United
States


Securities
and Exchange Commission


Washington,
D.C. 20549


FORM
10-Q





x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES


EXCHANGE
ACT OF 1934





For
the quarterly period ended March 31, 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 o     No o





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





Yes oNo o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check
one):


Large
      accelerated
              filer
            
            Accelerated
      filer
            
            Non-accelerated
      filer
              (Do
      not check if a smaller reporting company)
            
            Smaller
      reporting company  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
May 13, 2010 was 42,079,940.







GFR
PHARMACEUTICALS INC.





FORM
10-Q





QUARTERLY
PERIOD ENDED MARCH 31, 2010





INDEX





TABLE OF
CONTENTS





PagePART
      I – FINANCIAL INFORMATIONItem
      1:
                    Financial
      Statements
                    F1-F-18Item
      2:
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                    3Item
      3:
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    5Item
      4T:
                    Controls
      and Procedures
                    5PART
      II – OTHER INFORMATIONItem
      1:
                    Legal
      Proceedings
                    5Item
      1A:
                    Risk
      Factors
                    6Item
      2:
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    6Item
      3:
                    Defaults
      Upon Senior Securities
                    6Item
      4:
                    Removed
      and Reserved
                    6Item
      5:
                    Other
      Information
                    6Item
      6:
                    Exhibits
                    6




2


PART
I. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS





GFR
PHARMACEUTICALS, INC.





INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(UNAUDITED)





PageCondensed
      Consolidated Balance Sheets as of March 31, 2010 and December 31,
      2009
                
                F-2Condensed
      Consolidated Statements of Operations And Comprehensive Income for the
      Three Months ended March 31, 2010 and 2009
                
                F-3Condensed
      Consolidated Statements of Cash Flows for the Three Months ended March 31,
      2010 and 2009
                
                F-4Condensed
      Consolidated Statement of Stockholders’ Equity for the Three Months ended
      March 31, 2010
                
                F-5Notes
      to Condensed Consolidated Financial Statements
                
                F-6
      to F-18




F-1


GFR
PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


AS
OF MARCH 31, 2010 AND DECEMBER 31, 2009


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





March 31, 2010
                        
                        
                        December 31, 2009(Unaudited)
                        
                        
                        (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        188,127
                        
                        
                        $
                        55,486Trade
      accounts receivable, net
                        
                        
                        816,602
                        
                        
                        
                        541,206Inventories,
      net
                        
                        
                        10,778
                        
                        
                        
                        10,289Prepayments
      and other current assets
                        
                        
                        359,112
                        
                        
                        
                        277,455Operating
      lease prepaid, current portion
                        
                        
                        7,253
                        
                        
                        
                        7,252Total
      current assets
                        
                        
                        1,381,872
                        
                        
                        
                        891,688Property,
      plant and equipment, net
                        
                        
                        6,536,247
                        
                        
                        
                        6,723,519Intangible
      asset, net
                        
                        
                        -
                        
                        
                        
                        -Operating
      lease prepaid, non-current portion
                        
                        
                        141,744
                        
                        
                        
                        143,534TOTAL
      ASSETS
                        
                        $
                        8,059,863
                        
                        
                        $
                        7,758,741LIABILITIES
      AND EQUITYCurrent
      liabilities:Trade
      accounts payable
                        
                        $
                        59,913
                        
                        
                        $
                        90,682Amount
      due to a related party
                        
                        
                        1,984,226
                        
                        
                        
                        1,960,874Income
      tax payable
                        
                        
                        133,164
                        
                        
                        
                        171,708Other
      payables and accrued liabilities
                        
                        
                        489,943
                        
                        
                        
                        428,553Total
      current liabilities
                        
                        
                        2,667,246
                        
                        
                        
                        2,651,817Long-term
      liabilities:Loss
      in excess of investment in an unconsolidated affiliate
                        
                        
                        784,770
                        
                        
                        
                        784,802TOTAL
      LIABILITIES
                        
                        
                        3,452,016
                        
                        
                        
                        3,436,619Commitments
      and contingenciesEquity:GFR
      Pharmaceuticals, Inc. stockholders’ equity:Common
      stock, $0.001 par value; 100,000,000 shares authorized; 42,079,940 shares
      issued and outstanding as of March 31, 2010 and December 31,
      2009
                        
                        
                        42,080
                        
                        
                        
                        42,080Additional
      paid-in capital
                        
                        
                        3,712,120
                        
                        
                        
                        3,712,120Accumulated
      other comprehensive income
                        
                        
                        211,221
                        
                        
                        
                        210,882Statutory
      reserve
                        
                        
                        595,253
                        
                        
                        
                        595,253Accumulated
      deficits
                        
                        
                        (485,178
                        )
                        
                        
                        (750,589
                        )Total
      GFR Pharmaceuticals, Inc. stockholders’ equity
                        
                        
                        4,075,496
                        
                        
                        
                        3,809,746Non-controlling
      interest
                        
                        
                        532,351
                        
                        
                        
                        512,376Total
      equity
                        
                        
                        4,607,847
                        
                        
                        
                        4,322,122TOTAL
      LIABILITIES AND EQUITY
                        
                        $
                        8,059,863
                        
                        
                        $
                        7,758,741





See
accompanying notes to condensed consolidated financial
statements.


F-2


GFR
PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


AND
COMPREHENSIVE INCOME


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009


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


(Unaudited)





Three months ended March 31,2010
                                    
                                    
                                    2009Revenue,
      net:Service
      revenue
                                    
                                    $
                                    779,668
                                    
                                    
                                    $
                                    554,256Product
      sales
                                    
                                    
                                    10,368
                                    
                                    
                                    
                                    9,786Total
      revenues, net
                                    
                                    
                                    790,036
                                    
                                    
                                    
                                    564,042Cost
      of revenue:Depreciation
                                    
                                    
                                    140,063
                                    
                                    
                                    
                                    125,443Cost
      of products
                                    
                                    
                                    9,875
                                    
                                    
                                    
                                    3,357Total
      cost of revenue
                                    
                                    
                                    149,938
                                    
                                    
                                    
                                    128,800Gross
      profit
                                    
                                    
                                    640,098
                                    
                                    
                                    
                                    435,242Operating
      expenses:Depreciation
      and amortization
                                    
                                    
                                    50,105
                                    
                                    
                                    
                                    47,770General
      and administrative
                                    
                                    
                                    171,451
                                    
                                    
                                    
                                    215,199Total
      operating expenses
                                    
                                    
                                    221,556
                                    
                                    
                                    
                                    262,969Income
      from operations
                                    
                                    
                                    418,542
                                    
                                    
                                    
                                    172,273Other
      income (expense):Interest
      income
                                    
                                    
                                    9
                                    
                                    
                                    
                                    7,138Interest
      expense
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (4,828
                                    )Other
      expense
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (44
                                    )Total
      other income
                                    
                                    
                                    9
                                    
                                    
                                    
                                    2,266Income
      before income taxes
                                    
                                    
                                    418,551
                                    
                                    
                                    
                                    174,539Income
      tax expense
                                    
                                    
                                    (133,165
                                    )
                                    
                                    
                                    (65,115
                                    )Net
      income
                                    
                                    
                                    285,386
                                    
                                    
                                    
                                    109,424Less:
      net income attributable to non-controlling interest
                                    
                                    
                                    (19,975
                                    )
                                    
                                    
                                    (7,382
                                    )Net
      income attributable to GFR Pharmaceuticals, Inc.
                                    
                                    
                                    265,411
                                    
                                    
                                    
                                    102,042Net
      income per share – Basic and diluted
                                    
                                    $
                                    0.01
                                    
                                    
                                    $
                                    0.00Weighted
      average shares outstanding during the period – Basic and
      diluted
                                    
                                    
                                    42,079,940
                                    
                                    
                                    
                                    42,079,940





See
accompanying notes to condensed consolidated financial
statements.


F-3


GFR
PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009


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


(Unaudited)





Three months ended March 31,2010
                        
                        
                        2009Cash
      flows from operating activities:Net
      income
                        
                        $
                        265,411
                        
                        
                        $
                        102,042Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
      and amortization
                        
                        
                        190,168
                        
                        
                        
                        173,213Non-controlling
      interest
                        
                        
                        19,975
                        
                        
                        
                        7,382Change
      in operating assets and liabilities:Trade
      accounts receivable
                        
                        
                        (275,312
                        )
                        
                        
                        237,799Inventories
                        
                        
                        (487
                        )
                        
                        
                        (13,219
                        )Other
      receivable
                        
                        
                        -
                        
                        
                        
                        (1,822
                        )Prepayments
      and other current assets
                        
                        
                        (81,613
                        )
                        
                        
                        57,095Trade
      accounts payable
                        
                        
                        (30,784
                        )
                        
                        
                        (87,430
                        )Income
      tax payable
                        
                        
                        (38,572
                        )
                        
                        
                        (109,474
                        )Other
      payables and accrued liabilities
                        
                        
                        84,733
                        
                        
                        
                        40,754Net
      cash provided by operating activities
                        
                        
                        133,519
                        
                        
                        
                        406,340Cash
      flows from investing activities:Repayment
      of notes payable
                        
                        
                        -
                        
                        
                        
                        (708,119
                        )Net
      cash used in investing activities
                        
                        
                        -
                        
                        
                        
                        (708,119
                        )Cash
      flows from financing activities:Repayment
      of notes payable
                        
                        
                        -
                        
                        
                        
                        (219,417
                        )Repayment
      to a related party
                        
                        
                        (883
                        )
                        
                        
                        (717
                        )Net
      cash used in financing activities
                        
                        
                        (883
                        )
                        
                        
                        (220,134
                        )Effect
      on exchange rate change on cash and cash equivalents
                        
                        
                        5
                        
                        
                        
                        (149
                        )NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                        
                        
                        132,641
                        
                        
                        
                        (522,062
                        )CASH
      AND CASH EQUIVALENT, BEGINNING OF PERIOD
                        
                        
                        55,486
                        
                        
                        
                        552,398CASH
      AND CASH EQUIVALENT, END OF PERIOD
                        
                        $
                        188,127
                        
                        
                        $
                        30,336SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for income taxes
                        
                        $
                        171,737
                        
                        
                        $
                        174,588Cash
      paid for interest
                        
                        $
                        -
                        
                        
                        $
                        4,828





See
accompanying notes to condensed consolidated financial
statements.


F-4


GFR
PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


FOR
THE THREE MONTHS ENDED MARCH 31, 2010


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


(Unaudited)





GFR Pharmaceuticals, Inc. stockholders’ equityCommon stock
                            
                            
                            Additional
                            
                            
                            Accumulated
                              other
                              comprehensive
                            
                            
                            Statutory
                            
                            
                            Retained
                              earnings
                              (accumulated
                            
                            
                            Non-controlling
                            
                            
                            TotalNo.
      of shares
                            
                            
                            Amount
                            
                            
                            paid-in capital
                            
                            
                            income
                            
                            
                            reserve
                            
                            
                            deficit)
                            
                            
                            interest
                            
                            
                            equityBalance
      as of December 31, 2009
                            
                            
                            42,079,940
                            
                            
                            $
                            42,080
                            
                            
                            $
                            3,712,120
                            
                            
                            $
                            210,882
                            
                            
                            $
                            595,253
                            
                            
                            $
                            (750,589
                            )
                            
                            $
                            512,376
                            
                            
                            $
                            4,322,122Foreign
      currency translation adjustment
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            339
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            339Net
      income for the period
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            265,411
                            
                            
                            
                            19,975
                            
                            
                            
                            285,386Balance
      as of March 31, 2010
                            
                            
                            42,079,940
                            
                            
                            $
                            42,080
                            
                            
                            $
                            3,712,120
                            
                            
                            $
                            211,221
                            
                            
                            $
                            595,253
                            
                            
                            $
                            (485,178
                            )
                            
                            $
                            532,351
                            
                            
                            $
                            4,607,847





See
accompanying notes to condensed consolidated financial statements.




F-5


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 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 March 31, 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 Xi’an 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
              
              Investing
      holding
              
              RMB1,500,000
              
              
              100
              %New
      Century Scientific Investment Ltd. (“New Century”)
              
              The
      PRC, a limited liability company
              
              Operator
      medical clinic in the PRC
              
              RMB30,000,000
              
              
              95
              %Xi’an
      Jiaoda Bao Sai Bio-Technology Co., Ltd (“Bao Sai”)
              
              The
      PRC, a limited liability company
              
              Research
      and development of extraction process and trading of pharmaceutical
      products in the PRC
              
              RMB60,000,000
              
              
              96.77
              %





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


F-6


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010


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


(Unaudited)





NOTE-3
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





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





l
            Use
      of estimates





In
preparing these consolidated financial statements, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities in
the balance sheets and revenues and expenses during the periods reported. Actual
results may differ from these estimates.





l
              Basis
      of consolidation





The
consolidated financial statements include the financial statements of GFRP and
its subsidiaries, Hua Long, New Century and Bao Sai. All significant
inter-company balances and transactions within the Company have been eliminated
upon consolidation.





l
              Equity
      method of accounting





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





Generally
accepted accounting principles require that the investment in the investee be
reported using the equity method under the provision of ASC Topic 323 “Investments - EquityMethodandJoint 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 Equity Investee,” is reflected as a
single amount on the Company’s condensed consolidated balance sheet as
approximately $784,770 and $784,802 liability as of March 31, 2010 and
December 31, 2009.





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.





l
              Cash
      and cash equivalents





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


F-7




GFR
PHARMACEUTICALS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010
 (Currency
expressed in United States Dollars (“US$”))
 (Unaudited)


l
              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
three months ended March 31, 2010 and 2009, no allowance for doubtful accounts
was provided during the periods.





l
              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 three months ended March 31,
2010 and 2009, no inventory allowance was provided for the
periods.





l
              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:


Depreciablelife
                  
                  ResidualvalueBuildings
                  20
      – 40 years
                  
                  
                  5
                  %Plant
      and equipment
                  5 –
      16 years
                  
                  
                  5
                  %Motor
      vehicles
                  8
      –12 years
                  
                  
                  5
                  %Furniture,
      fixture and equipment
                  5 –
      8 years
                  
                  
                  5
                  %





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





Depreciation
expenses for the three months ended March 31, 2010 and 2009 were $188,355 and
$173,213 respectively, of which $140,063 and $125,443 were included in cost
of revenue.





l
              Intangible
      asset





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





As of
March 31, 2010, the carrying value of the technical know-how was stated as zero.
The Company recognized a full impairment charge before the acquisition of Bao
Sai for recoverability test.





l
              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.


F-8


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010


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


(Unaudited)





The lease
expense on prepaid operating lease for the three months ended March 31, 2010 and
2009 was $1,813 and $1,813, respectively. As of March 31, 2010, the estimated
annual amortization of the prepaid operating lease for the next five years and
thereafter is as follows:





Year
      ending March 31:2011
                  
                  $
                  7,2532012
                  
                  
                  7,2532013
                  
                  
                  7,2532014
                  
                  
                  7,2532015
                  
                  
                  7,253Thereafter
                  
                  
                  112,732Total
                  
                  $
                  148,997





l
              Impairment
      of long-lived assets





In
accordance with the provisions of the provision of ASC Topic 360-10-5, “Impairment or Disposal of Long-Lived
Assets”, all long-lived assets such as property, plant and equipment and
intangible assets 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 March 31,
2010.





l
              Revenue
      recognition





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





(a)
            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.”


F-9


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010


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


(Unaudited)





(b)
            Sale
      of products





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 three months ended March 31, 2010 and 2009.





(c)
            Interest
      income





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





l
              Income
      taxes





The
Company adopts the ASC Topic 740, “Income Taxes” regarding
accounting for uncertainty in income taxes which prescribes the recognition
threshold and measurement attributes for financial statement recognition and
measurement of tax positions taken or expected to be taken on a tax return. In
addition, the guidance requires the determination of whether the benefits of tax
positions will be more likely than not sustained upon audit based upon the
technical merits of the tax position. For tax positions that are determined to
be more likely than not sustained upon audit, a company recognizes the largest
amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement in the financial statements. For tax positions that are not
determined to be more likely than not sustained upon audit, a company does not
recognize any portion of the benefit in the financial statements. The guidance
provides for de-recognition, classification, penalties and interest, accounting
in interim periods and disclosure.





For the
three months ended March 31, 2010 and 2009, the Company did not have any
interest and penalties associated with tax positions. As of March 31, 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
three months ended March 31, 2010, the Company filed and cleared 2009 PRC tax
return by the tax authority.





l
              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 shares 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 shares that would have been
outstanding if the potential common stock equivalents had been issued and if the
additional common shares were dilutive.





l
              Comprehensive
      income





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.





Three months ended March 31,2010
                    
                    
                    2009Net
      income
                    
                    $
                    265,411
                    
                    
                    $
                    102,042Other
      comprehensive income:-
      Foreign currency translation gain
                    
                    
                    339
                    
                    
                    
                    85Comprehensive
      income
                    
                    $
                    265,750
                    
                    
                    $
                    102,127




F-10





GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010


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


(Unaudited)





l
              Foreign
      currencies translation





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





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





In
general, for consolidation purposes, assets and liabilities of its subsidiaries
whose functional currency is not the US$ are translated into US$, in accordance
with ASC Topic 830-30, “Translation of Financial
Statement”,using the exchange rate on
the balance sheet date. Revenues and expenses are translated at average rates
prevailing during the year. The gains and losses resulting from translation of
financial statements of foreign subsidiaries are recorded as a separate
component of accumulated other comprehensive income within the statement of
stockholders’ equity.





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


March 31, 2010
                    
                    
                    March 31, 2009Period-end
      RMB:US$1 exchange rate
                    
                    
                    6.8361
                    
                    
                    
                    6.8359Period-average
      RMB:US$1 exchange rate
                    
                    
                    6.8360
                    
                    
                    
                    6.8363





l
              Related
      parties





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





l
              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 three months ended March 31, 2010, the Company operates in
two reportable segments: Medical Business and Extraction Business in
PRC.





l
              Fair
      value measurement





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


F-11


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 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.





l
              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.





l
              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 June
2009, the Financial Accounting Standards Board (“FASB”) expanded ASC 810-10, to
provide guidance for variable interest entities (VIEs). The change modifies our
approach for determining the primary beneficiary of a VIE by assessing whether
we have control over such entities. This change is effective for us on July 1,
2010. The Company is currently evaluating the requirements of the VIE provisions
of ASC 810-10, but does not expect a material impact on its condensed
consolidated financial statements.





In
October 2009, the FASB issued Accounting Standard Update (ASU) No. 2009-13,
“Revenue Recognition”
(Topic 605). The accounting standard update addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for products or
services separately rather than as a combined unit. Specifically, this subtopic
addresses how to separate deliverables and how to measure and allocate
arrangement consideration to one or more units of accounting. ASU 2009-13 will
be effective for us on July 1, 2010. The Company is currently evaluating the
requirements of ASU 2009-13, but do not expect a material impact on its
condensed consolidated financial statements.





FASB ASC
810, “Consolidation”
(“ASC 810”), establishes accounting and reporting standards for minority
interests, which are recharacterized as noncontrolling interests. ASC 810 was
revised so that noncontrolling interests are classified as a component of equity
separate from the parent’s equity; purchases or sales of equity interests that
do not result in a change in control are accounted for as equity transactions;
net income attributable to the noncontrolling interest are included in
consolidated net income in the statement of operations; and upon a loss of
control, the interest sold, as well as any interest retained, is recorded at
fair value, with any gain or loss recognized in earnings. This revision was
effective for the Company as of January 1, 2009. It applies prospectively,
except for the presentation and disclosure requirements, for which it applies
retroactively. In addition, ASC 810, amends the consolidation guidance
applicable to variable interest entities. The amendments will significantly
affect the overall consolidation analysis under ASC 810. This phase of ASC 810
became effective for the Company on January 1, 2010 and did not impact the
Company’s consolidation conclusions for its variable interest
entities.


F-12


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010


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


(Unaudited)





In
January 2010, the FASB issued an amendment to the fair value measurement and
disclosure standard improving disclosures about fair value measurements. This
amended guidance requires separate disclosure of significant transfers in and
out of Levels 1 and 2 and the reasons for the transfers. The amended guidance
also requires that in the Level 3 reconciliation, the information about
purchases, sales, issuances and settlements be disclosed separately on a gross
basis rather than as one net number. The guidance for the Level 1 and 2
disclosures was adopted on January 1, 2010, and did not have an impact on our
consolidated financial position, results of operations or cash flows. The
guidance for the activity in Level 3 disclosures is effective January 1, 2011,
and will not have an impact on our consolidated financial position, results of
operations or cash flows as the amended guidance provides only disclosure
requirements. The Company had no significant transfers between Level 1, 2 or 3
inputs during the quarter ended March 31, 2010.





In
February 2010, the FASB issued amended guidance on subsequent events. Under this
amended guidance, SEC filers are no longer required to disclose the date through
which subsequent events have been evaluated in originally issued and revised
financial statements. This guidance was effective immediately and the Company
adopted these new requirements for the quarter ended March 31,
2010.





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:


March 31, 2010
                    
                    
                    December 31, 2009Trade
      accounts receivable, gross
                    
                    $
                    1,368,704
                    
                    
                    $
                    1,093,324Less:
      allowance for doubtful accounts
                    
                    
                    (552,102
                    )
                    
                    
                    (552,118
                    )Trade
      accounts receivable, net
                    
                    $
                    816,602
                    
                    
                    $
                    541,206





For the
three months ended March 31, 2010 and 2009, no allowance for doubtful accounts
was provided during the periods.





NOTE-5
            AMOUNT
      DUE TO A RELATED PARTY





As of
March 31, 2010 and December 31, 2009, a balance of $1,984,226 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
March 31, 2010 and December 31, 2009, the investment in an unconsolidated
affiliate is presented as follows:-


F-13


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010


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


(Unaudited)





March 31, 2010
                      
                      
                      December 31, 2009Investment
      in Medicine at the date of acquisition
                      
                      $
                      106,804
                      
                      
                      $
                      106,804Amount
      due from Medicine
                      
                      
                      1,111,828
                      
                      
                      
                      1,111,828Less:
      allowance for doubtful accounts
                      
                      
                      (1,111,828
                      )
                      
                      
                      (1,111,828
                      )Share
      of accumulated losses in Medicine
                      
                      
                      (870,823
                      )
                      
                      
                      (870,823
                      )Foreign
      translation difference
                      
                      
                      (20,751
                      )
                      
                      
                      (20,783
                      )Loss
      in excess of investment in an unconsolidated affiliate
                      
                      $
                      (784,770
                      )
                      
                      $
                      (784,802
                      )





NOTE-7
            PREPAYMENTS
      AND OTHER CURRENT ASSETS





Prepayments
and other current assets consisted of the following:


March 31, 2010
                  
                  
                  December 31, 2009Advances
      to employees
                  
                  $
                  213,295
                  
                  
                  $
                  151,720Prepayments
      to equipment vendors
                  
                  
                  227
                  
                  
                  
                  41,169Prepaid
      operating expenses
                  
                  
                  145,590
                  
                  
                  
                  84,566$
                  359,112
                  
                  
                  $
                  277,455





NOTE-8
            OTHER
      PAYABLES AND ACCRUED LIABILITIES





Other
payables and accrued liabilities consisted of the following:


March 31, 2010
                    
                    
                    December 31, 2009Business
      tax payable
                    
                    $
                    28,672
                    
                    
                    $
                    81,174Government
      levy payable
                    
                    
                    797
                    
                    
                    
                    34,435Salaries
      and welfare payable
                    
                    
                    104,777
                    
                    
                    
                    97,724Advances
      from employees
                    
                    
                    265,622
                    
                    
                    
                    50,411Customer
      deposits
                    
                    
                    36,673
                    
                    
                    
                    -Accrued
      operating expenses
                    
                    
                    53,402
                    
                    
                    
                    164,809$
                    489,943
                    
                    
                    $
                    428,553




F-14


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010


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


(Unaudited)





NOTE-9
            INCOME
      TAXES





For the
three months ended March 31, 2010 and 2009, the local (“United States of
America”) and foreign components of income before income taxes were comprised of
the following:


Three months ended March 31,2010
                  
                  
                  2009Tax
      jurisdiction from:–
      Local
                  
                  $
                  -
                  
                  
                  $
                  -–
      Foreign
                  
                  
                  418,551
                  
                  
                  
                  174,539Income
      before income taxes
                  
                  $
                  418,551
                  
                  
                  $
                  174,539





The
provision for income taxes consisted of the following:


Three months ended March 31,2010
                    
                    
                    2009Current:–
      Local
                    
                    $
                    -
                    
                    
                    $
                    -–
      Foreign
                    
                    
                    133,165
                    
                    
                    
                    65,115Deferred:–
      Local
                    
                    
                    -
                    
                    
                    
                    -–
      Foreign
                    
                    
                    -
                    
                    
                    
                    -Income
      tax expense
                    
                    $
                    133,165
                    
                    
                    $
                    65,115





The
effective tax rate in the years 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 subsidiary and VIE 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.





The
PRC





Effective
as of January 1, 2008, the Corporate Income Tax Law of the People’s Republic of
China (the “New CIT Law”) is imposed. Under the New CIT Law, 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 three
months ended March 31, 2010 and 2009 is as follows:


Three months ended March 31,2010
                  
                  
                  2009Income
      before income taxes from PRC operation
                  
                  $
                  418,551
                  
                  
                  $
                  174,539Statutory
      income tax rate
                  
                  
                  25
                  %
                  
                  
                  25
                  %Income
      tax expense at statutory rate
                  
                  
                  104,638
                  
                  
                  
                  43,634Net
      operating loss not recognized as deferred tax assets
                  
                  
                  26,462
                  
                  
                  
                  25,649Non-deductible
      expenses
                  
                  
                  2,065
                  
                  
                  
                  -Others
                  
                  
                  -
                  
                  
                  
                  (4,168
                  )Income
      tax expense
                  
                  $
                  133,165
                  
                  
                  $
                  65,115




F-15





GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010


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


(Unaudited)





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


March 31, 2010
                    
                    
                    December 31, 2009Deferred
      tax assets:Net
      operating loss carryforwards from the PRC
                    
                    $
                    266,907
                    
                    
                    $
                    240,426Allowance
      for doubtful accounts
                    
                    
                    956,519
                    
                    
                    
                    956,519Total
      deferred tax assets
                    
                    
                    1,223,426
                    
                    
                    
                    1,196,945Less:
      valuation allowance
                    
                    
                    (1,223,426
                    )
                    
                    
                    (1,196,945
                    )Deferred
      tax assets
                    
                    $
                    -
                    
                    
                    $
                    -





As of
March 31, 2010, the Company incurred $1,651,085 of aggregate net operating loss
carryforwards available to offset its taxable income for income tax purposes.
The Company has provided for a full valuation allowance against the deferred tax
assets of $1,223,426 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 three months ended March 31, 2010, the valuation allowance
increased by $26,481, primarily relating to net operating loss carryforwards in
the foreign tax regime.





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 three months ended March 31, 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 months ended March 31, 2010 and
2009:





Three months ended March 31, 2010Medical Business
                    
                    
                    Extraction Business
                    
                    
                    TotalOperating
      revenue
                    
                    $
                    779,668
                    
                    
                    $
                    10,368
                    
                    
                    $
                    790,036Cost
      of revenue
                    
                    
                    (140,063
                    )
                    
                    
                    (9,875
                    )
                    
                    
                    (149,938
                    )Gross
      profit
                    
                    $
                    639,605
                    
                    
                    $
                    493
                    
                    
                    $
                    640,098Depreciation
      and amortization
                    
                    $
                    140,063
                    
                    
                    $
                    50,105
                    
                    
                    $
                    190,168Net
      income (loss)
                    
                    
                    359,473
                    
                    
                    
                    (74,087
                    )
                    
                    
                    285,386Expenditure
      for long-lived assets
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -




F-16


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010


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


(Unaudited)





Three months ended March 31, 2009Medical Business
                    
                    
                    Extraction Business
                    
                    
                    TotalOperating
      revenue, net:
                    
                    $
                    554,256
                    
                    
                    $
                    9,786
                    
                    
                    $
                    564,042Cost
      of revenue
                    
                    
                    (125,443
                    )
                    
                    
                    (3,357
                    )
                    
                    
                    (128,800
                    )Gross
      profit
                    
                    $
                    428,813
                    
                    
                    $
                    6,429
                    
                    
                    $
                    435,242Depreciation
      and amortization
                    
                    $
                    125,443
                    
                    
                    $
                    47,770
                    
                    
                    $
                    173,213Net
      income (loss)
                    
                    
                    208,801
                    
                    
                    
                    (99,377
                    )
                    
                    
                    109,424Expenditure
      for long-lived assets
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -





For the
three months ended March 31, 2010 and 2009, 100% of the Company’s assets were
located in the PRC and 100% of the Company’s revenues and purchases were derived
from customers and vendors located in the PRC.





NOTE-11
            CONCENTRATIONS
      OF RISK





The
Company is exposed to the following concentrations of risk:





(a)
            Major
      customers





For the
three months ended March 31, 2010, one customer represented more than 10% of the
Company’s revenue and trade accounts receivable. This customer accounted for 99%
of the Company’s revenues amounting to $825,050, with $812,819 of accounts
receivable.





For the
three months ended March 31, 2009, one customer represented more than 10% of the
Company’s revenue and trade accounts receivable. This customer accounted for 98%
of the Company’s revenues amounting to $586,514, with $306,117 of accounts
receivable.





(b)
            Major
      vendors





For the
three months ended March 31, 2010 and 2009, there was no vendor who represented
more than 10% of the Company’s purchases and trade accounts
payable.





(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.


F-17


GFR
PHARMACEUTICALS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 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.





(e)
            Economic
      and political risks





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





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





NOTE-12
            COMMITMENTS
      AND CONTINGENCIES





The
Company leased certain office space under a non-cancelable operating lease
agreement with a term of 2 years with fixed monthly rentals, expiry in June
2011. Total rent expenses for the three months ended March 31, 2010 and 2009 was
$527 and $526, respectively.





As of
March 31, 2010, future minimum rental payments due under the non-cancelable
operating lease agreement are as follows:





Year
      ending March 31:2011
                  
                  $
                  2,1062012
                  
                  
                  527Total
                  
                  $
                  2,633




NOTE-13
            COMPARATIVE
      FIGURES





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


F-18


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





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





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





FORWARD
LOOKING STATEMENTS





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





Results
of Operations for the Three Months Ended March 31, 2010 and 2009





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





New
Century’s strategic purchase of Bao Sai will provide us with key technology in
the biotech purification field and an experienced R&D team. We feel that the
acquisition will put us in a strong position for increasing our market share and
revenue in 2010.





The
Company believes that it has strong prospects of increasing our market share and
revenues because our diagnostic imaging and radiation oncology treatments and
equipment are all covered by the Chinese national medical insurance system.
Additionally, the acquisition of Bao Sai provides us with vital technology and
experience in the field of chromatography. We experience little, if any,
seasonality in our business.





The
Company is focused on strengthening its market share and improving its business
performance. We have no plans to purchase or sell any plants or
equipment.


3





Revenues





Entering
the first quarter of 2010, we continued to realize our revenues from the
business operations of two subsidiaries: New Century and Bao Sai. New Century
owns radiology and oncology equipment and provides it to Tang Du Hospital’s
Gamma Knife Therapeutic Center (the “Center”) in Shaan Xi province, which is
affiliated with the Fourth Military Medical University. New Century currently
owns three different devices used for radiological imaging for the brain and
body and cancer treatment. New Century receives a percentage of profits from the
Center. We recognize net revenues based on the total amount received from the
patients during the month, less the monthly operating costs incurred at the
Center. The service revenues were recorded when services are received by the
customers and realized the amounts net of provisions for discounts, allowance
and taxes which are recognized at the time of services performed.





The
revenue from our operation of the Center increased from $554,256 for the quarter
ended March 31, 2009 to $779,668 for the same period of 2010, an increase of
41%. During the first quarter of 2010, the Center on average handled
approximately 247 cases per month, compared to 218 cases per month in the same
period of 2009. Our overall revenues for the first quarter of 2010 increased
from $564,042 for the quarter ended March 31, 2009 to $790,036 for the same
period of 2010, an increase of 40%. The increase was attributed to the increased
service revenue from Center. Our Bao Sai operation was still in a developmental
stage after the acquisition in May 2008.  We expect it will put us in
a stronger position for increasing our market share and revenue later in
2010.





Expenses





Operating
expenses for the three months ended March 31, 2010 were $221,556, as compared to
$262,969 for the same period ended March 31, 2009, a decrease of 16%, this
decrease was attributable to a decrease in general and administrative expenses
from $215,199 during the three months ended March 31, 2009, to $171,451during
the three months ended March 31, 2010.





Net
Income





Net
income attributable to GFR Pharmaceuticals, Inc. increased from $109,424 during
the three months ended March 31, 2009, to $285,386 during the three months ended
March 31, 2010, an increase of 160%.  Such increase was primarily due to
our increased revenue from New Century and a slight decrease of our operating
expenses for the first quarter of 2010.





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





Impact of
Inflation





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





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





LIQUIDITY
AND CAPITAL RESOURCES





Liquidity
Analysis





March 31, 2010
                
                
                December 31, 2009Working
      Capital Deficit
                
                $
                (1,285,374
                )
                
                $
                (1,760,129
                )Stockholders’
      Equity
                
                $
                4,607,847
                
                
                $
                4,322,122Total
      Liabilities
                
                $
                3,452,016
                
                
                $
                3,436,619




4





Working
capital deficit was decreased from $1,760,129 as of December 31, 2009 to
$1,285,374 as of at March 31, 2010, and stockholder’s equity also increased from
$4,322,122 to $4,607,847 for the same periods. The primary reason for the
increase in working capital in 2010 was an increase in trade accounts
receivable, prepayments and other current assets.





As of
March 31, 2010, cash and cash equivalents increased to $188,127 from $55,486 as
of December 31, 2009 an increase of 239.1%. The increase of cash and cash
equivalents was mainly due to cash flows provided by operating activities for
the three months ended March 31, 2010. The increase in the positive cash flows
from operations for the first quarter of 2010 was due primarily to the combined
effect of increase of trade accounts receivable by $285,312; increase of
prepayments and other current assets by $81,613; increase of trade accounts
payable, income tax payable by $69,356 and increase of other payable and accrued
liabilities by $84,733 for the three months ended March 31, 2010.





Stockholders’
equity increased from $4,322,122 as of December 31, 2009 to $4,607,847 as of
March 31, 2010, an increase of7%. Total liability was increased from $3,436,619
as of December 31, 2009 to $3,452,016 as of March 31, 2010. The increase of
total liabilities was mainly due to the combined effect of decrease of trade
accounts payable by $30,769 and increase of amount due to a related party by
$23,352. In addition, our principal shareholder, Mr. Lian Guo made a loan to
fund our operations. As of March 31, 2010 and December 31, 2009, the balance of
the loan was $1,984,226 and $1,960,874, respectively, which was unsecured,
interest-free and repayable on demand.





We have
two business segments – the Cancer Diagnosis and Treatment Center at Tang Du
Hospital and the biological extraction business that extracts raw materials
to medicine ingredients and distributes the extracted ingredients for medicine
manufacturing uses.  We are dependent on the continued success of the
operations at the cancer diagnostic and treatment business to continue
operations. In the first quarter of 2010, the cancer treatment business
accounted for $779,668 (98.69%) of our revenue.  The extraction
business generated $10,368 of revenue in the first quarter of 2010 as compared
to $9,786 in the same period of 2009.





Item
3. Quantitative and Qualitative Disclosures about Market Risk





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





Item
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 March 31, 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


5





Item
1A.  Risk Factors





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





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





None.





Item
3. Defaults Upon Senior Securities.





None.





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





Removed
and Reserved.





Item 5. Other Information





None





Item
6. Exhibits





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




6




SIGNATURE





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





GFR
      PHARMACEUTICALS, INC.DATE:  May
      13, 2010
                                          By:
                                          /s/Zhao Yan DingZhao
      Yan Ding, Chief Executive Officer(Principal
      executive
officer)




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




7