American Oriental Bioengineering (AOB)

Cash Flow

2008 Compared to 2007

Cash flows from operations during 2008 amounted to $77,758,717, representing an increase of approximately 72% compared with cash flows from
operations of $45,099,379 in 2007. The increased cash flow was due primarily to the increase of our income from operations by 23%, to $64,330,696 in the year of 2008, compared with operation income of $52,228,110 in the year of 2007.

Cash Flow

Cash flows from operations during the nine months ended September 30, 2008 amounted to $48,569,653, representing an increase of approximately 80% compared with cash flows from operations of $26,989,761 in the same period of 2007. The increased cash flow was due primarily to the increase in our net income by 42%, to $39,764,740 in the nine months of 2008, compared with net income of $28,026,185 in the same period last year. The increased cash flow was also due in part to a decrease in advance to suppliers by $2,841,964 and notes receivable by $1,669,891, as well as increase in other payable , tax payable and accounts payable of $4,893,468, $1,641,432 and $1,351,984, respectively. The increase in other payable and accounts payable was due to the better credit terms obtained from our vendors. These increases were partly offset by an increase in our accounts receivable and inventories of $7,983,619 and $4,899,509, respectively to support our increased sales and production activities.

Our cash flows used in investing activities amounted to $84,145,169 in the nine months ended September 30, 2008. During that period, we paid $23,565,407 as deposit for long-term assets and $21,762,253 for the investments in and advances to our equity investments in China Aoxing and Qili. We also paid $20,236,226 for purchases of plant and equipment and spent $15,311,785 on land use rights in the PRC.

Our cash flows from financing activities amounted to $80,248,182 in the nine months ended September 30, 2008. During that period, the Company received net proceeds of $110 million from the issuance of our convertible notes and paid $29,998,616 for our prepaid forward stock repurchase contract.

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Cash Flow

Cash flows from operations during the six months ended June 30, 2008 amounted to $28,374,749, representing an increase of approximately 77% compared with cash flows from operations of $16,007,441 in the same period of 2007. The increased cash flow was due primarily to the increase in our net income by 44%, to $23,281,820 in the first six months of 2008, compared with net income of $16,117,817 in the same period last year. The increased cash flow was also due in part to a decrease in notes receivable by $1,567,744 and advance to suppliers by $1,324,457, as well as increase in accounts payable and tax payable of $1,235,110 and $922,717, respectively. The increase in accounts payable was due to the better credit terms obtained from our vendors.

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These increases were partly offset by an increase and our inventories of $6,538,693 to support increased production activities. The increased cash flow was also offset by a decrease in customer deposit of $2,253,528.

Our cash flows used in investing activities amounted to $58,111,000 in the six months ended June 30, 2008. During that period, we paid $34,852,986 as deposit for long-term assets and $18,000,000 for the acquisition of the equity share in China Aoxing. We also paid $391,877 for purchases of plant and equipment and spent $223,742 on construction-in-progress.

Our cash flows from financing activities amounted to $388,418 in the six months ended June 30, 2008. During that period, we repaid $26,456 bank loans and paid $290,000 for our financing activities during the second quarter of 2008.

Cash Flow

Cash flows from operations during the three months ended March 31, 2008 amounted to $10,676,287, compared with cash flows from operations of $4,534,617 in the same period of 2007. The increased cash flow was primarily due to an increase in our net income by 46%, to $9,422,129 in the first three months of 2008, compared with net income of $6,446,267 in the same period last year. The increase was also due to the increase in our accounts receivable of $2,149,762, repayment of notes receivable of $1,238,672 and accounts payable of $606,495 as well as a decrease in prepaid expenses and other receivables of $3,248,851. The increased cash flow was offset by an increase in our inventories of $7,751,721 to support our increased purchase and production activities. The increase was also offset in part by a decrease in other payables and accrued expenses by $2,418,510, customer deposits of $687,986 and taxes payable of $639,865 during the three months ended March 31, 2008.

Our cash flows used in investing activities amounted to $20,353,022 for the three months ended March 31, 2008. During that period, we paid $16,447,719 as a deposit for potential acquisitions and $3,728,000 as a deposit for the China Aoxing equity investment. We also paid $99,812 for purchases of plant and equipment and spent $77,491 for construction in progress.

Our cash flows used in financing activities amounted to $16,680 for the three months ended March 31, 2008. During that period, we repaid $710,135 of bank loans and received $697,530 from short-term bank loans.

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Cash Flow

Cash flows from operations during the nine months ended September 30, 2007 amounted to $26,989,761, representing an increase of approximately 78% compared with cash flows from operations of $ 15,144,342 in the same period of 2006. The increased cash flow was due primarily to the increase in our net income by 52%, to $28,026,185 in the first nine months of 2007, compared with net income of $18,411,931 in the same period last year. The increased cash flow was also due in part to a decrease in notes receivable by $1,014,478 and increase in accounts payable of $2,162,213 during the nine months ended September 30, 2007, due to our better control over payment to our vendors. These increases were partly offset by an increase in our accounts receivable of $3,913,584 and our inventories of $4,675,990 to support increased production activities. The increased cash flow was also offset by a decrease in customer deposits of $869,835 and accrued payroll and welfare of $868,625, which resulted from the payment of accrued bonus.

Our cash flows used in investing activities amounted to $23,219,046 in the nine months ended September 30, 2007. During that period, we paid $16,817,410 for the acquisition of CCXA and a deposit of $4,420,770 for the acquisition of BOKE. We also paid $1,352,252 for purchases of plant and equipment and spent $628,614 on construction in progress.

Our cash flows from financing activities amounted to $75,674,109 in the nine months ended September 30, 2007. During that period, we repaid $9,945,084 bank loans and received $74,107,250 from the underwriting agreement and $6,251,394 proceeds from exercise of warrants.

Cash Flow

Cash flows from operations during the six months ended June 30, 2007 amounted to $16,007,441, representing an increase of approximately 96% compared with cash flows from operations of $ 8,187,584 in the same period of 2006. The increased cash flow was due primarily to the increase in our net income by 50%, to $16,117,817 in the first six months of 2007, compared with net income of $10,731,527 in the same period last year. The increased cash flow was also due in part to a decrease in notes receivable by $2,543,005 and increase in accounts payable of $734,805 during the six months ended June 30, 2007, due to our better control over payment to our vendors. These increases were partly offset by an increase in our advance to suppliers of $1,453,861 and our inventories of $1,371,699 to support increased production activities. The increased cash flow was also offset by a decrease in other payable and accrual of $1,897,810 and tax payable of $461,975, which resulted from the payment of accrued bonus and income tax.

Our cash flows used in investing activities amounted to $1,441,700 in the six months ended June 30, 2007. During that period, we paid $953,637 for purchases of plant and equipment and spent $488,063 on construction in progress.

Our cash flows from financing activities amounted to $4,060,627 in the six months ended June 30, 2007. During that period, we repaid $17,961 bank loans and received $3,960,164 proceeds from exercise of warrants.

Working Capital

Our working capital increased by $22,088,091 to $114,340,162 at June 30, 2007 as compared to $92,252,071 at December 31, 2006, primarily due to our increase in cash of $20,665,382, inventories of $1,446,938, advances to suppliers of $1,372,562 and partly offset by a decrease of $2,543,005 in notes receivable and an increase of $882,101 in accounts payable. The increase of inventory was because we maintained higher inventory level to prepare for increased operating activities. The decrease in notes receivable was the result of better credit control.

We currently generate our cash flow through operations. We believe that our cash flow generated from operations will be sufficient to sustain operations for at least the next twelve months. There is no identifiable expansion plan as of June 30, 2007, but from time to time, we may identify new expansion opportunities for which there will be a need for use of cash.

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