products~~expenses decreased from $4012,~~276~~060,~~279~~135 ~~for~~in the three months ended ~~September~~June 30, ~~2011~~ 2012 to $1411,~~860~~018,~~925~~304 ~~for~~in the ~~same~~three ~~period~~months ofended June ~~2012~~30, or2013, representing a 639% decrease. The ~~decrease~~details ~~was~~of ~~primarily~~our ~~due~~sales toand ~~the~~marketing ~~following~~expenses ~~factors~~were as 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 51% in 2011 to 33% in 2012, principally as a result of this pricing pressure.

	Three Months Ended June 30,				Increase/			Increase/
	2013		2012		(Decrease)			(Decrease)
Promotional materials and fees	$	1,477,323	$	1,194,219	$	283,104			24	%
Payroll		2,976,273		3,308,956		(332,683	)		-10	%
Shipping		383,264		445,855		(62,591	)		-14	%
Trips and traveling		759,568		1,425,902		(666,334	)		-47	%
Professional fees		1,737,381		1,331,863		405,518			30	%
Staff welfare and insurance		1,025,825		1,323,151		(297,326	)		-22	%
Stock based compensation		318,179		696,323		(378,144	)		-54	%
Miscellaneous		2,340,491		2,333,866		6,625			0	%
Total	$	11,018,304	$	12,060,135	$	(1,041,831	)		-9	%

·The ~~Negative~~decreases ~~publicity surrounding the discovery of toxic substances~~ in ~~drug~~payroll, trips ~~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~~traveling, ~~our~~and ~~sales~~staff ~~have~~welfare ~~been~~and ~~impacted~~insurance ~~significantly~~correspond ~~due~~ to ~~the~~lower ~~widespread~~headcount ~~loss~~in of2013 ~~confidence~~as bycompared ~~consumers~~with ~~in pharmaceutical products~~2012.

·Stock ~~Because~~based ofcompensation decreased ~~the~~as ~~actual~~a ~~and~~result ~~potential size~~ of ~~the~~fewer ~~Chinese~~directors ~~pharmaceutical~~receiving ~~market,~~stock webased ~~face~~compensation ~~intense~~in ~~competition from companies that manufacture products similar to ours~~2013, ~~which~~as ~~has~~well ~~had~~as athe ~~negative~~completion ~~impact on our revenues. Many~~ of ~~these manufacturers are more established than we are, have greater brand recognition~~ amortization of ~~products~~previously-issued ~~that~~consultant ~~compete~~shares ~~with ours, have more financial, technical, marketing~~ and ~~other~~employee ~~resources~~stock ~~than we presently possess, and have a larger customer base~~options. These competitors are often able to respond more 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.

·Increased professional ~~Because~~fees ~~traditional~~resulted ~~Chinese~~primarily ~~medicine~~from ~~injection~~audit, ~~products~~legal ~~are~~and ~~not~~other ~~covered~~professional ~~under~~fees ~~the~~incurred ~~new~~in ~~essential~~2013 ~~drug~~in ~~list,~~connection ~~sales~~with ~~of SHL powder, one of~~ bringing our ~~two~~financial ~~flagship~~filings ~~products, declined materially from 2011 to 2012~~current.

~~Revenue~~Advertising in connection with our nutraceutical products decreased from $8,774,711 in 2011 to $1,587,654 in 2012, an 82% decrease. 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.Costs

~~Distribution revenue~~Advertising ~~increased~~costs decreased by $85,~~161~~267,~~268~~754, or ~~167~~66%, tofrom $137,~~044~~976,~~880~~078 ~~for~~in the three months ended ~~September~~June 30, 2012 ~~from~~to $42,~~883~~708,~~612~~324 ~~for~~in the ~~same~~three ~~period~~months ofended ~~2011~~June 30, 2013, primarily as a result of the ~~acquisition~~initial implementation of ~~Liaoning~~our ~~Baicao~~cost reduction measures started in 2012, ~~which~~as ~~occurred~~further discussed atin the ~~end~~“Liquidity” section. Advertising costs as a percentage of ~~2011~~revenue decreased from 29% in 2012 to 13% in 2013.

~~Cost~~Research ~~of Sales~~ and ~~Gross~~Development ~~Profit~~Costs

~~Cost~~Research ofand ~~sales~~development costs ~~was~~decreased by $236,~~037~~630 from $1,~~097 for~~729,301 in the three months ended ~~September~~June 30, 2012, ~~compared~~ to $281,~~730~~722,~~424~~671 ~~for~~in the three months ended ~~September~~ June 30, ~~2011~~2013. ~~Cost~~Expressed as a percentage of ~~sales by~~revenue, ~~segments~~research and ~~product~~development ~~categories~~costs were as9% ~~follows:~~and 6% in 2013 and 2012, respectively.

	Three Months Ended September 30,				Increase/			Increase/
	2012		2011		(Decrease)			(Decrease)
Pharmaceutical products	$	9,785,868	$	19,201,942	$	(9,416,074	)		-49%
Nutraceutical products		1,251,843		4,979,862		(3,728,019	)		-75%
Total manufacturing cost		11,037,711		24,181,804		(13,144,093	)		-54%
Distribution cost		11,999,386		4,548,620		7,450,766			164%
Total cost	$	23,037,097	$	28,730,424	$	(5,693,327	)		-20%

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

~~Cost~~Depreciation ofand sales in the manufacturing segment decreased with the corresponding drop in revenues for this segment. Gross profit as a percentage of revenues for the manufacturing segment was 33% in 2012, down from 51% in 2011.Amortization

~~Cost~~Depreciation ofand ~~sales in the~~amortization ~~distribution~~expenses ~~segment~~ increased ~~proportionally~~by to$276,343, ~~the~~or ~~increase~~18%, in ~~sales~~the ~~from~~three ~~2011~~months toended ~~2012~~June 30, ~~with~~2013 ~~gross~~as ~~profit~~compared asto athe ~~percentage~~same period of 2012. This was ~~revenues~~mainly ~~also~~due ~~increasing~~to ~~slightly~~increased ~~from~~amortization 7%expense related to 8%intangible assets acquired in 2012.

26Provision for reserves and doubtful accounts

~~Selling~~Provision for doubtful accounts decreased from a charge of $2,067,462 ~~General~~in the three months ended June 30, 2012 to a reversal of bad debts of $1,998,441 in the three months ended June 30, 2013. The reversal of bad debts is primarily due to the cash settlement of long outstanding accounts receivable that had previously been 100% reserved. 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 ~~Administrative~~whether ~~Expenses~~their financial position might deteriorate significantly in the future, which would result in their inability to pay their debts to us.

Selling, general and administrative expenses, decreased from $12,080,424 in the three months ended September 30, 2011 to $12,005,502 in the three months ended September 30, 2012, representing a 1% decrease. The details of our sales and marketing expenses were as follows:24

	Three Months Ended September 30,				Increase/			Increase/
	2012		2011		(Decrease)			(Decrease)
Promotional materials and fees	$	1,859,918	$	2,339,837	$	(479,919	)		-21%
Payroll		3,020,110		3,238,886		(218,776	)		-7%
Shipping		464,423		878,162		(413,739	)		-47%
Trips and traveling		620,640		1,107,824		(487,184	)		-44%
Professional fees		913,494		534,319		379,175			71%
Staff welfare and insurance		1,134,896		873,021		261,875			30%
Stock based compensation		686,468		850,979		(164,511	)		-19%
Miscellaneous		3,305,553		2,257,396		1,048,157			46%
Total	$	12,005,502	$	12,080,424	$	(74,922	)		-1%

Equity in Losses from Equity Method Investments

~~The~~Equity ~~decrease~~ in ~~promotional~~ ~~fees~~losses ~~and~~from ~~travel~~equity ~~expenses~~method ~~resulted~~investments decreased from ~~fewer~~$1,297,597 ~~marketing~~in ~~and~~the ~~promotional~~three ~~activities~~months ~~carried~~ended ~~out~~June ~~during~~30, 2012 to $1,004,141 in the ~~third~~three months ~~quarter~~ended ofJune ~~2012~~30, 2013. The decreased loss was mainly due to lower estimated losses realized by AXN in the three months ended June 30, 2013 as compared ~~with~~to the same period of ~~2011~~2012.

~~The~~Interest ~~decrease~~Expense, ~~in shipping costs was primarily due to the reduction in sales volume of our products.~~Net

~~Increased~~Net ~~professional~~interest ~~fees~~expense ~~resulted~~was ~~primarily~~$1,808,010 ~~from~~in ~~costs~~the ~~associated~~three ~~with~~months ~~the~~ended ~~audit~~June ~~committee’s~~30, ~~internal~~2012, ~~investigation~~compared ~~related~~ to ~~our~~net ~~prior~~interest ~~auditors’ resignation~~expense ~~and~~of $1,003,307 for the ~~cost~~three ofmonths ended ~~re-auditing~~June ~~the~~30, ~~prior~~2013. ~~year~~The ~~financial~~decrease ~~statements,~~was ~~which~~mainly ~~were~~due ~~conducted~~to lower average balances of convertible notes resulting from early retirements in the second half of 2012.

~~The~~Income ~~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.~~Tax

~~Advertising~~The ~~Costs~~Company’s effective tax rate for the three months ended June 30, 2013 was 6%, compared to 2% in the three months ended June 30, 2012, due primarily to higher losses in 2012. For additional information, see “Item 1. Financial Statements – Note 16. Income Tax.”

~~Advertising~~RESULTS ~~costs~~OF ~~increased by~~OPERATIONS ~~$6,420,139,~~– orSIX ~~217%,~~MONTHS ~~from~~ENDED ~~$2,964,877~~JUNE ~~in the three months ended September~~ 30, 2013 ~~2011~~AS toCOMPARED ~~$9,385,016~~TO inSIX ~~the~~MONTHS ~~three~~ENDED ~~months~~JUNE ~~ended September~~ 30, 2012, primarily as a result of more promotional expense by us in an effort to generate additional sales in the highly competitive Chinese pharmaceutical marketplace. Advertising costs as a percentage of revenue increased from 5% in 2011 to 32% in 2012.

~~Research~~The following table sets forth the amounts and ~~Development~~the ~~Costs~~percentage relationship to revenues of certain items in our condensed consolidated statements of income for the six months ended June 30, 2013 and 2012:

Research and development costs decreased by $1,144,318 from $2,825,967 in the three months ended September 30, 2011 to $1,681,649 in the three months ended September 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 5% in 2012 and 2011, respectively.

	Six Months Ended June 30,
	Results						% of Revenue
	2013			2012			2013			2012
Statement of Operations Data:
Revenues	$	41,230,900		$	53,192,202			100	%		100	%
Cost of sales		31,744,091			42,318,134			77	%		80	%

GROSS PROFIT		9,486,809			10,874,068			23	%		20	%
Selling, general and administrative expenses		23,495,026			24,042,204			57	%		45	%
Advertising costs		6,353,778			14,132,431			15	%		27	%
Research and development costs		3,129,716			3,296,234			8	%		6	%
Depreciation and amortization		3,719,283			3,659,432			9	%		7	%
Provision for reserves and doubtful accounts		(234,489	)		3,053,248			-1	%		6	%
Long term crop inventory costs		2,361,383			–			6	%		–
LOSS FROM OPERATIONS		(29,337,888	)		(37,309,481	)		-71	%		-70	%

Equity in losses from equity method investments		(1,972,373	)		(1,489,047	)		-5	%		-3	%
Interest expense, net		(1,766,998	)		(3,551,280	)		-4	%		-7	%
Other income (expenses), net		171,829			348,749			0	%		1	%
LOSS BEFORE INCOME TAX		(32,905,430	)		(42,001,059	)		-80	%		-79	%
Provision for income taxes		1,050,326			953,965			3	%		2	%
NET LOSS		(33,955,756	)		(42,955,024	)		-82	%		-81	%
Net loss attributable to non-controlling interest		–			10,902			–			0	%
NET LOSS ATTRIBUTABLE TO
AMERICAN ORIENTAL BIOENGINEERING, INC.	$	(33,955,756	)	$	(42,944,122	)		-82	%		-81	%

LOSS PER COMMON SHARE, BASIC AND DILUTED	$	(0.93	)	$	(1.09	)

~~Depreciation and Amortization~~Revenues

~~Depreciation~~We ~~and~~classify ~~amortization~~our revenues ~~expenses~~into ~~decreased~~two bysegments: ~~$1,721,~~manufacturing orrevenue ~~less~~and ~~than~~distribution ~~1%,~~revenue. inThe ~~the~~manufacturing ~~three~~revenue ~~months~~comprises ~~ended~~revenue ~~September~~from ~~30,~~pharmaceutical and ~~2012~~nutraceutical asproducts. ~~compared~~Revenues toby ~~the~~segments ~~same~~and ~~period~~product ofcategories ~~2011.~~were as follows:

Provision for reserves and doubtful accounts

	Six Months Ended June 30,				Increase/			Increase/
	2013		2012		(Decrease)			(Decrease)
Revenue from pharmaceutical products	$	24,010,946	$	30,111,084	$	(6,100,138	)		-20	%
Revenue from nutraceutical products		3,531,529		3,211,136		320,393			10	%
Total manufacturing revenue		27,542,475		33,322,220		(5,779,745	)		-17	%
Distribution revenue		13,688,425		19,869,982		(6,181,557	)		-31	%
Total revenues	$	41,230,900	$	53,192,202	$	(11,961,302	)		-22	%

~~Provision~~Revenue ~~for~~from ~~doubtful~~our ~~accounts~~pharmaceutical ~~increased~~products decreased from ~~a recovery of~~ $230,~~666~~111,~~829~~084 infor the ~~three~~six months ended ~~September~~June 30, ~~2011~~ 2012 to ~~a charge of~~ $~~777~~24,~~947 in the three months ended September 30~~010,946 ~~2012,~~for ~~due~~the tosame ~~continued~~period ~~deterioration~~ of ~~our~~2013, ~~customers’ ability to continue to pay their outstanding invoices on~~ a ~~timely~~20% ~~basis~~decrease. WeThe ~~evaluate~~decrease ~~the~~was ~~provision~~primarily ~~for~~due ~~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,~~following ~~which would result in their inability to pay their debts to us.~~factors:

27· 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.

~~Gain~~· onNegative ~~extinguishment~~publicity surrounding the discovery of ~~convertible notes~~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.

~~During~~· Because of the ~~three~~ ~~months~~actual ~~ended~~and ~~September~~potential ~~30,~~size ~~2012~~of the Chinese pharmaceutical market, we ~~repurchased~~face aintense ~~total~~competition ~~$59~~from companies that manufacture products similar to ours,~~339,000~~ inwhich ~~principal~~has ~~amount~~had ofa ~~our~~negative ~~convertible~~impact ~~Notes~~on ~~for~~our ~~$18,478,888~~revenues. A ~~gain~~Many of ~~debt~~these ~~extinguishment~~manufacturers are more established than we are, have greater brand recognition of ~~$40~~products that compete with ours,~~413~~ have more financial,~~555~~ ~~was~~technical, ~~recognized~~marketing ~~representing~~and ~~the~~other ~~difference~~resources ~~between~~than ~~the~~we ~~net~~presently ~~carrying~~possess, ~~value~~and ofhave ~~the~~a ~~notes repurchased~~larger customer base. These competitors are often able to respond more quickly to new or changing opportunities and ~~the~~customer ~~repurchase~~requirements, ~~price.~~and ~~For~~are ~~additional~~able ~~information~~to undertake more extensive promotional activities, ~~see~~offer ~~“Item~~more 1.attractive ~~Financial~~terms ~~Statements~~to –customers, ~~Note~~or ~~12.~~adopt ~~Convertible Notes~~more aggressive pricing policies.”

~~Equity~~· inBecause ~~Losses~~traditional Chinese medicine injection products are not covered under the new essential drug list, sales of SHL powder, one of our two flagship products, declined from ~~Equity~~2012 ~~Method~~to ~~Investments~~2013.

~~Equity in~~Revenue ~~losses~~in ~~from~~connection ~~equity~~with ~~method~~our ~~investments~~nutraceutical ~~decreased~~products increased from ~~income of~~ $~~796~~3,~~727~~211,136 in the ~~three~~six months ended ~~September~~June 30, ~~2011~~ 2012 to $~~267~~3,~~470~~ 531,529 in the ~~three~~six months ended ~~September~~June 30, ~~2012~~2013, a 10% increase. ~~The~~We ~~decreased~~experienced ~~loss~~material decreases ~~was~~in ~~mainly~~sales ~~due~~of toour anutraceutical ~~smaller~~products ~~loss~~in ~~realized~~2012 caused by ~~AXN~~the in2012 ~~the~~food ~~three months~~safety ~~ended~~and ~~September~~drug ~~30,~~problem ~~2012~~in asChina, ~~compared~~and tohave ~~the~~seen a ~~same~~rebound ~~period~~in ofsales ~~2011~~in 2013.

~~Interest~~Distribution ~~Expense~~revenue decreased by $6,181,557 or 31%, to $13,688,425 for the six months ended June 30, 2013 from $19,869,982 for the same period of 2012. Sales from our former Yushuntang subsidiary were $7,997,571 in the six months ended June 30, 2012, but due to the sale of our 6% interest in Yushuntang in December 2012, which resulted in the deconsolidation of this subsidiary, Yushuntang’s sales are no longer consolidated in our statement of operations for 2013. Net of Yushuntang, sales from the balance of our distribution business increased from $11,872,411 in 2012 to $13,688,425 in 2013.

Net interest expense was $1,423,839 in the three months ended September 30, 2012, compared to $1,802,954 for the three months ended September 30, 2011. The decrease was mainly due to lower interest on convertible notes, as the average balances were lower in 2012 due to the extinguishment of $59,339,000 in face value.26

~~Income~~Cost ~~Tax~~of Sales and Gross Profit

~~The~~Cost ~~Company’s effective~~of ~~tax~~sales ~~rate~~was ~~for~~$31,744,091 in the ~~three~~six months ended ~~September~~June 30, ~~2012 was 2%~~2013, compared to ~~40%~~$42,318,134 in the six ~~three~~ months ended ~~September~~June 30, ~~2011~~ 2012. ~~The~~Cost ~~higher effective tax rate in 2011 was mainly due to an increase in valuation allowance change because some~~ of ~~the~~sales ~~entities within~~by ~~the~~segments ~~group~~and ~~realized~~product acategories ~~relatively~~were ~~larger~~as ~~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.”~~follows:

	Six Months Ended June 30,				Increase/			Increase/
	2013		2012		(Decrease)			(Decrease)
Pharmaceutical products	$	16,466,784	$	21,053,648	$	(4,586,864	)		-22	%
Nutraceutical products		2,393,517		2,898,099		(504,582	)		-17	%
Total manufacturing cost		18,860,301		23,951,747		(5,091,446	)		-21	%
Distribution cost		12,883,790		18,366,387		(5,482,597	)		-30	%
Total cost	$	31,744,091	$	42,318,134	$	(10,574,043	)		-25	%

~~RESULTS~~Cost OFof ~~OPERATIONS~~sales –in ~~NINE~~the ~~MONTHS~~manufacturing ~~ENDED~~segment ~~SEPTEMBER~~decreased ~~30,~~with ~~2012~~the AScorresponding ~~COMPARED~~drop TOin ~~NINE~~revenues ~~MONTHS~~for ~~ENDED~~this ~~SEPTEMBER~~segment. 30Gross profit as a percentage of revenues for the manufacturing segment was 32% in 2013, ~~2011~~up from 28% in 2012.

~~The~~Cost ~~following~~of ~~table~~sales ~~sets~~in ~~forth~~ the ~~amounts~~ ~~and~~distribution ~~the~~segment ~~percentage~~decreased ~~relationship~~along with sales from 2012 to ~~revenues~~2013 as a result of ~~certain~~the ~~items~~deconsolidation inof ~~our~~Yushuntang ~~condensed~~at ~~consolidated~~the ~~financial~~end ~~statements~~of 2012, with gross profit as a percentage of revenues also decreasing from 8% to 6%.

	Nine Months Ended September 30,
	Results						% of Revenue
	2012			2011			2012		2011
Statement of Operations Data:
Revenues	$	82,685,661		$	159,988,508			100%		100%
Cost of sales		65,355,231			83,863,569			79%		52%
GROSS PROFIT		17,330,430			76,124,939			21%		48%
Selling, general and administrative expenses		36,047,706			34,577,769			44%		22%
Advertising costs		23,517,447			10,185,380			28%		6%
Research and development costs		4,977,883			8,652,455			6%		5%
Depreciation and amortization		5,462,599			5,359,979			7%		3%
Provision for reserves and doubtful accounts		3,831,195			(2,666,829	)		5%		-2%
(LOSS) INCOME FROM OPERATIONS		(56,506,400	)		20,016,185			-68%		13%
Gain on extinguishment of convertible notes		40,413,555			–			49%		–
Equity in losses from equity method investments		(1,756,517	)		(857,811	)		-2%		-1%
Gain on changes in ownership of unconsolidated entities		–			658,540			–		0%
Interest expense, net		(4,975,119	)		(4,850,651	)		-6%		-3%
Other income (expenses), net		443,473			321,571			1%		0%
(LOSS) INCOME BEFORE INCOME TAX		(22,381,008	)		15,287,834			-27%		10%
Provision for income taxes		1,441,245			4,091,655			2%		3%
NET (LOSS) INCOME		(23,822,253	)		11,196,179			-29%		7%
Net income attributable to non-controlling interest		(4,418	)		(14,767	)		0%		0%
NET (LOSS) INCOME ATTRIBUTABLE TO AMERICAN ORIENTAL BIOENGINEERING, INC.	$	(23,826,671	)	$	11,181,412			-29%		7%
EARNINGS (LOSS) PER COMMON SHARE
Basic	$	(0.62	)	$	0.30
Diluted		(0.62	)		0.29

Selling, General and Administrative Expenses

~~Revenues~~Selling, general and administrative expenses decreased from $24,042,204 in the six months ended June 30, 2012 to $23,495,026 in the six months ended June 30, 2013, representing a 2% decrease. The details of our sales and marketing expenses were as follows:

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

	Six Months Ended June 30,				Increase/			Increase/
	2013		2012		(Decrease)			(Decrease)
Promotional materials and fees	$	3,663,333	$	2,450,204	$	1,213,129			50	%
Payroll		6,421,119		6,456,740		(35,621	)		-1	%
Shipping		680,476		895,623		(215,147	)		-24	%
Trips and traveling		1,328,136		2,562,219		(1,234,083	)		-48	%
Professional fees		3,125,566		2,199,982		925,584			42	%
Staff welfare and insurance		2,229,915		2,842,941		(613,026	)		-22	%
Stock based compensation		879,169		1,360,458		(481,289	)		-35	%
Miscellaneous		5,167,312		5,274,037		(106,725	)		-2	%
Total	$	23,495,026	$	24,042,204	$	(547,178	)		-2	%

	Nine Months Ended September 30,				Increase/			Increase/
	2012		2011		(Decrease)			(Decrease)
Revenue from pharmaceutical products	$	44,972,009	$	119,969,639	$	(74,997,630	)		-63%
Revenue from nutraceutical products		4,798,790		28,110,229		(23,311,439	)		-83%
Total manufacturing revenue		49,770,799		148,079,868		(98,309,069	)		-66%
Distribution revenue		32,914,862		11,908,640		21,006,222			176%
Total revenues	$	82,685,661	$	159,988,508	$	(77,302,847	)		-48%

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

29Increased professional fees resulted primarily from audit, legal and other professional fees incurred in 2013 in connection with bringing our financial filings current.

~~Revenue from~~The ~~our~~decreases ~~pharmaceutical~~in ~~products~~payroll, trips ~~decreased~~and ~~from $119~~traveling,~~969,639~~ ~~for~~and ~~the~~staff ~~nine~~welfare ~~months~~and ~~ended~~insurance ~~September~~correspond ~~30, 2011~~ to ~~$44,972,009~~lower ~~for~~headcount ~~the~~in ~~same~~2013 ~~period~~as ofcompared ~~2012,~~with ~~or a 63% decrease~~2012. ~~The decrease was primarily due to the following factors:~~

·Stock ~~Rapidly~~based ~~evolving~~compensation decreased ~~Chinese~~as ~~government healthcare policies have~~ a ~~material~~result ~~impact on the entire pharmaceutical industry in China. In April 2009, the State Council issued “Opinions~~ of ~~the~~fewer ~~State~~directors ~~Council~~receiving onstock ~~Deepening~~based ~~the~~compensation ~~Reform~~in ~~of the Medical and Health Care System~~2013,” aas ~~major~~well ~~public~~as ~~health initiative,~~ the ~~goal~~completion of ~~which is to provide access to basic medical care for every person in China by 2020. In the implementation~~ amortization of ~~this plan, we witnessed increased dispensing of drugs that were listed on the government~~previously-~~published~~issued ~~essential~~consultant ~~drug~~shares ~~list,~~ and ofemployee ~~products~~stock ~~covered by the National Medical Insurance Catalog~~options. 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 51% in 2011 to 30% in 2012, principally as a result of this pricing pressure.

·Advertising 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.Costs

·Advertising ~~Because~~costs ofdecreased by ~~the~~$7,778,653, ~~actual~~or ~~and potential size of the Chinese pharmaceutical market~~55%, ~~we face intense competition~~ from ~~companies that manufacture products similar to ours~~$14, ~~which has had a negative impact on our revenues. Many of these manufacturers are more established than we are~~132,431 ~~have~~in ~~greater~~the ~~brand~~six ~~recognition~~months ofended ~~products that compete with ours~~June 30, ~~have~~2012 ~~more~~to ~~financial~~$6, ~~technical~~353,778 ~~marketing~~in ~~and~~the ~~other~~six ~~resources~~months ~~than~~ended weJune ~~presently~~30, ~~possess~~2013, primarily ~~and~~as ~~have~~ a ~~larger~~result ~~customer~~of ~~base.~~the ~~These~~initial ~~competitors~~implementation ~~are~~of ~~often~~our ~~able~~cost toreduction ~~respond~~measures ~~more~~started ~~quickly~~in to2012, ~~new~~as orfurther ~~changing~~discussed ~~opportunities~~in ~~and~~the “Liquidity” ~~customer~~section. ~~requirements,~~Advertising ~~and~~costs ~~are~~as ~~able~~a topercentage ~~undertake~~of ~~more~~revenue ~~extensive~~decreased ~~promotional~~from ~~activities,~~27% ~~offer~~for ~~more~~2012 ~~attractive terms~~ to ~~customers,~~15% orfor ~~adopt more aggressive pricing policies~~2013.

· Because traditional Chinese medicine injection products are not covered under the new essential drug list, sales of SHL powder, one of our two flagship products, declined materially from 2011 to 2012.27

~~Revenue in~~Research connection with our nutraceutical products decreased from $28,110,229 in the nine months ended September 30, 2011 to $4,798,790 in the nine months ended September 30, 2012, an 83% decrease. Revenues were adversely affected by the food safety and ~~drug~~Development ~~problem in 2012. The decrease was mainly due to the decrease in sales from our Soy Peptide tablets and Soy Peptide drinks.~~Costs

~~Distribution~~Research ~~revenue~~and development ~~increased~~costs decreased by $21166,~~006,222~~518 orfrom ~~176%, to~~ $323,~~914~~296,~~862~~234 ~~for~~in the ~~nine~~six months ended June ~~September~~ 30, 2012 ~~from~~to $113,~~908~~129,~~640~~716 ~~for~~in the ~~same~~six ~~period of~~months ~~2011~~ended June 30, 2013, primarily as a result of the ~~acquisition~~initial implementation of ~~Liaoning~~our ~~Baicao~~cost reduction measures started in 2012, ~~which~~as ~~occurred~~further atdiscussed in the ~~end~~“Liquidity” section. Expressed as a percentage of ~~2011~~revenue, research and development costs were 8% and 6% for 2013 and 2012, respectively.

~~Cost~~Our research and development activities consist of ~~Sales~~near term, middle term and ~~Gross~~long ~~Profit~~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.

~~Cost~~Depreciation ofand ~~sales was $65,355,231 in the nine months ended September 30, 2012, compared to $83,863,569 in the nine months ended September 30, 2011.~~Amortization

	Nine Months Ended September 30,				Increase/			Increase/
	2012		2011		(Decrease)			(Decrease)
Pharmaceutical products	$	30,839,516	$	57,172,135	$	(26,332,619	)		-46%
Nutraceutical products		4,149,942		15,396,392		(11,246,450	)		-73%
Total manufacturing cost		34,989,458		72,568,527		(37,579,069	)		-52%
Distribution cost		30,365,773		11,295,042		19,070,731			169%
Total cost	$	65,355,231	$	83,863,569	$	(18,508,338	)		-22%

Depreciation and amortization expenses increased by $59,851, or 2%, in the six months ended June 30, 2013 as compared to the six months ended June 30, 2012. This was mainly due to increased amortization expense related to intangible assets acquired in 2012.

~~Cost~~Provision ~~of sales in the manufacturing segment decreased with the corresponding drop in revenues~~ for ~~this~~reserves ~~segment.~~and ~~Gross~~doubtful ~~profit as a percentage of revenues for the manufacturing segment was 30% in 2012, down from 51% in 2011.~~accounts

~~Cost~~Provision for doubtful accounts decreased from a charge of ~~sales~~$3,053,248 in the ~~distribution~~ ~~segment~~six ~~increased~~months ~~proportionally~~ended June 30, 2012 to ~~the~~a ~~increase~~reversal of bad debts of $234,489 in ~~sales~~the ~~from~~six ~~2011~~months ended June 30, 2013. The reversal of bad debts is primarily due to ~~2012~~the cash settlement of long outstanding accounts receivable that had previously been 100% reserved. We evaluate the provision for doubtful accounts on an ongoing basis, ~~with~~based ~~gross~~upon ~~profit~~our ascustomers’ ability to continue to pay their outstanding invoices on a ~~percentage~~timely ofbasis, and whether their financial position might deteriorate significantly ~~revenues~~in ~~also~~the ~~increasing~~future, ~~from~~which 5%would result in their inability to 8%pay their debts to us.

30Long term crop inventory costs

~~Selling~~Subsequent to December 31, ~~General~~2012, pre-harvest agriculture costs, including cultivation, labor, land leasing costs, and ~~Administrative~~other ~~Expenses~~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 six months ended June 30, 2013, agricultural costs of $2,361,383 were expensed. During the six months ended June 30, 2012, agricultural costs of $3,395,407 were capitalized.

~~Selling,~~Equity ~~general~~in ~~and administrative~~Losses ~~expenses, increased~~ from ~~$34,577,769~~Equity inMethod ~~the nine months ended September 30, 2011 to $36,047,706 in the nine months ended September 30, 2012, representing a 4% increase. The details of our sales and marketing expenses were as follows:~~Investments

	Nine Months Ended September 30,				Increase/			Increase/
	2012		2011		(Decrease)			(Decrease)
Promotional materials and fees	$	4,310,122	$	5,913,443	$	(1,603,321	)		-27%
Payroll		9,476,850		9,511,771		(34,921	)		0%
Shipping		1,360,046		2,714,747		(1,354,701	)		-50%
Trips and traveling		3,182,859		3,116,518		66,341			2%
Professional fees		3,113,476		1,849,396		1,264,080			68%
Staff welfare and insurance		3,977,837		2,706,948		1,270,889			47%
Stock based compensation		2,046,926		2,514,251		(467,325	)		-19%
Miscellaneous		8,579,590		6,250,695		2,328,895			37%
Total	$	36,047,706	$	34,577,769	$	1,469,937			4%

Equity in losses from equity method investments increased from $1,489,047 in the six months ended June 30, 2012 to $1,972,373 in the six months ended June 30, 2013. The increased loss was mainly due to larger losses realized by AXN in the six months ended June 30, 2013 as compared to the same period of 2012.

~~The~~Interest ~~decrease~~Expense, ~~in promotional fees resulted from fewer marketing and promotional activities carried out during the first three quarters of 2012 as compared with the same period of 2011.~~Net

~~The~~Net ~~decrease~~interest expense was $1,766,998 in ~~shipping~~the six months ended June 30, 2013, compared to net interest expense of $3,551,280 ~~costs~~for the six months ended June 30, 2012. The decrease was ~~primarily~~mainly due to ~~the~~lower ~~reduction~~average balances of convertible notes resulting from early retirements in ~~sales~~the ~~volume~~second half of ~~our products~~2012.

~~The~~Income ~~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.~~Tax

~~Increased~~The ~~professional~~Company’s ~~fees~~effective ~~resulted~~tax ~~primarily~~rate ~~from~~for ~~costs~~the ~~associated~~six ~~with~~months ~~the~~ended ~~audit~~June ~~committee’s~~30, ~~internal~~2013 ~~investigation~~was ~~related~~3%, compared to ~~our~~2% ~~prior~~in ~~auditors’~~the ~~resignation~~six ~~and~~months ~~the~~ended ~~cost~~June of30, ~~re-auditing~~2012, ~~the~~due ~~prior~~primarily ~~year~~to ~~financial~~higher ~~statements~~losses in 2012. For additional information, ~~which~~see ~~were~~“Item ~~conducted~~1. inFinancial Statements ~~2012~~– Note 16. Income Tax.”

~~Advertising~~FINANCIAL ~~Costs~~POSITION, LIQUIDITY AND CAPITAL RESOURCES

Advertising costs increased by $13,332,067, or 131%, from $10,185,380 in the nine months ended September 30, 2011 to $23,517,447 in the nine months ended September 30, 2012, primarily as a result of more promotional expense by us in an effort to generate additional sales in the highly competitive Chinese pharmaceutical marketplace. Advertising costs as a percentage of revenue decreased from 6% for 2011 to 28% for 2012.Cash

~~Research~~Our cash position at June 30, 2013 was $7,004,814, representing a decrease of $92,284, or 1%, compared with our cash position of $7,097,098 at December 31, 2012. The change was mainly attributable to net cash used in operations of $5.3 million in the six months ended June 30, 2012, offset by cash provided by investing activities of $3.1 million and ~~Development~~provided ~~Costs~~by financing activities of $1.2 million.

~~Research~~We ~~and~~manage ~~development costs~~our ~~decreased by $3,674,572 from $8,652,455 in the nine months ended September 30, 2011 to~~cash ~~$4,977,883~~based inon ~~the~~thorough ~~nine~~consideration ~~months ended September 30, 2012, primarily as a result~~ of ~~the initial implementation of~~ our ~~cost~~corporate ~~reduction~~strategy ~~measures started in 2012,~~ as ~~further~~well ~~discussed in the “Liquidity” section. Expressed~~ as amacroeconomic ~~percentage of revenue~~considerations, ~~research~~ and ~~development~~we ~~costs~~take ~~were~~into 6%account ~~and~~such factors 5%as ~~for~~interest ~~2012~~income and ~~2011,~~foreign ~~respectively~~currency fluctuation.

~~Depreciation and Amortization~~Liquidity

~~Depreciation~~Our ~~and~~financial ~~amortization~~statements ~~expenses~~have ~~increased~~been byprepared ~~$102,620,~~on ora 2%going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the ~~nine~~normal course of business. For the six months ended ~~September~~June 30, ~~2012~~2013, aswe ~~compared~~recorded a loss from operations of $29,337,888 and toutilized ~~the~~cash ~~nine~~in ~~months~~operations ~~ended~~of ~~September~~$4,873,817. As of June 30, ~~2011~~2013, we had a working capital deficit of $36,114,345. ~~This~~In ~~was~~addition, ~~mainly~~we were in default of $49,161,000 of our convertible notes due toJuly an15, ~~increase~~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 ~~property~~an ~~and~~acceleration ~~equipment~~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 ~~final~~present ~~three~~action ~~quarters~~was interposed. The action seeks payment of ~~2011~~$20,378,608 ~~offset~~plus byprejudgment aninterest and ~~impairment~~other ~~charge~~fees ~~related~~and costs. The Company has been served with the complaint, and Plaintiffs agreed to ~~acquired~~extend ~~intangible~~the ~~assets~~Company’s time to answer. When that ~~was~~time ~~recognized~~passed on June 3, 2013, Plaintiffs refused to grant additional time and have now made a motion inseeking entry of a default. The Company filed its answer on June 5, 2013. We presently do not have the ~~fourth~~ability ~~quarter~~to ofpay ~~2011~~these notes. These factors, ~~resulting~~among inothers, ~~lower~~raise ~~amortization~~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.

31Historically, 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 half 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

~~Provision~~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 ~~reserves~~future periods, and/or operating cost reductions. We believe we can ~~doubtful~~utilize ~~accounts~~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.

~~Provision~~We ~~for doubtful~~have ~~accounts~~implemented ~~increased from~~ a ~~recovery~~cost ofreduction ~~$2,666,829~~plan inthat ~~the~~includes ~~nine~~decreasing ~~months~~our ~~ended September 30~~overhead, ~~2011 to~~research aand ~~charge of $3~~development,~~831,195~~ inand ~~the~~advertising ~~nine~~costs, which ~~months~~we ~~ended~~estimate ~~September~~will ~~30,~~save ~~2012,~~us ~~due~~10% to ~~continued~~15% ~~deterioration of~~overall ~~our~~compared ~~customers’ ability~~ to ~~continue to pay their outstanding invoices on a timely basis~~2012. We ~~evaluate~~do ~~the~~not ~~provision~~believe that ~~for doubtful~~this ~~accounts~~initiative onwill jeopardize anour ~~ongoing~~current ~~basis,~~operations ~~based~~or ~~upon~~future ~~our~~growth ~~customers’~~plans ~~ability~~materially. toWe ~~continue~~also plan to ~~pay their outstanding invoices on~~delay aour ~~timely~~capital ~~basis,~~spending and ~~whether~~additional ~~their~~expansion ~~financial~~to ~~position~~future ~~might~~periods, ~~deteriorate~~including ~~significantly~~investments in ~~the~~construction ~~future, which would result~~ in ~~their~~ ~~inability to pay their debts to us~~progress.

~~Gain~~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 ~~extinguishment~~the buildings and we believe that they could sustain a delay of ~~convertible~~at least 2-3 years without comprising overall structural integrity. We have ~~notes~~also evaluated our current production lines and expect that they will continue to function through their estimated useful lives.

~~During~~Furthermore, ~~the~~as ~~nine~~of ~~months~~June ~~ended September~~ 30, ~~2012~~2013, we ~~repurchased~~had ainvested ~~total $59,339,000~~ in ~~principal~~capitalized ~~amount~~agricultural ofcost ~~our convertible Notes~~ for $1817,~~478~~804,~~888~~002. These pre-harvest agriculture Acosts ~~gain~~usually ofrequire ~~debt~~substantial ~~extinguishment~~investment ofin ~~$40~~the early stages,~~413,555~~ ~~was~~gradually ~~recognized~~decreasing ~~representing~~to maintenance costs during the ~~difference~~growing ~~between~~stage. We expect that the ~~net~~cost ~~carrying~~required ~~value~~for ofthese ~~the~~crops ~~notes~~will be around $2.5 million per year. We ~~repurchased~~anticipate ~~and~~that the ~~repurchase~~crops ~~price.~~will ~~For~~benefit ~~additional~~our ~~information,~~operations ~~see~~in ~~“Item~~terms 1.of ~~Financial~~raw ~~Statements~~material –supply ~~Note~~for ~~12.~~internal ~~Convertible~~use, as well as ~~Notes~~profit from selling to the market in 2018.”

~~Equity~~We inhave ~~Losses~~also reviewed ~~from~~all ~~Equity~~of ~~Method~~our ~~Investments~~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.

~~Equity~~We indo ~~losses~~not ~~from~~plan to ~~equity~~further ~~method~~downsize ~~investments~~our ~~decreased~~operations ~~from~~beyond ~~$857,811 in~~ the ~~nine~~cost ~~months~~reductions ~~ended~~discussed ~~September 30~~herein, ~~2011 to~~including ~~$1,756,517~~selling inor ~~the~~closing ~~nine~~any ~~months~~of ~~ended September 30, 2012. The increased loss was mainly due~~our tosubsidiaries aor ~~larger~~suspending ~~loss~~any ~~realized~~ongoing ~~by AXN in the nine months ended September 30, 2012~~operations.

~~Interest~~Total ~~Expense, Net~~Debt

~~Net~~We ~~interest~~had ~~expense was~~a total of $464,~~975~~685,~~119~~ 183 in ~~the~~debt ~~nine~~as ~~months~~of ~~ended~~June ~~September~~ 30, ~~2012~~2013, as compared to $467,~~850~~642,~~651~~849 ~~for~~as ~~the nine~~of ~~months~~December ~~ended September 30~~31, ~~2011~~2012. The ~~increase~~decrease of $2,957,666 was mainly due to ~~higher~~a decrease ~~average~~in ~~balances of~~ bank acceptance notes to vendors, ~~offset by lower interest expense on convertible notes due to the repurchase of $59,339,000~~ in ~~principal during~~ the ~~third quarter~~first half of ~~2012~~2013.

~~Income Tax~~29

~~The~~Cash Company’s effective tax rate for the nine months ended September 30, 2012 was 6%, compared to 27% in the nine months ended September 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 19. Income Tax.”Flow

~~FINANCIAL~~Operating ~~POSITION, LIQUIDITY AND CAPITAL RESOURCES~~Activities

Cash flows used in operations during the six months ended June 30, 2013 amounted to $4,873,817, representing a decrease in cash used of $29,563,772 compared with cash flows used in operations of $34,437,589 for six months ended June 30, 2012. The decrease in net cash used by operating activities was primarily attributable to: (i) lower losses in 2013 as compared to 2012, and (ii) a large decrease in accounts receivable of $16,838,907 in 2013, compared with a decrease of only $4,897,830 in 2012, and (iii) an increase of $3,326,358 in accrued expenses and other payables in 2013, as compared with a decrease of $4,135,928 in 2012.

~~Our~~Investing cash position at September 30, 2012 was $26,432,161, representing a decrease of $26,195,767, or 50%, 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 $37.1 million in the nine months ended September 30, 2012, due in large part to our lower sales and larger operating losses.Activities

WeOur ~~manage~~net ~~our~~cash provided by investing activities amounted to $2,594,473 in the six months ended June 30, 2013, as compared to net cash provided by investing ~~based~~activities onof ~~thorough~~$26,021,071 ~~consideration~~in the six months ended June 30, 2012. The changes mainly included: (i) cash inflow from the collection of ~~our~~receivable ~~corporate~~for ~~strategy~~the assale ~~well~~of asthe ~~macroeconomic~~NuoHua ~~considerations~~affiliate in the amount of $18,278,815 in 2012, and we(ii) ~~take~~proceeds ~~into~~from ~~account~~the ~~such~~payment of ~~factors~~bank asacceptance ~~interest~~notes ~~income~~from ~~and~~customers ~~foreign~~in ~~currency~~the ~~fluctuation~~first half of 2012 in the amount of $23,068,432 with a corresponding amount of only $4,567,451 in 2013.

~~Liquidity~~Financing Activities

Our ~~financial~~net ~~statements~~cash provided ~~have~~by ~~been~~financing ~~prepared~~activities onwas ~~a going concern basis~~$1,206,798 ~~which contemplates the realization of assets and the satisfaction of liabilities~~ in ~~the~~ ~~normal course of business. For~~ the ~~nine~~six months ended ~~September~~June 30, ~~2012~~2013, wecompared ~~recorded~~to acash ~~loss~~provided ~~from~~by ~~operations~~financing activities of $561,~~506~~924,~~400 and~~118 ~~utilized cash~~ in ~~operations~~the ofsix ~~$37,139,732. As~~months ofended ~~September~~June 30, 2012,. weThe ~~had~~difference ~~working~~is ~~capital~~primarily ofdue ~~$869,366. In addition, subsequent~~ to ~~September~~(i) ~~30,~~net ~~2012~~proceeds wefrom ~~were~~bank inloans ~~default~~and ofbank acceptance ~~$49,161,000 of our convertible~~ notes ~~due~~to ~~July 15~~vendors, ~~2015.~~net ~~On April 8, 2013, four~~ of ~~the holders of the Notes filed this action claiming a default under the Notes~~repayments, ~~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 $207,~~378~~016,~~608~~929 ~~plus~~in ~~prejudgment interest and other fees and costs. The Company has been served with the complaint~~2012, ~~and~~as ~~Plaintiffs~~compared ~~agreed~~ to ~~extend~~net ~~the~~repayments ~~Company’s~~of ~~time to answer. When that time passed on June~~ $3,252,251 in 2013, ~~Plaintiffs refused to grant additional time and have now made a motion seeking~~(ii) ~~entry~~decreases ofin arestricted ~~default.~~cash ~~The~~in ~~Company filed its answer on June 5,~~ 2013. Weresulting ~~presently~~from dodecreases ~~not~~in ~~have~~bank ~~the~~acceptance ~~ability to pay these~~ notes. ~~These factors,~~which ~~among~~require ~~others,~~restricted ~~raise~~cash ~~substantial doubt about our ability to continue as a going concern. As a result~~deposits, ~~our independent registered~~ ~~public~~and ~~accounting~~(iii) ~~firm,~~the inpurchase 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~~treasury orshares ~~capital. No assurances can be given that we will be successful~~ in ~~obtaining additional financing in~~ the ~~future~~amount ~~and~~of ~~any~~$1,270,603 ~~future~~in ~~financing that we may obtain may cause significant dilution to existing stockholders~~2012.

32Issuance of Common Stock

~~Historically,~~See ~~our~~Part ~~main source~~II, ofItem ~~cash~~2 ~~was~~for ~~through~~issuance of ~~the~~unregistered ~~sales~~shares 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.Inflation

WeInflation ~~have~~has ~~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~~had ~~this~~a ~~initiative will jeopardize our current operations~~material orimpact ~~future~~on ~~growth plans materially. We also plan to delay~~ our ~~capital spending~~ ~~and additional expansion to future periods, including investments in construction in progress~~business.

~~Our~~Currency ~~plan~~Exchange 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. Fluctuations

~~Furthermore,~~The asCompany's ofoperations ~~September~~are ~~30,~~exposed ~~2012,~~to wea ~~had~~variety ~~invested~~of ~~in capitalized~~global ~~agricultural~~market ~~cost for $25~~risks,~~831,222. These~~ ~~pre-harvest~~including ~~agriculture costs~~the ~~usually~~effect ~~require~~of ~~substantial~~changes ~~investment~~ in ~~the~~foreign ~~early~~currency ~~stages,~~exchange ~~gradually~~rates. ~~decreasing~~These ~~to maintenance costs~~exposures are ~~during~~managed, ~~the growing stage. We~~in ~~expect~~part, ~~that~~with the ~~cost~~use ~~required~~of ~~for~~a ~~these~~financial ~~crops will~~derivative. beThe ~~around~~Company ~~$2.5 million per~~does ~~year. We~~not ~~anticipate that~~use ~~the~~financial ~~crops~~derivatives ~~will~~to ~~benefit~~hedge ~~our~~exposures in ~~operations~~the inordinary ~~terms~~course of ~~raw material supply~~business or for ~~internal~~speculative ~~use, as well as profit from selling to the market in 2018~~purposes.

We ~~have~~ ~~also~~currently ~~reviewed~~conduct substantially all of our ~~current~~operations ~~material~~through ~~obligations~~our ~~and~~PRC ~~expect~~subsidiaries. ~~that~~The wefunctional ~~could fulfill all~~currency of our ~~material~~ ~~commitments~~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, ~~with~~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 ~~exception~~other comprehensive income in the statement of ~~construction~~shareholders’ ~~contracts~~equity. ~~which~~Transaction wegains ~~believe~~and ~~can~~losses bethat ~~renegotiated~~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.

WeAs dothe ~~not~~majority ~~plan~~of our toassets ~~further downsize~~ and substantially all of our ~~operations~~revenue, ~~beyond~~costs and expenses are denominated in RMB, any significant revaluation of the RMB ~~cost~~may ~~reductions~~materially ~~discussed~~and ~~herein~~adversely affect our cash flows, ~~including~~ ~~selling~~revenues orand ~~closing~~financial ~~any~~condition. For example, if the RMB depreciates against the U.S. dollar, the value of our ~~subsidiaries~~RMB orrevenues, ~~suspending~~earnings, and assets, as expressed in our U.S. dollar financial statements could ~~any~~decline. ~~ongoing~~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.

~~Total~~The ~~Debt~~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.

~~We had total of $67,214,059 in debt as of September~~ 30, 2012, as compared to $116,440,026 as of December 31, 2011. The decrease of $49,225,967 was mainly due to the repurchase of convertible notes with a face value of $59,339,000 during the third quarter of 2012.

~~Cash~~The ~~Flow~~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.

~~Operating~~Pursuant ~~Activities~~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.

~~Cash~~Enterprises ~~flows~~in ~~used by~~China, ~~operations~~including ~~during~~FIEs, ~~the~~which ~~nine~~require ~~months~~foreign ~~ended~~exchange ~~September~~for ~~30,~~transactions ~~2012~~relating ~~amounted~~ to ~~$37,139,732,~~current ~~representing~~account anitems, ~~increase~~if inwithin ~~cash~~a ~~used~~certain oflimited amount ~~$57~~may,~~929,115 compared~~ ~~with~~without ~~cash~~approval ~~flows~~of ~~provided~~the byState ~~operations~~Administration of ~~$20~~Foreign Exchange,~~787,291~~ ~~for~~or ~~nine months ended September 30~~SAFE, ~~2011.~~effect ~~The~~payment ~~increase~~from intheir ~~net~~foreign ~~cash~~exchange ~~used~~account byor ~~operating~~convert ~~activities~~and ~~was~~pay ~~primarily~~at ~~attributable~~the ~~to:~~designated ~~(i)~~foreign ~~lower~~exchange ~~sales~~banks ~~and~~by ~~resulting~~providing ~~increased~~valid ~~losses~~receipts ~~in 2012 as compared to 2011,~~ and ~~(ii) a large decrease in accounts receivable of $16,554,608 in 2011, with a corresponding decrease of accounts receivable of only $9,251,412 in 2012~~proofs.

~~Investing~~Convertibility ~~Activities~~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.

~~Our~~Between ~~net~~1994 ~~cash~~and ~~provided~~2004, bythe ~~investing~~exchange ~~activities~~rate ~~amounted~~for toRMB ~~$25,807,373~~against in the ~~nine~~U.S. ~~months~~dollar ~~ended~~remained ~~September~~relatively 30stable, ~~2012,~~most asof ~~compared~~the totime ~~net~~in ~~cash~~the ~~used~~region inof ~~investing~~approximately RMB8.28 ~~activities~~to of US$391.00. However,~~616,540~~ in ~~the nine months ended September 30~~2005, ~~2011.~~the ~~The~~Chinese ~~changes~~government ~~mainly~~announced ~~included:~~that ~~(i)~~it ~~the~~would ~~collection~~begin ofpegging ~~notes receivable in~~ the ~~first~~exchange ~~three~~rate ~~quarters~~ of ~~2012 in~~ the ~~amount~~RMB ~~of $24,278,884, (ii) cash inflow from the collection of receivable~~against ~~for~~a ~~the~~number ~~sale~~ of ~~the NuoHua affiliate in the amount of $18~~currencies,~~278,815~~ inrather ~~2012,~~than ~~and~~just ~~(iii) deposits made against long term assets in~~ the ~~amount~~U.S. ~~of $30,353,949 in 2011~~dollar.

33Since 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.

~~Financing~~We ~~Activities~~recognized a foreign currency translation adjustment of $7.4 million and $4.0 million for the six months ended June 30, 2013 and 2012, respectively. The balance sheet amounts with the exception of equity at June 30, 2013 were translated at 6.2065 RMB to $1.00 USD as compared to 6.3161 RMB at December 31, 2012. The equity accounts were stated at their historical rate.

~~Our~~The ~~net~~average ~~cash provided~~translation ~~used~~rates inapplied ~~activities~~to ~~was $16,443,390 in~~ the ~~nine~~income ~~months~~and ~~ended September 30, 2012, compared to~~ cash ~~provided~~flow bystatement ~~financing~~amounts ~~activities of~~for ~~$1,956,053 in~~ the ~~nine~~three months ended ~~September~~June 30, ~~2011.~~2013 ~~The~~and ~~difference~~2012 iswere ~~primarily~~6.1882 ~~due~~RMB and 6.3309 RMB to ~~(i)~~$1.00 ~~cash~~USD, ~~used~~respectively. ~~for~~We ~~the~~do ~~purchase~~not ~~of convertible~~hedge ~~notes~~our inexposure ~~the~~to ~~amount~~foreign ofexchange ~~$18,478,888~~risk; inas ~~2012~~such, ~~and~~we ~~(ii)~~may ~~increases~~ in ~~restricted~~the ~~cash~~future ofexperience economic ~~$6,781,052~~loss inas ~~2012~~a ~~resulting~~result ~~from an increased use~~ of ~~bank~~any ~~acceptance~~foreign ~~notes~~currency ~~which~~exchange ~~require~~rate ~~restricted cash deposits~~fluctuations.

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.

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

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

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

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

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

We recognized a foreign currency translation adjustment of $3.3 million and $16.4 million for the nine months ended September 30, 2012 and 2011, respectively. The balance sheet amounts with the exception of equity at September 30, 2012 were translated at 6.3340 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 three months ended September 30, 2012 and 2011 were 6.3313 RMB and 6.4329 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, ~~2011~~2012. For a discussion of our market risk, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our ~~2011~~2012 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 below to remediate these deficiencies.

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

As of ~~September~~June 30, ~~2012~~ 2013 and December 31, ~~2011~~2012, the Company was subject to various legal proceedings and claims. Management continues to evaluate the ~~lawsuits~~ lawsuits discussed below and based on the stage of these proceedings, management is unable to reasonably estimate the likelihood of any loss or the amount or range of any potential loss that could result from the litigation. Therefore, at ~~September~~June 30, ~~2012~~ ~~and~~2013 and December 31, ~~2011~~2012, no accrual has been established for any potential loss in connection with these lawsuits. Should the ~~Company~~ Company fail to prevail in any of these legal matters or should several of these legal matters be resolved against the Company in the same reporting period, the operating results of a particular reporting period could be materially adversely affected.

On 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.32

On June 2223, ~~2012~~2010, a ~~putative~~Haining ~~class~~Zhang ~~action~~asserted ~~complaint~~breach ~~was~~of ~~filed~~contract, byfraudulent ~~Kevin~~dealing, ~~McGee~~and ~~against~~breach ~~American~~of ~~Oriental~~fiduciary ~~Bioengineering~~duty ~~Inc,~~claims ~~Eileen~~against ~~Brody,~~the ~~Binsheng~~Company ~~Li,~~and its ~~Yangchun~~Chief ~~Li,~~Executive ~~Tony Liu~~Officer, ~~Cosimo~~Shu ~~Patti,~~Jun ~~Xianmin~~Liu ~~Wang,~~(together ~~and~~“Defendants”). Zhang’s ~~Lawrence~~claims ~~Wizel~~arose ~~alleging~~out ~~violations~~ of ~~Section~~an ~~10b~~alleged ~~of the Securities Exchange~~2003 ~~Act~~investment ofbanking ~~1934~~advisory and ~~liability~~consultant ~~pursuant~~agreement, towhereby ~~Section~~Zhang ~~20(a)~~allegedly ~~thereunder.~~arranged ~~The~~for ~~complaint,~~the asCompany ~~subsequently~~to ~~amended~~receive ~~(see~~an ~~below)~~equity ~~centers on the~~line ~~accounting treatment~~ of ~~the~~credit ~~sale~~and ofwas anallegedly ~~interest~~given ~~held by~~ the ~~Company’s~~exclusive ~~subsidiary,~~right ~~Nuo~~to ~~Hua~~arrange ~~Investment~~financing ~~Company~~transactions ~~Limited~~for ~~and~~ the Company’s ~~Restatement~~for ~~filed~~a onperiod ~~November~~of ~~14,~~one ~~2011~~year. Zhang ~~Several~~sought ~~motions~~damages ~~were filed~~ for ~~appointment~~allegedly asunpaid ~~lead~~financing ~~plaintiff,~~commission and ~~on October~~advisory ~~16,~~compensation ~~2012,~~in the ~~Court~~amount ~~appointed~~of ~~lead plaintiff~~$2, ~~consolidated the cases~~410,000, plus interest and ~~ordered~~expenses. On ~~that~~September ~~a consolidated complaint be filed~~12, ~~which~~ ~~occurred on November 19~~2011, ~~2012.~~the ~~The~~District ~~served~~Court ~~defendants~~granted ~~(AOB,~~a ~~Brody,~~motion ~~Wizel~~by ~~and~~Defendants ~~Patti) moved~~ to dismiss ~~the~~Zhang’s ~~consolidated~~claims ~~complaint,~~as ~~and~~either onbarred ~~March~~by ~~25,~~the ~~2013~~applicable ~~those~~statute ~~motions~~of ~~were~~limitations ~~granted~~or ~~with~~as ~~leave~~failing to ~~amend.~~state Ona ~~April~~claim. Zhang ~~15, 2013, Plaintiffs~~ filed a ~~Second~~notice ~~Amended~~of ~~Complaint, which~~appeal ~~the served Defendants moved to dismiss~~ on October ~~May 15~~11, ~~2013~~2011. On InApril ~~the~~23, ~~interim~~2013, the ~~Court~~Second ~~granted~~Circuit ~~Plaintiffs’~~Court ~~motion~~of ~~for~~Appeals ~~leave to~~affirmed ~~serve most of~~ the ~~remaining~~District ~~Defendants~~Court’s bydismissal ~~alternative~~of Zhang’s ~~means,~~claims. Zhang ~~and~~had on90 ~~May~~days ~~15,~~from ~~2013,~~ the ~~parties~~date ~~entered~~of ~~into a stipulation consenting to~~ the ~~filing~~Second ofCircuit’s adecision ~~Third~~in ~~Amended~~which ~~Complaint~~to ~~(“TAC,”~~seek ~~setting~~an ~~forth no new paragraphs), deeming the TAC served on all~~appeal ~~defendants,~~to ~~deeming~~ the ~~motion~~United toStates ~~dismiss~~Supreme ~~the~~Court. ~~Second~~No ~~Amended~~such ~~Complaint~~appeal ~~interposed~~was ~~against~~sought ~~the~~by ~~TAC,~~Zhang and ~~reserving~~the ~~all~~period ~~rights~~to ~~of the~~do ~~un-served~~so ~~Defendants~~has expired.

36On June 22, 2012, a putative class action complaint was filed by Kevin McGee against American Oriental Bioengineering Inc, Eileen Brody, Binsheng Li, Yangchun Li, Tony Liu, Cosimo Patti, Xianmin Wang, and Lawrence Wizel alleging violations of Section 10b of the Securities Exchange Act of 1934 and liability pursuant to Section 20(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. The defendants have moved to dismiss the TAC, and the motion is scheduled to be heard on November 7, 2013.

On October 1, 2012, Peter 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 (discussed above) are resolved.

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~~ 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. Plaintiff has consented to the lifting of the default against the Company and to agree to a schedule for responses to the Complaint.

On April 8, 2013, ~~four~~ four of the holders of the Company’s 5% senior convertible notes issued July 15, 2008 (the “Notes”) filed this ~~action~~ action claiming a default under the Notes, which allegedly resulted in an acceleration of the maturity of the Notes. The Plaintiffs ~~had~~ had previously commenced a similar action in federal court in New Jersey, but that action was withdrawn and the present action ~~was~~ was interposed. The action seeks payment of $20,378,608 plus prejudgment interest and other fees and costs. The Company has been ~~served~~ 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~~ answer on June 5, 2013. On August 9, 2013, Plaintiffs submitted to the Court a Request for Final Judgment by Default. The default judgment has been entered, and Plaintiffs have proceeded to domesticate the judgment in states in which Plaintiff believes assets can be found.

There are no other known legal proceedings against the Company.

~~ITEM 1A. RISK FACTORS~~33

~~There~~ITEM ~~have~~1A ~~been~~– ~~no material~~RISK ~~changes or new risks since our Annual Report on Form 10-K for the year ended December 31, 2011.~~FACTORS

~~ITEM~~There 2.have ~~UNREGISTERED~~been ~~SALES~~no material OFchanges ~~EQUITY~~or ~~SECURITIES~~new ~~AND~~risks ~~USE~~since OFour ~~PROCEEDS~~Annual Report on Form 10-K for the year ended December 31, 2012.

~~None.~~ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~ITEM 3~~None. ~~DEFAULTS UPON SENIOR SECURITIES~~

OnITEM 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~~DEFAULTS anUPON ~~aggregate~~SENIOR ~~of $49,161,000 in principal amount outstanding as of September 30, 2013.~~SECURITIES

~~The~~On ~~Company~~July is15, in2008 ~~default~~the ofCompany ~~the~~issued ~~Notes~~$115,000,000 ~~which~~of ~~was~~its ~~caused~~5% bysenior ~~the~~convertible ~~delisting~~notes. ofThe ~~the~~net ~~Company’s~~proceeds ~~common~~from ~~stock by~~ the ~~NYSE~~sale asof ~~described in~~ the ~~Form~~convertible ~~25NSE filed~~notes onwere ~~April 16~~$110,358,550. During ~~2012 by~~ the ~~NYSE;~~years ~~and~~ended byDecember ~~the non-payment of the interest due on July 15~~31, 2012. Onand ~~April 8~~2011, ~~2013,~~ the ~~Plaintiffs filed~~Company anrepurchased ~~action claiming~~ a ~~default~~total ~~under~~of ~~the Notes~~$59,339,000 ~~which~~and ~~allegedly~~$6,500,000, ~~resulted~~ respectively, in anprincipal ~~acceleration~~amount of the ~~maturity~~convertible ofnotes ~~the~~for ~~Notes.~~cash ~~The Plaintiffs~~consideration ~~had~~of ~~previously commenced a similar action in federal court in New Jersey~~$18,478,888 ~~which action was withdrawn~~ and ~~the~~$3,160,004, ~~present action~~respectively, ~~interposed.~~leaving ~~The~~an ~~action seeks payment~~ aggregate of $2049,~~378~~161,~~608~~000 ~~plus~~in ~~prejudgment~~principal ~~interest~~amount ~~and~~outstanding ~~other~~as ~~fees~~of ~~and~~June ~~costs.~~30, ~~An adverse judgment related to this proceeding would have a material adverse effect on our liquidity~~2013.

~~ITEM~~The 4Company is 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. ~~MINE~~On ~~SAFETY~~April ~~DISCLOSURES~~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.

~~Not~~ITEM ~~applicable.~~4 – MINE SAFETY DISCLOSURES

37Not applicable.

ITEM 5. – OTHER INFORMATION

Not applicable.

ITEM 6. – EXHIBITS

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

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

3834

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~~November 24, 2013

/s/ Yanchun Li

YANCHUN LI

CHIEF FINANCIAL OFFICER

DATED: ~~August~~November 24, 2013

3935

Filing Compare · AMERICAN ORIENTAL BIOENGINEERING INC