United
States


Securities
and Exchange Commission


Washington,
D.C. 20549


FORM
10-Q





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





For
the quarterly period ended September 30, 2010





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) n/a





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





N/A


———————————————————————


Former
name, former address and former fiscal year,


(if
changed since last report)





Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x     No  ̈





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





Yes  ̈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  x




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





The
number of shares of common stock, $0.001 par value per share, outstanding as of
November 10, 2010 was 42,079,940.





GFR
PHARMACEUTICALS, INC.


FORM
10-Q


QUARTERLY
PERIOD ENDED SEPTEMBER
30, 2010





INDEX




PagePART
      I - FINANCIAL INFORMATIONItem
      1: – Financial Statements
                    3Item
      2: - Management's Discussion and Analysis of Financial Condition and
      Results of Operations
                    23Item
      3: – Quantitative and Qualitative Disclosures About Market
      Risk
                    25Item
      4: Controls and Procedures
                    26PART
      II - OTHER INFORMATIONItem
      1: - Legal Proceedings
                    26Item
      1A: Risk Factors
                    26Item
      2: - Unregistered Sales of Equity Securities and Use of
      Proceeds
                    26Item
      3: – Default upon Senior Securities
                    26Item
      4: – Removed and Reserved
                    26Item
      5: – Other Information
                    26Item
      6: – Exhibits
                    26




2


GFR
PHARMACEUTICALS, INC.





INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(UNAUDITED)





PageCondensed
      Consolidated Balance Sheets as of September 30, 2010 and December 31,
      2009
                  
                  4Condensed
      Consolidated Statements of Operations And Comprehensive Income for the
      Three and Nine Months ended September 30, 2010 and 2009
                  
                  5Condensed
      Consolidated Statements of Cash Flows for the Nine Months ended September
      30, 2010 and 2009
                  
                  6Condensed
      Consolidated Statement of Stockholders’ Equity for the Nine Months ended
      September 30, 2010
                  
                  7Notes
      to Condensed Consolidated Financial Statements
                  
                  8 -
      22




3


GFR
PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


AS
OF SEPTEMBER 30, 2010 AND DECEMBER 31, 2009


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




September 30, 2010
                                  
                                  
                                  December 31, 2009(Unaudited)
                                  
                                  
                                  (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                  
                                  $
                                  1,429,840
                                  
                                  
                                  $
                                  55,486Trade
      accounts receivable, net
                                  
                                  
                                  857,343
                                  
                                  
                                  
                                  541,206Inventories,
      net
                                  
                                  
                                  16,141
                                  
                                  
                                  
                                  10,289Prepayments
      and other current assets
                                  
                                  
                                  268,106
                                  
                                  
                                  
                                  277,455Operating
      lease prepaid, current portion
                                  
                                  
                                  7,403
                                  
                                  
                                  
                                  7,252Total
      current assets
                                  
                                  
                                  2,578,833
                                  
                                  
                                  
                                  891,688Property,
      plant and equipment, net
                                  
                                  
                                  7,016,061
                                  
                                  
                                  
                                  6,723,519Operating
      lease prepaid, non-current portion
                                  
                                  
                                  140,962
                                  
                                  
                                  
                                  143,534TOTAL
      ASSETS
                                  
                                  $
                                  9,735,856
                                  
                                  
                                  $
                                  7,758,741LIABILITIES
      AND EQUITYCurrent
      liabilities:Trade
      accounts payable
                                  
                                  $
                                  299,232
                                  
                                  
                                  $
                                  90,682Amount
      due to a related party
                                  
                                  
                                  1,876,126
                                  
                                  
                                  
                                  1,960,874Income
      tax payable
                                  
                                  
                                  170,769
                                  
                                  
                                  
                                  171,708Other
      payables and accrued liabilities
                                  
                                  
                                  331,738
                                  
                                  
                                  
                                  428,553Total
      current liabilities
                                  
                                  
                                  2,677,865
                                  
                                  
                                  
                                  2,651,817Long-term
      liabilities:Loss
      in excess of investment in an unconsolidated affiliate
                                  
                                  
                                  801,099
                                  
                                  
                                  
                                  784,802TOTAL
      LIABILITIES
                                  
                                  
                                  3,478,964
                                  
                                  
                                  
                                  3,436,619Commitments
      and contingenciesEquity:GFR
      Pharmaceuticals, Inc. stockholders’ equity:Common
      stock, $0.001 par value; 100,000,000 shares authorized; 42,079,940 shares
      issued and outstanding, respectively
                                  
                                  
                                  42,080
                                  
                                  
                                  
                                  42,080Additional
      paid-in capital
                                  
                                  
                                  3,712,120
                                  
                                  
                                  
                                  3,712,120Accumulated
      other comprehensive income
                                  
                                  
                                  268,087
                                  
                                  
                                  
                                  210,882Statutory
      reserve
                                  
                                  
                                  595,253
                                  
                                  
                                  
                                  595,253Retained
      earnings (accumulated deficits)
                                  
                                  
                                  1,049,055
                                  
                                  
                                  
                                  (750,589
                                  )Total
      GFR Pharmaceuticals, Inc. stockholders’ equity
                                  
                                  
                                  5,666,595
                                  
                                  
                                  
                                  3,809,746Non-controlling
      interest
                                  
                                  
                                  590,297
                                  
                                  
                                  
                                  512,376Total
      equity
                                  
                                  
                                  6,256,892
                                  
                                  
                                  
                                  4,322,122TOTAL
      LIABILITIES AND EQUITY
                                  
                                  $
                                  9,735,856
                                  
                                  
                                  $
                                  7,758,741





See accompanying notes to condensed
consolidated financial statements.




4




GFR
PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


AND
COMPREHENSIVE INCOME


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009


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


(Unaudited)


Three
      months ended September 30,
                                          
                                          
                                          Nine
      months ended September 30,2010
                                          
                                          
                                          2009
                                          
                                          
                                          2010
                                          
                                          
                                          2009Revenues,
      net:Service
      revenue
                                          
                                          $
                                          1,184,821
                                          
                                          
                                          $
                                          896,387
                                          
                                          
                                          $
                                          3,108,446
                                          
                                          
                                          $
                                          2,424,264Product
      sales
                                          
                                          
                                          10,197
                                          
                                          
                                          
                                          113,091
                                          
                                          
                                          
                                          62,837
                                          
                                          
                                          
                                          132,256Total
      revenues, net
                                          
                                          
                                          1,195,018
                                          
                                          
                                          
                                          1,009,478
                                          
                                          
                                          
                                          3,171,283
                                          
                                          
                                          
                                          2,556,520Cost
      of revenue:Depreciation
                                          
                                          
                                          164,195
                                          
                                          
                                          
                                          143,511
                                          
                                          
                                          
                                          439,052
                                          
                                          
                                          
                                          411,209Cost
      of products
                                          
                                          
                                          20,879
                                          
                                          
                                          
                                          126,467
                                          
                                          
                                          
                                          96,910
                                          
                                          
                                          
                                          135,212Total
      cost of revenue
                                          
                                          
                                          185,074
                                          
                                          
                                          
                                          269,978
                                          
                                          
                                          
                                          535,962
                                          
                                          
                                          
                                          546,421Gross
      profit
                                          
                                          
                                          1,009,944
                                          
                                          
                                          
                                          739,500
                                          
                                          
                                          
                                          2,635,321
                                          
                                          
                                          
                                          2,010,099Operating
      expenses:Depreciation
      and amortization
                                          
                                          
                                          39,541
                                          
                                          
                                          
                                          31,554
                                          
                                          
                                          
                                          135,721
                                          
                                          
                                          
                                          126,393General
      and administrative
                                          
                                          
                                          112,273
                                          
                                          
                                          
                                          156,827
                                          
                                          
                                          
                                          378,435
                                          
                                          
                                          
                                          548,111Total
      operating expenses
                                          
                                          
                                          151,814
                                          
                                          
                                          
                                          188,381
                                          
                                          
                                          
                                          514,156
                                          
                                          
                                          
                                          674,504Income
      from operations
                                          
                                          
                                          858,130
                                          
                                          
                                          
                                          551,119
                                          
                                          
                                          
                                          2,121,165
                                          
                                          
                                          
                                          1,335,595Other
      income (expense):Interest
      income
                                          
                                          
                                          657
                                          
                                          
                                          
                                          6,074
                                          
                                          
                                          
                                          948
                                          
                                          
                                          
                                          16,938Recovery
      from an unconsolidated affiliate
                                          
                                          
                                          8,967
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          254,533
                                          
                                          
                                          
                                          -Other
      expense
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (574
                                          )Total
      other income
                                          
                                          
                                          9,624
                                          
                                          
                                          
                                          6,074
                                          
                                          
                                          
                                          255,481
                                          
                                          
                                          
                                          16,364Income
      before income taxes
                                          
                                          
                                          867,754
                                          
                                          
                                          
                                          557,193
                                          
                                          
                                          
                                          2,376,646
                                          
                                          
                                          
                                          1,351,959Income
      tax expense
                                          
                                          
                                          (168,694
                                          )
                                          
                                          
                                          (159,543
                                          )
                                          
                                          
                                          (499,081
                                          )
                                          
                                          
                                          (400,539
                                          )Net
      income
                                          
                                          
                                          699,060
                                          
                                          
                                          
                                          397,650
                                          
                                          
                                          
                                          1,877,565
                                          
                                          
                                          
                                          951,420Less:
      net income attributable to non-controlling interest
                                          
                                          
                                          (27,368
                                          )
                                          
                                          
                                          (21,573
                                          )
                                          
                                          
                                          (77,921
                                          )
                                          
                                          
                                          (52,741
                                          )Net
      income attributable to GFR Pharmaceuticals, Inc.
                                          
                                          
                                          671,692
                                          
                                          
                                          
                                          376,077
                                          
                                          
                                          
                                          1,799,644
                                          
                                          
                                          
                                          898,679Other
      comprehensive income:-
      Foreign currency translation gain
                                          
                                          
                                          44,568
                                          
                                          
                                          
                                          350
                                          
                                          
                                          
                                          57,205
                                          
                                          
                                          
                                          475Comprehensive
      income
                                          
                                          $
                                          716,260
                                          
                                          
                                          $
                                          376,427
                                          
                                          
                                          $
                                          1,856,849
                                          
                                          
                                          $
                                          899,154Net
      income per share – Basic and diluted
                                          
                                          $
                                          0.02
                                          
                                          
                                          $
                                          0.01
                                          
                                          
                                          $
                                          0.04
                                          
                                          
                                          $
                                          0.02Weighted
      average common stock outstanding
                                            –
      Basic and diluted
                                          
                                          
                                          42,079,940
                                          
                                          
                                          
                                          42,079,940
                                          
                                          
                                          
                                          42,079,940
                                          
                                          
                                          
                                          42,079,940




See
accompanying notes to condensed consolidated financial
statements.


5


GFR
PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009


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


(Unaudited)





Nine
      months ended September 30,2010
                                  
                                  
                                  2009Cash
      flows from operating activities:Net
      income
                                  
                                  $
                                  1,799,644
                                  
                                  
                                  $
                                  898,679Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
      and amortization
                                  
                                  
                                  574,773
                                  
                                  
                                  
                                  537,602Recovery
      from allowance for doubtful accounts
                                  
                                  
                                  (46,207
                                  )
                                  
                                  
                                  -Non-controlling
      interest
                                  
                                  
                                  77,921
                                  
                                  
                                  
                                  52,741Change
      in operating assets and liabilities:Trade
      accounts receivable
                                  
                                  
                                  (240,777
                                  )
                                  
                                  
                                  67,943Inventories
                                  
                                  
                                  (5,540
                                  )
                                  
                                  
                                  (26,137
                                  )Other
      receivable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (42,374
                                  )Prepayments
      and other current assets
                                  
                                  
                                  2,980
                                  
                                  
                                  
                                  85,666Trade
      accounts payable
                                  
                                  
                                  203,080
                                  
                                  
                                  
                                  (1,345
                                  )Income
      tax payable
                                  
                                  
                                  (4,427
                                  )
                                  
                                  
                                  (13,045
                                  )Other
      payables and accrued liabilities
                                  
                                  
                                  (68,763
                                  )
                                  
                                  
                                  71,222Net
      cashprovided
      byoperating activities
                                  
                                  
                                  2,292,684
                                  
                                  
                                  
                                  1,630,952Cash
      flows from investing activities:Purchase
      of property, plant and equipment
                                  
                                  
                                  (719,577
                                  )
                                  
                                  
                                  (1,291
                                  )Net
      cash used ininvesting
      activities
                                  
                                  
                                  (719,577
                                  )
                                  
                                  
                                  (1,291
                                  )Cash
      flows from financing activities:Repayment
      of notes payable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (219,549
                                  )Repayment
      of notes payable to related parties
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,931,162
                                  )Repayment
      to a related party
                                  
                                  
                                  (223,616
                                  )
                                  
                                  
                                  (1,244
                                  )Net
      cash
      provided by (used in)financing
      activities
                                  
                                  
                                  (223,616
                                  )
                                  
                                  
                                  (2,151,955
                                  )Effect
      on exchange rate change on cash and cash equivalents
                                  
                                  
                                  24,863
                                  
                                  
                                  
                                  185NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                                  
                                  
                                  1,374,354
                                  
                                  
                                  
                                  (522,109
                                  )CASH
      AND CASH EQUIVALENT, BEGINNING OF PERIOD
                                  
                                  
                                  55,486
                                  
                                  
                                  
                                  552,398CASH
      AND CASH EQUIVALENT, END OF PERIOD
                                  
                                  $
                                  1,429,840
                                  
                                  
                                  $
                                  30,289SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for income taxes
                                  
                                  $
                                  503,508
                                  
                                  
                                  $
                                  400,539Cash
      paid for interest
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -





See
accompanying notes to condensed consolidated financial
statements.


6


GFR
PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


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


(Unaudited)




GFR
      Pharmaceuticals, Inc. stockholders’ equityAccumulated
                        
                        
                        
                        
                        
                        Retainedother
                        
                        
                        
                        
                        
                        earningsCommon
      stock
                        
                        
                        Additional
                        
                        
                        comprehensive
                        
                        
                        Statutory
                        
                        
                        (accumulated
                        
                        
                        Non-controlling
                        
                        
                        TotalNo.
      of shares
                        
                        
                        Amount
                        
                        
                        paid-in
      capital
                        
                        
                        income
                        
                        
                        reserve
                        
                        
                        deficit)
                        
                        
                        interest
                        
                        
                        equityBalance
      as of January 1, 2010
                        
                        
                        42,079,940
                        
                        
                        $
                        42,080
                        
                        
                        $
                        3,712,120
                        
                        
                        $
                        210,882
                        
                        
                        $
                        595,253
                        
                        
                        $
                        (750,589
                        )
                        
                        $
                        512,376
                        
                        
                        $
                        4,322,122Foreign
      currency translation adjustment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        57,205
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        57,205Net
      income for the period
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,799,644
                        
                        
                        
                        77,921
                        
                        
                        
                        1,877,565Balance
      as of September 30, 2010
                        
                        
                        42,079,940
                        
                        
                        $
                        42,080
                        
                        
                        $
                        3,712,120
                        
                        
                        $
                        268,087
                        
                        
                        $
                        595,253
                        
                        
                        $
                        1,049,055
                        
                        
                        $
                        590,297
                        
                        
                        $
                        6,256,892





See
accompanying notes to condensed consolidated financial
statements.


7


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


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


(Unaudited)





NOTE-1
            BASIS
      OF PRESENTATION





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





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





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





NOTE-2
              ORGANIZATION
      AND BUSINESS BACKGROUND





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





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





Description of
subsidiaries





Name
              
              Place of incorporation
                and kind of
                legal entity
              
              Principal activities
                and place of operation
              
              Particulars of
                registered share
                capital
              
              Effective
                interest
                heldXi'an
      Hua Long Yu Tian Scientific and Technological Industry Co., Ltd. (“Hua
      Long”)
              
              The
      PRC, a limited liability company
              
              Investment
      holding
              
              RMB
              1,500,000
              
              100
              %New
      Century Scientific Investment Ltd. (“New Century”)
              
              The
      PRC, a limited liability company
              
              Operator
      medical clinic in the PRC
              
              RMB
              30,000,000
              
              95
              %Xi’an
      Jiaoda Bao Sai Bio-Technology Co., Ltd (“Bao Sai”)
              
              The
      PRC, a limited liability company
              
              Research
      and development of extraction process and trading of pharmaceutical
      products in the PRC
              
              RMB
              60,000,000
              
              96.77
              %




8


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


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


(Unaudited)





GFRP and
its subsidiaries are hereinafter referred to as (the
“Company”).





NOTE-3
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





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





·
            Use
      of estimates





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





·
              Basis
      of consolidation





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





·
              Equity
      method of accounting





Under
Financial Accounting Standard Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 810 “Consolidation” (“ASC 810”),
consolidation of a majority-owned subsidiary is precluded where control does not
rest with the majority owner. From May 1, 2007, GFRP’s subsidiary Medicine
ceased business and leased out its business license. Accordingly, GFRP
deconsolidated Medicine and accounted Medicine for under the equity method of
accounting.





Generally
accepted accounting principles require that the investment in the investee be
reported using the equity method under the provision of ASC, Topic 323, “Investments - Equity Method and
Joint Ventures”
(“ASC 323”) when an investor corporation can exercise significant influence over
the operations and financial policies of an investee corporation. When the
equity method of accounting is used, the investor initially records the
investment in the stock of an investee at cost. The investment account is then
adjusted to recognize the investor’s share of the income or losses of the
investee when it is earned by the investee. Such amounts are included when
determining the net income of the investor in the period they are reported
by the investee.





As a
result of deconsolidation under ASC 810 and the application of the equity method
under ASC 323, GFRP had a negative basis in its investment in Medicine, the
Equity Investee, because the subsidiary generated significant losses and
intercompany liabilities in excess of its asset balances. This negative
investment, “Loss in excess of investment in an unconsolidated affiliate” is
reflected as a single amount on the Company’s condensed consolidated balance
sheet as approximately $801,099 as of September 30, 2010.





Since
Medicine’s results are no longer consolidated and GFRP believes that it is not
obligated to fund future operating losses at Medicine, any adjustments reflected
in Medicine’s financial statements subsequent to May 1, 2007 are not expected to
affect the results of operations of GFRP.


9


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


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


(Unaudited)





·
                Cash
      and cash
equivalents


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





·
              Accounts
      receivable and allowance for doubtful
accounts





Accounts
receivable are recorded at the invoiced amount and do not bear interest.
Management reviews the adequacy of the allowance for doubtful accounts on an
ongoing basis, using historical collection trends and aging of receivables.
Management also periodically evaluates individual customer’s financial
condition, credit history, and the current economic conditions to make
adjustments in the allowance when it is considered necessary. Account balances
are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. The Company does
not have any off-balance-sheet credit exposure related to its customers. For the
nine months ended September 30, 2010, the Company recovered $46,207 from
allowance for doubtful accounts.





·
              Inventories





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





·
              Property,
      plant and equipment





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





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





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





Depreciation
expense for the three months ended September 30, 2010 and 2009 were $201,907 and
$173,251 respectively, of which $164,195 and $143,511 were include in cost of
revenue.





Depreciation
expense for the nine months ended September 30, 2010 and 2009 were $569,317 and
$532,159 respectively, of which $439,052 and $411,209 were include in cost of
revenue.





·
              Operating
      lease prepaid





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


10


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


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


(Unaudited)





The lease
expense on prepaid operating lease for the three months ended September 30, 2010
and 2009 was $526 and $528, respectively. The lease expense on prepaid operating
lease for the nine months ended September 30, 2010 and 2009 was $5,456 and
$5,443, respectively. As of September 30, 2010, the estimated annual
amortization of the prepaid operating lease for the next five years and
thereafter is as follows:





Years
      ending September 30:2011
                  
                  $
                  7,4032012
                  
                  
                  7,4032013
                  
                  
                  7,4032014
                  
                  
                  7,4032015
                  
                  
                  7,403Thereafter
                  
                  
                  111,350Total
                  
                  $
                  148,365





·
              Impairment
      of long-lived assets





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





·
              Revenue
      recognition





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





(a)
            Medical
      service revenue





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





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




11




GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


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


(Unaudited)





(b)
            Product
      sales





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





(c)
            Technical
      service income





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





(d)
            Interest
      income





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





·
              Income
      taxes





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





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





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





The
Company conducts major businesses in the PRC and is subject to tax in this
jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by the foreign tax authority. For the
nine months ended September 30, 2010, the Company filed and cleared 2009 PRC tax
return by the tax authority.





·
              Net
      income per share





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


12


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


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


(Unaudited)





·
              Comprehensive
      income





ASC Topic
220, “Comprehensive
Income”, establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income as defined
includes all changes in equity during a period from non-owner sources.
Accumulated other comprehensive income, as presented in the accompanying
condensed consolidated statement of stockholders’ equity, consists of changes in
unrealized gains and losses on foreign currency translation. This comprehensive
income is not included in the computation of income tax expense or
benefit.





·
              Foreign
      currencies translation





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





The
reporting currency of the Company is United States Dollar ("US$") and the
accompanying financial statements have been expressed in US$. In addition, the
Company's subsidiaries in the PRC maintain their books and records in their
local currency, Renminbi Yuan ("RMB"), which is functional currency as being the
primary currency of the economic environment in which these entities operate. In
accordance with ASC Topic 830-30, “Translation of Financial
Statement”,assets and liabilities of
the Company whose functional currency is not US$ are translated into US$, 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
are recorded as a separate component of accumulated other comprehensive income
within the statement of stockholders’ equity.





Translation
of amounts from RMB into US$1 has been made at the following exchange rates for
the respective period:




September 30, 2010
                
                
                September 30, 2009Period-end
      RMB:US$1 exchange rate
                
                
                6.6981
                
                
                
                6.8319Period-average
      RMB:US$1 exchange rate
                
                
                6.8164
                
                
                
                6.8328





·
              Related
      parties





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





·
              Segment
      reporting





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





·
              Fair
      value measurement





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


13


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


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


(Unaudited)





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





·
              Fair
      value of financial
instruments





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





·
              Recent
      accounting pronouncements





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





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





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





In July
2010, the FASB issued an accounting standards update to require further
disaggregated disclosures that improve financial statement users’ understanding
of (1) the nature of an entity’s credit risk associated with its financing
receivables and (2) the entity’s assessment of that risk in estimating its
allowance for credit losses as well as changes in the allowance and the reasons
for those changes. This update will be effective for the Company in the second
quarter of fiscal 2011, except for the disclosures relating to activity that
occurred during a reporting period which is effective for the Company in the
third quarter of fiscal 2011. Since this update addresses only disclosures
related to credit quality of financing receivables and the allowance for credit
losses, it is not expected that the adoption of this update will have a
material impact on the Company’s financial position, results of operations or
cash flows.


14





GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


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


(Unaudited)





NOTE-4
            TRADE
      ACCOUNTS RECEIVABLE





The
majority of the Company’s sales are on open credit terms and in accordance with
terms specified in the contracts governing the relevant transactions. The
Company evaluates the need of an allowance for doubtful accounts based on
specifically identified amounts that management believes to be uncollectible. If
actual collections experience changes, revisions to the allowance may be
required.





Trade
accounts receivable consisted of the following:





September 30, 2010
                
                
                December 31, 2009Trade
      accounts receivable, gross
                
                $
                1,530,444
                
                
                $
                1,259,263Less:
      allowance for doubtful accounts
                
                
                (673,101
                )
                
                
                (718,057
                )Trade
      accounts receivable, net
                
                $
                857,343
                
                
                $
                541,206





For the
nine months ended September 30, 2010, the Company recovered $46,207 from
allowance for doubtful accounts.





NOTE-5
            AMOUNT
      DUE TO A RELATED PARTY





As of
September 30, 2010 and December 31, 2009, a balance of $1,876,126 and $1,960,874
due to a stockholder, Mr. Lian Guo represented a temporary advance to the
Company which was unsecured, interest-free and repayable on
demand.





NOTE-6
            INVESTMENT
      IN AN UNCONSOLIDATED AFFILIATE





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





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





September 30, 2010
                  
                  
                  December 31, 2009Investment
      in Medicine at the date of acquisition
                  
                  $
                  106,804
                  
                  
                  $
                  106,804Amount
      due from Medicine
                  
                  
                  741,910
                  
                  
                  
                  980,575Less:
      allowance for doubtful accounts
                  
                  
                  (741,910
                  )
                  
                  
                  (980,575
                  )Share
      of accumulated losses in Medicine
                  
                  
                  (870,823
                  )
                  
                  
                  (870,823
                  )Foreign
      translation difference
                  
                  
                  (37,080
                  )
                  
                  
                  (20,783
                  )Loss
      in excess of investment in an unconsolidated affiliate
                  
                  $
                  (801,099
                  )
                  
                  $
                  (784,802
                  )




15


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


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


(Unaudited)





For the
nine months ended September 30, 2010, the Company received $254,533 from
Medicine as recovery from an unconsolidated affiliate and recorded as “other
income” in the operation.





NOTE-7
            PREPAYMENTS
      AND OTHER CURRENT ASSETS





Prepayments
and other current assets consisted of the following:





September 30, 2010
                    
                    
                    December 31, 2009Advances
      to employees
                    
                    $
                    192,626
                    
                    
                    $
                    151,720Prepayments
      to equipment vendors
                    
                    
                    61,809
                    
                    
                    
                    41,169Prepaid
      operating expenses
                    
                    
                    13,671
                    
                    
                    
                    84,566$
                    268,106
                    
                    
                    $
                    277,455




NOTE-8
            OTHER
      PAYABLES AND ACCRUED LIABILITIES





Other
payables and accrued liabilities consisted of the following:





September 30, 2010
                  
                  
                  December 31, 2009Business
      tax payable
                  
                  $
                  82,859
                  
                  
                  $
                  81,174Government
      levy payable
                  
                  
                  30,370
                  
                  
                  
                  34,435Salaries
      and welfare payable
                  
                  
                  102,490
                  
                  
                  
                  97,724Advances
      from employees
                  
                  
                  9,594
                  
                  
                  
                  50,411Customer
      deposits
                  
                  
                  52,555
                  
                  
                  
                  -Accrued
      operating expenses
                  
                  
                  53,870
                  
                  
                  
                  164,809$
                  331,738
                  
                  
                  $
                  428,553




NOTE-9
            INCOME
      TAXES





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





Nine months ended September 30,2010
                      
                      
                      2009Tax
      jurisdiction from:–
      Local
                      
                      $
                      -
                      
                      
                      $
                      -–
      Foreign
                      
                      
                      2,376,646
                      
                      
                      
                      1,351,959Income
      before income taxes
                      
                      $
                      2,376,646
                      
                      
                      $
                      1,351,959




16


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


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


(Unaudited)





The
provision for income taxes consisted of the following:





Nine months ended September 30,2010
                      
                      
                      2009Current:–
      Local
                      
                      $
                      -
                      
                      
                      $
                      -–
      Foreign
                      
                      
                      499,081
                      
                      
                      
                      400,539Deferred:–
      Local
                      
                      
                      -
                      
                      
                      
                      -–
      Foreign
                      
                      
                      -
                      
                      
                      
                      -Income
      tax expense
                      
                      $
                      499,081
                      
                      
                      $
                      400,539





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





United
States of America





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





The
PRC





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





Nine months ended September 30,2010
                    
                    
                    2009Income
      before income taxes from PRC operation
                    
                    $
                    2,376,646
                    
                    
                    $
                    1,351,959Statutory
      income tax rate
                    
                    
                    25
                    %
                    
                    
                    25
                    %Income
      tax expense at statutory rate
                    
                    
                    594,162
                    
                    
                    
                    337,990Net
      operating loss not recognized as deferred tax assets
                    
                    
                    2,328
                    
                    
                    
                    68,806Non-deductible
      items
                    
                    
                    (97,409
                    )
                    
                    
                    (6,257
                    )Income
      tax expense
                    
                    $
                    499,081
                    
                    
                    $
                    400,539





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


17


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


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


(Unaudited)





September 30, 2010
                    
                    
                    December 31, 2009Deferred
      tax assets:Net
      operating loss carryforwards
                    
                    $
                    388,637
                    
                    
                    $
                    386,309Allowance
      for doubtful accounts
                    
                    
                    844,420
                    
                    
                    
                    919,616Total
      deferred tax assets
                    
                    
                    1,233,057
                    
                    
                    
                    1,305,925Less:
      valuation allowance
                    
                    
                    (1,233,057
                    )
                    
                    
                    (1,305,925
                    )Deferred
      tax assets
                    
                    $
                    -
                    
                    
                    $
                    -





As of
September 30, 2010, the Company incurred $1,554,549 of aggregate cumulative
operating losses carryforwards available to offset its taxable income for PRC
income tax purposes. The Company has provided for a full valuation allowance
against the deferred tax assets of $1,233,057 on the expected future tax
benefits from the net operating loss carryforwards and allowance for doubtful
accounts as the management believes it is more likely than not that these assets
will not be realized in the future. For the nine months ended September 30,
2010, the valuation allowance decreased by $72,868 primarily relating to the
change in allowance for doubtful accounts.





NOTE-10
            SEGMENT
      INFORMATION





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





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





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





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





The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 3). The Company had no
inter-segment sales for the nine months ended September 30, 2010 and 2009. The
Company’s reportable segments are strategic business units that offer different
products and services. They are managed separately based on the different
technology and marketing strategies of each business unit for making internal
operating decisions.





Summary
of financial information concerning the Company’s reportable segments is shown
in the following table for the three and nine months ended September 30, 2010
and 2009:





Three months ended September 30, 2010Medical Business
                  
                  
                  Extraction Business
                  
                  
                  TotalOperating
      revenue, net:Product
      sales
                  
                  $
                  -
                  
                  
                  $
                  10,197
                  
                  
                  $
                  10,197Service
      revenue
                  
                  
                  963,730
                  
                  
                  
                  221,091
                  
                  
                  
                  1,184,821963,730
                  
                  
                  
                  231,288
                  
                  
                  
                  1,195,018Cost
      of revenue
                  
                  
                  (139,114
                  )
                  
                  
                  (45,960
                  )
                  
                  
                  (185,074
                  )Gross
      profit
                  
                  $
                  824,616
                  
                  
                  $
                  185,328
                  
                  
                  $
                  1,009,944Depreciation
      and amortization
                  
                  $
                  166,386
                  
                  
                  $
                  37,350
                  
                  
                  $
                  203,736Net
      income
                  
                  
                  547,357
                  
                  
                  
                  151,703
                  
                  
                  
                  699,060Expenditure
      for long-lived assets
                  
                  $
                  58,682
                  
                  
                  $
                  2,495
                  
                  
                  $
                  61,177




18


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


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


(Unaudited)





Nine months ended September 30, 2010Medical Business
                  
                  
                  Extraction Business
                  
                  
                  TotalOperating
      revenue, net:Product
      sales
                  
                  $
                  -
                  
                  
                  $
                  62,837
                  
                  
                  $
                  62,837Service
      revenue
                  
                  
                  2,741,683
                  
                  
                  
                  366,763
                  
                  
                  
                  3,108,4462,741,683
                  
                  
                  
                  429,600
                  
                  
                  
                  3,171,283Cost
      of revenue
                  
                  
                  (400,567
                  )
                  
                  
                  (135,395
                  )
                  
                  
                  (535,962
                  )Gross
      profit
                  
                  $
                  2,341,116
                  
                  
                  $
                  294,205
                  
                  
                  $
                  2,635,321Depreciation
      and amortization
                  
                  $
                  427,837
                  
                  
                  $
                  146,936
                  
                  
                  $
                  574,773Net
      income
                  
                  
                  1,558,412
                  
                  
                  
                  319,153
                  
                  
                  
                  1,877,565Expenditure
      for long-lived assets
                  
                  $
                  58,682
                  
                  
                  $
                  660,896
                  
                  
                  $
                  719,578





Three months ended September 30, 2009Medical Business
                  
                  
                  Extraction Business
                  
                  
                  TotalOperating
      revenue, net :Product
      sales
                  
                  $
                  -
                  
                  
                  $
                  113,091
                  
                  
                  $
                  113,091Service
      revenue
                  
                  
                  896,387
                  
                  
                  
                  -
                  
                  
                  
                  896,387896,387
                  
                  
                  
                  113,091
                  
                  
                  
                  1,009,478Cost
      of revenue
                  
                  
                  (133,885
                  )
                  
                  
                  (136,093
                  )
                  
                  
                  (269,978
                  )Gross
      profit
                  
                  $
                  762,502
                  
                  
                  $
                  (23,002
                  )
                  
                  $
                  739,500Depreciation
      and amortization
                  
                  $
                  133,885
                  
                  
                  $
                  41,180
                  
                  
                  $
                  175,065Net
      income (loss)
                  
                  
                  486,972
                  
                  
                  
                  (89,322
                  )
                  
                  
                  397,650Expenditure
      for long-lived assets
                  
                  $
                  -
                  
                  
                  $
                  1,291
                  
                  
                  $
                  1,291





Nine months ended September 30, 2009Medical Business
                  
                  
                  Extraction Business
                  
                  
                  TotalOperating
      revenue, net:Product
      sales
                  
                  $
                  -
                  
                  
                  $
                  132,256
                  
                  
                  $
                  132,256Service
      revenue
                  
                  
                  2,424,264
                  
                  
                  
                  -
                  
                  
                  
                  2,424,2642,424,264
                  
                  
                  
                  132,256
                  
                  
                  
                  2,556,520Cost
      of revenue
                  
                  
                  (401,583
                  )
                  
                  
                  (144,838
                  )
                  
                  
                  (546,421
                  )Gross
      profit
                  
                  $
                  2,022,681
                  
                  
                  $
                  (12,582
                  )
                  
                  $
                  2,010,099Depreciation
      and amortization
                  
                  $
                  401,583
                  
                  
                  $
                  136,019
                  
                  
                  $
                  537,602Net
      income (loss)
                  
                  
                  1,226,645
                  
                  
                  
                  (275,225
                  )
                  
                  
                  951,420Expenditure
      for long-lived assets
                  
                  $
                  -
                  
                  
                  $
                  1,291
                  
                  
                  $
                  1,291





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


19


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


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


(Unaudited)





NOTE-11
            CONCENTRATIONS
      OF RISK





The
Company is exposed to the following concentrations of risk:





(a)         Major
customers





For the
three months and nine months ended September 30, 2010, the customers who account
for 10% or more of the Company’s revenues are presented as follows:





Three months ended September 30, 2010
                                      
                                      
                                      September 30, 2010Revenues
                                      
                                      
                                      Percentage
                                        of revenues
                                      
                                      
                                      Trade accounts
                                        receivableCustomer
      A
                                      
                                      $
                                      219,767
                                      
                                      
                                      
                                      18
                                      %
                                      
                                      $
                                      74,648Customer
      B
                                      
                                      
                                      860,928
                                      
                                      
                                      
                                      81
                                      %
                                      
                                      
                                      782,695Total:
                                      
                                      $
                                      1,090,775
                                      
                                      
                                      
                                      99
                                      %
                                      
                                      $
                                      857,343





Nine months ended September 30, 2010
                                
                                
                                September 30, 2010Revenues
                                
                                
                                Percentage
                                  of revenues
                                
                                
                                Trade accounts
                                  receivableCustomer
      A
                                
                                $
                                366,078
                                
                                
                                
                                11
                                %
                                
                                $
                                74,648Customer
      B
                                
                                
                                2,741,684
                                
                                
                                
                                87
                                %
                                
                                
                                782,695Total:
                                
                                $
                                3,107,762
                                
                                
                                
                                98
                                %
                                
                                $
                                857,343





For the
three and nine months ended September 30, 2009, there was one customer who
accounted for 10% or more of the Company’s revenue.





(b)         Major
vendors





For the
three and nine months ended September 30, 2010, there was one vendor who
accounted for 10% or more of the Company’s purchases.





For the
three and nine months ended September 30, 2009, there were two vendors who
accounted for 10% or more of the Company’s purchases.





(c)         Credit
risk





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


20


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


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


(Unaudited)





(d)         Exchange
rate risk





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


21


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


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


(Unaudited)





(e)         Economic
and political risks





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





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





NOTE-12
            COMMITMENTS
      AND CONTINGENCIES





The
Company is committed to an office space under a non-cancelable operating lease
agreement with a term of 2 years with fixed monthly rentals, expiry in June
2011. Total rent expenses for the nine months ended September 30, 2010 and 2009
was $1,578 and $1,581, respectively.





As of
September 30, 2010, the Company has $1,612 of future minimum rental payments due
under the non-cancelable operating lease agreement in the next 12
months.





NOTE-13
            COMPARATIVE
      FIGURES





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


22


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





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





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





FORWARD
LOOKING STATEMENTS





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





GENERAL
DESCRIPTION OF BUSINESS




GFR
Pharmaceuticals, Inc. is a holding company with two business segments. The
Company is involved in a biological extraction business that extracts raw
materials to medicine ingredients and distributes the extracted ingredients for
medicine manufacturing uses by Xi’an Jiaoda Bao Sai Bio-technology Co., Ltd
(“Bao Sai”). The Company also operates a Cancer Diagnosis and Treatment Center,
which is a joint operation of PET Scanner and Rotary Gamma Ray Stereotactic
Neurosurgery System imaging center operated by Shan Xi New Century Scientific
Investment Development Ltd. (“New Century”) in the PRC.





Bao Sai
is a high-tech company in China chartered and authorized by the Chinese
government for involvement in researching and inventing, manufacturing and sales
of biological separation medium products. It has the technology and facilities
for the separation and purification of biological products and natural medicines
and manufactures the agarose products of separation
media.


23


Biological
separation medium refers to the separation and purification of biological
products and natural medicines, which is the core technology of biotechnology
Industry. Such technology has been widely used in the producing of antibiotic
products, Genetic Recombinant Medicine, the Gene Chip, bacteria production,
diagnoses reagent and biochemical products. In addition to the biotechnology
industry, the technology also has the wide applications and can be used for
environmental protection industry, chemical and pharmaceutical industry and
modernization of Chinese medicine.





In the
next two years, Bao Sai intends to expand the production scale of
separation media technology by two or five times by developing media
derivatives—civil products. With the adsorption media, civil products will be
removed the harmful substances such as bacteria, viruses, organic pesticides and
tobacco tar etc. Civil products have a wide market and we believe
they create more revenues and profits for the Company.





New
Century is a medical equipment investment management company, which mainly
engages in investment and management of cancer treatment equipment and provides
comprehensive services for customers with advanced radiology and oncology
equipment.





New
Century cooperates with Tangdu Hospital in Shan Xi province, which is affiliated
with the Fourth Military Medical University. New Century’s medical equipment is
used in Tangdu Hospital’s Gamma Knife Therapeutic Center (the “Center”). The
Center is a well known cancer treatment center with a team of experts, for
patients in need of high-quality treatment in the industry with high
authority, in the five northwestern provinces of China and the country is
renowned.





New
Century has successfully established a large integrated medical professional
website - Medical Sina (www.120md.com), which provides extensive publicity and
online integrated counseling services for patients.





New
Century has established an outstanding marketing team and management team, which
will extend our business to neighboring provinces of Shaanxi Province and other
provinces of the country. The Center currently has owns three different devices
used for radiological imaging of the brain and body and for use in cancer
treatment and runs in full volume of business so that the existing equipment
capacity can not meet the requirements of patients. The company’s operating
revenue and profit are increasing steadily.




The
Company intends to continue to invest in the construction and management of
cancer treatment equipment in the next few years. With its resources,
technologies and services, the Company believes it will seize market
opportunities, gradually expand the treatment capacity and improve profitability
by the addition of cancer treatment centers or hospitals. The Company may build
an integrated service center with prevention, screening, treatment and
rehabilitation capabilities in the Northwest of China.




The
Company needs additional capital to finance its expansion plans.  The
Company does not presently have a commitment for such additional capital and
there is no assurance such capital can be obtained on terms acceptable to the
Company.




RESULTS
OF OPERATIONS FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010




Revenues





The
revenue from our operation of the Center increased from $896,387 for the three
months ended September 30, 2009 to $1,184,821 for the same period of 2010, an
increase of 32.18%; and increased from $ 2,424,264 during the nine months ended
September 30, 2009 to $ 3,108,446 during the nine months ended September 30,
2010, an increase of 28.22%. In the third quarter of 2010, the cancer treatment
business accounted for $1,184,821 (99.15%) of our revenue. The product sales
generated $10,197of revenue in the third quarter of 2010 as compared to $113,091
in the same period of 2009. Our overall revenues for the third quarter of 2010
increased from $1,009,478 for the three months ended September 30, 2009 to
$1,195,018 for the same period of 2010, an increase of 18.38%. Likewise,
our overall revenue increased from $2,556,520 during the nine months ended
September 30, 2009 to $3,171,283 during the nine months ended September 30,
2010. The increase was attributed primarily to the increased service revenue
from the Center.





Expenses





Operating
expenses for the third quarter of 2010 were $151,814 as compared to $188,381 for
the same period of 2009, a decrease of $36,567, a decrease of
19.4%.  For the nine months ended September 30, 2010, our operating
expenses decreased from $674,504 for the nine months ended September 30, 2010 to
$514,156, a decrease of 23.8%. This decrease was attributable to the
reduction of professional and consultancy expenses during the nine months ended
September 30, 2010 compared to the same period of 2009.


24




Net
Income





Net
income attributable to GFR Pharmaceuticals, Inc. during the three and nine
months ended September 30, 2009 was $376,077 and $898,679 respectively, compared
to $671,692 and $1,799,644 during the three and nine months ended September 30,
2010.  This increase was primarily due to our increased revenue from New
Century, a slight decrease of our operating expenses and increased technical
service revenue from Bao Sai for the third quarter of 2010.





We hope
to remain profitable in 2010 through the implementation of our marketing
strategies.





Impact of
Inflation





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





Our
business operates entirely in Chinese Renminbi, but we report our results in our
SEC filings in U.S. Dollars.  The conversion of our accounts from RMB
to Dollars results in translation adjustments.  While our net income
is added to the retained earnings on our balance sheet; the translation
adjustments are added to a line item on our balance sheet labeled “other
comprehensive income,” since it is more reflective of changes in the relative
values of U.S. and Chinese currencies than of the success of our
business.





LIQUIDITY
AND CAPITAL RESOURCES





Liquidity
Analysis





September
                    30, 2010
                  
                  
                  December 31,
                    2009Working
      Capital
                  
                  $
                  (99,032
                  )
                  
                  $
                  (1,760,129
                  )Stockholders’
      Equity
                  
                  $
                  6,256,892
                  
                  
                  $
                  4,322,122Total
      Liabilities
                  
                  $
                  3,478,964
                  
                  
                  $
                  3,436,619




Our
working capital deficit was decreased from $1,760,129 as of December 31, 2009 to
$99,032 as of September 30, 2010, which was mainly attributable to the increase
in cash and cash equivalents generated from operating activities in New
Century.





Stockholders’
equity increased from $4,322,122 as of December 31, 2009 to $6,256,892 as of
September 30, 2010, an increase of $1,934,770 or 44.76%.





Total
liabilities increased from $3,436,619 as of December 31, 2009 to $3,478,964 as
of September 30, 2010, an increase of $42,345 or 1.23%. In addition, our
principal shareholder, Mr. Guo Li’an made a loan to fund our operations since
the first quarter of 2008. As of September 30, 2010 and December 31, 2009, the
balance of the loan was $1,876,126 and $1,960,874 respectively, which was
unsecured, interest-free and repayable on demand.





As of
September 30, 2010, cash and cash equivalents increased to $1,429,840 from
$55,486 as of December 31, 2009, an increase of $1,374,354 or 2,476.94%. The
increase of cash and cash equivalents was mainly due to the cash flows provided
from operating activities by $2,292,684 for the nine months ended September 30,
2010. Our liquidity improved dramatically during the nine months ended September
30, 2010. We expect this trend will continue for the coming quarter




Item 3.
Quantitative and Qualitative Disclosure about Market Risk




A smaller reporting company is not required to
provide the information required by this item.


25


Item
4T. Controls and Procedures





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





Changes in Internal Control Over
Financial Reporting. During the most recent quarter ended September 30,
2010, there has been no change in our internal control over financial reporting
(as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.





PART
II. OTHER INFORMATION





Item
1. Legal Proceedings





None





Item
1A.  Risk Factors





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





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





None.





Item
3. Defaults Upon Senior Securities.





None.





Item 4.   Removed and
Reserved.





Item 5. Other Information





None





Item
6. Exhibits





31.1
                  Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  200231.2
                  Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  200232.1
                  Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.2
                  Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002




26




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
      11 , 2010
                  By:
                  /s/Zhao Yan DingZhao
      Yan Ding, Chief Executive Officer(Principal
      executive
officer)





DATE:  November
      11, 2010
                  By:
                  /s/ Zhong Ya LiZhong
      Ya Li, Chief Financial Officer(Principal
      financial
officer)




27