United
States


Securities
and Exchange Commission


Washington,
D.C. 20549


FORM
10-Q




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





For
the quarterly period ended June 30, 2010





OR





oTRANSITION 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) n/a





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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).





Yes 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 o   No x





The
number of shares of common stock, $0.001 par value per share, outstanding as of
August 13, 2010 was 42,079,940.









GFR
PHARMACEUTICALS, INC.


FORM
10-Q


QUARTERLY
PERIOD ENDED JUNE 30, 2010
  INDEX
  PagePART
      I - FINANCIAL INFORMATION
                3Item
      1: – Financial Statements
                3Item
      2: - Management's Discussion and Analysis of Financial Condition and
      Results of Operations
                3Item
      3: – Quantitative and Qualitative Disclosures About Market
      RiskItem
      4: Controls and Procedures
                5PART
      II - OTHER INFORMATION
                6Item
      1: - Legal Proceedings
                6Item
      1A: Risk Factors
                6Item
      2: - Unregistered Sales of Equity Securities and Use of
      Proceeds
                6Item
      3: – Default upon Senior Securities
                6Item
      4: – Removed and Reserved
                6Item
      5: – Other Information
                6Item
      6: – Exhibits
                6
  2


GFR
PHARMACEUTICALS, INC.





INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




(UNAUDITED)




PageCondensed
      Consolidated Balance Sheets as of June 30, 2010 and December 31,
      2009
                F-3Condensed
      Consolidated Statements of Operations And Comprehensive Income for
      theThree
      and Six Months ended June 30, 2010 and 2009
                F-4Condensed
      Consolidated Statements of Cash Flows for the Six Months ended June 30,
      2010and
      2009
                F-5Condensed
      Consolidated Statement of Stockholders’ Equity for the Six Months ended
      June30,
      2010
                F-6Notes
      to Condensed Consolidated Financial Statements
                F-7
      to F-19




F-2




GFR
PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


AS
OF JUNE 30, 2010 AND DECEMBER 31, 2009


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




June
      30, 2010
              
              
              December
      31, 2009(Unaudited)
              
              
              (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              398,954
              
              
              $
              55,486Trade
      accounts receivable, net
              
              
              1,306,082
              
              
              
              541,206Inventories,
      net
              
              
              1,348
              
              
              
              10,289Prepayments
      and other current assets
              
              
              326,054
              
              
              
              277,455Operating
      lease prepaid, current portion
              
              
              7,283
              
              
              
              7,252Total
      current assets
              
              
              2,039,721
              
              
              
              891,688Property,
      plant and equipment, net
              
              
              7,102,617
              
              
              
              6,723,519Operating
      lease prepaid, non-current portion
              
              
              140,495
              
              
              
              143,534TOTAL
      ASSETS
              
              $
              9,282,833
              
              
              $
              7,758,741LIABILITIES
      AND EQUITYCurrent
      liabilities:Trade
      accounts payable
              
              $
              75,247
              
              
              $
              90,682Amount
      due to a related party
              
              
              1,800,085
              
              
              
              1,960,874Income
      tax payable
              
              
              195,819
              
              
              
              171,708Other
      payables and accrued liabilities
              
              
              910,321
              
              
              
              428,553Total
      current liabilities
              
              
              2,981,472
              
              
              
              2,651,817Long-term
      liabilities:Loss
      in excess of investment in an unconsolidated affiliate
              
              
              788,097
              
              
              
              784,802TOTAL
      LIABILITIES
              
              
              3,769,569
              
              
              
              3,436,619Commitments
      and contingenciesEquity:GFR
      Pharmaceuticals, Inc. stockholders’ equity:Common
      stock, $0.001 par value; 100,000,000 shares authorized; 42,079,940 shares
      issued and outstanding as of June 30, 2010 and December 31,
      2009
              
              
              42,080
              
              
              
              42,080Additional
      paid-in capital
              
              
              3,712,120
              
              
              
              3,712,120Accumulated
      other comprehensive income
              
              
              223,519
              
              
              
              210,882Statutory
      reserve
              
              
              595,253
              
              
              
              595,253Retained
      earnings / (accumulated deficits)
              
              
              377,363
              
              
              
              (750,589
              )Total
      GFR Pharmaceuticals, Inc. stockholders’ equity
              
              
              4,950,335
              
              
              
              3,809,746Non-controlling
      interest
              
              
              562,929
              
              
              
              512,376Total
      equity
              
              
              5,513,264
              
              
              
              4,322,122TOTAL
      LIABILITIES AND EQUITY
              
              $
              9,282,833
              
              
              $
              7,758,741




See
accompanying notes to condensed consolidated financial statements.




F-3




GFR
PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


AND
COMPREHENSIVE INCOME


FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009


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


(Unaudited)




Three
      months ended June 30,
            
            
            Six
      months ended June 30,2010
            
            
            2009
            
            
            2010
            
            
            2009Revenues,
      net:Service
      revenue
            
            $
            1,143,957
            
            
            $
            973,621
            
            
            $
            1,923,625
            
            
            $
            1,527,877Product
      sales
            
            
            42,272
            
            
            
            9,379
            
            
            
            52,640
            
            
            
            19,165Total
      revenues, net
            
            
            1,186,229
            
            
            
            983,000
            
            
            
            1,976,265
            
            
            
            1,547,042Cost of revenue(inclusive of depreciation):Depreciation
            
            
            (134,794
            )
            
            
            (142,255
            )
            
            
            (274,857
            )
            
            
            (267,698
            )Cost
      of products
            
            
            (66,156
            )
            
            
            (5,388
            )
            
            
            (76,031
            )
            
            
            (8,745
            )Total
      cost of revenue
            
            
            (200,950
            )
            
            
            (147,643
            )
            
            
            (350,888
            )
            
            
            (276,443
            )Gross
      profit
            
            
            985,279
            
            
            
            835,357
            
            
            
            1,625,377
            
            
            
            1,270,599Operating
      expenses:Depreciation
      and amortization
            
            
            (46,076
            )
            
            
            (47,069
            )
            
            
            (96,180
            )
            
            
            (94,839
            )General
      and administrative
            
            
            (94,710
            )
            
            
            (171,257
            )
            
            
            (266,162
            )
            
            
            (391,284
            )Total
      operating expenses
            
            
            (140,786
            )
            
            
            (218,326
            )
            
            
            (362,342
            )
            
            
            (486,123
            )Income
      from operations
            
            
            844,493
            
            
            
            617,031
            
            
            
            1,263,035
            
            
            
            784,476Other
      income (expense):Interest
      income
            
            
            282
            
            
            
            3,726
            
            
            
            291
            
            
            
            10,864Recovery
      from an unconsolidated affiliate
            
            
            245,566
            
            
            
            -
            
            
            
            245,566
            
            
            
            -Other
      expense
            
            
            -
            
            
            
            (530
            )
            
            
            -
            
            
            
            (574
            )Total
      other income
            
            
            245,848
            
            
            
            3,196
            
            
            
            245,857
            
            
            
            10,290Income
      before income taxes
            
            
            1,090,341
            
            
            
            620,227
            
            
            
            1,508,892
            
            
            
            794,766Income
      tax expense
            
            
            (197,222
            )
            
            
            (175,881
            )
            
            
            (330,387
            )
            
            
            (240,996
            )Net
      income
            
            
            893,119
            
            
            
            444,346
            
            
            
            1,178,505
            
            
            
            553,770Less:
      net income attributable to non-controlling interest
            
            
            (30,578
            )
            
            
            (23,786
            )
            
            
            (50,553
            )
            
            
            (31,168
            )Net
      income attributable to GFR Pharmaceuticals, Inc.
            
            
            862,541
            
            
            
            420,560
            
            
            
            1,127,952
            
            
            
            522,602Other
      comprehensive income:-
      Foreign currency translation gain
            
            
            12,298
            
            
            
            40
            
            
            
            12,637
            
            
            
            125Comprehensive
      income
            
            $
            874,839
            
            
            $
            420,600
            
            
            $
            1,140,589
            
            
            $
            522,727Net
      income per share – Basic and diluted
            
            $
            0.02
            
            
            $
            0.01
            
            
            $
            0.03
            
            
            $
            0.01Weighted
      average common stock 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-4




GFR
PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009


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


(Unaudited)





Six
      months ended June 30,2010
              
              
              2009Cash
      flows from operating activities:Net
      income
              
              $
              1,127,952
              
              
              $
              522,602Adjustments
      to reconcile net income to net cash provided by operatingactivities:Depreciation
      and amortization
              
              
              371,037
              
              
              
              362,537Recovery
      from an unconsolidated affiliate
              
              
              (245,566
              )
              
              
              -Non-controlling
      interest
              
              
              50,553
              
              
              
              31,168Change
      in operating assets and liabilities:Trade
      accounts receivable
              
              
              (759,686
              )
              
              
              53,576Inventories
              
              
              8,950
              
              
              
              (25,468
              )Other
      receivable
              
              
              -
              
              
              
              6,804Prepayments
      and other current assets
              
              
              (47,250
              )
              
              
              107,160Trade
      accounts payable
              
              
              (15,755
              )
              
              
              (74,159
              )Income
      tax payable
              
              
              23,300
              
              
              
              1,170Other
      payables and accrued liabilities
              
              
              62,723
              
              
              
              46,029Net
      cash provided by operating activities
              
              
              576,258
              
              
              
              1,031,419Cash
      flows from investing activities:Purchase
      of property, plant and equipment
              
              
              (277,992
              )
              
              
              -Net
      cash used in investing activities
              
              
              (277,992
              )
              
              
              -Cash
      flows from financing activities:Payments
      from an unconsolidated affiliate
              
              
              245,566
              
              
              
              -Repayment
      of notes payable
              
              
              -
              
              
              
              (219,529
              )Repayment
      of notes payable to related parties
              
              
              -
              
              
              
              (1,344,846
              )Repayment
      from a related party
              
              
              (205,061
              )
              
              
              (1,244
              )Net
      cash provided by (used in) financing activities
              
              
              40,505
              
              
              
              (1,565,619
              )Effect
      on exchange rate change on cash and cash equivalents
              
              
              4,697
              
              
              
              128NET
      CHANGE IN CASH AND CASH EQUIVALENTS
              
              
              343,468
              
              
              
              (534,072
              )CASH
      AND CASH EQUIVALENT, BEGINNING OF PERIOD
              
              
              55,486
              
              
              
              552,398CASH
      AND CASH EQUIVALENT, END OF PERIOD
              
              $
              398,954
              
              
              $
              18,326SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for income taxes
              
              $
              306,276
              
              
              $
              239,826Cash
      paid for interest
              
              $
              -
              
              
              $
              -




See
accompanying notes to condensed consolidated financial statements.




F-5




GFR
PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


FOR
THE SIX MONTHS ENDED JUNE 30, 2010


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


(Unaudited)





GFR
      Pharmaceuticals, Inc. stockholders’ equityCommon
      stock
            
            
            Additional
              paid-in
      capital
            
            
            Accumulated
              other
              comprehensive
              income
            
            
            Statutory
              reserve
            
            
            Retained
              earnings
              (accumulated
      deficit)
            
            
            Non-controlling
              interest
            
            
            Total
              equityNo.
      of shares
            
            
            AmountBalance
      as of January 1, 2010
            
            
            42,079,940
            
            
            $
            42,080
            
            
            $
            3,712,120
            
            
            $
            210,882
            
            
            $
            595,253
            
            
            $
            (750,589
            )
            
            $
            512,376
            
            
            $
            4,322,122Foreign
      currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            12,637
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            12,637Net
      income for the period
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,127,952
            
            
            
            50,553
            
            
            
            1,178,505Balance
      as of June 30, 2010
            
            
            42,079,940
            
            
            $
            42,080
            
            
            $
            3,712,120
            
            
            $
            223,519
            
            
            $
            595,253
            
            
            $
            377,363
            
            
            $
            562,929
            
            
            $
            5,513,264




See
accompanying notes to condensed consolidated financial
statements.




F-6




GFR
PHARMACEUTICALS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)




NOTE-1
            BASIS
      OF PRESENTATION





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





In the
opinion of management, the consolidated balance sheet as of December 31, 2009
which has been derived from audited financial statements and these unaudited
condensed consolidated financial statements reflect all normal and recurring
adjustments considered necessary to state fairly the results for the periods
presented. The results for the period ended June 30, 2010 are not necessarily
indicative of the results to be expected for the entire fiscal year ending
December 31, 2010 or for any future periods.





These
unaudited condensed consolidated financial statements and notes thereto should
be read in conjunction with the Management’s Discussion and the audited
financial statements and notes thereto included in the Annual Report on Form
10-K for the year ended December 31, 2009.








NOTE-2
            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”).





Description of
subsidiaries





Name
            
            Place
      of incorporation
              and
      kind of
              legal
      entity
            
            Principal
      activities
              and
      place of operation
            
            Particulars
      of
              registered
      share
              capital
            
            Effective
      interest
              heldXi'an
      Hua Long Yu Tian Scientific and Technological Industry Co., Ltd. (“Hua
      Long”)
            
            The
      PRC, a limited liability company
            
            Investment
      holding
            
            RMB1,500,000
            
            100%New
      Century Scientific Investment Ltd. (“New Century”)
            
            The
      PRC, a limited liability company
            
            Provision
      of medical management service in the PRC
            
            RMB30,000,000
            
            95%Xi’an
      Jiaoda Bao Sai Bio-Technology Co., Ltd (“Bao Sai”)
            
            The
      PRC, a limited liability company
            
            Research
      and development of extraction process and trading of pharmaceutical
      products in the PRC
            
            RMB60,000,000
            
            96.77%





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





F-7


GFR
PHARMACEUTICALS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)


NOTE-3
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





The
accompanying condensed consolidated financial statements reflect the application
of certain significant accounting policies as described in this note and
elsewhere in the accompanying condensed consolidated financial statements and
notes.





·
            Use
      of estimates





In
preparing these 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 periods reported. Actual
results may differ from these estimates.





·
            Basis
      of consolidation





The
consolidated financial statements include the financial statements of GFRP and
its subsidiaries. All significant inter-company balances and transactions within
the Company have been eliminated upon consolidation.





·
            Equity
      method of accounting





Under
Accounting Standards Codification (“ASC”) Topic 810 “Consolidation” (“ASC 810”),
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 the provision of ASC Topic 323 “Investments - Equity Method and
Joint Ventures” (“ASC 323”) 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 under ASC 810 and the application of the equity method
under ASC 323, 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 an unconsolidated affiliate” is
reflected as a single amount on the Company’s condensed consolidated balance
sheet as approximately $656,844 as of June 30, 2010.





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.





·
            Cash
      and cash equivalents





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





·
            Accounts
      receivable and allowance for doubtful
accounts





Accounts
receivable are recorded at the invoiced amount and do not bear interest.
Management reviews the adequacy of the allowance for doubtful accounts on an
ongoing basis, using historical collection trends and aging of receivables.
Management also periodically evaluates individual customer’s financial
condition, credit history, and the current economic conditions to make
adjustments in the allowance when it is considered necessary. Account balances
are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. The Company does
not have any off-balance-sheet credit exposure related to its customers. For the
six months ended June 30, 2010 and 2009, no allowance for doubtful accounts was
provided during the periods.




F-8




GFR
PHARMACEUTICALS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)


·
            Inventories





Inventories
are stated at the lower of cost or market value (net realizable value), cost
being determined on a weighted average method. Costs include material, labor and
manufacturing overhead costs. The Company quarterly reviews historical sales
activity to determine excess, slow moving items and potentially obsolete items
and also evaluates the impact of any anticipated changes in future demand.
The Company provides inventory allowances based on excess and obsolete
inventories determined principally by customer demand. For the six months ended
June 30, 2010 and 2009, no inventory allowance was provided for the
periods.





·
            Property,
      plant and equipment





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





Depreciable
      life
            
            Residual
      valueBuildings
            
            20
      – 40 years
            
            5%Plant
      and equipment
            
            5 –
      16 years
            
            5%Motor
      vehicles
            
            8
      –12 years
            
            5%Furniture,
      fixture and equipment
            
            5 –
      8 years
            
            5%





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





Depreciation
expense for the three months ended June 30, 2010 and 2009 were $179,057 and
$187,510 respectively, of which $134,794 and $142,255 were included in cost of
revenue.





Depreciation
expense for the six months ended June 30, 2010 and 2009 were $367,410 and
$358,908 respectively, of which $274,857 and $267,698 were include in cost of
revenue.








·
            Operating
      lease prepaid





All lands
in the PRC are owned by the PRC government. The government in the PRC, according
to the relevant PRC law, may grant the right to use the land for a specified
period of time. Thus, all of the Company’s lands in the PRC are considered
operating lease prepaid. Operating lease prepaid is amortized on a straight-line
basis over the lease term of 50 years.





The lease
expense on prepaid operating lease for the six months ended June 30, 2010 and
2009 was $3,627 and $3,629, respectively. As of June 30, 2010, the estimated
annual amortization of the prepaid operating lease for the next five years and
thereafter is as follows:





Periods
      ending June 30:2011
            
            $
            7,2832012
            
            
            7,2832013
            
            
            7,2832014
            
            
            7,2832015
            
            
            7,283Thereafter
            
            
            111,363Total
            
            $
            147,778




F-9


GFR
PHARMACEUTICALS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)




·
            Impairment
      of long-lived assets





In
accordance with the provisions of the provision of ASC Topic 360-10-5, “Impairment or Disposal of Long-Lived
Assets”, all long-lived assets such as property, plant and equipment held
and used by the Company are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is evaluated by a
comparison of the carrying amount of assets to estimated discounted net cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amounts of the assets exceed the fair value of the assets. There
has been no impairment as of June 30, 2010.





·
            Revenue
      recognition





In
accordance with the ASC Topic 605, “Revenue Recognition”, the
Company recognizes revenue when persuasive evidence of an arrangement exists,
transfer of title has occurred or services have been rendered, the selling price
is fixed or determinable and collectibility is reasonably assured.





(a)
            Medical
      service revenue





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





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





(b)
            Product
      sales





The
Company recognizes revenue from the sale and trading of pharmaceutical products
upon delivery to the customers, whereas the title and risk of loss are fully
transferred to the customers. The Company records its revenues, net of value
added taxes (“VAT”) under the PRC tax law which is levied on the majority of the
products at the rate of 17% on the invoiced value of sales. The Company
experienced no product returns and has recorded no reserve for sales returns for
the six months ended June 30, 2010 and 2009.





(c)
            Technical
      service income





The
Company provides technical service based upon the customer’s specifications in a
term of 3 years on a monthly fixed-rate basis. The Company recognizes its
monthly service fee over the service period.





(d)
            Interest
      income





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




F-10


GFR
PHARMACEUTICALS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)


·
            Income
      taxes





The
provision for income taxes is determined in accordance with the provisions of
ASC Topic 740, “Income
Taxes” (“ASC 740”). Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted income tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Any effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.





ASC 740
prescribes a comprehensive model for how companies should recognize, measure,
present, and disclose in their financial statements uncertain tax positions
taken or expected to be taken on a tax return. Under ASC 740, tax positions must
initially be recognized in the financial statements when it is more likely than
not the position will be sustained upon examination by the tax authorities. Such
tax positions must initially and subsequently be measured as the largest amount
of tax benefit that has a greater than 50% likelihood of being realized upon
ultimate settlement with the tax authority assuming full knowledge of the
position and relevant facts.





For the
six months ended June 30, 2010 and 2009, the Company did not have any interest
and penalties associated with tax positions. As of June 30, 2010, the Company
did not have any significant unrecognized uncertain tax positions.





The
Company conducts major businesses in the PRC and is subject to tax in this
jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by the foreign tax authority. For the
six months ended June 30, 2010, the Company filed the 2009 PRC tax return, which
such return was accepted as finalby the tax authority.





·
            Net
      income per share





The
Company calculates net income per share in accordance with ASC Topic 260,“Earnings per Share.” Basic
income per share is computed by dividing the net income by the weighted-average
number of common stocks outstanding during the period. Diluted income per share
is computed similar to basic income per share except that the denominator is
increased to include the number of additional common stocks that would have been
outstanding if the potential common stock equivalents had been issued and if the
additional common stocks were dilutive.





·
            Comprehensive
      income





ASC Topic
220, “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 a period from non-owner sources.
Accumulated other comprehensive income, as presented in the accompanying
condensed consolidated statement of stockholders’ equity, 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.





·
            Foreign
      currencies translation





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




F-11


GFR
PHARMACEUTICALS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)


The
reporting currency of the Company is United States Dollar ("US$"). The Company's
subsidiaries in the PRC maintain their books and records in their 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 the US$ are translated into US$, in accordance
with ASC Topic 830-30, “Translation of Financial
Statement”,using the exchange rate on
the balance sheet date. Revenues and expenses are translated at average rates
prevailing during the year. 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$1 has been made at the following exchange rates for
the respective period:





June
      30, 2010
            
            
            June
      30, 2009Period-end
      RMB:US$1 exchange rate
            
            
            6.8086
            
            
            
            6.8319Period-average
      RMB:US$1 exchange rate
            
            
            6.8348
            
            
            
            6.8328





·
            Related
      parties





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





·
            Segment
      reporting





ASC Topic
280, “Segment Reporting”
establishes standards for reporting information about operating segments on a
basis consistent with the Company’s internal organization structure as well as
information about geographical areas, business segments and major customers in
financial statements. For the six months ended June 30, 2010, the Company
operates in two reportable segments: Medical Business and Extraction Business in
PRC.





·
            Fair
      value measurement





ASC Topic
820-10, “Fair Value Measurements and
Disclosures” (“ASC 820-10”) establishes a new framework for measuring
fair value and expands related disclosures. Broadly, ASC 820-10 framework
requires fair value to be determined based on the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants. ASC 820-10 establishes a three-level
valuation hierarchy based upon observable and non-observable inputs. These tiers
include: Level 1, defined as observable inputs such as quoted prices in active
markets; Level 2, defined as inputs other than quoted prices in active markets
that are either directly or indirectly observable; and Level 3, defined as
unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions.




F-12


GFR
PHARMACEUTICALS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)


For
financial assets and liabilities, fair value is the price the Company would
receive to sell an asset or pay to transfer a liability in an orderly
transaction with a market participant at the measurement date. In the absence of
active markets for the identical assets or liabilities, such measurements
involve developing assumptions based on market observable data and, in the
absence of such data, internal information that is consistent with what market
participants would use in a hypothetical transaction that occurs at the
measurement date.





·
            Fair
      value of financial instruments





The
carrying value of the Company’s financial instruments include cash and cash
equivalents, trade accounts receivable, prepayments and other current assets,
trade accounts payable, amount due to a related party, income tax payable, other
payables and accrued liabilities. Fair values were assumed to approximate
carrying values for these financial instruments because they are short term in
nature and their carrying amounts approximate fair values.





·
            Recent
      accounting pronouncements





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





In
September 2009, the Financial Accounting Standard Board (“FASB”) issued certain
amendments as codified in ASC Topic 605-25, “Revenue Recognition;
Multiple-Element Arrangements.” These amendments provide clarification on
whether multiple deliverables exist, how the arrangement should be separated,
and the consideration allocated. An entity is required to allocate revenue in an
arrangement using estimated selling prices of deliverables in the absence of
vendor-specific objective evidence or third-party evidence of selling price.
These amendments also eliminate the use of the residual method and require an
entity to allocate revenue using the relative selling price method. The
amendments significantly expand the disclosure requirements for
multiple-deliverable revenue arrangements. These provisions are to be applied on
a prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010, with earlier application
permitted. The Company will adopt the provisions of these amendments in its
fiscal year 2011 and is currently evaluating the impact of these amendments to
its consolidated financial statements.





In March
2010, the FASB issued Accounting Standards Update (“ASU”) 2010-11, “Derivatives and Hedging (Topic 815)
— Scope Exception Related to Embedded Credit Derivatives.” ASU 2010-11
clarifies that the only form of an embedded credit derivative that is exempt
from embedded derivative bifurcation requirements are those that relate to the
subordination of one financial instrument to another. As a result, entities that
have contracts containing an embedded credit derivative feature in a form other
than such subordination may need to separately account for the embedded credit
derivative feature. The provisions of ASU 2010-11 will be effective on July 1,
2010 and are not expected to have a significant impact on the Company’s
consolidated financial statements.





In April 2010, the FASB issued ASU 2010-13, Compensation–Stock Compensation (Topic 718):
Effect of Denominating the Exercise Price of aShare-Based Payment Award in the
Currency of the Market in Which the Underlying Equity Security Trades.
ASU 2010-13 provides guidance on the classification of a share-based payment
award as either equity or a liability. A share-based payment that contains a
condition that is not a market, performance, or service condition is required to
be classified as a liability. ASU 2010-13 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010 and is not expected to have a significant impact on the Company’s financial
statements.





In May
2010, the FASB issued ASU 2010-19, Foreign Currency (Topic 830):
Foreign Currency Issues: Multiple Foreign Currency Exchange Rates. The
amendments in ASU 2010-19 are effective as of the announcement date of March 18,
2010. The Company does not expect the provisions of ASU 2010-19 to have a
material effect on the financial position, results of operations or cash flows
of the Company.





In July
2010, the FASB issued new accounting guidance that will require additional
disclosures about the credit quality of loans, lease receivables and other
long-term receivables and the related allowance for credit losses. Certain
additional disclosures in this new accounting guidance will be effective for the
Company on December 31, 2010 with certain other additional disclosures that will
be effective on March 31, 2011. The Company does not expect the adoption of this
new accounting guidance to have a material impact on its consolidated financial
statements.




F-13




GFR
PHARMACEUTICALS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)




NOTE-4
            TRADE
      ACCOUNTS RECEIVABLE




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.





Trade
accounts receivable consisted of the following:





June
      30, 2010
            
            
            December
      31, 2009Trade
      accounts receivable, gross
            
            $
            1,860,519
            
            
            $
            1,093,324Less:
      allowance for doubtful accounts
            
            
            (554,437
            )
            
            
            (552,118
            )Trade
      accounts receivable, net
            
            $
            1,306,082
            
            
            $
            541,206





For the
six months ended June 30, 2010 and 2009, the Company does not provide an
allowance for doubtful accounts.





NOTE-5
            AMOUNT
      DUE TO A RELATED PARTY





As of
June 30, 2010 and December 31, 2009, a balance of $1,800,085 and $1,960,874 due
to a stockholder, Mr. Lian Guo represented a temporary advance to the Company
which was unsecured, interest-free and repayable on demand.





NOTE-6
            INVESTMENT
      IN AN UNCONSOLIDATED AFFILIATE





The
Company has a 75% equity interest in Xi’an Bao Sai Medicine Co., Ltd
(“Medicine”), through Bai Sai, which is registered as a limited liability
company in the PRC. Medicine ceased business in 2007 and leased out its business
license. Thus, the Company does not have control on the policy decisions in
Medicine; and accordingly, investment in Medicine is accounted for under the
equity method.





As of
June 30, 2010 and December 31, 2009, the investment in an unconsolidated
affiliate is presented as follows:-





June
      30, 2010
            
            
            December
      31, 2009Investment
      in Medicine at the date of acquisition
            
            $
            106,804
            
            
            $
            106,804Amount
      due from Medicine
            
            
            735,009
            
            
            
            980,575Less:
      allowance for doubtful accounts
            
            
            (735,009
            )
            
            
            (980,575
            )Share
      of accumulated losses in Medicine
            
            
            (870,823
            )
            
            
            (870,823
            )Foreign
      translation difference
            
            
            (24,078
            )
            
            
            (20,783
            )Loss
      in excess of investment in an unconsolidated affiliate
            
            $
            (788,097
            )
            
            $
            (784,802
            )





For the
three months ended June 30, 2010, the Company received $245,566 from Medicine as
recovery from an unconsolidated affiliate.





F-14




GFR
PHARMACEUTICALS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)


NOTE-7
            PREPAYMENTS
      AND OTHER CURRENT ASSETS





Prepayments
and other current assets consisted of the following:





June
      30, 2010
            
            
            December
      31, 2009Advances
      to employees
            
            $
            219,243
            
            
            $
            151,720Prepayments
      to equipment vendors
            
            
            9,685
            
            
            
            41,169Prepaid
      operating expenses
            
            
            97,126
            
            
            
            84,566$
            326,054
            
            
            $
            277,455




NOTE-8
            OTHER
      PAYABLES AND ACCRUED LIABILITIES





Other
payables and accrued liabilities consisted of the following:





June
      30, 2010
            
            
            December
      31, 2009Business
      tax payable
            
            $
            81,515
            
            
            $
            81,174Government
      levy payable
            
            
            30,354
            
            
            
            34,435Salaries
      and welfare payable
            
            
            98,564
            
            
            
            97,724Advances
      from employees
            
            
            17,444
            
            
            
            50,411Customer
      deposits
            
            
            51,702
            
            
            
            -Payable
      to an equipment vendor
            
            
            440,619
            
            
            
            -Accrued
      operating expenses
            
            
            190,123
            
            
            
            164,809$
            910,321
            
            
            $
            428,553




NOTE-9
            INCOME
      TAXES





For the
six months ended June 30, 2010 and 2009, the local (“United States of America”)
and foreign components of income (loss) before income taxes were comprised of
the following:





Six
      months ended June 30,2010
            
            
            2009Tax
      jurisdiction from:–
      Local
            
            $
            -
            
            
            $
            -–
      Foreign
            
            
            1,508,892
            
            
            
            794,766Income
      before income taxes
            
            $
            1,508,892
            
            
            $
            794,766





The
provision for income taxes consisted of the following:





Six
      months ended June 30,2010
            
            
            2009Current:–
      Local
            
            $
            -
            
            
            $
            -–
      Foreign
            
            
            330,387
            
            
            
            240,996Deferred:–
      Local
            
            
            -
            
            
            
            -–
      Foreign
            
            
            -
            
            
            
            -Income
      tax expense
            
            $
            330,387
            
            
            $
            240,996




F-15


GFR
PHARMACEUTICALS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)




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





United
States of America





GFRP is
registered in the State of Nevada and is subject to the tax laws of the United
States of America. The Company has no operation in the United States of
America.





The
PRC





Under the
Corporate Income Tax Law of the People’s Republic of China, the Company’s
subsidiaries in the PRC are subject to the unified statutory income tax rate of
25%. The reconciliation of income tax rate to the effective income tax rate for
the six months ended June 30, 2010 and 2009 is as follows:





Six
      months ended June 30,2010
            
            
            2009Income
      before income taxes from PRC operation
            
            $
            1,508,892
            
            
            $
            794,766Statutory
      income tax rate
            
            
            25
            %
            
            
            25
            %Income
      tax expense at statutory rate
            
            
            377,223
            
            
            
            198,691Net
      operating loss not recognized as deferred tax assets
            
            
            14,485
            
            
            
            46,476Non-deductible
      items
            
            
            (61,321
            )
            
            
            -Others
            
            
            -
            
            
            
            (4,171
            )Income
      tax expense
            
            $
            330,387
            
            
            $
            240,996





The
following table sets forth the significant components of the aggregate net
deferred tax assets of the Company as of June 30, 2010 and December 31,
2009:





June
      30, 2010
            
            
            December
      31, 2009Deferred
      tax assets:Net
      operating loss carry forwards
            
            $
            254,911
            
            
            $
            240,426Allowance
      for doubtful accounts
            
            
            895,128
            
            
            
            956,519Total
      deferred tax assets
            
            
            1,150,039
            
            
            
            1,196,945Less:
      valuation allowance
            
            
            (1,150,039
            )
            
            
            (1,196,945
            )Deferred
      tax assets
            
            $
            -
            
            
            $
            -





As of
June 30, 2010, the Company incurred $1,019,645 of aggregate cumulative operating
losses carryforwards available to offset its taxable income for PRC income tax
purposes. The Company has provided for a full valuation allowance against the
deferred tax assets of $1,150,039 on the expected future tax benefits from the
net operating loss carryforwards and allowance for doubtful accounts as the
management believes it is more likely than not that these assets will not be
realized in the future. For the six months ended June 30, 2010, the valuation
allowance decreased by $46,906 primarily relating to the recovery of doubtful
accounts.




F-16


GFR
PHARMACEUTICALS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)


NOTE-10
            SEGMENT
      INFORMATION





The
Company’s business units have been aggregated into two reportable segments, as
defined by ASC Topic 280:





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





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





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





The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 3). The Company had no
inter-segment sales for the six months ended June 30, 2010 and 2009. 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 and six months ended June 30, 2010 and
2009:





Three
      months ended June 30, 2010Medical
      Business
            
            
            Extraction
      Business
            
            
            TotalOperating
      revenue, net:Product
      sales
            
            $
            -
            
            
            $
            42,272
            
            
            $
            42,272Service
      revenue
            
            
            997,647
            
            
            
            146,310
            
            
            
            1,143,957997,647
            
            
            
            188,582
            
            
            
            1,186,229Cost
      of revenue
            
            
            (121,390
            )
            
            
            (79,560
            )
            
            
            (200,950
            )Gross
      profit
            
            $
            876,257
            
            
            $
            109,022
            
            
            $
            985,279Depreciation
      and amortization
            
            $
            121,388
            
            
            $
            59,482
            
            
            $
            180,870Net
      income
            
            
            651,582
            
            
            
            241,537
            
            
            
            893,119Expenditure
      for long-lived assets
            
            $
            -
            
            
            $
            658,401
            
            
            $
            658,401





Six
      months ended June 30, 2010Medical
      Business
            
            
            Extraction
      Business
            
            
            TotalOperating
      revenue, net:Product
      sales
            
            $
            -
            
            
            $
            52,640
            
            
            $
            52,640Service
      revenue
            
            
            1,777,953
            
            
            
            145,672
            
            
            
            1,923,6251,777,953
            
            
            
            198,312
            
            
            
            1,976,265Cost
      of revenue
            
            
            (261,453
            )
            
            
            (89,435
            )
            
            
            (350,888
            )Gross
      profit
            
            $
            1,516,500
            
            
            $
            108,877
            
            
            $
            1,625,377Depreciation
      and amortization
            
            $
            261,451
            
            
            $
            109,586
            
            
            $
            371,037Net
      income
            
            
            1,011,055
            
            
            
            167,450
            
            
            
            1,178,505Expenditure
      for long-lived assets
            
            $
            -
            
            
            $
            658,401
            
            
            $
            658,401





Three
      months ended June 30, 2009Medical
      Business
            
            
            Extraction
      Business
            
            
            TotalOperating
      revenue, net :Product
      sales
            
            $
            -
            
            
            $
            9,379
            
            
            $
            9,379Service
      revenue
            
            
            973,621
            
            
            
            -
            
            
            
            973,621973,621
            
            
            
            9,379
            
            
            
            983,000Cost
      of revenue
            
            
            (142,255
            )
            
            
            (5,388
            )
            
            
            (147,643
            )Gross
      profit
            
            $
            831,366
            
            
            $
            3,991
            
            
            $
            835,357Depreciation
      and amortization
            
            $
            142,255
            
            
            $
            47,069
            
            
            $
            189,324Net
      income (loss)
            
            
            530,872
            
            
            
            (86,526
            )
            
            
            444,346Expenditure
      for long-lived assets
            
            $
            -
            
            
            $
            -
            
            
            $
            -




F-17


GFR
PHARMACEUTICALS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)


Six
      months ended June 30, 2009Medical
      Business
            
            
            Extraction
      Business
            
            
            TotalOperating
      revenue, net:Product
      sales
            
            $
            -
            
            
            $
            19,165
            
            
            $
            19,165Service
      revenue
            
            
            1,527,877
            
            
            
            -
            
            
            
            1,527,8771,527,877
            
            
            
            19,165
            
            
            
            1,547,042Cost
      of revenue
            
            
            (267,698
            )
            
            
            (8,745
            )
            
            
            (276,443
            )Gross
      profit
            
            $
            1,260,179
            
            
            $
            10,420
            
            
            $
            1,270,599Depreciation
      and amortization
            
            $
            267,698
            
            
            $
            94,839
            
            
            $
            362,537Net
      income (loss)
            
            
            739,673
            
            
            
            (185,903
            )
            
            
            553,770Expenditure
      for long-lived assets
            
            $
            -
            
            
            $
            -
            
            
            $
            -





For the
three and six months ended June 30, 2010 and 2009, 100% of the Company’s assets
were located in the PRC and 100% of the Company’s revenues and purchases were
derived from customers and vendors located in the PRC.





NOTE-11
            CONCENTRATIONS
      OF RISK





The
Company is exposed to the following concentrations of risk:





(a)         Major
customers





For the
three months ended June 30, 2010, one customer represented more than 10% of the
Company’s revenue and trade accounts receivable. This customer accounted for 89%
of the Company’s revenues amounting to $1,055,710, with $411,938 of trade
accounts receivable.





For the
six months ended June 30, 2010, one customer represented more than 10% of the
Company’s revenue and trade accounts receivable. This customer accounted for 95%
of the Company’s revenues amounting to $1,880,756, with $1,224,765 of trade
accounts receivable.





For the
three months ended June 30, 2009, one customer represented more than 10% of the
Company’s revenue and trade accounts receivable. This customer accounted for 99%
of the Company’s revenues amounting to $973,621, with $763,973 of trade accounts
receivable.





For the
six months ended June 30, 2009, one customer represented more than 10% of the
Company’s revenue and trade accounts receivable. This customer accounted for 99%
of the Company’s revenues amounting to $1,527,877, with $763,973 of trade
accounts receivable.





(b)         Major
vendors





For the
three and six months ended June 30, 2010, no vendor represented more than 10% of
the Company’s purchases and trade accounts payable.





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




F-18


GFR
PHARMACEUTICALS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2010
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)


(c)         Credit
risk





Financial
instruments that are potentially subject to credit risk consist principally of
trade accounts receivables. The Company believes the concentration of credit
risk in its trade receivables is substantially mitigated by its ongoing credit
evaluation process and relatively short collection terms. The Company does not
generally require collateral from customers. The Company evaluates the need for
an allowance for doubtful accounts based upon factors surrounding the credit
risk of specific customers, historical trends and other
information.





(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 RMB depreciates
against US$, the value of RMB revenues and assets as expressed in US$ financial
statements will decline. The Company does not hold any derivative or other
financial instruments that expose to substantial market risk.





(e)         Economic
and political risks





The
Company's operations are conducted in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy.





The
Company's operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Company's results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation.








NOTE-12
            COMMITMENTS
      AND CONTINGENCIES





The
Company leased certain office space under a non-cancelable operating lease
agreement with a term of 2 years with fixed monthly rentals, expiry in June
2011. Total rent expenses for the six months ended June 30, 2010 and 2009 was
$1,053 and $1,052, respectively.





As of
June 30, 2010, the Company has $2,115 of future minimum rental payments due
under the non-cancelable operating lease agreement.








NOTE-13
            COMPARATIVE
      FIGURES





Certain
amounts in the prior periods presented have been reclassified to conform to the
current period financial statement presentation.





F-19





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





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.





The
following discussion should be read in conjunction with, and is qualified in its
entirety by, the financial statements and related notes thereto and other
financial information included in this Annual Report on Form 10- Q. Certain
statements in this “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” are forward-looking.





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 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.





Results
of Operations





Through
the second quarter of 2010, 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 Tang Du
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 Center. 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.





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




3





The
Company believes that New Century has strong prospects of increasing our market
share and revenues because our diagnostic imaging and radiation oncology
treatments and equipment are all covered by the Chinese national medical
insurance system. Bao Sai is focused on strengthening its market share and
improving its business performance. We also believe that Bao Sai will increase
our market share and revenue later in 2010.





Revenues





The
revenue from our operation of the Center increased from $973,621 for the three
months ended June 30, 2009 to $1,143,957 for the same period of 2010, an
increase of 17.50%; and increased from $ 1,527,877 during the six months ended
June 30, 2009 to $ 1,923,625 during the six months ended June 30, 2010 an
increase of 25.90%. In the second quarter of 2010, the cancer treatment business
accounted for $1,143,957 (96.44%) of our revenue. The product sales generated
$42,272 of revenue in the second quarter of 2010 as compared to $9,379 in the
same period of 2009. Our overall revenues for the second quarter of 2010
increased from $983,000 for the three months ended June 30, 2009 to $1,186,229
for the same period of 2010, an increase of 20.67%. Likewise, our overall
revenue increased from $1,547,042 during the six months ended June 30, 2009 to
$1,976,265 during the six months ended June 30, 2010. The increase was
attributed primarily to the increased service revenue from Center and the
increased product sales from Bao Sai.





Expenses





Operating
expenses for the second quarter of 2010 were $140,786 as compared to $218,326
for the same period of 2009, a decrease of $77,540.  For the six
months ended June 30, 2010, our operating expenses decreased from $486,123 to
$362,342 as compared to the same period of 2009. This decrease was
attributable to the reduction of professional and consultancy expenses during
the six months ended June 30, 2010compared to the same period of
2009.




Net
Income





Net
income attributable to GFR Pharmaceuticals, Inc. during the three and six months
ended June 30, 2009 was $420,560 and $522,602 respectively, compared to $862,541
and $1,127,952 during the three and six months ended June 30, 2010.  This
increase was primarily due to our increased revenue from New Century and a
slight decrease of our operating expenses for the second quarter of
2010.





We hope
to be profitable in 2010 through the implementation of our marketing strategies.
However, we cannot be certain that we will be able to successfully implement our
marketing strategies and there can be no assurance for the achievement of any
revenue growth 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.





4





LIQUIDITY
AND CAPITAL RESOURCES





Liquidity
Analysis





June
      30, 2010
            
            
            December 31,
      2009Working
      Capital
            
            $
            (941,751
            )
            
            $
            (1,760,129
            )Stockholders’
      Equity
            
            $
            5,513,264
            
            
            $
            4,322,122Total
      Liabilities
            
            $
            3,769,569
            
            
            $
            3,436,619





Our
working capital deficit was decreased from $1,760,129 as of December 31, 2009 to
$941,751 as of at June 30, 2010. The primary reason for the decrease in working
capital deficit in 2010 by $818,378 was attributable to the  increase
in accounts receivable by $764,876: an increase of cash and cash equivalents by
$343,468; which was partly offset by an increase of accounts payable by $481,768
and a decrease of amounts due to shareholders by $160,789 for the six months
period ended June 30, 2010.





Stockholders’
equity increased from $4,322,122 as of December 31, 2009 to $5,513,264 as of
June 30, 2010, an increase of $1,191,142 or  27.6%. Total liabilities
increased from $3,436,619 as of December 31, 2009 to $3,769,569 as of June 30,
2010, an increase of $332,950 or 9.7%. The increase of total liabilities
was mainly due to the increase of other payables and accrued liabilities from
$428,553 as of December 31, 2009 to $910,321 as of June 30, 2010, an increase of
$481,768 or 112.4%. In addition, our principal shareholder, Mr. Guo Li’an made a
loan to fund our operations. As of June 30, 2010 and December 31, 2009, the
balance of the loan was $1,800,085 and $1,960,874, respectively, which was
unsecured, interest-free and repayable on demand.





As of
June 30, 2010, cash and cash equivalents increased to $398,954 from $55,486 as
of December 31, 2009, an increase of $343,468 or 619.0%. The increase of cash
and cash equivalents was mainly due to the cash flows provided from operating
activities by $576,258; and provided from financing activities by $40,505;
offset by the  outflow in vesting activities of $277,992 for the six
months ended June 30, 2010.





Item
4T. Controls and Procedures





Evaluation of Disclosure Controls
and Procedures. Under the supervision and with the participation of our
management, including our Chief Executive Officer, Zhao Yan Ding, and Principal
Financial Officer, Zhong Ya Li, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange
Act")) as of the end of the period covered by this report.  Based upon
that evaluation, our Chief Executive Officer and Principal Financial Officer
concluded that our disclosure controls and procedures as of the end of the
period covered by this report were effective such that the information required
to be disclosed by us in reports filed under the Securities Exchange Act of 1934
is (i) recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms and (ii) accumulated and communicated to
our management to allow timely decisions regarding disclosure.  A
controls system cannot provide absolute assurance, however, that the objectives
of the controls system are met, and no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within a company have been detected.





Changes in Internal Control Over
Financial Reporting. During the most recent quarter ended June 30, 2010,
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.





5




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.Removed and Reserved.





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
  200231.2
            
            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
  200232.1
            
            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
  200232.2
            
            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





6




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,
      2010
            By:
            /s/Zhao Yan DingZhao
      Yan Ding, Chief Executive Officer(Principal
      executive officer)DATE:  August  13,
      2010
            By:
            /s/ Zhong Ya LiZhong
      Ya Li, Chief Financial Officer(Principal
      financial officer)





7