**United
        States**
 **Securities
        and Exchange Commission**
 **Washington,
        D.C. 20549**
 **FORM
        10-Q**
 
 x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
 EXCHANGE
        ACT OF 1934
 
 **For
        the quarterly period ended** **September
        30, 2008**
  OR
 
  ̈ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
        SECURITIES
 EXCHANGE
        ACT OF 1934
 
 Commission
        File No: 09081
 
 GFR
        PHARMACEUTICALS, INC.
 (Exact
        name of registrant as specified in its charter)
 
 NEVADA
              77-0517964(State
                  or other jurisdiction of
              (I.R.S.
                  Employer ID No)incorporation
                  or organization)
 
 99
        Yan
        Xiang Road, Biosep Building, Xi An, Shaan Xi Province, P.R. China 710054
 (Address
        of principal executive office) (Zip
        Code)
 
 Registrant's
        telephone number: (011)
        86-29-8239-9676
 
 N/A
 
 Former
        name, former address and former fiscal year,
 (if
        changed since last report)
 
 Indicate
        by check mark whether the registrant: (1) has filed all reports required to
        be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
        during the preceding 12 months (or for such shorter period that the
        registrant was required to file such reports), and (2) has been subject to
        such filing requirements for the past 90 days. Yes  ̈ No  ̈
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, a non-accelerated filer, or a smaller reporting company.
        See
        definitions of "large accelerated filer", "accelerated filer" and "smaller
        reporting company" in Rule 12b-2 of the Exchange Act. (Check
        one):
 Large accelerated filer ̈
              Accelerated filer ̈
              Non-accelerated filer ̈
                (Do not check if a smaller
                reporting company)
              Smaller reporting company ̈
  Indicate
        by check mark whether the registrant is a shell company (as defined in
        Rule 12b-2 of the Exchange Act). Yes  ̈ No  ̈
 
 The
        number of shares of common stock, no par value per share, outstanding as
        of
        November 18, 2008 was 42,079,940.
  
  **GFR
        PHARMACEUTICALS INC.**
 
 **INDEX
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 
 **(UNAUDITED)**
 
 **Page**Condensed
                  Consolidated Balance Sheets as of September 30, 2008 and December
                  31, 2007
              
              F-2Condensed
                  Consolidated Statements of Operations And Comprehensive Income
                  for the
                  three and nine months ended September 30, 2008 and 2007
              
              F-3Condensed
                  Consolidated Statements of Cash Flows for the nine months ended
                  September
                  30, 2008 and 2007
              
              F-4Condensed
                  Consolidated Statement of Stockholders’ Equity for the nine months ended
                  September 30, 2008
              
              F-5Notes
                  to Condensed Consolidated Financial Statements
              
              F-6 to F-22
  
  **GFR PHARMACEUTICALS
        INC.**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 **AS
        OF SEPTEMBER 30, 2008 AND DECEMBER 31, 2007**
 **(Currency
        expressed in United States Dollars (“US$”), except for number of
        shares)**
 
 September 30, 2008
              
              December 31, 2007(Unaudited)
              
              (Audited)**ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              1,772,821
              
              $
              9,951Accounts
                  receivable, net
              
              
              1,216,748
              
              
              343,087Inventories,
                  net
              
              
              281,917
              
              
              -Amount
                  due from related parties
              
              
              1,216,728
              
              
              28,232Notes
                  receivable, net
              
              
              1,083,135
              
              
              -Prepayments
                  and other receivables, net
              
              
              551,629
              
              
              314,185Total
                  current assets
              
              
              6,122,978
              
              
              695,455Non-current
                  assets:Property,
                  plant and equipment, net
              
              
              7,732,601
              
              
              5,585,711Intangible
                  assets, net
              
              
              159,434
              
              
              -Investment
                  in an unconsolidated affiliate
              
              
              340,841
              
              
              -**TOTAL
                  ASSETS**
              
              $
              14,355,854
              
              $
              6,281,166**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable, trade
              
              $
              124,349
              
              $
              -Note
                  payable
              
              
              437,630
              
              
              -Current
                  portion of long-term note payable, related parties
              
              
              714,223
              
              
              -Income
                  tax payable
              
              
              181,159
              
              
              214,570Amount
                  due to related parties
              
              
              1,891,485
              
              
              -Other
                  payables and accrued liabilities
              
              
              539,374
              
              
              59,675Total
                  current liabilities
              
              
              3,888,220
              
              
              274,245Long-term
                  liabilities:Note
                  payable, related parties
              
              
              2,327,220
              
              
              -Total
                  liabilities
              
              
              6,215,440
              
              
              274,245Minority
                  interest
              
              
              574,275
              
              
              328,605Commitments
                  and contingenciesStockholders’
                  equity:Common
                  stock, $0.001 par value; 100,000,000 shares authorized; 42,079,940
                  shares
                  issued and outstanding as of September 30, 2008 and December 31,
                  2007
              
              
              42,080
              
              
              42,080Additional
                  paid-in capital
              
              
              3,712,120
              
              
              3,712,120Accumulated
                  other comprehensive income
              
              
              641,491
              
              
              134,797Statutory
                  reserve
              
              
              236,818
              
              
              236,818Retained
                  earnings
              
              
              2,933,630
              
              
              1,552,501Total
                  stockholders’ equity
              
              
              7,566,139
              
              
              5,678,316**TOTAL
                  LIABILITIES AND STOCKHOLDERS’ EQUITY**
              
              $
              14,355,854
              
              $
              6,281,166
 
 See
        accompanying notes to condensed consolidated financial
        statements.
  F-2
  **GFR
        PHARMACEUTICALS INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF**
 **OPERATIONS
        AND COMPREHENSIVE INCOME**
 **FOR
        THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND
        2007**
 **(Currency
        expressed in United States Dollars (“US$”), except for number of
        shares)**
 **(Unaudited)**
 
 Three months ended September 30,
              
              Nine months ended September 30,2008
              
              2007
              
              2008
              
              2007**REVENUE,
                  NET**Service
                  revenue
              
              $
              941,336
              
              $
              850,101
              
              $
              2,517,325
              
              $
              2,295,937Product
                  sales
              
              
              87,011
              
              
              -
              
              
              329,778
              
              
              -Total
                  revenue, net
              
              
              1,028,347
              
              
              850,101
              
              
              2,847,103
              
              
              2,295,937**COST
                  OF REVENUE**(exclusive
                  of depreciation)Cost
                  of products
              
              
              79,471
              
              
              -
              
              
              215,417
              
              
              -**GROSS
                  PROFIT**
              
              
              948,876
              
              
              850,101
              
              
              2,631,686
              
              
              2,295,937**OPERATING
                  EXPENSES:**Depreciation
                  and amortization
              
              
              186,441
              
              
              117,433
              
              
              543,265
              
              
              342,575General
                  and administrative
              
              
              206,506
              
              
              99,592
              
              
              748,860
              
              
              472,555Total
                  operating expenses
              
              
              392,947
              
              
              217,025
              
              
              1,292,125
              
              
              815,130**INCOME
                  FROM OPERATIONS**
              
              
              555,929
              
              
              633,076
              
              
              1,339,561
              
              
              1,480,807**OTHER
                  INCOME (EXPENSE):**Interest
                  income
              
              
              6,151
              
              
              74
              
              
              6,239
              
              
              269Rental
                  income
              
              
              158,556
              
              
              -
              
              
              561,520
              
              
              -Equity
                  in net income of an unconsolidated affiliate
              
              
              3,464
              
              
              -
              
              
              10,180
              
              
              -Interest
                  expense
              
              
              -
              
              
              (16,637
              )
              
              -
              
              
              (73,745
              )**INCOME
                  BEFORE INCOME TAXES AND MINORITY INTEREST**
              
              
              724,100
              
              
              616,513
              
              
              1,917,500
              
              
              1,407,331Income
                  tax expense
              
              
              (180,426
              )
              
              (224,384
              )
              
              (464,341
              )
              
              (565,966
              )Minority
                  interest
              
              
              (27,431
              )
              
              (21,561
              )
              
              (72,030
              )
              
              (56,403
              )**NET
                  INCOME**
              
              $
              516,243
              
              $
              370,568
              
              $
              1,381,129
              
              $
              784,962Other
                  comprehensive income:-
                  Foreign currency translation gain
              
              
              22,193
              
              
              150,158
              
              
              506,694
              
              
              175,155**COMPREHENSIVE
                  INCOME**
              
              $
              538,436
              
              $
              520,726
              
              $
              1,887,823
              
              $
              960,117Net
                  income per share – Basic and diluted
              
              $
              0.01
              
              $
              0.01
              
              $
              0.03
              
              $
              0.02Weighted
                  average shares outstanding – basic and diluted
              
              
              42,079,940
              
              
              42,079,940
              
              
              42,079,940
              
              
              41,983,644
 
 See
        accompanying notes to condensed consolidated financial
        statements.
  F-3
  **GFR
        PHARMACEUTICALS INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **FOR
        THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007**
 **(Currency
        expressed in United States Dollars (“US$”))**
 **(Unaudited)**
 
 Nine months ended September 30,2008
              
              2007**Cash
                  flows from operating activities:**Net
                  income
              
              $
              1,381,129
              
              $
              784,962Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              543,265
              
              
              342,575Rental
                  expenses, non cash
              
              
              -
              
              
              940Stock-based
                  compensation
              
              
              -
              
              
              264,000Equity
                  in net income of an unconsolidated affiliate
              
              
              (10,180
              )
              
              -Minority
                  interest
              
              
              72,030
              
              
              56,403Change
                  in operating assets and liabilities:Accounts
                  receivable, trade
              
              
              (291,075
              )
              
              153,555Inventories
              
              
              (6,127
              )
              
              -Prepayments
                  and other receivables
              
              
              188,124
              
              
              138,068Accounts
                  payable, trade
              
              
              (802,990
              )
              
              -Income
                  tax payable
              
              
              (46,794
              )
              
              565,966Other
                  payables and accrued liabilities
              
              
              7,809
              
              
              62,779Net
                  cash provided by operating activities
              
              
              1,035,191
              
              
              2,369,248**Cash
                  flows from investing activities:**Acquisition
                  of a subsidiary, net of cash acquired
              
              
              (864,709
              )
              
              -Repayment
                  from an unconsolidated affiliate
              
              
              176,694
              
              
              -Proceeds
                  from repayment of note receivable
              
              
              1,414,516
              
              
              -Purchase
                  of property, plant and equipment
              
              
              (207,230
              )
              
              (283,100
              )Net
                  cash provided by (used in) investing activities
              
              
              519,271
              
              
              (283,100
              )**Cash
                  flows from financing activities:**Advances
                  to related companies
              
              
              (49,897
              )
              
              -Repayment
                  of short-term bank loan
              
              
              -
              
              
              (797,367
              )Advance
                  from (repayment to) stockholders
              
              
              221,821
              
              
              (17,819
              )Net
                  cash provided by (used in) financing activities
              
              
              171,924
              
              
              (815,186
              )Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              36,484
              
              
              29,430**NET
                  CHANGE IN CASH AND CASH EQUIVALENTS**
              
              
              1,762,870
              
              
              1,300,392**CASH
                  AND CASH EQUIVALENTS, BEGINNING OF PERIOD**
              
              
              9,951
              
              
              64,543**CASH
                  AND CASH EQUIVALENTS, END OF PERIOD**
              
              $
              1,772,821
              
              $
              1,364,935**SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:**Cash
                  paid for income taxes
              
              $
              491,301
              
              $
              -Cash
                  paid for interest expenses
              
              $
              -
              
              $
              73,745
 
 See
        accompanying notes to condensed consolidated financial
        statements.
  F-4
  **GFR
        PHARMACEUTICALS INC.**
 **CONDENSED
        CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**
 **FOR
        THE NINE MONTHS ENDED SEPTEMBER 30, 2008**
 **(Currency
        expressed in United States Dollars (“US$”), except for number of
        shares)**
 **(Unaudited)**
 
 Commonstock
              
              Additional
              
              Accumulated
                other
                comprehensive
              
              Statutory
              
              Retained
              
              Total
                Stockholders’No.of shares
              
              Amount
              
              paid-in capital
              
              income
              
              reserve
              
              earnings
              
              equityBalance
                  as of January 1, 2008
              
              
              42,079,940
              
              $
              42,080
              
              $
              3,712,120
              
              $
              134,797
              
              $
              236,818
              
              $
              1,552,501
              
              $
              5,678,316Foreign
                  currency translation adjustment
              
              
              -
              
              
              **-**
              
              
              -
              
              
              506,694
              
              
              -
              
              
              -
              
              
              506,694Net
                  income for the period
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,381,129
              
              
              1,381,129Balance
                  as of September 30, 2008
              
              
              42,079,940
              
              $
              42,080
              
              $
              3,712,120
              
              $
              641,491
              
              $
              236,818
              
              $
              2,933,630
              
              $
              7,566,139
 
 See
        accompanying notes to condensed consolidated financial
        statements.
  F-5
  **GFR
        PHARMACEUTICALS INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **AS
        OF SEPTEMBER 30, 2008 AND DECEMBER 31, 2007**
 **(Currency
        expressed in United States Dollars (“US$”), except for number of
        shares)**
 
 **NOTE
        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 (“GAAP”), and the instructions to Form 10-Q and
        Rule 10-01 of Regulation S-X. Certain information and note disclosures normally
        included in audited financial statements prepared in accordance with generally
        accepted accounting principles have been condensed or omitted pursuant to
        those
        rules and regulations, although the Company believes that the disclosures
        made
        are adequate to make the information not misleading.
 
 In
        the
        opinion of management, the consolidated balance sheet as of December 31,
        2007
        which has been derived from audited financial statements and these unaudited
        condensed consolidated financial statements reflect all normal and recurring
        adjustments considered necessary to state fairly the results for the periods
        presented. The results for the period ended September 30, 2008 are not
        necessarily indicative of the results to be expected for the entire fiscal
        year
        ending December 31, 2008 or for any future period.
 
 These
        unaudited condensed consolidated financial statements and notes thereto should
        be read in conjunction with the Management’s Discussion and the audited
        financial statements and notes thereto included in the Annual Report on Form
        10-KSB for the year ended December 31, 2007.
 
 **NOTE
        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”).
 
 Xi’an
        Hua
        Long Yu Tian Ke Ji Shi Ye Co., Ltd. (“Hua Long”) is a wholly-owned subsidiary of
        the Company, which was incorporated as a limited liability company in the
        PRC on
        December 23, 1999. Its principal activity is an investment holding of 95%
        equity
        interest in New Century Scientific Investment Ltd. (“New Century”).
 
 New
        Century was incorporated as a limited liability company in the PRC on November
        23, 2001 with a registered capital of RMB30,000,000
        (equivalent to US$3,636,000). It jointly
        operates a PET Scanner and Rotary Gamma Ray Stereotactic Neurosurgery System
        imaging center with Tong Du Hospital ("the Hospital") in Xian City, Shaanxi
        Province, the PRC. The duration of the operation was 11 years and it will
        expire
        in 2017.
 
 On
        May
        14, 2008, the Company completed the acquisition of assets and liabilities
        of
        Xi’an Jiaoda Bao Sai Bio-Technology Co., Ltd ("Bao Sai") pursuant to the terms
        of a Stock Purchase Agreement (“the Agreement”) dated January 1, 2008, between
        GFRP and Bao Sai in a consideration of $4,500,211 (approximately RMB33,000,000)
        for 96.77% of its equity interest in Bao Sai, based on the aggregate net
        book
        value of total assets and liabilities of Bao Sai as of December 31, 2007.
        The
        closing date was January 1, 2008. Upon the completion of the transaction,
        Bao
        Sai became a subsidiary of the Company.
  F-6
  GFRP,
        Hua
        Long, New Century and Baosai are hereinafter referred to as (the
“Company”).
 
 **NOTE
        3**  **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES**
 
 l  Use
        of
        estimates
 
 In
        preparing these condensed consolidated financial statements, management makes
        estimates and assumptions that affect the reported amounts of assets and
        liabilities in the balance sheets and revenues and expenses during the period
        reported. Actual results may differ from these estimates.
 
 l  Basis
        of
        consolidation
 
 The
        condensed consolidated financial statements include the financial statements
        of
        GFRP and its subsidiaries, Hua Long, New
        Centur y
        and Bao
        Sai.
 
 All
        significant inter-company balances and transactions within the Company have
        been
        eliminated upon consolidation.
 
 Upon
        the
        acquisition of Bao Sai, the results of subsidiary acquired during the periods
        are included in the consolidated financial statement from the effective date
        of
        acquisition.
 
 Investment
        in an unconsolidated affiliate, namely Xi’ an Bao Sai Medicine Co., Ltd
        (“Medicine”) over which the Company has significant influence are accounted for
        under the equity method of accounting whereby the investment is initially
        recorded at the cost of acquisition and adjusted to recognize the Company’s
        share in undistributed earnings or losses since acquisition. The Company’s share
        in the earnings or losses for its unconsolidated affiliate is reflected in
        equity share in income of unconsolidated affiliates. If the investment in
        an
        unconsolidated affiliate is reduced to a zero balance due to prior losses,
        the
        Company recognizes any further losses related to its share to the extent
        that
        any receivables, loans or advances to the unconsolidated affiliate are evaluated
        to be uncollectible.
 
 l  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.
 
 l  Accounts
        receivable
 
 Accounts
        receivable are recorded at the invoiced amount and do not bear interest.
        The
        Company extends unsecured credit to its customers in the ordinary course
        of
        business but mitigates the associated risks by performing credit checks and
        actively pursuing past due accounts. An allowance for doubtful accounts is
        established and determined based on managements’ assessment of known
        requirements, aging of receivables, payment history, the customer’s current
        credit worthiness and the economic environment.
 
 l  Allowance
        for doubtful accounts
 
 The
        allowance for loan losses on small-balance receivables reflects management’s
        best estimate of probable losses determined principally on the basis of
        historical experience. For larger loans, including specific allowances for
        known
        troubled accounts. The Company maintains a general reserve for all losses
        and
        receivable at 0.05% of the balances.
  F-7
  l  Inventories
 
 Inventories
        are stated at the lower of cost or market (net realizable value), cost being
        determined on a weighted average method. Costs include material, labor and
        manufacturing overhead costs. The Company quarterly reviews historical sales
        activity to determine excess, slow moving items and potentially obsolete
        items
        and also evaluates the impact of any anticipated changes in future demand.
        The
        Company provides inventory allowances based on excess and obsolete inventories
        determined principally by customer demand.
 
 l  Property,
        plant and equipment, net
 
 Property,
        plant and equipment are stated at cost less accumulated depreciation and
        accumulated impairment losses, if any. Depreciation is calculated on the
        straight-line basis over the following expected useful lives from the date
        on
        which they become fully operational and after taking into account their
        estimated residual values:
 
 Depreciable life
              
              Residual valueBuildings
              
              
              20 to 40 years
              
              
              5
              %Plant
                  and equipment
              
              
              5
                  to 16 years
              
              
              5
              %Motor
                  vehicles
              
              
              8
                  to 12 years
              
              
              5
              %Furniture,
                  fixture and office equipment
              
              
              5
                  to 8 years
              
              
              5
              %
 
 Expenditure
        for repairs and maintenance is expensed as incurred. When assets have retired
        or
        sold, the cost and related accumulated depreciation are removed from the
        accounts and any resulting gain or loss is recognized in the results of
        operations.
 
 lIntangible assets


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





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





l Land use
      right





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





l  Impairment
      of long-lived assets





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





F-8





(a) Service
          revenue





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





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





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





(b) Sales
          of
          products





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





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





(c) Interest
          income





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





l  Income
      taxes





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





F-9




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





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





l  Net
      income per share





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





l  Comprehensive
      income





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





l  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.





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





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





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





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




F-10





l Stock-based
          compensation





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





l  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
      operating decisions. Companies are also considered to be related if they are
      subject to common control or common significant influence.





l  Segment
      reporting





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





l  Fair
      value of financial instruments





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





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





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





l Recently
          issued accounting standards





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





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


F-11





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





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





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





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





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


F-12





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





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





**NOTE
      4**  **ACQUISITION
      OF INTEREST IN BAO SAI**





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





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





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


F-13





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





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





Years ending December 31,
            
            Approximately2008
            
            $
            714,2232009
            
            
            2,327,220Total:
            
            $
            3,041,443





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





**NOTE
      5**  **ACCOUNTS
      RECEIVABLE, NET**





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





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





**NOTE
      6**  **NOTES
      RECEIVABLE, NET**





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


F-14





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





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





**NOTE
      7**  **INVENTORIES,
      NET**





Inventories
      consisted of the followings:





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





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





**NOTE
      8**  **AMOUNT
      DUE FROM (TO) RELATED PARTIES**





(a)  Amount
      due from related parties





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





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





(b)  Amount
      due to a stockholder





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


F-15





**NOTE
      9**  **PREPAYMENTS
      AND OTHER RECEIVABLES**





Prepayments
      and other receivables consisted of the following:





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





**NOTE
      10**  **PROPERTY,
      PLANT AND EQUIPMENT, NET**





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





September 30, 2008
            
            December 31, 2007(Unaudited)
            
            (Audited)Buildings
            
            $
            2,293,130
            
            $
            608,053Plant
                and equipment
            
            
            6,486,747
            
            
            5,379,652Motor
                vehicles
            
            
            246,806
            
            
            -Furniture,
                fixture and office equipment
            
            
            146,807
            
            
            18,944Foreign
                translation difference
            
            
            605,262
            
            
            547,3669,778,752
            
            
            6,554,015Less:
                accumulated depreciation
            
            
            (1,801,254
            )
            
            (914,000
            )Less:
                foreign translation difference
            
            
            (244,897
            )
            
            (54,304
            )Property,
                plant and equipment, net
            
            $
            7,732,601
            
            $
            5,585,711





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





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





**NOTE
      11**  **INTANGIBLE
      ASSETS, NET**





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


F-16





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





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





**NOTE
      12**  **INVESTMENT
      IN AN UNCONSOLIDATED AFFILIATE**





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





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





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





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





Revenue
            
            $
            13,573Net
                income
            
            $
            13,573





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





Periods
                ending December 31,
            
            Approximately2008
            
            $
            3,4552009
            
            
            273,4482010
            
            
            273,4482011
            
            
            273,4482012
            
            
            264,027Total:
            
            $
            1,087,826





**NOTE
      13**  **NOTE
      PAYABLE**





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


F-17





**NOTE
      14**  **OTHER
      PAYABLES AND ACCRUED LIABILITIES**





Other
      payables and accrued liabilities consisted of the followings:





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





**NOTE
      15**  **INCOME
      TAXES**





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





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





The
      provision for income taxes consisted of the following:





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





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





*United
      States of America*





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


F-18





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





*The
      PRC*





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





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





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





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





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





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





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




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





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


F-19





**NOTE
      16**  **SEGMENT
      REPORTING**





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





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





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





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





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





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


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


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





F-20




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


Nine months ended September 30, 2008Medical
                Business
              
              Extraction
                Business
              
              TotalOperating
                  revenues
              
              $
              2,517,325
              
              $
              329,778
              
              $
              2,847,103Cost
                  of revenues
              
              
              -
              
              
              (215,417
              )
              
              (215,417
              )Gross
                  profit
              
              
              2,517,325
              
              
              114,361
              
              
              2,631,686Depreciation
                  and amortization
              
              
              411,481
              
              
              131,784
              
              
              543,265Net
                  income
              
              $
              1,270,899
              
              $
              110,230
              
              $
              1,381,129Expenditure
                  for long-lived assets
              
              $
              192,274
              
              $
              14,956
              
              $
              207,230
 
 Nine months ended September 30, 2007Medical
                Business
              
              Extraction
                Business
              
              TotalOperating
                  revenues
              
              $
              2,295,937
              
              $
              -
              
              $
              2,295,937Depreciation
                  and amortization
              
              
              342,575
              
              
              -
              
              
              342,575Net
                  income
              
              $
              784,962
              
              $
              -
              
              $
              784,962Expenditure
                  for long-lived assets
              
              $
              283,100
              
              $
              -
              
              $
              283,100





**NOTE
      17**  **CONCENTRATIONS
      OF RISK**





The
      Company is exposed to the followings concentrations of risk:





(a)  Major
      customers





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





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





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





(b)  Major
      vendors





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





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




F-21





(c)  Credit
      risk





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





(d)  Exchange
      rate risk





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





**NOTE
      18**  **COMMITMENT
      AND CONTINGENCIES**





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





Years
                ending September 30:2009
            
            $
            2,454





F-22


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





**GENERAL
      DESCRIPTION OF BUSINESS**





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





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




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




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




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




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





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





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





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




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




1





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




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





FORWARD
      LOOKING STATEMENTS




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





2





CRITICAL
      ACCOUNTING POLICIES





*Revenue
      recognition*





a)  
      Service revenue





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





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





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





b)  
      Interest income





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





*Stock-based
      compensation*





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





*Property,
      plant and equipment, net*





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




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





Expenditure
      for maintenance and repairs is expensed as incurred.





**Revenues**





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




3





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





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





**Net
      Income**





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





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





**Expenses**





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





**Impact
      of Inflation**





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





**Liquidity
      and Capital Resources**





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





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




4





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




5





**Item
      3. Quantitative and Qualitative Disclosures about Market
      Risk**




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





**Item
      4. Controls and Procedures**





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





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




6


**PART
      II. OTHER INFORMATION**





**Item
      1. Legal Proceedings**





**None**





**Item
      1A. Risk Factors**





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





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





None.





**Item
      3. Defaults Upon Senior Securities.**





None.




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





None.





**Item
      5.**  **Other
      Information**





None





**Item
      6. Exhibits**


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




7




**SIGNATURE**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this Report to be signed on its behalf by the undersigned thereunto
      duly authorized.





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




8