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 June 30, 2009





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 o     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
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
August 11, 2009 was 42,079,940





GFR
PHARMACEUTICALS INC.





INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(UNAUDITED)




PageCondensed
      Consolidated Balance Sheets as of June 30, 2009 and December 31,
      2009
                  
                  
                  F-2Condensed
      Consolidated Statements of Operations And Comprehensive Income for the six
      and three months ended June 30, 2009 and 2008
                  
                  
                  F-4Condensed
      Consolidated Statements of Cash Flows for the six and three months ended
      June 30, 2009 and 2008
                  
                  
                  F-5Condensed
      Consolidated Statement of Stockholders’ Equity for the six and three
      months ended June 30, 2009
                  
                  
                  F-7Notes
      to Condensed Consolidated Financial Statements
                  
                  F-9
      to F-25










GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


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





As ofJune
      30,
                        
                        
                        December
      31,2009
                        
                        
                        2008(unaudited)
                        
                        
                        (audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        18,326
                        
                        
                        $
                        552,398Trade
      accounts receivable, net
                        
                        
                        606,007
                        
                        
                        
                        659,329Note
      receivable, net
                        
                        
                        -
                        
                        
                        
                        -Inventories,
      net
                        
                        
                        307,890
                        
                        
                        
                        282,307Prepayments
      and other receivables
                        
                        
                        143,370
                        
                        
                        
                        243,242Other
      receivable, net
                        
                        
                        -
                        
                        
                        
                        -Amount
      due from unconsolidated affiliate, net
                        
                        
                        -
                        
                        
                        
                        -Operating
      lease prepaid - current portion
                        
                        
                        7,258
                        
                        
                        
                        7,255Total
      current assets
                        
                        
                        1,082,851
                        
                        
                        
                        1,744,531Non-current
      assets:Property,
      plant and equipment, net
                        
                        
                        6,506,365
                        
                        
                        
                        6,862,609Intangible
      asset, net
                        
                        
                        -
                        
                        
                        
                        -Operating
      lease prepaid – non-current portion
                        
                        
                        147,274
                        
                        
                        
                        150,844Long
      term prepayment
                        
                        
                        576,042
                        
                        
                        
                        589,822TOTAL
      ASSETS
                        
                        $
                        8,312,532
                        
                        
                        $
                        9,347,806LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Amount
      due to a related party
                        
                        $
                        1,951,993
                        
                        
                        $
                        1,951,203Note
      payable, related parties
                        
                        
                        1,149,277
                        
                        
                        
                        2,493,318Trade
      accounts payable
                        
                        
                        50,580
                        
                        
                        
                        124,700Note
      payable
                        
                        
                        -
                        
                        
                        
                        219,472Tax
      payable
                        
                        
                        173,086
                        
                        
                        
                        171,847Other
      payables and accrued liabilities
                        
                        
                        502,856
                        
                        
                        
                        456,641Total
      current liabilities
                        
                        
                        3,827,792
                        
                        
                        
                        5,417,181Loss
      in excess of investment in unconsolidated affiliate
                        
                        
                        785,410
                        
                        
                        
                        785,100Total
      liabilities
                        
                        
                        4,613,202
                        
                        
                        
                        6,202,281COMMITMENTS
      AND CONTINGENCIES (Note 23)
                          (Note
      23)GFRP
      Company stockholders’ equity:Common
      stock, $0.001 par value; 100,000,000 shares authorized; 42,079,940 shares
      issued and outstanding as of June 30, 2009 and December 31,
      2008
                        
                        
                        42,080
                        
                        
                        
                        42,080Additional
      paid-in capital
                        
                        
                        3,712,120
                        
                        
                        
                        3,712,120Accumulated
      other comprehensive income
                        
                        
                        210,820
                        
                        
                        
                        210,695Statutory
      reserve
                        
                        
                        423,760
                        
                        
                        
                        423,760Accumulated
      deficits
                        
                        
                        (1,153,126
                        )
                        
                        
                        (1,675,728
                        )Total
      GFRP shareholders’ equity
                        
                        
                        3,235,654
                        
                        
                        
                        2,712,927Non-controlling
      interest
                        
                        
                        463,676
                        
                        
                        
                        432,598Total
      equity
                        
                        
                        3,699,330
                        
                        
                        
                        3,145,525TOTAL
      LIABILITIES AND EQUITY
                        
                        $
                        8,312,532
                        
                        
                        $
                        9,347,806




F-2


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


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





Three months endedJune 30,
                      
                      
                      Sixmonths
      endedJune 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008(unaudited)
                      
                      
                      (unaudited)
                      
                      
                      (unaudited)
                      
                      
                      (unaudited)REVENUE,
      NETService
      revenue
                      
                      $
                      973,621
                      
                      
                      $
                      1,503,258
                      
                      
                      $
                      1,527,877
                      
                      
                      $
                      1,978,953Product
      sales
                      
                      
                      9,379
                      
                      
                      
                      36,055
                      
                      
                      
                      19,165
                      
                      
                      
                      242,767Total
      revenue, net
                      
                      
                      983,000
                      
                      
                      
                      1,539,313
                      
                      
                      
                      1,547,042
                      
                      
                      
                      2,221,720COST OF REVENUE
      (exclusive of depreciation)Cost
      of products
                      
                      
                      5,388
                      
                      
                      
                      27,828
                      
                      
                      
                      8,745
                      
                      
                      
                      135,946GROSS
      PROFIT
                      
                      
                      977,612
                      
                      
                      
                      1,511,485
                      
                      
                      
                      1,538,297
                      
                      
                      
                      2,085,774OPERATING
      EXPENSES:Depreciation
      and amortization
                      
                      
                      189,324
                      
                      
                      
                      182,666
                      
                      
                      
                      362,537
                      
                      
                      
                      356,825General
      and administrative
                      
                      
                      171,254
                      
                      
                      
                      341,992
                      
                      
                      
                      386,453
                      
                      
                      
                      542,354Total
      operating expenses
                      
                      
                      360,578
                      
                      
                      
                      524,658
                      
                      
                      
                      748,990
                      
                      
                      
                      899,179INCOME
      FROM OPERATIONS
                      
                      
                      617,034
                      
                      
                      
                      986,827
                      
                      
                      
                      789,307
                      
                      
                      
                      1,186,595OTHER
      INCOME (EXPENSE):Interest
      income
                      
                      
                      3,726
                      
                      
                      
                      26
                      
                      
                      
                      10,864
                      
                      
                      
                      88Interest
      expense
                      
                      
                      (3
                      )
                      
                      
                      -
                      
                      
                      
                      (4,831
                      )
                      
                      
                      -Others
                      
                      
                      (530
                      )
                      
                      
                      -
                      
                      
                      
                      (574
                      )
                      
                      
                      -Equity
      in net income of an unconsolidated affiliate
                      
                      
                      -
                      
                      
                      
                      3,441
                      
                      
                      
                      -
                      
                      
                      
                      6,716Total
      other income
                      
                      
                      3,193
                      
                      
                      
                      3,467
                      
                      
                      
                      5,459
                      
                      
                      
                      6,804INCOME
      BEFORE INCOME TAXES
                      
                      
                      620,227
                      
                      
                      
                      990,294
                      
                      
                      
                      794,766
                      
                      
                      
                      1,193,399Income
      tax expenses
                      
                      
                      (175,881
                      )
                      
                      
                      (237,491
                      )
                      
                      
                      (240,996
                      )
                      
                      
                      (283,915
                      )NET
      INCOME
                      
                      
                      444,346
                      
                      
                      
                      752,803
                      
                      
                      $
                      553,770
                      
                      
                      $
                      909,484Net
      income attributable to non-controlling interest
                      
                      
                      (23,786
                      )
                      
                      
                      (36,896
                      )
                      
                      
                      (31,168
                      )
                      
                      
                      (44,599
                      )NET
      INCOME ATTRIBUTABLE TO GFRP STOCKHOLDERS
                      
                      $
                      420,560
                      
                      
                      $
                      715,907
                      
                      
                      $
                      522,602
                      
                      
                      $
                      864,885Other
      comprehensive income:-
      Foreign currency translation gain
                      
                      
                      40
                      
                      
                      
                      184,849
                      
                      
                      
                      125
                      
                      
                      
                      484,502COMPREHENSIVE
      INCOME
                      
                      $
                      420,600
                      
                      
                      $
                      900,756
                      
                      
                      $
                      522,726
                      
                      
                      $
                      1,349,387Net
      income per share attributable to GFRP stockholders – Basic and
      diluted
                      
                      $
                      0.01
                      
                      
                      $
                      0.02
                      
                      
                      $
                      0.01
                      
                      
                      $
                      0.02Weighted
      average number of GFRP shares outstanding – Basic and
    diluted
                      
                      
                      42,079,940
                      
                      
                      
                      42,079,940
                      
                      
                      
                      42,079,940
                      
                      
                      
                      42,079,940





See
accompanying notes to condensed consolidated financial statements.




F-3




GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATION STATEMENT OF CASH FLOWS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


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




Sixmonths
      endedJune 30,2009
                                
                                
                                2008(unaudited)
                                
                                
                                (unaudited)Cash
      flows from operating activities:Net
      income
                                
                                $
                                522,602
                                
                                
                                $
                                864,885Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                                
                                
                                362,537
                                
                                
                                
                                356,825Equity
      in net income of an unconsolidated affiliate
                                
                                
                                -
                                
                                
                                
                                (6,716
                                )Non-controlling
      interest
                                
                                
                                31,168
                                
                                
                                
                                44,599Change
      in operating assets and liabilities:Trade
      accounts receivable, net
                                
                                
                                53,576
                                
                                
                                
                                (264,322
                                )Other
      receivable
                                
                                
                                6,804
                                
                                
                                
                                -Inventories
                                
                                
                                (25,468
                                )
                                
                                
                                (51
                                )Prepayments
      and deposits
                                
                                
                                107,160
                                
                                
                                
                                143,001Trade
      accounts payable
                                
                                
                                (74,159
                                )
                                
                                
                                (887,603
                                )Income
      tax payable
                                
                                
                                1,170
                                
                                
                                
                                9,984Other
      payables and accrued liabilities
                                
                                
                                46,029
                                
                                
                                
                                (50,604
                                )Net
      cash provided by operating activities
                                
                                
                                1,031,419
                                
                                
                                
                                209,998Cash
      flows from investing activities:Partial
      payment in relation to the Bao Sai acquisition, net of cash
      acquired
                                
                                
                                -
                                
                                
                                
                                (855,693
                                )Repayment
      from an unconsolidated affiliate
                                
                                
                                -
                                
                                
                                
                                174,851Proceeds
      from repayment of note receivable
                                
                                
                                -
                                
                                
                                
                                1,399,768Repayment
      of notes payable – related to acquisition of Baosai – related
      parties
                                
                                
                                (1,344,846
                                )
                                
                                
                                -Purchase
      of property, plant and equipment
                                
                                
                                -
                                
                                
                                
                                (205,069
                                )Net
      cash (used in) provided by investing activities
                                
                                
                                (1,344,846
                                )
                                
                                
                                513,857Cash
      flows from financing activities:Advances
      to related companies
                                
                                
                                -
                                
                                
                                
                                (49,377
                                )Contribution
      from stockholders
                                
                                
                                -
                                
                                
                                
                                -Repayment
      of notes payable
                                
                                
                                (219,529
                                )
                                
                                
                                -Advance
      from stockholders
                                
                                
                                -
                                
                                
                                
                                219,509Repayment
      from stockholders
                                
                                
                                (1,244
                                )Net
      cash provided by (used in) financing activities
                                
                                
                                (220,733
                                )
                                
                                
                                170,132Foreign
      currency translation adjustment
                                
                                
                                128
                                
                                
                                
                                26,383NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                                
                                
                                (534,072
                                )
                                
                                
                                920,370CASH
      AND BANK BALANCE, BEGINNING OF PERIOD
                                
                                
                                552,398
                                
                                
                                
                                9,951CASH
      AND BANK BALANCE, END OF PERIOD
                                
                                $
                                18,326
                                
                                
                                $
                                930,321SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for income taxes
                                
                                $
                                239,826
                                
                                
                                $
                                268,328Cash
      paid for interest expenses
                                
                                $
                                4,831
                                
                                
                                $
                                -





See
accompanying notes to condensed consolidated financial
statements.


F-4




GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


CONDENSED
CONSOLDIATED STATEMENT OF STOCKHOLDERS’ EQUITY


FOR
THE SIX MONTHS ENDED JUNE 30, 2009


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


(Unaudited)





GFRP
      Company ShareholderCommon
      stockNo.
      of
                            shares
                          
                          
                          Amount
                          
                          
                          Additional
                            paid-in
                            capital
                          
                          
                          Accumulated
                            other
                            comprehensive
                            income
                          
                          
                          Statutory
                            reserve
                          
                          
                          Retained
                            earnings
                            (accumulated
                            deficit)
                          
                          
                          Non-controlling
                            interest
                          
                          
                          TotalBalance
      as of December 31, 2008
                          
                          
                          42,079,940
                          
                          
                          $
                          42,080
                          
                          
                          $
                          3,712,120
                          
                          
                          $
                          210,695
                          
                          
                          $
                          423,760
                          
                          
                          $
                          (1,675,728
                          )
                          
                          $
                          432,598
                          
                          
                          $
                          3,145,525Foreign
      currency translation adjustment
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          125
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          125Net
      income for the period
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          522,602
                          
                          
                          
                          31,168
                          
                          
                          
                          553,770Total
      comprehensive income
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          553,895Share
      of foreign currency translation adjustment by non-controlling
      interest
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          
                          
                          
                          
                          (90
                          )
                          
                          
                          (90
                          )Balance
      as of June 30, 2009
                          
                          
                          42,079,940
                          
                          
                          $
                          42,080
                          
                          
                          $
                          3,712,120
                          
                          
                          $
                          210,820
                          
                          
                          $
                          423,760
                          
                          
                          $
                          (1,153,126
                          )
                          
                          $
                          463,676
                          
                          
                          $
                          3,699,330




See
accompanying notes to condensed consolidated financial
statements.


F-5




GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009





NOTE 1
ORGANIZATION 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 Scientific and Technological Industry 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 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 for
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.





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





NOTE 2 GOING
CONCERN AND MANAGEMENT PLAN





The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. As of June 30, 2009, the Company had a net
working capital deficiency of $2,744,941 that indicates the Company may need
additional financing to meet cash requirements for its operations in order to
continue as a going concern.





The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of recorded amounts of assets or the amounts
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. Management believes the Company’s ability
to continue as a going concern is depending upon its ability to maintain
profitable operations and to obtain additional financing or refinancing as may
be required. The Company has generated net income and positive cash inflows from
operating activities during the periods ended June 30, 2009. The Company will
devote more resources on marketing in order to increase the market share and
improve the operating performance. Management believes the Company will generate
sufficient cash flow to meet its obligations on a timely basis in the
foreseeable future.





NOTE3 SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





Basis of
preparation




These
interim condensed consolidated financial statements are unaudited. In the
opinion of management, all adjustments and disclosures necessary for a fair
presentation of these interim statements have been included. The results
reported in the condensed consolidated financial statements for any interim
periods are not necessarily indicative of the results that may be reported for
the entire year. The accompanying condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and do not include all information and
footnotes necessary for a complete presentation of financial statements in
conformity with accounting principles generally accepted in the United States.
These unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and accompanying
footnotes included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008.


F-6





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009





Use 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.





Equity
Method of Accounting





Under
Accounting Research Bulletin No. 51 “Consolidation of Financial Statements (as
Amended)” (“ARB 51”), consolidation of a majority-owned subsidiary is precluded
where control does not rest with the majority owner. From May 1, 2007, GFRP’s
subsidiary Medicine ceased business and leased out its business license.
Accordingly, GFRP deconsolidated Medicine and accounted Medicine for under the
equity method of accounting.





Generally
accepted accounting principles require that the investment in the investee be
reported using the equity method under Accounting Principles Board (“APB”)
Opinion No. 18, “The Equity Method of Accounting for Investments in Common
Stock” when an investor corporation can exercise significant influence over the
operations and financial policies of an investee corporation. When the equity
method of accounting is used, the investor initially records the investment in
the stock of an investee at cost. The investment account is then adjusted to
recognize the investor’s share of the income or losses of the investee when it
is earned by the investee. Such amounts are included when determining the net
income of the investor in the period they are reported by the
investee.





As a
result of deconsolidation and the application of the equity method under ARB 51,
GFRP had a negative basis in its investment in Medicine, the Equity Investee,
because the subsidiary generated significant losses and intercompany liabilities
in excess of its asset balances. This negative investment, “Loss in excess of
investment in Equity Investee,” is reflected as a single amount on the Company’s
consolidated balance sheet as an approximate $785,410 liability as of June 30,
2009. (See Note 14)





Since
Medicine’s results are no longer consolidated and GFRP believes that it is not
obligated to fund future operating losses at Medicine, any adjustments reflected
in Medicine’s financial statements subsequent to May 1, 2007 are not expected to
affect the results of operations of GFRP. The reversal of the Company’s
liability into income will occur when Medicine commences business and generates
operating profit. GFRP will continue to evaluate the equity method investment in
Medicine quarterly to review the reasonableness of the liability
balance.





Shipping
and handling costs





Shipping
and handling costs were included in operating expenses. During the six months
ended June 30, 2009 and 2008, shipping and handling costs were
insignificant.





Advertising
costs





Advertising
costs are accounted for in accordance with SOP 93-7,“Reporting for Advertising
Costs”. No advertising expense was incurred for the six months ended June
30, 2009 and 2008.





Research
and development expenses





Research
and development costs are charged to expense when incurred and are included in
operating expenses.


F-7


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009





During
the six months ended June 30, 2009 and 2008, research and development costs
expensed to operating expenses were approximately $10,155 and $Nil
respectively.





Comprehensive
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.





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 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 periods:




June 30, 2009
                                    
                                    December 31,
                                      2008
                                    
                                    June 30, 2008Periods/year
      end RMB:US$ exchange rate
                                    
                                    6.8319
                                    
                                    
                                    6.8346
                                    
                                    6.8718Average
      daily RMB:US$ exchange rate
                                    
                                    6.8328
                                    
                                    
                                    7.0671
                                    
                                    7.0726





Recently
issued accounting standards





Effective
January 1, 2009, the first day of fiscal 2009, the Company adopted Financial
Accounting Standards Board (“FASB”) Staff Position Financial Accounting Standard
142-3 (“FSP FAS 142-3”), “Determination of the Useful Life of Intangible
Assets.” FSP FAS 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142 ("SFAS 142"), “Goodwill and
Other Intangible Assets.” the Company will apply FSP FAS 142-3 prospectively to
intangible assets acquired subsequent to the adoption date.  The
adoption of FSP FAS 142-3 had no impact on the Company’s Condensed Consolidated
Financial Statements.





Effective
January 1, 2009, the Company adopted, Statement of Financial Accounting
Standards No. 161 (“SFAS 161”), “Disclosures about Derivative Instruments and
Hedging Activities,” which amends and expands Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 161 requires tabular disclosure of the fair value of
derivative instruments and their gains and losses.  This Statement
also requires disclosure regarding the credit-risk related contingent features
in derivative agreements, counterparty credit risk, and strategies and
objectives for using derivative instruments. The adoption of SFAS 161 did not
have a material impact on the Company’s Condensed Consolidated Financial
Statements.


F-8


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009





Recently
issued accounting standards (continued)





In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”), which defines fair value, establishes a framework
for measuring fair value in GAAP, and expands disclosures about fair value
measurements. SFAS 157 does not require any new fair value measurements, but
provides guidance on how to measure fair value by providing a fair value
hierarchy used to classify the source of the information. In February 2008,
the FASB deferred the effective date of SFAS 157 by one year for certain
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). On January 1, 2008, the Company adopted the
provisions of SFAS 157, except as it applies to those nonfinancial assets and
nonfinancial liabilities for which the effective date has been delayed by one
year, which the Company adopted on January 1, 2009.





The fair
value hierarchy distinguishes between assumptions based on market data
(observable inputs) and an entity’s own assumptions (unobservable inputs). The
hierarchy consists of three levels:





•
            Level
      one — Quoted market prices in active markets for identical assets or
      liabilities;•
            Level
      two — Inputs other than level one inputs that are either directly or
      indirectly observable; and•
            Level
      three — Unobservable inputs developed using estimates and assumptions,
      which are developed by the reporting entity and reflect those assumptions
      that a market participant would
use.





The
adoption of SFAS 157 did not have a material effect on the Company’s financial
position or results of operations. The book values of cash, accounts receivable,
accounts and note payable approximate their respective fair values due to the
short-term nature of these instruments.





The
Company has no assets or liabilities that are measured at fair value on a
recurring basis. There were no assets or liabilities measured at fair value on a
non-recurring basis during the six months ended June 30, 2009.





Effective
January 1, 2009, the Company adopted Statement of Financial Accounting Standards
No. 160 ("SFAS 160"), "Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51." SFAS 160 amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements" to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as equity
in the Company’s Consolidated Financial Statements. Among other requirements,
this Statement requires that the consolidated net income attributable to the
parent and the noncontrolling interest be clearly identified and presented on
the face of the consolidated income statement. SFAS 160 was effective beginning
in our fiscal 2009. The provisions of SFAS 160 were applied prospectively,
except for the presentation and disclosure requirements, which were applied
retrospectively to all periods presented. As a result, upon the adoption of SFAS
160, we reclassified the “minority interest” balance previously included in
other liabilities of our Consolidated Balance Sheet to a new component of
equity. The adoption also impacted certain captions previously used on the
consolidated statement of income, largely identifying net income including
noncontrolling interest and net income attributable to GFRP. The adoption of
SFAS 160 did not have a material impact on the Company’s consolidated financial
position or results of operations.





Effective
January 1, 2009, the Company adopted Statement of Financial Accounting Standards
No. 141 (revised 2007) ("SFAS 141R"), "Business Combinations." SFAS 141R
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in an acquiree and the goodwill
acquired. the Company will apply SFAS 141R to any business combinations
subsequent to adoption. In addition, this Statement requires that any
additional reversal of deferred tax asset valuation allowance established in
connection with the Company’s fresh start reporting on January 7, 1998 be
recorded as a component of income tax expense rather than as a reduction to
the goodwill established in connection with the fresh start
reporting.


F-9


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009





Recently
issued accounting standards (continued)





In April
2009, the FASB issued FASB Staff Position Financial Accounting Standard
141R-1 ("FSP FAS 141R-1"), "Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies." FSP FAS 141R-1
amends SFAS 141R to require that an acquirer recognize at fair value, at the
acquisition date, an asset acquired or a liability assumed in a business
combination that arises from a contingency if the acquisition-date fair value of
that asset or liability can be determined during the measurement period. If the
acquisition-date fair value of such an asset acquired or liability assumed
cannot be determined, the acquirer should apply the provisions of SFAS 5, "
Accounting for Contingencies", to determine whether the contingency should be recognized at the
acquisition date or after such date. FSP FAS 141R-1 is effective for business
combinations whose acquisition date is on or after the first reporting period
beginning after December 15, 2008. Accordingly, the Company adopted this FSP
during the first quarter of 2009. The adoption of FSP FAS 141R-1 did
not have a material impact on the Company’s Condensed Consolidated Financial
Statements.





In April
2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1 ("FSP FAS
107-1 and APB 28-1"), "Interim Disclosures about Fair Value of Financial
Instruments." The FSP amends SFAS 107, "Disclosure about Fair Value of Financial
Instruments," and Accounting Principles Board Opinion No. 28, "Interim Financial
Reporting," to require disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements. FSP FAS 107-1 and APB 28-1 is effective in
the second quarter of 2009. The adoption of the FSP did not have a material
impact on the Company’s Condensed Consolidated Financial
Statements.




In April
2009, the FASB issued FASB Staff Position No. FSP FAS 115-2 and FAS 124-2 ("FSP
FAS 115-2 and FAS 124-2"), "Recognition and Presentation of Other-Than-Temporary
Impairments." The FSP amends the other-than-temporary impairment guidance in
U.S. GAAP for debt securities to make the guidance more operational and to
improve the presentation and disclosure of other-than-temporary impairments on
debt and equity securities in the financial statements. This FSP does not amend
existing recognition and measurement guidance related to other-than-temporary
impairments of equity securities. FSP FAS 115-2 and FAS 124-2 are effective in
the second quarter of 2009.  The adoption of the FSP did not have a
material impact on the Company’s Condensed Consolidated Financial
Statements.





In April
2009, the FASB issued FASB Staff Position No. FAS 157-4 ("FSP FAS 157-4"),
"Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly." The FSP provides additional guidance for estimating fair value in
accordance with FASB Statement No. 157, "Fair Value Measurements" , when the
volume and level of activity for the asset or liability have significantly
decreased. This FSP also includes guidance on identifying circumstances that
indicate a transaction is not orderly. FSP FAS 157-4 are effective in the second
quarter of 2009. The adoption of the FSP did not have a material impact on the
Company’s Condensed Consolidated Financial Statements.





In
December 2008, the FASB issued FASB Staff Position FAS 132(R)-1 (“FSP FAS
132(R)-1”), “ Employers’ Disclosures about Postretirement Benefit Plan Assets.”
The FSP expands the disclosure requirements about plan assets for defined
benefit pension plans and postretirement plans. The Company is required to adopt
FSP FAS 132(R)-1 in the fourth quarter of 2009. The Company is currently in the
process of assessing the impact that this FSP may have on the disclosures in the
Company’s Consolidated Financial Statements.




In
June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“FAS”) No. 167, Amendments to FASB Interpretation
No. 46(R) (“FAS 167”).  FAS 167 improves financial reporting by
enterprises involved with variable interest entities by addressing (1) the
effects on certain provisions of FASB Interpretation No. 46 (R), Consolidation of Variable Interest
Entities (“FIN 46(R)”) , as a result of eliminating
the qualifying special-purpose entity (“SPE”) concept in FAS No. 166, Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No. 140 (“FAS 166”),
and (2) constituent concerns about the application of certain key provisions of
FIN 46(R), including those in which the accounting and disclosures do not always
provide timely and useful information about an enterprise’s involvement in a
variable interest entity. FAS 167 shall be effective as of January 1, 2010, our
first annual reporting period beginning after November 15, 2009.  Earlier
application is prohibited.  The adoption of FAS 167 is not currently
expected to have a material effect on the Company’s Consolidated Financial
Statements.


F-10


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009





Recently
issued accounting standards (continued)




In June 2009, the FASB issued FAS 166, improving the relevance, representational
faithfulness and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and cash
flows; and a transferor’s continuing involvement, if any, in transferred
financial assets.   The FASB undertook this project to address (1)
practices that have developed since the issuance of FAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, that
are not consistent with the original intent and key requirements of that
statement and (2) concerns of financial statement users that many of the
financial assets (and related obligations) that have been derecognized should
continue to be reported in the financial statements of transferors.  FAS
166 must be applied as of January 1, 2010, the beginning of our first annual
reporting period after November 15, 2009. Earlier application is prohibited.
  FAS 166 must be applied to transfers occurring on or after the effective
date.  Additionally, on and after the effective date, the concept of a
qualifying SPE is no longer relevant for accounting purposes.  Therefore, a
formerly qualifying SPE should be evaluated for consolidation by reporting
entities on and after the effective date in accordance with the applicable
consolidation guidance.   If the evaluation on the effective date results
in consolidation, the reporting entity should apply the transition guidance
provided in the pronouncement that requires consolidation.  The disclosure
provisions of FAS 166 should be applied to transfers that occurred both before
and after the effective date of this statement.  The adoption of FAS 166 is
not currently expected to have a material effect on the Company’s Consolidated
Financial Statements.




Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the Company’s Consolidated Financial
Statements upon adoption.





NOTE4 ACQUISITION 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, bacteria production, the gene chip, diagnostic reagents and other
biochemical products.





Upon the
completion of the transaction, Bao Sai became a subsidiary of the Company. As
the Company and Boa Sai were under common control before the acquisition, the
acquisition was accounted for under the purchase method of accounting with
initial measurement of assets and liabilities recognized at book value. The
following table summarizes the historical value of the assets acquired and
liabilities assumed at the date of acquisition.


F-11


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009





January 1, 2008Acquired
      assets:Cash
      and cash equivalents
                
                $
                539,790Accounts
      receivable, net of reserve for bad debts of $15,222
                
                
                518,786Inventories,
      net
                
                
                258,365Amount
      due from related parties
                
                
                743,887Notes
      receivables, net
                
                
                2,368,745Prepayment
      and other receivables, net
                
                
                399,712Plant
      and equipment, net
                
                
                1,978,200Intangible
      assets, net
                
                
                154,515Investment
      in an unconsolidated affiliate
                
                
                478,795Total
      assets acquired
                
                $
                7,440,795Less:
      Liabilities assumedAccounts
      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:
      Non-controlling interest
                
                
                (150,209
                )Purchase
      price
                
                $
                4,500,211Satisfied
      by:Net
      cash to be paid to acquire Bao Sai
                
                $
                4,500,211




The
sellers of Bao Sai and consideration are as follows:





A
      non-related party
                  
                  $
                  616,182





Related
      partiesXi’an
      Bio-sep Biological Filler Engineering Technology Co., Ltd.
    (a)
                    
                    $
                    2,170,350Wang
      Zhidong (b)
                    
                    
                    1,143,073Guo
      Lizheng (c)
                    
                    
                    570,606$
                    3,884,029





(a)
            This
      is a company owned mostly by the major shareholder of the
      Company.


(b)
            This
      is former director of the Company and a director of Bao
    Sai.


(c)
            This
      is the brother of the major shareholder of the
  Company.




F-12


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009





NOTE4 ACQUISITION OF INTEREST IN BAO SAI
(Continued)





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 has been 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. 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, during the year ending
December 31, 2009.





As of
June 30, 2009, the purchase price consideration is payable are as
follows:





Repayable
      on or before
                    Year
      ending December 31,
                  
                  Approximately2009
                  
                  $
                  1,149,277





Consideration
of the acquisition was in RMB and as payment made during the period was
accounted for at exchange rate as on the date of payment and amount outstanding
as of June 30, 2009 was accounted for at exchange rate at period end, there is a
reconciliation difference of $96,594 represented by exchange difference as
follows:





Amount
      paid
                    
                    $
                    3,254,340Amounts
      still outstanding
                    
                    
                    1,149,277Exchange
      difference
                    
                    
                    (96,594
                    )Total
      consideration
                    
                    $
                    4,500,211





For the
six months ended June 30, 2009, the Company made a payment of purchase price
consideration totaling $1,344,846 (equivalent to RMB9,189,085).





NOTE5 TRADE ACCOUNTSRECEIVABLE, 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.





June
      30, 2009
                                
                                
                                December
      31, 2008(unaudited)
                                
                                
                                (unaudited)Accounts
      receivable, cost
                                
                                $
                                1,121,237
                                
                                
                                $
                                1,174,355Less:
      allowance for doubtful accounts
                                
                                
                                (515,230
                                )
                                
                                
                                (515,026
                                )Accounts
      receivable, net
                                
                                $
                                606,007
                                
                                
                                $
                                659,329


F-13


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009





NOTE6 NOTE RECEIVABLE, NET





June
      30, 2009
                                        
                                        
                                        December
      31, 2008(unaudited)
                                        
                                        
                                        (unaudited)Note
      receivable, cost
                                        
                                        $
                                        1,097,358
                                        
                                        
                                        $
                                        1,097,358Less:
      allowance for doubtful accounts
                                        
                                        
                                        (1,097,358
                                        )
                                        
                                        
                                        (1,097,358
                                        )Note
      receivable, net
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -





On
September 3, 2007, the Company’s newly acquired subsidiary, Bao Sai, disposed of
its investment in 75% of HuaYang for a cash consideration of $1,097,358
(equivalent to RMB7,500,000). The balance was unsecured and interest-free and
repayable in 4 installments due in full, by December 31, 2008. However, the
balance was overdue as of December 31, 2008, and additional
agreement was entered into by both parties to extend the payment term up to
December 31, 2009. As collectibility has been considered doubtful, an allowance
of doubtful debt was made fully on the notes receivable.





NOTE7 INVENTORIES,
NET





Inventories
consisted of the followings:





(unaudited)
                
                
                December
      31, 2008June
      30, 2009
                
                
                (unaudited)Raw
      materials
                
                $
                22,155
                
                
                $
                74,270Work
      in process
                
                
                10,873
                
                
                
                7,109Finished
      goods
                
                
                641,001
                
                
                
                568,318674,029
                
                
                
                649,697Less:
      inventory allowances
                
                
                (366,139
                )
                
                
                (367,390
                )Inventories,
      net
                
                $
                307,890
                
                
                $
                282,307




F-14


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009





NOTE8 OTHER
RECEIVABLE





June
      30, 2009
                    
                    
                    December
      31, 2008(unaudited)
                    
                    
                    (audited)Other
      receivable
                    
                    $
                    1,122,650
                    
                    
                    $
                    1,122,650Less:
      allowance for doubtful accounts
                    
                    
                    (1,122,650
                    )
                    
                    
                    (1,122,650
                    )Other
      receivable , net
                    
                    $
                    -
                    
                    
                    $
                    -





As of
June 30, 2009, the balance of $1,122,650 due from a former subsidiary of
the Company, represented temporary advance from the Company which was unsecured,
interest-free, with a with a fixed repayment term of 5 installments and is due
in full, no later than 2013. As of June 30, 2009, the future installments to be
received are as follows:





Years
      ending December 31,2009
                    
                    $
                    73,1572010
                    
                    
                    131,6832011
                    
                    
                    219,4722012
                    
                    
                    424,3122013
                    
                    
                    274,026Total:
                    
                    $
                    1,122,650





NOTE9 AMOUNT DUE FROM (TO) RELATED
PARTIES





(a) Amount
due to a stockholder





June
      30, 2009
                    
                    
                    December
      31, 2008(unaudited)
                    
                    
                    (audited)Due
      to:Mr.
      Lian Guo
                    
                    $
                    1,951,993
                    
                    
                    $
                    1,951,203





The
amount represented temporary advance to the Company which was unsecured,
interest-free and repayable on demand.





(b) Note
payable





As of
June 30, 2009, note payable to related parties represented payable to
ex-shareholder of Xi'an Jiaoda Bao Sai Bio-Technology Co., Ltd for the transfer
of their shares to New Century. The amount will be paid to these ex-shareholders
preceding December 31, 2009. (Note 4)


F-15





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009





NOTE10 PREPAYMENTS AND OTHER
RECEIVABLES





Prepayments
and other receivables consisted of the following:





June
      30, 2009
                      
                      December
      31, 2008(unaudited)
                      
                      (audited)Deposits
                      
                      $
                      68,069
                      
                      
                      $
                      77,617Advances
      to employees
                      
                      
                      28,116
                      
                      
                      
                      25,334Prepaid
      expenses for operating purpose
                      
                      
                      47,185
                      
                      
                      
                      140,291$
                      143,370
                      
                      
                      $
                      243,242





NOTE11 PROPERTY, PLANT AND
EQUIPMENT,NET





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





June
      30, 2009
                              
                              
                              December
      31, 2008(unaudited)
                              
                              
                              (audited)Buildings
                              
                              $
                              2,293,130
                              
                              
                              $
                              2,293,130Plant
      and equipment
                              
                              
                              6,322,678
                              
                              
                              
                              6,322,678Motor
      vehicles
                              
                              
                              246,806
                              
                              
                              
                              246,806Furniture,
      fixture and office equipment
                              
                              
                              151,356
                              
                              
                              
                              151,356Foreign
      translation difference
                              
                              
                              36,840
                              
                              
                              
                              33,2649,050,810
                              
                              
                              
                              9,047,234Less:
      accumulated depreciation
                              
                              
                              (2,426,521
                              )
                              
                              
                              (2,067,613
                              )Less:
      foreign translation difference
                              
                              
                              (117,924
                              )
                              
                              
                              (117,012
                              )Property,
      plant and equipment, net
                              
                              $
                              6,506,365
                              
                              
                              $
                              6,862,609





The buildings
were pledged as security for banking facilities related to the note payable as
of December 31, 2008. See also Note 15.





Depreciation
expense for the six months ended June 30, 2009 and 2008 were $358,908 and
$353,320, respectively.


F-16





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009





NOTE 12 INTANGIBLE ASSETS,
NET





June
      30, 2009
                          
                          December
      31, 2008(unaudited)
                          
                          (audited)Technical
      know-how
                          
                          $
                          1,131,064
                          
                          
                          $
                          1,131,064Less:
      accumulated impairment charge
                          
                          
                          (1,131,064
                          )
                          
                          
                          (1,131,064
                          )Net
      book value
                          
                          $
                          -
                          
                          
                          $
                          -





As of
June 30, 2009, the carrying value of the technical know-how was stated as zero.
The Company recognized a full impairment charge before the acquisition of Bao
Sai for recoverability test.





NOTE 13 OPERATING LEASE
PREPAID





The
Company has recorded as operating lease prepaid for the costs paid to acquire a
long-term interest to utilize the land underlying the building and production
facility for its business. This type of arrangement is common for the use of
land in the PRC. The operating lease prepaid is amortized on the straight-line
method over the term of the operating lease prepaid of 50 years.





The lease
expenses on operating lease prepaid for the six months ended June 30, 2009
and 2008 was $3,629 and $3,505, respectively. The estimated amount to be
expensed on operating lease prepaid over each of the next five years and
thereafter is $7,258 per annum.





NOTE 14 INVESTMENT 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. The
Company ceased operations of Medicine in 2007 and leased out its business
license for a fixed return annually. Thus, the Company does not control policy
decisions in ordinary course of business of Medicine; and
accordingly, investment in Medicine is accounted for under the equity
method.





As of
June 30, 2009, the investment in an unconsolidated affiliate is presented as
follows:-





Investment
      in Medicine at the date of acquisition
                  
                  $
                  106,804Amount
      due from Medicine
                  
                  
                  1,103,046Less:
      allowance for doubtful accounts
                  
                  
                  (1,103,046
                  )Share
      of accumulated losses in Medicine at date of loss of
    control
                  
                  
                  (870,823
                  )Foreign
      translation difference
                  
                  
                  (21,391
                  )Loss
      in excess of investment in unconsolidated affiliate
                  
                  $
                  (785,410
                  )





The
balance of $1,103,046 due from Medicine represented a temporary advance from the
Company which was unsecured and interest-free with a fixed repayment term of 4
installments and is due in full, no later than 2012. As of June 30, 2009, the
future installments to be received are as follows:


F-17


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009





Years
      ending December 31,2009
                    
                    $
                    235,4072010
                    
                    
                    292,5732011
                    
                    
                    292,5732012
                    
                    
                    282,493Total:
                    
                    $
                    1,103,046





NOTE 15 NOTE
PAYABLE





The notes
payable was repaid in February 2009 and the related charge on the property
secured (Note 11) was released accordingly.





NOTE16 OTHER PAYABLES AND ACCRUED
LIABILITIES





Other
payables and accrued liabilities consisted of the followings:





June
      30, 2009
                      
                      
                      December
      31, 2008(unaudited)
                      
                      
                      (audited)Business
      tax payable
                      
                      $
                      82,587
                      
                      
                      $
                      82,554Government
      levy payable
                      
                      
                      14,945
                      
                      
                      
                      20,321Salaries
      and welfare payable
                      
                      
                      98,019
                      
                      
                      
                      100,405Temporary
      advances
                      
                      
                      190,041
                      
                      
                      
                      161,491Customer
      deposits
                      
                      
                      44,790
                      
                      
                      
                      8,457Accrued
      expenses
                      
                      
                      72,474
                      
                      
                      
                      83,413$
                      502,856
                      
                      
                      $
                      456,641





NOTE 17 INCOME
TAXES





The PRC
subsidiaries within the Group are subject to PRC income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which they operate,
i.e. the PRC. The statutory PRC Enterprise Income Tax rate (“EIT”) for the six
months ended June 30, 2009 and 2008 is generally 25%.





The
Company’s income tax consisted of:





June
      30, 2009
                              
                              
                              December
      31, 2008(unaudited)
                              
                              
                              (audited)Current
      – PRC
                              
                              $
                              240,996
                              
                              
                              $
                              46,424Deferred
                              
                              
                              -
                              
                              
                              
                              -$
                              240,996
                              
                              
                              $
                              46,424




F-18


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009





A
reconciliation of the provision for income taxes determined at PRC EIT to the
Company’s effective income tax rate is as follows:





June
      30, 2009
                                    
                                    
                                    December
      31, 2008(unaudited)
                                    
                                    
                                    (audited)Pre-tax
      income
                                    
                                    $
                                    794,766
                                    
                                    
                                    $
                                    210,105PRC
      EIT
                                    
                                    
                                    25
                                    %
                                    
                                    
                                    25
                                    %Income
      tax computed at PRC EIT
                                    
                                    
                                    198,691
                                    
                                    
                                    
                                    52,526Reconciling
      items:Loss
      not recognized as deferred tax assets
                                    
                                    
                                    46,476
                                    
                                    
                                    
                                    -Non-deductible
      expenses
                                    
                                    
                                    -
                                    
                                    
                                    
                                    3,495Net
      operating loss carryforwards
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (9,597
                                    )Others
                                    
                                    
                                    (4,171
                                    )
                                    
                                    
                                    -Effective
      tax expense
                                    
                                    $
                                    240,996
                                    
                                    
                                    $
                                    46,424





On March
16, 2007, the PRC government promulgated a new tax law, China’s Unified
Enterprise Income Tax Law (“New EIT Law”), which took effect from January 1,
2008. Under the New EIT Law, foreign-owned enterprises as well as domestic
companies are subject to a uniform tax rate of 25%.





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 June 30, 2009 were as follows:




June
      30, 2009
                            
                            
                            December
      31, 2008(unaudited)
                            
                            
                            (audited)Deferred
      tax assets:-
      Net operating loss carryforwards
                            
                            
                            261,253
                            
                            
                            
                            214,777-
      Allowance for doubtful debts
                            
                            
                            956,519
                            
                            
                            
                            956,5191,217,772
                            
                            
                            
                            1,171,296Less:
      valuation allowance
                            
                            
                            (1,217,772
                            )
                            
                            
                            (1,171,296
                            )Net
      deferred tax assets
                            
                            $
                            -
                            
                            
                            $
                            -





As of
June 30, 2009 and 2008, full valuation allowance was provided to the deferred
tax assets due to the uncertainty surrounding their realization.





NOTE 18 SEGMENT REPORTINGDON’T WE ALSO NEED SEGMENT REPORTING FOR
THE 3 MONTHS ENDED JUNE 30, 2009?





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





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





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




F-19


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009





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 June 30, 2009 and 2008. 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 June 30, 2009 and
2008:
  Three
      months ended June 30, 2009Medical
                Business
              
              
              Extraction
                Business
              
              
              Total(unaudited)
              
              
              (unaudited)
              
              
              (unaudited)Net
      revenues
              
              $
              973,621
              
              
              $
              9,379
              
              
              $
              983,000Cost
      of revenues
              
              
              -
              
              
              
              (5,388
              )
              
              
              (5,388
              )Gross
      profit
              
              $
              973,621
              
              
              $
              3,991
              
              
              $
              977,612Depreciation
      and amortization
              
              $
              142,255
              
              
              $
              47,069
              
              
              $
              189,324Net
      income (loss)
              
              $
              538,254
              
              
              $
              (86,526
              )
              
              $
              451,728Expenditure
      for long-lived assets
              
              $
              -
              
              
              $
              -
              
              
              $
              -
 
 Three
      months ended March 31, 2008Medical
                Business
              
              
              Extraction
                Business
              
              
              Total(unaudited)
              
              
              (unaudited)
              
              
              (unaudited)Net
      revenues
              
              $
              1,122,457
              
              
              $
              416,856
              
              
              $
              1,539,313Cost
      of revenues
              
              
              -
              
              
              
              (27,828
              )
              
              
              (27,828
              )Gross
      profit
              
              $
              1,122,457
              
              
              $
              389,028
              
              
              $
              1,511,485Depreciation
      and amortization
              
              $
              138,436
              
              
              $
              44,230
              
              
              $
              182,666Net
      income
              
              $
              654,184
              
              
              $
              61,723
              
              
              $
              715,907Expenditure
      for long-lived assets
              
              $
              23,038
              
              
              $
              213
              
              
              $
              23,251


Summary
of financial information concerning the Company’s reportable segments is shown
in the following table for the six months ended June 30, 2009 and
2008:





Six
      months ended June 30, 2009Medical
                                    Business
                                  
                                  
                                  Extraction
                                    Business
                                  
                                  
                                  Total(unaudited)
                                  
                                  
                                  (unaudited)
                                  
                                  
                                  (unaudited)Net
      revenues
                                  
                                  $
                                  1,527,877
                                  
                                  
                                  $
                                  19,165
                                  
                                  
                                  $
                                  1,547,042Cost
      of revenues
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (8,745
                                  )
                                  
                                  
                                  (8,745
                                  ))Gross
      profit
                                  
                                  $
                                  1,527,877
                                  
                                  
                                  $
                                  10,420
                                  
                                  
                                  $
                                  1,538,297Depreciation
      and amortization
                                  
                                  $
                                  267,698
                                  
                                  
                                  $
                                  94,839
                                  
                                  
                                  $
                                  362,537Net
      income (loss)
                                  
                                  $
                                  739,673
                                  
                                  
                                  $
                                  (185,903
                                  )
                                  
                                  $
                                  553,770Expenditure
      for long-lived assets
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -




Six
      months ended June 30, 2008Medical
                                Business
                              
                              
                              Extraction
                                Business
                              
                              
                              Total(unaudited)
                              
                              
                              (unaudited)
                              
                              
                              (unaudited)Net
      revenues
                              
                              $
                              1,598,152
                              
                              
                              $
                              623,568
                              
                              
                              $
                              2,221,720Cost
      of revenues
                              
                              
                              -
                              
                              
                              
                              (135,946
                              )
                              
                              
                              (135,946
                              )Gross
      profit
                              
                              $
                              1,598,152
                              
                              
                              $
                              487,622
                              
                              
                              $
                              2,085,774Depreciation
      and amortization
                              
                              $
                              270,023
                              
                              
                              $
                              86,802
                              
                              
                              $
                              356,825Net
      income
                              
                              $
                              766,052
                              
                              
                              $
                              98,833
                              
                              
                              $
                              864,885Expenditure
      for long-lived assets
                              
                              $
                              190,269
                              
                              
                              $
                              14,800
                              
                              
                              $
                              205,069


F-20


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009





NOTE 19 NETINCOME PER
SHARE





Basic
net income per share is computed using the weighted average number of the
ordinary shares outstanding during the year. Diluted net income per share is
computed using the weighted average number of ordinary shares and ordinary share
equivalents outstanding during the year. Pursuant to stock exchange transaction
on November 30, 2006, the weighted average number of common shares issued and
outstanding was adjusted to account for the effects of the stock exchange
transaction as a reverse acquisition.





The
following table sets forth the computation of basic and diluted net income per
share for the periods ended June 30, 2009 and 2008:





Six
      months ended June 30,2009
                                        
                                        
                                        2008(unauidted)
                                        
                                        
                                        (unauidted)Basis
      and diluted net income per share calculationNumerator:-
      Net income in computing basic and diluted net income per
      share
                                        
                                        $
                                        522,602
                                        
                                        
                                        $
                                        864,885Denominator:-
      Weighted average ordinary shares outstanding
                                        
                                        
                                        42,079,940
                                        
                                        
                                        
                                        42,079,940Basic
      and diluted net income per share
                                        
                                        $
                                        0.01
                                        
                                        
                                        $
                                        0.02





NOTE20 STOCK-BASED
COMPENSATION





The Board
of Directors has authorized and GFRP has established the 2002 Incentive and
Non-qualified Stock Option Plan (“the Plan”) under which GFRP may grant to
employees, officers, directors, attorneys, consultants or other advisers of the
Company or affiliated companies up to 10,000,000 shares of GFRP’s common stock
with such exercise price and vesting periods as the Board of Directors
deems to be in the best interest of the Company. As of June 30, 2009 and 2008,
no options or shares have been granted under the Plan.





NOTE21 CHINA CONTRIBUTION
PLAN





Under the
PRC Law, full-time employees of its subsidiaries in the PRC, Hua Long, New
Century and Bao Sai are entitled to staff welfare benefits including medical
care, welfare subsidies, unemployment insurance and pension benefits through a
China government-mandated multi-employer defined contribution plan. Hua Long,
New Century and Bao Sai are required to accrue for these benefits based on
certain percentages of the employees’ salaries. The total contributions made for
such employee benefits were $5,091 and $8,307 for the periods ended June
30, 2009 and 2008, respectively.





NOTE 22 CONCENTRATION AND
RISK





(a) Major
customers





For both
periods ended June 30, 2009 and 2008, 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
six months ended June 30, 2009, one customer represented more than 10% of the
Company’s revenue and accounts receivable, respectively. As of June 30, 2009,
this customer accounted for 99% or $1,616,800 of the Company’s revenues and
44% or $488,669 of accounts receivable.





For the
six months ended June 30, 2008, one customer represented more than 10% of the
Company’s revenue and accounts receivable, respectively. As of June 30, 2008,
this customer accounted for 72% of the Company’s revenues


F-21


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009





NOTE 22 CONCENTRATION AND RISK(continued)





and 37%
of accounts receivable, amounting to $1,596,152 and $168,915,
respectively.





(b) Major
vendors





For the
six months ended June 30, 2009, one vendor represented more than 10% of the
Company’s purchases and accounts payable, respectively.





For the
six months ended June 30, 2008, one vendor represented more than 10% of the
Company’s purchases and accounts payable, respectively.





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




NOTE 23 COMMITMENTSAND
CONTINGENCIES





Lease
Obligations





The
Company has entered into operating leases related to office space under
non-cancelable agreement expired through June 2009.





As of
June 30, 2009, total future lease commitment was as follows:





Reminder
      of 2009
                  
                  $
                  Nil





Rental
expense for the six months ended June 30, 2009 and 2008 totaled approximately
$1,054 and $3,054, respectively.


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 are a
high-tech company in China chartered and authorized by the Chinese government
for research and inventing, manufacturing and selling biological separation
medium products, which refers to the separation and purification of biological
products and natural medicines. Such technology has been widely used in
producing antibiotic products, Genetic Recombinant Medicine, the Gene Chip,
bacterin production, diagnoses reagent, and biochemical products.





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”).  The Center averaged approximately 217 cases per month
for the first six months of 2009, compared to 188 cases per month in the same
period of 2008, 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 its capital stock of Bao Sai, or 96.77% of
its common stock, as of January 1, 2008.





Supplemental
Agreements executed on August 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 will 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.  For the year ended December 31, 2008, the Company made
a payment of purchase price consideration totaling $2,322,436. As of June 30,
2009, we still have note payable in the amount of $1,149,277 due on December 31,
2009.


1


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. 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.





New
Century’s strategic purchase of Bao Sai provides us with key technology in the
biotech purification field and in chromatography and an experienced R&D
team.   The acquisition increased the number of our full time
employees by about 50.  The Bao Sai employees are primarily in sales,
research and development and administrative areas.





The
Company believes that it has strong prospects of increasing its overall market
share and revenues. Management believes that Bao Sai’s business has good growth
potential and its revenue will increase in the second half of 2009 as Bao Sai
recovers from the effect of the worldwide financial crisis .  The
Center’s diagnostic imaging and radiation oncology treatments and equipment are
all covered by the Chinese national medical insurance system, which provides
greater assurance that the Company will continue to generate reliable revenues
from the Center.  .  We have no plans to purchase or sell
any plant or equipment.  We experience little, if any, seasonality in
our business.





RESULTS
OF OPERATIONS FOR THREE AND SIX MONTHS ENDED JUNE 30, 2009





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 August 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.





Revenues




Through
the second quarter of 2009, we continued to realize our revenues from the
business operations of two subsidiaries: New Century and Bao Sai. New Century
owns radiology and oncology equipment and provides it to Tangdu Hospital’s Gamma
Knife Therapeutic Center (the “Center”) in Shaan 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. New Century receives a percentage of profits from the
Center. We recognize net revenues based on the total amount received from the
patients during the month, less the monthly operating costs incurred at the
centers. The service revenues were recorded 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.


2


The
revenue from our operation of the Center decreased from $1,503,258 for the
quarter ended June 30, 2008 to $973,621 for the same period of 2009 and.
decreased from $1,978,953 during the six months ended June 30, 2008 to $
1,527,877 during the six months ended June 30, 2009. During the second quarter
of 2009, the Center, on average handled approximately 217 cases per month,
compared to 188 cases per month in the same period of
2008.  Revenues from our operation of the Center declined, despite
more cases, in part because the respective profit sharing ratios between us and
the Center changed. New Century receives 70% of the revenues of the Centers in
2009 compared to 80% in 2008. Similarly, our production sales from our Bao Sai
subsidiary also decreased from $623,568 during the six months ended June 30,
2008 to $19,165 during the six month ended June 30, 2009. Baosai’s revenue
decrease so much from 2008 to 2009 principally as a result of the financial
crisis affecting its customers. .





As a
result, our overall revenues for the second quarter of 2009 slightly decreased
to $983,000 from $1,539,313 for the same period ended June 30, 2009. Likewise,
our overall revenue decreased from $2,221,720 during the six months ended June
30, 2008 to $1,547,042 during the six months ended June 30, 2009. This decrease
was attributed to our business adjustment after our acquisition of a new
subsidiary Bao Sai in August 2008. Our Bao Sai operation was still in a
developmental stage.  We expect it will put us in a stronger position
for increasing our market share and revenue later in 2009 because we believe the
market for its services provides significant opportunities for
growth.





Expenses




Accordingly,
our operating expenses for the second quarter of 2009 was reduced to $360,578, a
decrease of $164,080 or 31% from $524,658 for the same period of 2008. Our
operating expenses during the six months ended June 30, 2009 was reduced to
$748,990, a decrease of $ 150,189 or 16.7% to $ 899,179 during the six months
ended June 30, 2008.  The reduction in our operating expenses was due
primarily to the decrease of our business scope and scale as a result of our
acquisition of Bao Sai in August 2008, despite of the increased number of our
full time employees by about 52 as of June 30, 2009 as a result of the
acquisition.





Net
Income





Our net
income during the three and six months ended June 30, 2009 was $444,346 and
$553,770 respectively, compared to $752,803 and $909,484 during the three and
six months ended June 30, 2008.  The reduction of our net income was
primarily due to our decreased revenue as a result of our business adjustment
after our acquisition of Bao Sai. As we complete our business adjustment and our
operation of Bao Sai expands in the future, we expect our net income to
increase.





We expect
to be profitable during fiscal year 2009 through the implementation of our
marketing strategies. However, we cannot be certain that we will be able to
successfully implement our marketing strategies and revenues may decline in 2009
compared to 2008 or, therefore, that we will be profitable.





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.





Our
business operates entirely in Chinese Renminbi, but we report our results in our
SEC filings in U.S. Dollars.  The conversion of our accounts from RMB
to Dollars results in translation adjustments.  While our net income
is added to the retained earnings on our balance sheet; the translation
adjustments are added to a line item on our balance sheet labeled “other
comprehensive income,” since it is more reflective of changes in the relative
values of U.S. and Chinese currencies than of the success of our business.
During the six and three months ended June 30, 2009, the effect of converting
our financial results to Dollars was to add $125 and $40 to our comprehensive
income.


3


LIQUIDITY
AND CAPITAL RESOURCES





As of
June 30, 2009, cash in the bank decreased to $18,326, compared to $552,398 as of
December 31, 2008. This decline is primarily due to repayment of $1,344,846 of
notes payable to related parties arising from the acquisition of Bao Sai. Our
Cash flows provided by operating activities were $1,031,419 for six months ended
June 30, 2009; a significant increase of $821,421 or 391% compared to cash flows
of $209,998 from operating activities for the same period ended June 30, 2008.
The increase in the positive cash flows from operations for the first six months
of 2009 was due primarily to the substantial increase of collected accounts
receivable of $53,576 from ($ 264,322) for the six months of 2008, and
substantial reduction of our trade accounts payable to ($74,159) for the first
six months of 2009 from ($887,603) for the same period of 2008.





However,
cash flows used in investment activities were $(1,344,846) for the six months
ended June 30, 2009, which was used to repay the notes payable to related
parties. .Meanwhile, cash flows used in financing activities were $(220,733) for
the six months ended June 30, 2009.





Our
stockholders’ equity increased from $2,712,927 at December 31, 2008 to
$3,235,654 at June 30, 2009.





In
connection with the purchse of Bao Sai, we still have a note payable in the
amount of $1,149,277 due on December 31, 2009 for the balance of the purchase
price.  We may not be able to generate sufficient cash to satisfy this
obligation from internally generated funds. In such event, we would need to
obtain funds from related parties or outside sources or seek to renegotiate the
terms of the loan, of which there can be no assurance.





In
addition, allowance for doubtful accounts receivable was $515,230 as of June 30,
2009 ($515,026 recorded as a doubtful account receivable on December 31, 2008)
with total accounts receivable totaling $1,121,237, compared to $1,196,511 as of
June 30, 2008. The inability to collect more outstanding receivables can
adversely affect our operations.  The Center accounted for 81% of our
accounts receivable as of June 30, 2009.





On
September 3, 2007, the Company’s newly acquired subsidiary, Bao Sai, disposed of
its investment in 75% of HuaYang for a cash consideration of $1,097,358
(equivalent to RMB7, 500,000). The balance was unsecured and interest-free and
repayable in 4 installments due in full, by December 31, 2008. However, the
balance was overdue as of December 31, 2008, and additional agreement was
entered into by both parties to extend the payment term up to December 31, 2009.
As collectibility has been considered doubtful, an allowance of doubtful debt
was made fully on the notes receivable.  The failure of the Company to
collect this receivable has adversely affected the Company’s
liquidity.





We also
advanced to Xi’an Bao Sai Medicine Co., Ltd (“Medicine”) a loan in the principal
amount of $1,103,046 which was unsecured and interest-free. The loan is
repayable in four equal annual installments commencing December 31, 2009 through
December 31, 2012. The Company leased Bao Sai’s business license for an annual
fixed return. Bao Sai has a 75% equity interest in Medicine.





Overall,
we have funded our cash needs from inception through June 30, 2009 primarily
with a series of debt and equity transactions, including note payable to related
parties of $1,149,277, accounts payable of $50,580, and amount due to
stockholders of $1,951,993.  At June 30, 2009, we have a negative
working capital of ($2,744,941). If we are unable to receive additional cash
from our related parties, we need to rely on financing from outside sources
through debt or equity transactions. Our related parties are under no legal
obligation to provide us with capital infusions. Failure to obtain such
financing could have a material adverse effect on operations and financial
condition.





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.


4


Changes in Internal Control Over
Financial Reporting.  During the most recent quarter ended June
30, 2009, 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.





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
  5
  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:  August  13
      , 2009
                          By:
                          s/Zhan
      Yan DingZhao
      Yan Ding, Chief Executive OfficerBy:
                          /s/Zhong
      Ya LiZhong
      Ya Li, the Principal Financial
Officer




6