UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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(Mark One)

|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------

For the quarterly period ended:September 30, 2006

|o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
|- | ---------------------------------------------------------------

For the transition period from __________ to __________

Commission file number000-27959



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GFR Pharmaceuticals Corp.

(Exact name of small business issuer as specified in its charter)



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Nevada
        
        77-0517964(State or other jurisdiction
        
        (IRS Employerof incorporation or organization
        
        Identification No.)




Suite 11405 - 201A Street, Maple Ridge, British Columbia V2X 0Y3

(Address of principal executive offices)

(604) 460-8440

Issuers telephone number

(Former name, former address and former fiscal year, if changed since last report.)

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practical date:September 30, 20061,079,940

Transitional Small Business Disclosure Format (check one).

Yes o ;  Nox





1

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



(Unaudited)September 30,
        
        December 31,2006
        
        2005ASSETSCurrent Assets:Cash and Cash Equivalents
        $                   -
        
        $                   -Accounts Receivable, Net
        1,196,157
        
        1,525,435Inventory
        1,963,739
        
        1,789,407Prepaid expense
        48,475
        
        86,765Total Current Assets
        3,208,371
        
        3,401,607Fixed Assets:Manufacturing Equipment
        907,535
        
        495,953Office Equipment
        299,932
        
        240,533Furniture & Fixtures
        5,330
        
        4,061Leasehold improvements
        73,041
        
        56,759Property Held Under Capital Lease
        316,748
        
        353,2691,602,586
        
        1,150,575Less Accumulated Depreciation
        (675,853)
        
        (491,948)Total Fixed Assets
        926,733
        
        658,627TOTAL ASSETS
        $     4,135,104
        
        $    4,060,234






2

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GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Continued)



(Unaudited)September 30,
        
        December 31,2006
        
        2005LIABILITIESCurrent Liabilities:Accounts Payable and Accrued Liabilities
        $       924,425
        
        $    1,298,032Bank Line
        901,141
        
        844,609Related Party Loans
        183,890
        
        166,742Shareholder Payables
        149,794
        
        -Current Portion of Obligations Under Capital Leases
        58,306
        
        46,184Current Portion Long-Term Debt
        8,930
        
        8,543Total Current Liabilities
        2,226,486
        
        2,364,110Non-Current Liabilities:Long-Term Debt
        131,436
        
        22,069Lease Obligations
        59,450
        
        72,160Deferred Tax Liability
        236,257
        
        225,114Total Non-Current Liabilities
        427,143
        
        319,343Total Liabilities
        2,653,629
        
        2,683,453STOCKHOLDERS EQUITYCommon Stock - $0.001 par value, 100,000,000shares authorized, 1,079,940 issued and outstandingat March 31, 2005 and December 31, 2004
        1,080
        1,080Additional Paid-in Capital
        698,961
        
        698,961Currency Translation Adjustment
        230,407
        
        173,819Retained Earnings (Deficit)
        551,027
        
        502,921Total Stockholders Equity
        1,481,475
        
        1,376,781TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
        $    4,135,104
        
        $    4,060,234




The accompanying notes are an integral part of these financial statements.



3

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GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



For the three months ended
        
        For the nine months endedSeptember 30,
        
        September 30,2006
        
        2005
        
        2006
        
        2005REVENUESSales
        $ 1,380,352
        
        $ 1,790,877
        
        $ 5,303,833
        
        $ 4,727,551Cost of Sales
        987,804
        
        1,342,249
        
        3,726,005
        
        3,457,572Gross margin
        392,548
        
        448,628
        
        1,577,828
        
        1,269,979EXPENSESSelling & Marketing
        54,458
        
        34,855
        
        253,790
        
        150,018General & Administrative
        127,730
        
        202,365
        
        483,673
        
        357,116Consulting
        18,814
        
        14,352
        
        40,366
        
        52,608Depreciation Expense
        36,070
        
        32,136
        
        98,613
        
        92,802Salaries & Wages
        159,434
        
        63,488
        
        507,347
        
        422,277396,506
        
        347,196
        
        1,383,789
        
        1,074,821Net Income from Operations
        (3,958)
        
        101,432
        
        194,039
        
        195,158Other Income (Expense)Interest, Net
        (32,081)
        
        (1,720)
        
        (81,642)
        
        (48,148)Currency Exchange, Net
        (16,494)
        
        (1,705)
        
        (16,494)
        
        (1,344)Net Income (Loss)Before Income Taxes
        (52,533)
        
        98,007
        
        95,903
        
        145,666Income Tax Expense
        7,481
        
        (22,973)
        
        (47,797)
        
        (55,353)NET INCOME (LOSS)
        $    (45,052)
        
        $      75,034
        
        $      48,106
        
        $      90,313Weighted Average Shares Outstanding
        1,079,949
        
        1,079,949
        
        1,079,949
        
        1,079,949Earnings (Loss) Per Share
        $        (0.04)
        
        $          0.07
        
        $          0.04
        
        $          0.08




The accompanying notes are an integral part of these financial statements.



4

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GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



For the nine months endedSeptember 30,2006
        
        2005Cash Flows From Operating ActivitiesNet Income (loss) for the period
        $      48,106
        
        $     90,313Adjustments to reconcile net loss to net cashProvided by operating activitiesCurrency Translation Adjustment
        -
        
        234,056Depreciation and Amortization
        95,100
        
        112,919Decrease (Increase) in Receivables
        158,509
        
        217,097Decrease (Increase) in Inventory
        (91,749)
        
        (503,984)Decrease (Increase) in Prepaid Expense
        41,594
        
        (14,285)Increase (Decrease) in Accounts Payable & Accrued Liabilities
        (425,101)
        
        174,089Increase (Decrease) in Bank Overdraft
        17,940
        
        120,052Net Cash Provided by (Used in) Operating Activities
        (155,601)
        
        430,257Cash Flows From Investing ActivitiesPurchase of Property and Equipment
        (108,145)
        
        (50,632)Net Cash Used by Investing Activities
        (108,145)
        
        (50,632)Cash Flows From Financing ActivitiesProceeds/(Payments) on Bank Line
        -
        
        (346,770)Proceeds/(Payments) on Shareholder Payables
        147,550
        
        20,687Proceeds/(Payments) Long Term Debt/Lease Obligation
        116,196
        
        (53,542)Net Cash Provided by (Used in) Financing Activities
        263,746
        
        (379,625)Increase (Decrease) in Cash
        -
        
        -Cash at beginning of period
        -
        
        -Cash at End of Period
        $                -
        
        $               -Supplemental Disclosure of Interest and Income Taxes PaidInterest paid during the period
        $      81,216
        
        $     38,683Income taxes paid during the period
        $        8,786
        
        $               -Supplemental Disclosure of Non-cash Investing and Financing ActivitiesManufacturing Equipment on Capital Lease
        $      30,958
        
        $               -Shares issued in satisfaction of notes payable
        $                -
        
        $               -




The accompanying notes are an integral part of these financial statements.



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GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of accounting policies for GFR Pharmaceuticals, Inc. and Subsidiaries (Formerly Laredo Investment Corp.) is presented to assist in understanding the Companys financial statements. The accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.

Interim Reporting

The unaudited financial statements as of September 30, 2006, in the opinion of management, reflects all adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position and results of operations for the nine months. Operating results for interim periods are not necessarily indicative of the results which can be expected for full years.

Organization and Basis of Presentation

The Company was incorporated under the laws of the State of Nevada on December 18, 1996. The Company ceased all operating activities during the period from December 18, 1996 to July 9, 1999 and was considered dormant. On July 9, 1999, the Company obtained a Certificate of renewal from the State of Nevada. From July 9, 1999 to January 21, 2000, the Company was in the development stage.

On January 21, 2000, Laredo entered into an Acquisition Agreement with GFR Pharma, Ltd. (Formerly GFR Nutritionals, Ltd.), a British Columbia corporation, (GFR), Richard Pierce and Lucretia Schanfarber  (the GFR Majority Shareholders) to acquire their shares representing 100% of the outstanding common stock of GFR in exchange for 19,000,000 newly issued shares of Laredos restricted common stock. The transaction was recorded as a reverse acquisition. GFR was incorporated in March 1997 as Helm Developments Ltd. In June 1998, the Company formally changed its name to GFR Nutritionals Ltd. GFR was 100% owned by the President and CEO, Richard Pierce from inception until January 17, 2000, when a 10% interest was acquired by Lucretia Schanfarber. Business operations began in October 1998 after acquiring manufacturing equipment and arranging to manufacture nutritional supplements under a
private label contract.

On June 21, 2000, the Company entered into an Acquisition Agreement with Nutritionals (USA) Direct.Com, a Washington corporation, (NDC), to acquire 100% of the outstanding common stock of NDC in exchange for $1,000. The transaction has been recorded as a purchase. NDC operations were wound down in October 2002 and the company became dormant.



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GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

On November 1, 2000, the Company entered into an Acquisition Agreement with GFR Health, Inc. (Formerly R & L Health, Inc.), a British Columbia corporation, to acquire 100% of the outstanding common stock of GFR Health, Inc. in exchange for $0.01. The transaction was recorded as a purchase.

On April 5, 2004, GFR Nutritionals Ltd. and R&L Health Inc changed their names to GFR Pharma Ltd. and GFR Health Inc. respectively.

On August 9, 2004, Laredo Investment Corp. changed its name to GFR Pharmaceuticals, Inc.

Principles of Consolidation

The consolidated financial statements include the accounts of GFR Pharmaceuticals, Inc. (Formerly Laredo Investment Corp.) and the following wholly owned subsidiaries:

*
        GFR Pharma Ltd. (Formerly GFR Nutritionals, Ltd.), a British Columbia corporation


*
        Nutritionals(USA) Direct.com, a Washington corporation


*
        GFR Health, Inc. (Formerly R & L Health, Inc.),  a British Columbia corporation


All significant inter-company accounts and transactions have been eliminated.

Nature of Business

The Company specializes in formulating, blending, encapsulating and packing nutritional products. The Company also distributes products through its GFR Health Inc. subsidiary. The Companys operations are located in the province of British Columbia, Canada.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes.



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GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

Inventories

Raw materials inventory is stated at a lower of weighted average cost and replacement value. Inventories of work in progress are stated at the lower of weighted average cost and net realizable value.

Revenue Recognition

Revenue is recognized from sales of product at the time of shipment to customers.

Advertising Costs

Advertising is expensed as incurred.

Depreciation

Fixed assets are stated at cost. Depreciation and amortization is calculated on a straight-line  basis over the estimated  useful lives of the assets as follows:



Asset
        
        RateManufacturing equipment
        
        10-20 yearsFurniture and fixtures
        
        5-7 yearsOffice equipment
        
        3-5 yearsComputer Software
        
        4 yearsLeasehold improvements
        
        Term of lease




Maintenance and repairs are charged to operations; betterments are capitalized. The cost of property sold or otherwise disposed of and the accumulated depreciation thereon are eliminated from the property and related accumulated depreciation accounts, and any resulting gain or loss is credited or charged to income.

The Company has adopted the Financial Accounting Standards Board SFAS No., 121, Accounting for the Impairment of Long-lived Assets.  SFAS No. 121 addresses the accounting for (i) impairment of long-lived assets, certain identified intangibles and goodwill related to assets to be held and used, and (ii) long-live lived assets and certain identifiable intangibles to be



8

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GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

disposed of. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles  be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows from the use of the asset and its eventual disposition (un-discounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized.

Foreign Currency Translation

The Companys functional currency is the Canadian dollar and the reporting currency is the U.S. Dollar.       All elements of financial statements are translated using a current exchange rate. For assets and liabilities, the exchange rate at the balance sheet date is used. Stockholders Equity is translated using the historical  rate. For revenues, expenses, gains and losses the weighted average exchange rate for the period is used. Translation gains and losses are included as a separate component of stockholders equity. Gains and losses resulting from foreign currency transactions are included in net income.

Pervasiveness of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles required management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Concentrations of Credit Risk

The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.

Income Taxes

The Company accounts for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes.  SFAS No.109 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities.



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GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

Reclassifications

Certain reclassifications have been made in the 2005 financial statements to conform with the 2006 presentation.

Earnings (Loss) per Share

Basic earnings (loss) per share has been computed by dividing the income (loss) for the year applicable to the common stockholders by the weighted average number of common shares outstanding during the years. There were no common equivalent shares outstanding at September 30, 2006 and 2005.

Stock Compensation for Non-Employees

The Company accounts for the fair value of its stock compensation grants for non-employees in accordance with FASB Statement 123. The fair value of each grant is equal to the market price of the Companys stock on the date of grant if an active market exists or at a value determined in an arms length negotiation between the Company and the non-employee.

NOTE 2 - ACCOUNTS RECEIVABLE

As of September 30, 2006 and December 31, 2005, accounts receivable consisted of the following:



September 30,
        
        December 31,2006
        
        2005Accounts Receivable
        $   1,262,378
        
        $  1,607,436Less: Allowance for Doubtful Accounts
        (66,221)
        
        (82,001)Total Accounts Receivable
        $   1,196,157
        
        $  1,525,435




The allowance for doubtful accounts is based on management estimate of receivables over 120 days outstanding.



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GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

NOTE 3 - INVENTORY

Inventory is valued at lower of cost or market. As of September 30, 2006 and December 31, 2005, inventory consists of the following:



September 30,
        
        December 31,2006
        
        2005Raw materials
        $   1,448,143
        
        $  1,419,651Work in process
        185,816
        
        39,654Finished Goods
        329,780
        
        330,102Total Inventory
        $   1,963,739
        
        $  1,789,407




NOTE 4 - INCOME TAXES

The provision for income taxes consists of Canadian federal and provincial and territorial income tax. For the nine months ended September 30, 2006, income tax expense has been estimated as $47,797. For the same period in 2005, it was estimated as $55,353.

Deferred taxes result from temporary differences in the recognition of income and expenses for income tax reporting and financial statement reporting purposes. The Company had deferred tax liability (asset) of 236,257 and 225,114 as of September 30, 2006 and December 31, 2005. The deferred tax liability (asset) is the result of excess depreciation for income tax purposes over the amount for financial reporting purposes.

NOTE 5 - RELATED PARTY TRANSACTIONS

As of September 30, 2006, a major shareholder of the Company, Richard Pierce CEO of GFR Pharmaceuticals Inc. gave the Company an unsecured line of credit of up to $268,986 ($300,000 Canadian). As of September 30, 2006, the Company owes $149,794  (167,066 Canadian) against this line of credit.

Richard Pierce, CEO of Laredo holds a contract with GFR Health, Ltd. (Formerly R&L Health Inc.) that licenses his names and images for use on certain products. He is paid a quarterly bonus of 10% of GFR Health, Inc. profits before income taxes, depreciation, and amortization are deducted as expenses. As of September 30, 2006 and 2005, $0 and $8,184 were accrued or paid.



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GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

NOTE 6 - SHORT-TERM OBLIGATIONS



September 30,
        
        December 31,2006
        
        2005Promissory note, repayable to related partiesupon demand, including interest at 12%
        $        183,890
        
        $       166,742




The Company has a line of credit with a bank with a  total amount owing of $901,141 and $844,609 as of September 30, 2006 and December 31, 2005, respectively. This line carries an interest rate of prime plus 0.5%  and a total available credit of $920,000 ($1,000,000 Canadian) as of September 30, 2006. The line is secured by certain manufacturing equipment of the Company.

NOTE 7 - LONG-TERM DEBT



September 30,
        
        December 31,2006
        
        2005Business Development Bank of Canada Loan, repayable inmonthly installments $747 ($830 Canadian), including interestat prime plus 1%, maturing August 23, 2009
        $          26,045
        
        $         30,612Business Development Bank of Canada Loan, repayable in
        114,321
        
        -monthly installments $990 ($1,105 Canadian), Interest onlyat prime plus 1%, maturing July 7, 2011Less current portion of long-term debt
        (8,930)
        
        (8,543)Long-term portion of debt
        $        131,436
        
        $         22,069






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GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Principal payments due on long-term debt for each of the five years subsequent to December 31, 2005 and thereafter are as follows:



Year ending:
        
        Amount2006
        
        $     8,9302007
        
        31,7942008
        
        31,7942009
        
        27,3292010
        
        22,864Thereafter
        
        -Total
        
        $ 122,711




NOTE 8 - ECONOMIC DEPENDENCE

The Company sells a substantial portion of its product to one customer. During the first three quarters of 2006 and 2005, sales to that customer aggregated 41% and 49%, respectively. As of September 30, 2006 and December 31, 2005, amounts due from that customer included in accounts receivable were 29% and 49%, respectively. Future operations of the Company depend on continuation of the manufacturing arrangement with that customer.

NOTE 9 - COMMITMENTS

The Company has entered into a lease agreement for its manufacturing and office facilities and certain manufacturing equipment with the Companys major shareholder, Richard Pierce and other parties. The rental charges are approximately $240,200 ($268,000 Canadian) per year for real property and $58,640 ($65,400 Canadian) per year for equipment. There are two real property leases. The first expires December 31, 2006, it is comprised of the original building that the company has been operating from. The second is a five year lease that will expire March 31, 2011. This lease is where the new operating premises will be located. The equipment leases expire June 2005 through December 2008.

The assets and liabilities under capital leases are recorded at the fair value of the asset. The assets are depreciated over the lower of their estimated productive lives. Depreciation of assets under capital leases is included in depreciation expense for 2006 and 2005.



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GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Following is a summary of property held under capital leases:



September 30,
        
        December 31,2006
        
        2005Manufacturing Equipment
        $      316,748
        
        $     353,269Less: Accumulated Depreciation
        (58,860)
        
        (61,430)Net Assets Held Under Capital Lease
        $      257,888
        
        $     291,839




The minimum future lease payments under these leases for the next five years are:



Ending December 31:
        Real Property
        
        Equipment2006
        $     241,200
        
        $    65,9852007
        356,400
        
        68,6912008
        356,400
        
        30,7442009
        356,400
        
        9,5312010
        356,400
        
        7,943Net Minimum Lease Payments
        -
        
        182,894Less: Amount Representing Interest
        -
        
        (22,126)Present Value of Net Minimum Lease Payment
        $  1,666,800
        
        $  160,768




The leases generally provide that insurance, maintenance and tax expenses are obligations of the Company. It is expected that in the normal course of business, leases that expire will be renewed or replaced by leases on other properties.

NOTE 10 - STOCK INCENTIVE PLAN

The Board of Directors has authorized and the Company has established the 2000 Incentive and Non-qualified Stock Option Plan. Under the plan the Company is authorized to issue up to 200,000 shares of the Company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 September 30, 2006, no options have been granted.

NOTE 11 - STOCK SPLIT

On August 9, 2004, the Company changed its name from Laredo Investment Corp. To GFR Pharmaceuticals, Inc. In addition, a retroactive 30:1 reverse stock split was approved by shareholders. All references to stock in the accompanying financial statements reflect this stock split.



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Item 2. Managements Discussion and Analysis or Plan of Operation.

Plan of Operations

The Company is currently working on securing additional private label manufacturing contracts. The key target for private label sales are wholesale distributors of health food nutrition products. GFR is also pursuing opportunities for direct sales to consumers through the Internet. GFR has entered into the OTC (Over the Counter) drug market with the introduction of Acetaminophen and A.S.A. products but has no signed contracts at this time.

Liquidity and Capital Resources

GFRs working capital ratio was 1.44 at September 30, 2006 compared to 1.44 at December 31, 2005. Current liabilities include a $183,890 promissory note payable to a party related to the major shareholder,  Richard Pierce, which bears interest at 12% annually. These funds are repayable on demand however, the request for repayment occurring at this time is not expected.

GFR has a two small business loans outstanding. The first has an outstanding balance of $26,045 as of September 30, 2006. This loan bears interest at prime plus 1 percent, maturing August 23, 2009. The second loan has an outstanding balance of  $114,319 as of September 30, 2006. This loan bears interest at prime plus 1 percent, maturing August 23, 20014. At this time only interest payments are being made on this loan and the amount could increase to $358,648 before the loan is closed. New manufacturing equipment is being purchased.

GFR acquired an additional $108,145 of manufacturing equipment in the first three quarters of 2006. An additional $275,000 of manufacturing equipment is expected to be purchased in 2006 in order to meet demands for new private label sales.

Results of Operations



For the Three Months Ended
        
        For the Nine Months EndedSeptember 30,
        
        September 30,2006
        
        2005
        
        2006
        
        2005Sales
        $1,380,352
        
        $1,790,877
        
        $5,303,833
        
        $4,727,551Cost of Sales
        392,548
        
        1,342,249
        
        3,726,005
        
        3,457,572Gross Margin
        $  987,804
        
        $   448,628
        
        $1,577,828
        
        $1,269,979Gross Profit Percentage
        71.56%
        
        25.05%
        
        29.75%
        
        26.86%Selling and Marketing Expenses
        $    54,458
        
        $     34,855
        
        $   253,790
        
        $   150,018Selling Expense as a % of Sales
        3.95%
        
        1.95%
        
        4.79%
        
        3.17%Admin. and Other Expenses
        $   342,047
        
        $   312,341
        
        $1,129,999
        
        $  924,803Admin Expenses as a % of Sales
        24.78%
        
        17.44%
        
        21.31%
        
        19.56%




For the nine months ended September 30, 2006, sales were $576,282 higher than 2005. Although sales for the 3rd quarter were lower than for the same quarter of 2005, due to lower sales in the months of July and August, sales have recovered back to the same levels as 2005 and are expected to stay at these levels for the last quarter of 2006.

During the first three quarters of 2006 and 2005 sales to Prairie Naturals Inc. were 41% and 49% respectively. GFR has a verbal arrangement to manufacture, on an as-ordered basis, private label products that Prairie Naturals Inc. and distributes under the Prairie Naturals Inc. name. GFR also has an exclusive written contract to manufacture one product that Prairie Naturals Inc. distributes for a third party private label.

Operating margins for the nine months ending September 30, 2006 and 2005 were 29.75% and 26.86% of sales revenue. Cost of Sales includes the cost of raw materials used in manufacturing, production labor costs and an applicable share of overhead expenses. Operating margins for the three quarters were higher than the same period for 2005 in part because the product mix contained jobs with higher margins in general.



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General and administrative expenses for the nine months ended September 30, 2006 and 2005 were 21.31% and 19.56% of sales. GFR anticipates realizing economies of scale as production volumes increase. This will be reflected favorably in the future by decreasing further the percentage of sales for these expenses.

Effect of Inflation

GFR does not anticipate any financial impact, whether beneficial or detrimental, as a result of inflation.

Item 3. Controls and Procedures

The Companys Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures for the Company.

(a) Evaluation of Disclosure Controls and Procedures

As of the end of the  period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys President, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based upon the evaluation, the Companys President concluded that, as of the end of the period, the Companys disclosure controls and procedures were effective in timely alerting him to material information relating to the Company required to be included in the reports that the Company files and submits pursuant to the Exchange Act.

(b) Changes in Internal Controls

Based on this evaluation as of September 30, 2006, there were no significant changes in the Companys internal controls over financial reporting or in any other areas that could significantly affect the Companys internal controls subsequent to the date of his most recent evaluation, including any corrective actions with regard to significant deficiencies

PART II- OTHER INFORMATION

Item 1. Legal Proceedings

The company is in dispute with one of its waste disposal vendor for cancellation of the service contract between the two companies. The dispute is being heard in small claims court with the vendor asking for $12,578 in compensation. The initial settlement conference is scheduled for October 2006.

Item 2. Changes in Securities

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 and Reports on Form 8-K

The Company did not file a report on Form 8-K during the past quarter.



16

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

GFR Pharmaceuticals, Inc.

(Registrant)

DATE: October 31,2006
        By: /s/ Richard Pierce


Richard Pierce

President, C.E.O., Director



DATE: October 31, 2006
        By: /s/  Marc Casavant


Marc Casavant

C.F.O., Director



17

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Exhibit 31.1

Section 302 Certifications

I, Richard Pierce, certify that:

1.            I have reviewed this quarterly report on form 10-QSB of GFR Pharmaceuticals, Inc.

2.            Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

3.            Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report.

4.             The small business issuers other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in exchange act rules 13a-15(e) and 15d-15(e) for the small business issuer and have:

a)             designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)            evaluated the effectiveness of the small business issuers disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report on such evaluation; and

c)             disclosed in this report any change in the small business issuers internal control over financial reporting that occurred during the small business issuers most recent fiscal quarter (the small business issuers fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuers internal control over financial reporting; and

5.             The small business issuers other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuers auditors and the audit committee of small business issuers board of directors (or persons performing the equivalent functions):

a)             all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuers ability to record, process, summarize and report financial information; and

b)            any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuers internal control over financial reporting.

Date October 312006

By:/s/ Richard Pierce

Richard Pierce,

CEO, Director (Principal Executive Officer)





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Exhibit 31.2

Section 302 Certifications

I, Marc Casavant, certify that:

1.            I have reviewed this quarterly report on form 10-QSB of GFR Pharmaceuticals, Inc.

2.            Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

3.            Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report.

4.             The small business issuers other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in exchange act rules 13a-15(e) and 15d-15(e) for the small business issuer and have:

a)             designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)            evaluated the effectiveness of the small business issuers disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report on such evaluation; and

c)             disclosed in this report any change in the small business issuers internal control over financial reporting that occurred during the small business issuers most recent fiscal quarter (the small business issuers fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuers internal control over financial reporting; and

5.             The small business issuers other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuers auditors and the audit committee of small business issuers board of directors (or persons performing the equivalent functions):

a)             all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuers ability to record, process, summarize and report financial information; and

b)            any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuers internal control over financial reporting.

Date: October 31, 2006

By: /s/ Marc Casavant

Marc Casavant

CFO, Director(Principal Accounting Officer)





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Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of GFR Pharmaceuticals, Inc. on Form 10-QSB for the period ending September 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Richard Pierce, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:

(1)           The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

By: /s/ Richard Pierce

Richard Pierce

CEO, Director

(Principal Executive Officer)

Date: October 31, 2006

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.





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Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of GFR Pharmaceuticals, Inc. on Form 10-QSB for the period ending September 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Marc Casavant, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:

(1)           The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

By: /s/ Marc Casavant

Marc Casavant

CFO, Director

(Principal Accounting Officer)

Date: October 31, 2006

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.