GFR Pharmaceuticals 10-Q 2008 Q3 Quarterly report

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

OR

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

EXCHANGE ACT OF 1934

Commission File No: 09081

GFR PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

NEVADA	77-0517964
(State or other jurisdiction of	(I.R.S. Employer ID No)
incorporation or organization)

99 Yan Xiang Road, Biosep Building, Xi An, Shaan Xi Province, P.R. China 710054

(Address of principal executive office) (Zip Code)

Registrant's telephone number: (011) 86-29-8239-9676

N/A

Former name, former address and former fiscal year,

(if changed since last report)

        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 ¨ No ¨

        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 definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

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

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

The number of shares of common stock, no par value per share, outstanding as of November 18, 2008 was 42,079,940.

GFR PHARMACEUTICALS INC.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	Page
Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007	F-2
Condensed Consolidated Statements of Operations And Comprehensive Income for the three and nine months ended September 30, 2008 and 2007	F-3
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007	F-4
Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2008	F-5
Notes to Condensed Consolidated Financial Statements	F-6 to F-22

GFR PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2008 AND DECEMBER 31, 2007

(Currency expressed in United States Dollars (“US$”), except for number of shares)

	September 30, 2008		December 31, 2007
	(Unaudited)		(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,772,821	$	9,951
Accounts receivable, net		1,216,748		343,087
Inventories, net		281,917		-
Amount due from related parties		1,216,728		28,232
Notes receivable, net		1,083,135		-
Prepayments and other receivables, net		551,629		314,185
Total current assets		6,122,978		695,455
Non-current assets:
Property, plant and equipment, net		7,732,601		5,585,711
Intangible assets, net		159,434		-
Investment in an unconsolidated affiliate		340,841		-
TOTAL ASSETS	$	14,355,854	$	6,281,166
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade	$	124,349	$	-
Note payable		437,630		-
Current portion of long-term note payable, related parties		714,223		-
Income tax payable		181,159		214,570
Amount due to related parties		1,891,485		-
Other payables and accrued liabilities		539,374		59,675
Total current liabilities		3,888,220		274,245
Long-term liabilities:
Note payable, related parties		2,327,220		-
Total liabilities		6,215,440		274,245
Minority interest		574,275		328,605
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 42,079,940 shares issued and outstanding as of September 30, 2008 and December 31, 2007		42,080		42,080
Additional paid-in capital		3,712,120		3,712,120
Accumulated other comprehensive income		641,491		134,797
Statutory reserve		236,818		236,818
Retained earnings		2,933,630		1,552,501
Total stockholders’ equity		7,566,139		5,678,316
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	14,355,854	$	6,281,166

See accompanying notes to condensed consolidated financial statements.

F-2

GFR PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF

OPERATIONS AND COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007
REVENUE, NET
Service revenue	$	941,336		$	850,101		$	2,517,325		$	2,295,937
Product sales		87,011			-			329,778			-
Total revenue, net		1,028,347			850,101			2,847,103			2,295,937
COST OF REVENUE (exclusive of depreciation)
Cost of products		79,471			-			215,417			-
GROSS PROFIT		948,876			850,101			2,631,686			2,295,937
OPERATING EXPENSES:
Depreciation and amortization		186,441			117,433			543,265			342,575
General and administrative		206,506			99,592			748,860			472,555
Total operating expenses		392,947			217,025			1,292,125			815,130
INCOME FROM OPERATIONS		555,929			633,076			1,339,561			1,480,807
OTHER INCOME (EXPENSE):
Interest income		6,151			74			6,239			269
Rental income		158,556			-			561,520			-
Equity in net income of an unconsolidated affiliate		3,464			-			10,180			-
Interest expense		-			(16,637	)		-			(73,745	)
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST		724,100			616,513			1,917,500			1,407,331
Income tax expense		(180,426	)		(224,384	)		(464,341	)		(565,966	)
Minority interest		(27,431	)		(21,561	)		(72,030	)		(56,403	)
NET INCOME	$	516,243		$	370,568		$	1,381,129		$	784,962
Other comprehensive income:
- Foreign currency translation gain		22,193			150,158			506,694			175,155
COMPREHENSIVE INCOME	$	538,436		$	520,726		$	1,887,823		$	960,117
Net income per share – Basic and diluted	$	0.01		$	0.01		$	0.03		$	0.02
Weighted average shares outstanding – basic and diluted		42,079,940			42,079,940			42,079,940			41,983,644

See accompanying notes to condensed consolidated financial statements.

F-3

GFR PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

	Nine months ended September 30,
	2008			2007
Cash flows from operating activities:
Net income	$	1,381,129		$	784,962
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		543,265			342,575
Rental expenses, non cash		-			940
Stock-based compensation		-			264,000
Equity in net income of an unconsolidated affiliate		(10,180	)		-
Minority interest		72,030			56,403
Change in operating assets and liabilities:
Accounts receivable, trade		(291,075	)		153,555
Inventories		(6,127	)		-
Prepayments and other receivables		188,124			138,068
Accounts payable, trade		(802,990	)		-
Income tax payable		(46,794	)		565,966
Other payables and accrued liabilities		7,809			62,779
Net cash provided by operating activities		1,035,191			2,369,248
Cash flows from investing activities:
Acquisition of a subsidiary, net of cash acquired		(864,709	)		-
Repayment from an unconsolidated affiliate		176,694			-
Proceeds from repayment of note receivable		1,414,516			-
Purchase of property, plant and equipment		(207,230	)		(283,100	)
Net cash provided by (used in) investing activities		519,271			(283,100	)
Cash flows from financing activities:
Advances to related companies		(49,897	)		-
Repayment of short-term bank loan		-			(797,367	)
Advance from (repayment to) stockholders		221,821			(17,819	)
Net cash provided by (used in) financing activities		171,924			(815,186	)
Effect of exchange rate changes on cash and cash equivalents		36,484			29,430
NET CHANGE IN CASH AND CASH EQUIVALENTS		1,762,870			1,300,392
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		9,951			64,543
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	1,772,821		$	1,364,935
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes	$	491,301		$	-
Cash paid for interest expenses	$	-		$	73,745

See accompanying notes to condensed consolidated financial statements.

F-4

GFR PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

	Common stock				Additional		Accumulated other comprehensive		Statutory		Retained		Total Stockholders’
	No. of shares		Amount		paid-in capital		income		reserve		earnings		equity
Balance as of January 1, 2008		42,079,940	$	42,080	$	3,712,120	$	134,797	$	236,818	$	1,552,501	$	5,678,316
Foreign currency translation adjustment		-		-		-		506,694		-		-		506,694
Net income for the period		-		-		-		-		-		1,381,129		1,381,129
Balance as of September 30, 2008		42,079,940	$	42,080	$	3,712,120	$	641,491	$	236,818	$	2,933,630	$	7,566,139

See accompanying notes to condensed consolidated financial statements.

F-5

GFR PHARMACEUTICALS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2008 AND DECEMBER 31, 2007

(Currency expressed in United States Dollars (“US$”), except for number of shares)

NOTE 1BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with both accounting principles generally accepted in the United States (“GAAP”), and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

In the opinion of management, the consolidated balance sheet as of December 31, 2007 which has been derived from audited financial statements and these unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary to state fairly the results for the periods presented. The results for the period ended September 30, 2008 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2008 or for any future period.

These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Management’s Discussion and the audited financial statements and notes thereto included in the Annual Report on Form 10-KSB for the year ended December 31, 2007.

NOTE 2ORGANIZATION AND BUSINESS BACKGROUND

GFR Pharmaceuticals, Inc. (the “Company” or “GFRP”) was incorporated in the State of Nevada on December 18, 1996 as Laredo Investment Corp. On August 9, 2004, Laredo Investment Corp. changed its name to GFR Pharmaceuticals, Inc.

The Company, through its subsidiaries, mainly engages in a joint operation of a Positive Emission Tomography (“PET”) Scanner and Rotary Gamma Ray Stereotactic Neurosurgery System imaging center in Xian City, Shaanxi Province, the People’s Republic of China (the “PRC”).

Xi’an Hua Long Yu Tian Ke Ji Shi Ye Co., Ltd. (“Hua Long”) is a wholly-owned subsidiary of the Company, which was incorporated as a limited liability company in the PRC on December 23, 1999. Its principal activity is an investment holding of 95% equity interest in New Century Scientific Investment Ltd. (“New Century”).

New Century was incorporated as a limited liability company in the PRC on November 23, 2001 with a registered capital of RMB30,000,000 (equivalent to US$3,636,000). It jointly operates a PET Scanner and Rotary Gamma Ray Stereotactic Neurosurgery System imaging center with Tong Du Hospital ("the Hospital") in Xian City, Shaanxi Province, the PRC. The duration of the operation was 11 years and it will expire in 2017.

On May 14, 2008, the Company completed the acquisition of assets and liabilities of Xi’an Jiaoda Bao Sai Bio-Technology Co., Ltd ("Bao Sai") pursuant to the terms of a Stock Purchase Agreement (“the Agreement”) dated January 1, 2008, between GFRP and Bao Sai in a consideration of $4,500,211 (approximately RMB33,000,000) for 96.77% of its equity interest in Bao Sai, based on the aggregate net book value of total assets and liabilities of Bao Sai as of December 31, 2007. The closing date was January 1, 2008. Upon the completion of the transaction, Bao Sai became a subsidiary of the Company.

F-6

GFRP, Hua Long, New Century and Baosai are hereinafter referred to as (the “Company”).

NOTE 3SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

lUse of estimates

In preparing these condensed consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the period reported. Actual results may differ from these estimates.

lBasis of consolidation

The condensed consolidated financial statements include the financial statements of GFRP and its subsidiaries, Hua Long, New Century and Bao Sai.

All significant inter-company balances and transactions within the Company have been eliminated upon consolidation.

Upon the acquisition of Bao Sai, the results of subsidiary acquired during the periods are included in the consolidated financial statement from the effective date of acquisition.

Investment in an unconsolidated affiliate, namely Xi’ an Bao Sai Medicine Co., Ltd (“Medicine”) over which the Company has significant influence are accounted for under the equity method of accounting whereby the investment is initially recorded at the cost of acquisition and adjusted to recognize the Company’s share in undistributed earnings or losses since acquisition. The Company’s share in the earnings or losses for its unconsolidated affiliate is reflected in equity share in income of unconsolidated affiliates. If the investment in an unconsolidated affiliate is reduced to a zero balance due to prior losses, the Company recognizes any further losses related to its share to the extent that any receivables, loans or advances to the unconsolidated affiliate are evaluated to be uncollectible.

lCash and cash equivalents

Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.

lAccounts receivable

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on managements’ assessment of known requirements, aging of receivables, payment history, the customer’s current credit worthiness and the economic environment.

lAllowance for doubtful accounts

The allowance for loan losses on small-balance receivables reflects management’s best estimate of probable losses determined principally on the basis of historical experience. For larger loans, including specific allowances for known troubled accounts. The Company maintains a general reserve for all losses and receivable at 0.05% of the balances.

F-7

lInventories

Inventories are stated at the lower of cost or market (net realizable value), cost being determined on a weighted average method. Costs include material, labor and manufacturing overhead costs. The Company quarterly reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand.

lProperty, plant and equipment, net

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:

	Depreciable life		Residual value
Buildings		20 to 40 years		5	%
Plant and equipment		5 to 16 years		5	%
Motor vehicles		8 to 12 years		5	%
Furniture, fixture and office equipment		5 to 8 years		5	%

Expenditure for repairs and maintenance is expensed as incurred. When assets have retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the results of operations.

l Intangible assets

Intangible assets include technical know-how purchased from a third party. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), intangible assets with finite useful lives related to developed technology, customer lists, trade names and other intangibles are being amortized on a straight-line basis over the estimated useful life of the related asset.

Technical know-how is carried at cost less accumulated amortization and impairment charge and is amortized on a straight-line basis over its estimated useful lives of 10 years beginning at the time it is granted.

l Land use right

All lands in the PRC are owned by the PRC government. The government in the PRC, according to the relevant PRC law, may sell the right to use the land for a specified period of time. Thus, all of the Company’s land purchases in the PRC are considered to be leasehold land and are stated at cost less accumulated amortization and any recognized impairment loss. Amortization is provided over the term of the land use right agreements on a straight-line basis, which is 50 years and they will expire in 2052.

lImpairment of long-lived assets

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, all long-lived assets such as plant and equipment held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of assets to estimated discounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. There has been no impairment as of September 30, 2008.

F-8

(a) Service revenue

In accordance with the SEC’s Staff Accounting Bulletin No. 104, “Revenue Recognition”, the Company records revenue when services are received by the customers and realized the amounts net of provisions for discounts, allowance and taxes which are recognized at the time of services performed.

Pursuant to the agreements entered into between the Company and Tong Du Hospital ("the Hospital"), the Company and the Hospital would jointly operate the medical center in the provision of diagnostic imaging services to the patients. In return, the Company and the Hospital would share net revenues from services rendered, on a monthly basis, when earned, at their net realizable amounts from patients for services rendered at contractually established billing rates, after deducting the total operating cost of the centers. The Company recognizes net revenues based on the total amount received from the patients during the month, less the monthly operating costs incurred at the center.

The Company records the revenue, net of business tax, from the customers through the Hospital, on a net basis in compliance with EITF 99-19, “Reporting Revenues Gross as a Principal versus Net as an Agent.”

(b) Sales of products

Revenue is recognized when products are delivered to customers. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. In instances where products are configured to customer requirements, revenue is recorded upon the successful completion of the Company’s final test procedures and the customer’s acceptance.

The Company is subject to valued-added tax ("VAT") under the PRC tax law which is levied on the majority of the products at the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the subsidiaries in addition to the invoiced value of purchases to the extent not refunded for export sales.

(c) Interest income

Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.

lIncome taxes

The Company accounts for income tax using SFAS No. 109 “Accounting for Income Taxes”, which requires the asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred income taxes are provided for the estimated future tax effects attributable to temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, and for the expected future tax benefits from loss carry-forwards and provisions, if any. Deferred tax assets and liabilities are measured using the enacted tax rates expected in the years of recovery or reversal and the effect from a change in tax rates is recognized in the statements of operations and comprehensive income in the period of enactment. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.

F-9

Effective January 1, 2007, the Company also adopts the provisions of the Financial Accounting Standards Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. In connection with the adoption of FIN 48, the Company has analyzed the filing positions in all of the jurisdictions where the Company is required to file income tax returns, as well as all open tax years in these jurisdictions. There was no impact on the condensed consolidated financial statements. The Company did not have any unrecognized tax benefits and there was no effect on the financial condition or results of operations for the period ended September 30, 2008.

The Company conducts its major businesses in the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the local and foreign tax authorities.

lNet income per share

The Company calculates net income per share in accordance with SFAS No. 128, “Earnings per Share.” Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income (loss) per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.

lComprehensive income

SFAS No. 130, “Reporting Comprehensive Income”, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during the period from non-owner sources. Accumulated comprehensive income consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.

lForeign currencies translation

Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the condensed consolidated statement of operations.

The reporting currency of the Company is United States dollar ("US$"). The Company's subsidiaries in the PRC, Hua Long, New Century and Bao Sai maintain their books and records in its local currency, Renminbi Yuan ("RMB"), which is functional currency as being the primary currency of the economic environment in which these entities operate.

In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not US$ are translated into US$, in accordance with SFAS No 52. “Foreign Currency Translation”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.

Translation of amounts from RMB into US$ has been made at the following exchange rates for the respective period:

	2008		2007
Months end RMB:US$ exchange rate		6.8551		7.4960
Average monthly RMB:US$ exchange rate		6.9989		7.6543

F-10

lStock-based compensation

The Company adopts SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R") using the fair value method. Under SFAS No. 123R, stock-based compensation expense is measured at the grant date based on the value of the option or restricted stock and is recognized as expense, less expected forfeitures, over the requisite service period.

lRelated parties

Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.

lSegment reporting

SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in the financial statements. Commencing this year, the Company operates in two reportable segments: Medical Business and Extraction Business in the PRC.

lFair value of financial instruments

The Company values its financial instruments as required by SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”. The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. The estimates presented herein are not necessarily indicative of amounts that the Company could realize in a current market exchange.

The Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, amounts due from (to) related parties, notes receivable, prepayments and other receivables, accounts payable, note payable, income tax payable, other payables and accrued liabilities.

As of the balance sheet date, the estimated fair values of the financial instruments were not materially different from their carrying values as presented due to the short term maturities of these instruments and that the interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective period ends.

lRecently issued accounting standards

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business Combinations" ("SFAS No. 141R"). SFAS No. 141R will change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Accordingly, any business combinations the Company engages in will be recorded and disclosed following existing GAAP until January 1, 2009. The Company expects SFAS No. 141R will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time. The Company is still assessing the impact of this pronouncement.

F-11

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements--An Amendment of ARB No. 51, or SFAS No. 160" ("SFAS No. 160"). SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company believes that SFAS 160 should not have a material impact on the consolidated financial position or results of operations.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS No. 161"). SFAS 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this statement is not expected to have a material effect on the Company's future financial position or results of operations.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” ("SFAS No. 162"). This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP) in the United States. This statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The Company does not expect the adoption of SFAS No. 162 to have a material effect on the financial condition or results of operations of the Company.

In May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts--an interpretation of FASB Statement No. 60" ("SFAS No. 163"). SFAS No. 163 interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement. SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Company is currently evaluating the impact of SFAS No. 163 on its financial statements but does not expect it to have an effect on the Company's financial position, results of operations or cash flows.

Also in May 2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 applies to convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash. FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years after December 15, 2008, and must be applied on a retrospective basis. Early adoption is not permitted. The Company does not expect it to have an effect on the Company's financial position, results of operations or cash flows.

F-12

In June 2008, the FASB issued FASB Staff Position ("FSP") EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No. 128, Earnings per Share. Under the guidance of FSP EITF 03-6-1, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings-per-share pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and all prior-period earnings per share data presented shall be adjusted retrospectively. Early application is not permitted. The Company does not expect it to have an effect on the Company's financial position, results of operations or cash flows.

Also in June 2008, the FASB ratified EITF No. 07-5, "Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF 07-5"). EITF 07-5 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early application is not permitted. The Company is assessing the potential impact of this EITF 07-5 on the financial condition and results of operations and does not expect it to have an effect on the Company's financial position, results of operations or cash flows.

NOTE 4ACQUISITION OF INTEREST IN BAO SAI

On January 1, 2008, the Company acquired 96.77% equity interest in Bao Sai in exchange for notes payable aggregating $4,500,211 as described below. Bao Sai is engaged in research, development, manufacture and sale of biological separation medium products, which is technological know-how and devices engineered to separate and purify biological products and medicines. Separation medium products are used in the production of antibiotics, genetic recombinant medicine, bacterin production, the gene chip, diagnostic reagents and other biochemical products.

Upon the completion of the transaction, Bao Sai became a subsidiary of the Company. The acquisition was accounted for under the purchase method of accounting. The following table summarizes the historical value of the assets acquired and liabilities assumed at the date of acquisition.

	January 1, 2008
Acquired assets:
Cash and cash equivalents	$	539,790
Accounts receivable, net of reserve for bad debts of $15,222		518,786
Inventories, net		258,365
Amount due from related parties		743,887
Notes receivables, net		2,368,745
Prepayment and other receivables, net		399,712
Plant and equipment, net		1,978,200
Intangible assets, net		154,515
Investment in an unconsolidated affiliate		478,795
Total assets acquired	$	7,440,795
Less: liabilities assumed
Accounts payable, trade		(884,939	)
Note payable		(410,172	)
Amount due to related parties		(1,039,606	)
Other payables and accrued liabilities		(455,658	)
Total liabilities assumed		(2,790,375	)
Less: minority interest		(150,209	)
Purchase price	$	4,500,211
Satisfied by:
Net cash to be paid to acquire Bao Sai	$	4,500,211

F-13

The purchase price is scheduled to be paid by the Company in two installments for a term of over 2 years due December 31, 2009. The first installment will be paid to Xi’an Bio-sep Biological Filling Engineering Technology Company, Ltd., the former owner of 28 million shares, or 46.67% of Bao Sai by December 31, 2008. The second installment will be paid to the other three former owners, in amounts equal to their respective percentage of equity ownership in Bao Sai, ending December 31, 2009.

As of September 30, 2008, the purchase price consideration is payable are as follows:

Years ending December 31,	Approximately
2008	$	714,223
2009		2,327,220
Total:	$	3,041,443

For the nine months ended September 30, 2008, the Company made a partial payment of purchase price consideration totaling $1,428,796 (equivalent to RMB10,000,000). On October 13, 2008, the Company made the payment to the second installment of $714,223 (equivalent to RMB5,872,920).

NOTE 5ACCOUNTS RECEIVABLE, NET

The majority of the Company’s sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required. Based upon the aforementioned criteria, management has determined that no allowance for doubtful accounts was required. No allowance for doubtful accounts was charged to operations during the nine months ended September 30, 2008 and 2007.

	September 30, 2008			December 31, 2007
	(Unaudited)			(Audited)
Accounts receivable, cost	$	1,223,696		$	343,087
Less: allowance for doubtful accounts		(6,948	)		-
Accounts receivable, net	$	1,216,748		$	343,087

NOTE 6NOTES RECEIVABLE, NET

	September 30, 2008			December 31, 2007
	(Unaudited)			(Audited)
Notes receivable, cost	$	1,094,076		$	-
Less: allowance for doubtful accounts		(10,941	)		-
Notes receivable, net	$	1,083,135		$	-

F-14

On September 3, 2007, the Company disposed of its investment in 75% of Hua Yang for a cash consideration of $1,091,417 (equivalent to RMB7,500,000). As of September 30, 2008, the balance was unsecured and interest-free and repayable in 4 installments due in full, by December 31, 2008.

On December 10, 2007, the Company disposed of a building for a cash consideration of $1,424,055 (equivalent to RMB10,000,000). During the nine months ended September 30, 2008, the Company received a full consideration of $1,424,055 from the purchaser.

NOTE 7INVENTORIES, NET

Inventories consisted of the followings:

	September 30, 2008			December 31, 2007
	(Unaudited)			(Audited)
Raw materials	$	74,830		$	-
Work in process		3,819			-
Finished goods		569,516			-
		648,165			-
Less: inventory allowances		(366,248	)		-
Inventories, net	$	281,917		$	-

No provision for inventory allowance was charged to operations during the three and nine months ended September 30, 2008.

NOTE 8AMOUNT DUE FROM (TO) RELATED PARTIES

(a)Amount due from related parties

	September 30, 2008			December 31, 2007
	(Unaudited)			(Audited)
Amount due from related parties, cost	$	1,237,905		$	28,232
Less: allowance for doubtful accounts		(21,177	)		-
Amount due from related parties, net	$	1,216,728		$	28,232

As of September 30, 2008, a net balance of $1,216,728 due from a former subsidiary of the Company, represented temporary advance from the Company which was unsecured, interest-free, with a fixed term of repayment.

(b)Amount due to a stockholder

As of September 30, 2008, a balance of $1,891,485 due to a stockholder, Mr Lian Guo represented temporary advance to the Company which was unsecured, interest-free and repayable on demand.

F-15

NOTE 9PREPAYMENTS AND OTHER RECEIVABLES

Prepayments and other receivables consisted of the following:

	September 30, 2008		December 31, 2007
	(Unaudited)		(Audited)
Deposits	$	195,417	$	-
Advances to employees		101,278		18,587
Deferred expenditure		5,058		-
Prepayment for equipment purchase		81,108		256,358
Prepayments		168,768		39,240
	$	551,629	$	314,185

NOTE 10PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net, consisted of the following:

	September 30, 2008			December 31, 2007
	(Unaudited)			(Audited)
Buildings	$	2,293,130		$	608,053
Plant and equipment		6,486,747			5,379,652
Motor vehicles		246,806			-
Furniture, fixture and office equipment		146,807			18,944
Foreign translation difference		605,262			547,366
		9,778,752			6,554,015
Less: accumulated depreciation		(1,801,254	)		(914,000	)
Less: foreign translation difference		(244,897	)		(54,304	)
Property, plant and equipment, net	$	7,732,601		$	5,585,711

Depreciation expense for the three and nine months ended September 30, 2008 totaled $184,631 and $537,951, respectively.

Depreciation expense for the three and nine months ended September 30, 2007 was $117,433 and $342,575, respectively.

NOTE 11INTANGIBLE ASSETS, NET

	September 30, 2008			December 31, 2007
	(Unaudited)			(Audited)
Technical know-how	$	1,091,703		$	-
Land use right		153,437			-
Foreign translation difference		159,165			-
		1,404,305			-
Less: accumulated amortization		(781,276	)		-
Less: accumulated impairment charge		(406,571	)		-
Less: foreign translation difference		(57,024	)		-
Net book value	$	159,434		$	-

F-16

Amortization expenses for the three and nine months ended September 30, 2008 were $1,810 and $5,314.

As of September 30, 2008, the carrying value of the technical know-how was stated as zero. The Company recognized a full impairment charge in prior years for recoverability test.

NOTE 12INVESTMENT IN AN UNCONSOLIDATED AFFILIATE

The Company has a 75% equity interest in Xi’an Bao Sai Medicine Co., Ltd (“Medicine”), which is registered as a limited liability company in the PRC. Medicine’s principal activity was the leasing business of the business license. Although the Company owns more than 50% of the equity, it does not control policy decisions in Medicine, therefore, the 75%-investment in Medicine is accounted for under the equity method. Prior to its acquisition, Medicine was a subsidiary of Bao Sai which was primarily engaged in the medicine wholesale and retailing businesses. However, the business did not perform well and was discontinued.

As of September 30, 2008, the investment in an unconsolidated affiliate is presented as follows:-

Investment in Medicine at the date of acquisition	$	106,804
Amount due from Medicine		1,087,826
Share of accumulated losses in Medicine		(870,823	)
Equity in net income of unconsolidated affiliate		10,180
Foreign translation difference		6,854
Net investment	$	340,841

A summary of the operating results of Medicine for the nine months ended September 30, 2008 is described as below:

Revenue	$	13,573
Net income	$	13,573

The balance of $1,087,826 due from Medicine represented a temporary advance from the Company which was unsecured and interest-free with a fixed repayment term of 5 installments and is due in full, no later than 2012. As of September 30, 2008, the future installments to be received are as follows:

Periods ending December 31,	Approximately
2008	$	3,455
2009		273,448
2010		273,448
2011		273,448
2012		264,027
Total:	$	1,087,826

NOTE 13NOTE PAYABLE

As of September 30, 2008, a balance of $437,630 represented a temporary advance from Shaanxi Zhai Hua Nuan Tong Zhileng Gongcheng Co., Ltd to the Company. Interest on this note is charged at 10.46% per annum, payable monthly, with principal and accrued interest due on December 20, 2008.

F-17

NOTE 14OTHER PAYABLES AND ACCRUED LIABILITIES

Other payables and accrued liabilities consisted of the followings:

	September 30, 2008		December 31, 2007
	(Unaudited)		(Audited)
Business tax payable	$	18,527	$	17,154
Salaries and welfare payable		100,122		1,292
Temporary advances		113,680		-
Accrued expenses		199,144		6,216
Other payable		107,901		35,013
	$	539,374	$	59,675

NOTE 15INCOME TAXES

For the nine months ended September 30, 2008 and 2007, the local (“the United States”) and foreign components of income (loss) before income taxes and minority interest were comprised of the following:

	Nine months ended September 30,
	2008			2007
Local	$	(21,000	)	$	(270,916	)
Foreign		1,938,500			1,678,247
Income before income taxes and minority interest	$	1,917,500		$	1,407,331

The provision for income taxes consisted of the following:

	Nine months ended September 30,
	2008		2007
Current:
Local	$	-	$	-
Foreign		464,341		565,966
Deferred:
Local		-		-
Foreign		-		-
Provision for income taxes	$	464,341	$	565,966

The effective tax rate in the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The Company has subsidiaries and branches that operate in various countries: United States and the PRC that are subject to tax in the jurisdictions in which they operate, as follows:

United States of America

The Company is registered in the State of Nevada and is subject to the tax laws of the United States of America.

F-18

As of September 30, 2008, the Company’s United States operations incurred $422,015 of net operating losses available for federal tax purposes, which are available to offset future taxable income. The net operating loss carry forwards begin to expire in 2029. The Company has provided for a full valuation allowance of $143,485 for future tax benefits from the net operating loss carry forwards as the management believes it is more likely than not that these assets will not be realized in the future.

The PRC

The Company generated substantially all of its net income from the operation of its subsidiaries in the PRC and is subject to the PRC tax law. The Company has recorded income tax expenses for the nine months ended September 30, 2008 and 2007.

All of the Company’s PRC subsidiaries are subject to the Corporate Income Tax governed by the Income Tax Law of the People’s Republic of China. Effective from January 1, 2008, the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”) is followed. The new CIT Law, among other things, imposes a unified income tax rate of 25% for both domestic and foreign invested enterprises. Under the New CIT Law, Hua Long, as a foreign investment enterprise, its tax holidays are expired and subject to the new statutory income rate of 25%. Bao Sai and New Century are domestic companies which are entitled to the tax rate reduction from 33% to 25%.

The reconciliation of income tax rate to the effective income tax rate based on income before income taxes and minority interest under the PRC tax jurisdiction for the periods ended September 30, 2008 and 2007 are as follows:

	Nine months ended September 30,
	2008			2007
Income before income taxes	$	1,938,500		$	1,678,247
Statutory income tax rate		25	%		33	%
Income tax expense at statutory tax rate		484,625			553,822
Expenses not deductible for the PRC income tax		3,947			12,144
Net operating loss carryforwards		(24,231	)		-
Income tax expenses	$	464,341		$	565,966

Under the PRC tax jurisdiction, its effective income tax rate for the nine months ended September 30, 2008 and 2007 were 23.9% and 33.7%, respectively.

For the nine months ended September 30, 2008, Hua Long and Bao Sai were exempted from Corporate Income Tax due to cumulative tax losses.

Deferred tax assets and liabilities reflect the tax impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Significant components of the net deferred tax assets and liabilities as of September 30, 2008 were as follows:

Deferred tax assets:
- Net operating loss carryforwards	$	948,655
Less: valuation allowance		(948,655	)
Net deferred tax assets	$	-

As of September 30, 2008, the Company had approximately an aggregate $3,642,693 of cumulative tax losses which can be carried forward to offset future taxable income. The deferred tax assets of the Company consisted mainly of tax losses and for which a full valuation allowance has been provided, as the management believes it is more likely than not that these assets will not be realized in the future.

F-19

NOTE 16SEGMENT REPORTING

The Company’s business units have been aggregated into two reportable segments, as defined by SFAS No. 131:

l Medical Business – joint operation of PET Scanner and Rotary Gamma Ray Stereotactic Neurosurgery System imaging center in the PRC.

l Extraction Business – extraction of raw materials to medicine ingredients and distribution of extracted ingredients for medicine manufacturing uses.

The Company operates these segments in the PRC and all of the identifiable assets of the Company are located in the PRC during the period presented.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 3). The Company had no inter-segment sales for the periods ended September 30, 2008 and 2007. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately based on the different technology and marketing strategies of each business unit for making internal operating decisions.

Summary of financial information concerning the Company’s reportable segments is shown in the following table for the three months ended September 30, 2008 and 2007:

	Three months ended September 30, 2008
	Medical Business		Extraction Business			Total
Operating revenues	$	941,336	$	87,011		$	1,028,347
Cost of revenues		-		(79,471	)		(79,471	)
Gross profit		941,336		7,540			948,876
Depreciation and amortization		141,459		44,982			186,441
Net income	$	504,846	$	11,397		$	516,243
Expenditure for long-lived assets	$	2,005	$	156		$	2,161

	Three months ended September 30, 2007
	Medical Business		Extraction Business		Total
Operating revenues	$	850,101	$	-	$	850,101
Depreciation and amortization		117,433		-		117,433
Net income	$	370,568	$	-	$	370,568
Expenditure for long-lived assets	$	279,579	$	-	$	279,579

F-20

Summary of financial information concerning the Company’s reportable segments is shown in the following table for the nine months ended September 30, 2008 and 2007:

	Nine months ended September 30, 2008
	Medical Business		Extraction Business			Total
Operating revenues	$	2,517,325	$	329,778		$	2,847,103
Cost of revenues		-		(215,417	)		(215,417	)
Gross profit		2,517,325		114,361			2,631,686
Depreciation and amortization		411,481		131,784			543,265
Net income	$	1,270,899	$	110,230		$	1,381,129
Expenditure for long-lived assets	$	192,274	$	14,956		$	207,230

	Nine months ended September 30, 2007
	Medical Business		Extraction Business		Total
Operating revenues	$	2,295,937	$	-	$	2,295,937
Depreciation and amortization		342,575		-		342,575
Net income	$	784,962	$	-	$	784,962
Expenditure for long-lived assets	$	283,100	$	-	$	283,100

NOTE 17CONCENTRATIONS OF RISK

The Company is exposed to the followings concentrations of risk:

(a)Major customers

For both periods ended September 30, 2008 and September 30, 2007, 100% of the Company’s assets were located in the PRC and 100% of the Company’s revenues were derived from customers located in the PRC.

For the three and nine months ended September 30, 2008, one customer represented more than 10% of the Company’s revenue and accounts receivable, respectively. As of September 30, 2008, this customer accounted for $2,696,518 of the Company’s revenue (75%) for the nine months ended September 30, and $362,908 of accounts receivable.

For the three and nine months ended September 30, 2007, one customer represented more than 10% of the Company’s revenue and accounts receivable, respectively. As of September 30, 2007, this customer accounted for both 100% of the Company’s revenues and accounts receivable, amounting to $2,295,937 of revenue for the nine months ended September 30, 2007 and $335,759 of accounts receivable.

(b)Major vendors

For the three and nine months ended September 30, 2008, two (2) vendors represented more than 10% of the Company’s purchases and accounts payable, respectively.

For the three and nine months ended September 30, 2007, no vendor represented more than 10% of the Company’s purchases and accounts payable, respectively.

F-21

(c)Credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company performs ongoing credit evaluations of its customers’ financial condition, but does not require collateral to support such receivables.

(d)Exchange rate risk

The reporting currency of the Company is US$ and to date the majority of the revenues and costs are denominated in RMB and a significant portion of the assets and liabilities are denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between US$ and RMB. If RMB depreciates against US$, the value of RMB revenues and assets as expressed in US$ financial statements will decline. The Company does not hold any derivative or other financial instruments that expose to substantial market risk.

NOTE 18COMMITMENT AND CONTINGENCIES

The Company rented office space under non-cancelable operating lease agreements which run for a term of 1 to 2 years, due December 31, 2008 and June 19, 2009. Costs incurred under these operating leases are recorded as rental expense and totaled approximately $4,828 and $0 for the period ended September 30, 2008 and 2007. As of September 30, 2008, future minimum annual operating lease payments are as follows:

Years ending September 30:
2009	$	2,454

F-22

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

GENERAL DESCRIPTION OF BUSINESS

As used herein the terms "we", "us", "our," the “Registrant,” “GFRP” and the "Company" means, GFR Pharmaceuticals Inc., a Nevada corporation, formerly known as Laredo Investment Corp. These terms also refer to our subsidiary corporations, Xi'an Hua Long Yu Tian Ke Ji Shi Ye Co., Ltd. (“Hua Long") and New Century Scientific Investment Ltd. ("New Century") and Xi’an Jiaoda Bao Sai Bio-Technology Co., Ltd ("Bao Sai"), all of which are organized and existing under the laws of the Peoples’ Republic of China

We were incorporated in the State of Nevada on December 18, 1996 as Laredo Investment Corp. On August 9, 2004, Laredo Investment Corp. changed its name to GFR Pharmaceuticals, Inc. GFRP specialized in formulating, blending, encapsulating and packing nutritional products. The Company’s operations were located in the province of British Columbia, Canada.

On October 15, 2006, we executed an acquisition agreement with Hua Long. Pursuant to the Agreement, we paid Hua Long Shareholders approximately $187,500 in cash to acquire a 100% interest in the shares of registered capital of Hua Long. Hua Long acts as the holding company of New Century Scientific Investment Ltd. ("New Century"), a Chinese corporation with which we entered into a stock exchange transaction through Hua Long, on December 11, 2006, pursuant to which 40,000,000 shares of GFRP common stock were exchanged for 95% of the equity of New Century.

The acquisition of Hua Long allowed us to complete the share exchange with New Century in China. Upon completion of the acquisition, we owned 100% equity interest of Hua Long which in turn owns a 95% equity interest in New Century. The transaction was treated for accounting purposes as a capital transaction and recapitalization by the accounting acquirer, Hua Long, and as a re-organization by the accounting acquiree.

Subsequent to completion of the exchange transaction and acquisition, we have continued operations of New Century, through Hua Long. The principal activity of New Century is to lease diagnostic imaging medical equipment to hospitals.  Our current operation commenced in March 2006.  All customers are located in China.

New Century, formerly Shan Xi New Century Technology Investment Development Company Ltd., owns radiology and oncology equipment and provides it to Tangdu Hospital in Shan Xi province, which is affiliated with the Fourth Military Medical University. New Century currently owns three different devices used for radiological imaging for the brain and body and cancer treatment. The Company’s medical equipment is used in Tangdu Hospital’s Gamma Knife Therapeutic Center (the “Center”), which averaged 137 cases per month in 2006 and 204 cases per month in 2007. New Century is paid a percentage of profits from the Center.

Pursuant to the Purchase Agreement dated January 1, 2008, by and among New Century and the holders of all 60,000,000 shares of the capital stock of Bao Sai, the Company acquired 58,060,000 shares of capital stock of Bao Sai, or 96.77% of its common stock, as of January 1, 2008.

Supplemental Agreements executed on May 14, 2008 set the aggregate purchase price for the shares at $ 4,500,211. The Purchase Agreement set forth that the purchase price of the 58,060,000 shares would equal Bao Sai’s net asset value based on Bao Sai’s audited financial statements for the fiscal year ended December 31, 2007 prepared in accordance with Generally Accepted Accounting Principals. The net asset value was $4,650,420.

Pursuant to the Supplemental Agreements, the Company agreed to pay an aggregate purchase price of RMB 15,873,030 yuan to Xi’an Bio-sep Biological Filler Engineering Technology Co., Ltd. for 46.67% of the Bao Sai stock (28 million shares) in two installments. The Company paid the first such installment of RMB 10 million yuan that was due on or before June 30, 2008 and the second such installment of RMB 5,872,920 yuan that was due on or before October 31, 2008. The Company will pay the other three shareholders an aggregate of RMB 17,040,832 yuan proportionately for their respective shares (collectively, 30,060,000 shares) on or before December 30, 2009. Upon the completion of the transaction, Bao Sai became a subsidiary of the Company.

Bao Sai is engaged in research, development, manufacture and sale of biological separation medium products, which is technological know-how and devices engineered to separate and purify biological products and medicines. Separation medium products are used in the production of antibiotics, genetic recombinant medicine, bacterin production, the gene chip, diagnostic reagents and other biochemical products and purification of blood products, biochemical products, natural medicines and genetic engineering, which can effectively get rid of insecurity substances of drugs, such as impurity endotoxin. Bao Sai’s principal office and manufacturing facility is located at 99 Yan Xiang Road, Biosep Building, Xi An, Shaan Xi Province, P. R. China. Bao Sai has approximately 50 employees.

1

Bao Sai has produced more than 50 varieties of products including agarose, dextran and silica gel.. In the PRC, Bao Sai is the first company which specializes in research, development, manufacture and sale of biological separation medium products and is also one of a few enterprises that has the ability to complete this project. The industrial preparative chromatographic system products include Flange industrial preparative chromatographic columns, mechanical lock axial compression preparative chromatographic columns and automatic hydraulic pressure axial compression preparative chromatographic columns. By taking its scientific and technological advantages, the Company has established the first production line of industrial preparative chromatographic system for the refinement of natural products in China which the Company expects to enable it to provide high quality public service in technology and technical support for bio-medical industry and research organizations in PRC.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

FORWARD LOOKING STATEMENTS

Certain statements in this report, including statements of our expectations, intentions, plans and beliefs, including those contained in or implied by "Management's Discussion and Analysis" and the Notes to Consolidated Financial Statements, are "forward-looking statements", within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are subject to certain events, risks and uncertainties that may be outside our control. The words “believe”, “expect”, “anticipate”, “optimistic”, “intend”, “will”, and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or revise any forward-looking statements. These forward-looking statements include statements of management's plans and objectives for our future operations and statements of future economic performance, information regarding our expansion and possible results from expansion, our expected growth, our capital budget and future capital requirements, the availability of funds and our ability to meet future capital needs, the realization of our deferred tax assets, and the assumptions described in this report underlying such forward-looking statements. Actual results and developments could differ materially from those expressed in or implied by such statements due to a number of factors, including, without limitation, those described in the context of such forward-looking statements, our expansion and acquisition strategy, our ability to achieve operating efficiencies, our dependence on network infrastructure, capacity, telecommunications carriers and other suppliers, industry pricing and technology trends, evolving industry standards, domestic and international regulatory matters, general economic and business conditions, the strength and financial resources of our competitors, our ability to find and retain skilled personnel, the political and economic climate in which we conduct operations and the risk factors described from time to time in our other documents and reports filed with the Securities and Exchange Commission (the "Commission"). Additional factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to: 1) our ability to successfully develop and deliver our services on a timely basis and in the prescribed condition; 2) our ability to compete effectively with other companies in the same industry; 3) our ability to raise sufficient capital in order to effectuate our business plan; and 4) our ability to retain our key executives.

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CRITICAL ACCOUNTING POLICIES

Revenue recognition

a)   Service revenue

In accordance with the SEC’s Staff Accounting Bulletin No. 104, Revenue Recognition, the Company records revenue when services are received by the customers and realized the amounts net of provisions for discounts, allowance and taxes which are recognized at the time of services performed.

Pursuant to the Cooperation Agreement and the Additional Cooperation Agreement entered into between the Company and Tong Du Hospital (“Hospital”) dated February 2, 2006, the Company and the Hospital would jointly operate the medical center in the provision of diagnostic imaging services to the patients.  In return, the Company and the Hospital would share net revenues from services rendered, on a monthly basis, when earned, at their net realizable amounts from patients for services rendered at contractually established billing rates, after deducting the total operating cost of the centers.  The Company recognizes net revenues based on the total amount received from the patients during the month, less the monthly operating costs incurred at the centers.

The Company records the revenue, net of sales tax, from the customers through the Hospital, on a net basis in compliance with EITF 99-19, “Reporting Revenues Gross as a Principle versus Net as an Agent.”

b)   Interest income

Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.

Stock-based compensation

The Company adopts SFAS No. 123R, “Share-Based Payment” using the fair value method.  Under SFAS No. 123R, stock-based compensation expense is measured at the grant date based on the value of the option or restricted stock and is recognized as expense, less expected forfeitures, over the requisite service period.

Property, plant and equipment, net

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any.  Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:

	Depreciable life	Residual value
Buildings	20 years		5	%
Medical equipment	13 to 16 years		5	%
Furniture, fixture and equipment	5 years		5	%

Expenditure for maintenance and repairs is expensed as incurred.

Revenues

We recorded revenues of $1,028,347 and $2,847,103 for the three and nine months ended September 30, 2008, respectively. New Century owns radiology and oncology equipment and provides it to Tangdu Hospital’s Gamma Knife Therapeutic Center (the “Center”) in Shan Xi province, which is affiliated with the Fourth Military Medical University. New Century currently owns three different devices used for radiological imaging for the brain and body and cancer treatment. For the nine months ended September 30, 2008, the Center averaged approximately 188 cases per month as opposed to 204 cases per month in 2007. New Century receives a percentage of profits from the Center.

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New Century entered into its relationship with Tangdu Hospital on February 2, 2006, when it accepted the rights and responsibilities previously held by Masep Medical Science & Technology Development (Shenzhen) Co., Ltd. (“Masep”) which Masep undertook pursuant to the “Cooperation Establishment of ‘Tangdu Gamma Knife Therapeutic Center’ Agreement” by and between Masep and Tandgu Hospital, dated May 18, 2001, as amended (the “Tangdu Agreement”). Pursuant to the terms of the Tangdu Agreement, New Century presently receives eighty percent (80%) of the profits generated by the Center. New Century’s profit sharing percentage decreases over the term of the Tangdu Agreement, which is sixteen years from the date that the Center opened in January 2002.

We recognize net revenues based on the total amount received from patients during the month, less the monthly operating costs incurred at the Centers. The revenues from services are recorded when services are received by the customers and the amounts realized, net of provisions for discounts, allowances and taxes which are recognized at the time the services are performed. Net revenues of $1,028,347 and $2,847,103 for the three and nine months ended September 30, 2008, respectively, represent an increase of $178,246 and $551,166 or 21% and 24%, respectively, as compared to net revenues from the same period ended September 30, 2007. Such increase was due primarily to the receipt of additional revenue from sales of Bao Sai’s products, which totaled $87,011 and $329,778 during the three and nine months ended September 30, 2008, respectively..

Net Income

Our net income was $516,243 and $1,381,129 for the three and nine months ended September 30, 2008, respectively, an increase of $145,675 and $596,167, or 39% and 76%, respectively, as compared to net income for the same period ended September 30, 2007. Such increase was due primarily to the increase in revenues covering the operating expenses in these periods.

We expect to be profitable during fiscal year 2008 through the implementation of our marketing strategies. However, we cannot be certain that we will be able to successfully implement our marketing strategies and there can be no assurance for the achievement and any revenue growth will take place in the future.

Expenses

Operating expenses for the three and nine months ended September 30, 2008 were $392,947 and $1,292,125 respectively, as compared to operating expenses of $217,025 and $815,130 for the same period ended September 30, 2007. Increases of $175,922 and $476,995 of operating expenses during the three and nine months ended September 30, 2008 or 81% and 58.5%, respectively, were due primarily to the increase of our business scope and scale.

Impact of Inflation

We believe that inflation has had a negligible effect on operations during this period. We believe that we can offset inflationary increases in the cost of sales by increasing sales and improving operating efficiencies.

Liquidity and Capital Resources

Cash flows provided by operating activities were $1,035,191 for nine months ended September 30, 2008, compared to cash flows of $2,369,248 from operating activities for the same period ended September 30, 2007. Positive cash flows from operations for the nine months ended September 30, 2008 were due primarily to the net income of $1,381,129, the increase in the non-cash depreciation expenses to $543,265, the increase in prepayments to $188,124, and the decrease by $46,794 in income tax payable. The negative cash flow was also attributable to the decrease in the accounts receivable of $291,075, the decrease in the accounts payable of $802,990, and the increase in the other payables of $7,809.

Cash flows provided by investment activities were $519,271 for the nine months ended September 30, 2008 were due primarily to the proceeds from the repayment of a note receivable of $1,414,516, a partial payment in relation to the Bao Sai acquisition, net of cash acquired of $864,709 and the purchase of property and equipment of $207,230 during this period.

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At present, the revenue of GFRP includes revenues derived from the business of New Century and the revenue of product sales of Bao Sai. The revenue of New Century were primarily used to make the purchase price payment for Bao Sai , and all additional funds are primarily used as working capital. Within the next two years Bao Sai intends to obtain third party financing for the production and distribution of Separation Media and Industrial Preparative Chromatographic System of Bao Sai. Neither the Company nor Bai Sai has any definitive arrangements for such financing as of yet.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

A small reporting company is not required to provide the information required by this Item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer, Zhao Yan Ding, and Principal Financial Officer, Zhong Ya Li, we 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 (the "Exchange Act")) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control Over Financial Reporting. During the most recent quarter ended September 30, 2008, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

A small reporting company is not required to provide the information required by this Item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5.Other Information

None

Item 6. Exhibits

31.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURE

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.

	GFR PHARMACEUTICALS, INC.
DATE: November 18, 2008	By	/s/ Zhao Yan Ding
		Zhao Yan Ding, Chief Executive Officer

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