**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, 2008**





OR





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





Commission
      File No: 09081




GFR
      PHARMACEUTICALS, INC.


(Exact
      name of registrant as specified in its charter)


NEVADA
              77-0517964(State
                  or other jurisdiction of
              (I.R.S.
                  Employer ID No)incorporation
                  or organization)




99
      Yan
      Xiang Road, Biosep Building, Xi An, Shaan Xi Province, P.R. China 710054


(Address
      of principal executive office) (Zip
      Code)





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




N/A


Former
      name, former address and former fiscal year,


(if
      changed since last report)





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





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


Large accelerated filer o
            Accelerated filer o
            Non-accelerated filer o
              (Do not check if a smaller reportingcompany)
            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 o No x




The
      number of shares of common stock, no par value per share, outstanding as of
      May
      19, 2008 was 42,079,940.











GFR
      PHARMACEUTICALS, INC.


FORM
      10-Q


QUARTERLY
      PERIOD ENDED March 31, 2008





INDEX





TABLE
      OF
      CONTENTS





PagePART
                I – FINANCIAL INFORMATIONItem
                1:
            Financial
                Statements
            
            F-1
                – F-26Item
                2:
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            1Item
                3:
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            7Item
                4T:
            Controls
                and Procedures
            
            7PART
                II – OTHER INFORMATIONItem
                1:
            Legal
                Proceedings
            
            8Item
                1A:
            Risk
                Factors
            
            8Item
                2:
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            8Item
                3:
            Defaults
                Upon Senior Securities
            
            8Item
                4:
            Submission
                of Matters to a Vote of Security Holders
            
            8Item
                5:
            Other
                Information
            
            8Item
                6:
            Exhibits
            
            8





2


**Item
      1. Financial Statements.**


**GFR
        PHARMACEUTICALS, INC.**
 
 **INDEX
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 **Page**Condensed
                    Consolidated Balance Sheets as of March 31, 2008 and December
                    31, 2007
                F-2Condensed
                    Consolidated Statements of Operations And Comprehensive Income
                    for the
                    three months ended March 31, 2008 and 2007
                F-3Condensed
                    Consolidated Statements of Cash Flows for the three months ended
                    March 31,
                    2008 and 2007
                F-4Condensed
                    Consolidated Statement of Stockholders’ Equity for the three months ended
                    March 31, 2008
                F-5Notes
                    to Condensed Consolidated Financial Statements
                F-6
                    to F-26




F-1




**GFR
      PHARMACEUTICALS, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**AS
      OF MARCH 31, 2008 AND DECEMBER 31, 2007**


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





March 31, 2008
            
            December 31, 2007(unaudited)
            
            (audited)**ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            433,288
            
            $
            9,951Accounts
                receivable, net
            
            
            962,259
            
            
            343,087Inventories,
                net
            
            
            259,643
            
            
            -Amount
                due from related parties
            
            
            1,159,294
            
            
            28,232Notes
                receivable, net
            
            
            2,467,176
            
            
            -Prepayments
                and other receivables, net
            
            
            592,715
            
            
            314,185Total
                current assets
            
            
            5,874,375
            
            
            695,455Non-current
                assets:Property,
                plant and equipment, net
            
            
            7,887,814
            
            
            5,585,711Intangible
                assets, net
            
            
            159,171
            
            
            -Investment
                in an unconsolidated affiliate
            
            
            482,612
            
            
            -**TOTAL
                ASSETS**
            
            $
            14,403,972
            
            $
            6,281,166**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable, trade
            
            $
            924,366
            
            $
            -Note
                payable
            
            
            427,217
            
            
            -Income
                tax payable
            
            
            46,767
            
            
            214,570Amount
                due to related parties
            
            
            1,455,024
            
            
            -Other
                payables and accrued liabilities
            
            
            423,128
            
            
            59,675Total
                current liabilities
            
            
            3,276,502
            
            
            274,245Long-term
                liabilities:Note
                payable, related parties
            
            
            4,500,211
            
            
            -Total
                liabilities
            
            
            7,776,713
            
            
            274,245Minority
                interest
            
            
            500,312
            
            
            328,605Commitments
                and contingenciesStockholders’
                equity:Common
                stock, $0.001 par value; 100,000,000 shares authorized; 42,079,940
                and
                42,079,940 shares issued and outstanding as of March 31, 2008 and
                December
                31, 2007
            
            
            42,080
            
            
            42,080Additional
                paid-in capital
            
            
            3,712,120
            
            
            3,712,120Accumulated
                other comprehensive income
            
            
            434,450
            
            
            134,797Statutory
                reserve
            
            
            236,818
            
            
            236,818Retained
                earnings
            
            
            1,701,479
            
            
            1,552,501Total
                stockholders’ equity
            
            
            6,126,947
            
            
            5,678,316**TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY**
            
            $
            14,403,972
            
            $
            6,281,166




See
      accompanying notes to condensed consolidated financial statements.




F-2




**GFR
      PHARMACEUTICALS, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**AND
      COMPREHENSIVE INCOME**


**FOR
      THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007**


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


**(Unaudited)**





Three months ended March 31,2008
            
            2007**Revenue,
                net**Service
                revenue
            
            $
            475,695
            
            $
            399,879Sales
                of products
            
            
            206,712
            
            
            -Total
                revenue, net
            
            
            682,407
            
            
            399,879**Cost
                of revenue**(exclusive
                of depreciation and amortization)Cost
                of products
            
            
            108,118
            
            
            -**Gross
                profit**
            
            
            574,289
            
            
            399,879**Operating
                expenses:**Stock-based
                compensation
            
            
            -
            
            
            192,000Depreciation
                and amortization
            
            
            174,159
            
            
            111,638General
                and administrative
            
            
            200,362
            
            
            59,543Total
                operating expenses
            
            
            374,521
            
            
            363,181**Income
                from operations**
            
            
            199,768
            
            
            36,698**Other
                income (expense):**Interest
                income
            
            
            62
            
            
            90Equity
                in net income of an unconsolidated affiliate
            
            
            3,275
            
            
            -Interest
                expense
            
            
            -
            
            
            (24,446
            )**Income
                before income taxes and minority interest**
            
            
            203,105
            
            
            12,342Income
                tax expenses
            
            
            (46,424
            )
            
            (71,950
            )Minority
                interest
            
            
            (7,703
            )
            
            (10,901
            )**NET
                INCOME (LOSS)**
            
            $
            148,978
            
            $
            (70,509
            )Other
                comprehensive income:-
                Foreign currency translation gain
            
            
            299,653
            
            
            11,046**COMPREHENSIVE
                (LOSS) INCOME**
            
            $
            448,631
            
            $
            (59,463
            )Net
                (loss) income per share – Basic and diluted
            
            $
            0.00
            
            $
            (0.00
            )Weighted
                average number of shares outstanding during the period – Basic and
                diluted
            
            
            42,079,940
            
            
            41,791,051




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, 2008 AND 2007**


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


**(Unaudited)**


Three months ended March 31,2008
            
            2007**Cash
                flows from operating activities:**Net
                income (loss)
            
            $
            148,978
            
            $
            (70,509
            )Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            174,159
            
            
            111,638Stock-based
                compensation
            
            
            -
            
            
            192,000Equity
                in net income of an unconsolidated affiliate
            
            
            (3,275
            )
            
            -Minority
                interest
            
            
            7,703
            
            
            10,901Change
                in operating assets and liabilities:Accounts
                receivable, trade
            
            
            (63,191
            )
            
            (932
            )Inventories
            
            
            9,256
            
            
            -Receivable
                from a third party
            
            
            -
            
            
            (319,120
            )Prepayments
                and other receivables
            
            
            146,423
            
            
            98,937Accounts
                payable, trade
            
            
            2,598
            
            
            -Income
                tax payable
            
            
            (172,939
            )
            
            71,950Other
                payables and accrued liabilities
            
            
            (90,912
            )
            
            (34,495
            )Net
                cash provided by operating activities
            
            
            158,800
            
            
            60,370**Cash
                flows from investing activities:**Cash
                received from acquisition
            
            
            550,193
            
            
            -Repayment
                from an unconsolidated affiliate
            
            
            19,044
            
            
            -Purchase
                of property, plant and equipment
            
            
            (181,818
            )
            
            (3,521
            )Net
                cash provided by (used in) investing activities
            
            
            387,419
            
            
            (3,521
            )**Cash
                flows from financing activities:**Advances
                to related companies
            
            
            (395,200
            )
            
            -Contribution
                from stockholders
            
            
            263,136
            
            
            25,122Net
                cash (used in) provided by financing activities
            
            
            (132,064
            )
            
            25,122Effect
                of exchange rate changes on cash and cash equivalents
            
            
            9,182
            
            
            11,046**NET
                CHANGE IN CASH AND CASH EQUIVALENTS**
            
            
            423,337
            
            
            93,017**CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD**
            
            
            9,951
            
            
            64,543**CASH
                AND CASH EQUIVALENTS, END OF PERIOD**
            
            $
            433,288
            
            $
            157,560**SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:**Cash
                paid for income taxes
            
            $
            218,706
            
            $
            -Cash
                paid for interest expenses
            
            $
            -
            
            $
            24,446




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, 2008**
 **(Currency
        expressed in United States Dollars (“US$”), except for number of
        shares)**
 **(Unaudited)**


Common stock
              
              Additional
              
              Accumulated
                other
                comprehensive
              
              Statutory
              
              Retained
              
              Total
                Stockholders’No. of shares
              
              Amount
              
              paid-in capital
              
              income
              
              reserve
              
              earnings
              
              equityBalance
                  as of January 1, 2008
              
              
              42,079,940
              
              $
              42,080
              
              $
              3,712,120
              
              $
              134,797
              
              $
              236,818
              
              $
              1,552,501
              
              $
              5,678,316Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              299,653
              
              
              -
              
              
              -
              
              
              299,653Net
                  income for the period
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              148,978
              
              
              148,978Balance
                  as of March 31, 2008
              
              
              42,079,940
              
              $
              42,080
              
              $
              3,712,120
              
              $
              434,450
              
              $
              236,818
              
              $
              1,701,479
              
              $
              6,126,947





See
      accompanying notes to condensed consolidated financial statements.




F-5




**GFR
      PHARMACEUTICALS, INC.**


**NOTES
      TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED MARCH 31, 2008**


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


**(Unaudited)**


**NOTE** **** **1**  **BASIS
      OF PRESENTATION**





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with both generally accepted accounting principles for
      interim financial information, and the instructions to Form 10-Q and Rule 10-01
      of Regulation S-X. Accordingly, they do not include all of the information
      and
      footnotes required by generally accepted accounting principles for complete
      financial statements. The accompanying unaudited condensed consolidated
      financial statements reflect all adjustments (consisting of normal recurring
      accruals) that are, in the opinion of management, considered necessary for
      a
      fair presentation of the results for the interim periods presented. Interim
      results are not necessarily indicative of results for a full year.





The
      condensed consolidated financial statements and related disclosures have been
      prepared with the presumption that users of the interim financial information
      have read or have access to our annual audited consolidated financial statements
      for the preceding fiscal year. Accordingly, these condensed consolidated
      financial statements should be read in conjunction with the consolidated
      financial statements and the related notes thereto contained in the Annual
      Report on Form 10-KSB for the year ended December 31, 2007.





**NOTE** **** **2**  **ORGANIZATION
      AND BUSINESS BACKGROUND**





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





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





Xi’an
      Hua
      Long Yu Tian Ke Ji Shi Ye Co., Ltd. (“Hua Long”) is a wholly-owned subsidiary of
      the Company, which was incorporated as a limited liability company in the PRC
      on
      December 23, 1999. Its principal activity is an investment holding of 95% equity
      interest in New Century Scientific Investment Ltd. (“New Century”).





New
      Century was incorporated as a limited liability company in the PRC on November
      23, 2001 with a registered capital of RMB
      30,000,000 (equivalent to US $3,636,000). It jointly
      operates a PET Scanner and Rotary Gamma Ray Stereotactic Neurosurgery System
      imaging center with Tong Du Hospital ("the Hospital") in Xian City, Shaanxi
      Province, the PRC. The duration of the operation was 11 years and it will expire
      in 2017.




F-6


**GFR
          PHARMACEUTICALS, INC.**
 **NOTES
          TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
          expressed in United States Dollars (“US$”), except for number of
          shares)**
 **(Unaudited)**




Pursuant
      to a stock purchase agreement (the “Purchase Agreement”), dated January 1, 2008,
      by and between New Century (collectively with GFR Pharmaceuticals, Inc., and
      the
      holders of all 60,000,000 shares of the capital stock of Xi’an Jiaoda Bao Sai
      Bio-technology Co., Ltd (“Bao Sai”), New Century acquired 58,060,000 shares of
      capital stock of Bao Sai, or 96.77% of its common stock, as of January 1, 2008.




On
      May
      14, 2008, New Century and the Bao Sai stockholders (the “Shareholders”) entered
      into two supplemental agreements (collectively the “Supplemental Agreements”),
      in which the parties agreed on an aggregate purchase price of $ 4,500,211
      (the “Purchase Price”) for 96.77% of the common stock of Bao Sai. The Purchase
      Agreement set forth that the purchase price of the 58,060,000 shares would
      equal
      Bao Sai’s net asset value based on Bao Sai’s audited financial statements for
      the fiscal year ended December 31, 2007 prepared in accordance with Generally
      Accepted Accounting Principals. The net asset value was $4,650,420.




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




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





**NOTE** **** **3**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**




· Basis
        of
        presentation





These
      accompanying condensed consolidated financial statements have been prepared
      in
      accordance with generally accepted accounting principles in the United States
      of
      America.




· Use
        of
        estimates





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




· Basis
        of
        consolidation





The
      condensed consolidated financial statements include the financial statements
      of
      GFRP and its subsidiaries, Hua Long, New
      Centur y
      and Bao
      Sai.




F-7


**GFR
          PHARMACEUTICALS, INC.**
 **NOTES
          TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
          expressed in United States Dollars (“US$”), except for number of
          shares)**
 **(Unaudited)**


All
        significant inter-company balances and transactions within
        the Company have been eliminated upon consolidation.





Upon
      the
      acquisition of Bao Sai, the results of subsidiary acquired during the periods
      are included in the consolidated financial statement from the effective date
      of
      acquisition.





Investment
      in an unconsolidated affiliate, namely Xi’ an Bao Sai Medicine Co., Ltd
      (“Medicine”) over which the Company has significant influence are accounted for
      under the equity method of accounting whereby the investment is initially
      recorded at the cost of acquisition and adjusted to recognize the Company’s
      share in undistributed earnings or losses since acquisition. The Company’s share
      in the earnings or losses for its unconsolidated affiliate is reflected in
      equity share in income of unconsolidated affiliates. If the investment in an unconsolidated affiliateis
      reduced to a zero balance due to prior losses, the Company recognizes any
      further losses related to its share to the extent that any receivables, loans
      or
      advances to the unconsolidated affiliateare
      evaluated to be uncollectible.




· Cash
        and
        cash equivalents





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


· Accounts
        receivable





Accounts
      receivable are recorded at the invoiced amount and do not bear interest. The
      Company extends unsecured credit to its customers in the ordinary course of
      business but mitigates the associated risks by performing credit checks and
      actively pursuing past due accounts. An allowance for doubtful accounts is
      established and determined based on managements’ assessment of known
      requirements, aging of receivables, payment history, the customer’s current
      credit worthiness and the economic environment.


· Allowance
        for doubtful accounts





The
      allowance for loan losses on small-balance receivables reflects management’s
      best estimate of probable losses determined principally on the basis of
      historical experience. For larger loans, including specific allowances for
      known
      troubled accounts. The Company maintains a general reserve for all losses and
      receivable at 0.05% of the balances.




F-8


**GFR
          PHARMACEUTICALS, INC.**
 **NOTES
          TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
          expressed in United States Dollars (“US$”), except for number of
          shares)**
 **(Unaudited)**
 Inventories





Inventories
      are stated at the lower of cost or market (net realizable value), cost being
      determined on a weighted average method. Costs include material, labor and
      manufacturing overhead costs. The Company quarterly reviews historical sales
      activity to determine excess, slow moving items and potentially obsolete items
      and also evaluates the impact of any anticipated changes in future demand.
      The
      Company provides inventory allowances based on excess and obsolete inventories
      determined principally by customer demand.


· Property,
        plant and equipment, net





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





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





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


· Intangible
        asset





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





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


· Land
        use
        right





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




F-9


**GFR
          PHARMACEUTICALS, INC.**
 **NOTES
          TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
          expressed in United States Dollars (“US$”), except for number of
          shares)**
 **(Unaudited)**


· Impairment
        of long-lived assets





In
      accordance with Statement
      of Financial Accounting Standard ("SFAS") SFAS
      No.
      144, *“Accounting
      for the Impairment or Disposal of Long-Lived Assets”* ,
      all
      long-lived assets such as plant and equipment held and used by the Company
      are
      reviewed for impairment whenever events or changes in circumstances indicate
      that the carrying amount of an asset may not be recoverable. Recoverability
      of assets to be held and used is evaluated by a comparison of the carrying
      amount of assets to estimated discounted net cash flows expected to be generated
      by the assets. If such assets are considered to be impaired, the impairment
      to
      be recognized is measured by the amount by which the carrying amounts of the
      assets exceed the fair value of the assets. There has been no impairment as
      of
      March 31, 2008.





(a) Service
          revenue





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





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





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





(b) Sales
          of
          products





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





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




F-10


**GFR
          PHARMACEUTICALS, INC.**
 **NOTES
          TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
          expressed in United States Dollars (“US$”), except for number of
          shares)**
 **(Unaudited)**




(c) Interest
          income





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




· Income
        taxes





The
      Company accounts for income taxes in interim periods as required by Accounting
      Principles Board Opinion No. 28, *“Interim
      Financial Reporting”* and as
      interpreted by FASB Interpretation No. 18, *“Accounting
      for Income Taxes in Interim Periods.”* The
      Company has determined an estimated annual effective tax rate. The rate will
      be
      revised, if necessary, as of the end of each successive interim period during
      the Company’s fiscal year to the Company’s best current estimate. The estimated
      annual effective tax rate is applied to the year-to-date ordinary income at
      the
      end of the interim period.





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





Effective
      January 1, 2007, the Company also adopts the provisions of the Financial
      Accounting Standards Interpretation No. 48, *“Accounting
      for Uncertainty in Income Taxes”* ("FIN
      48"). FIN 48 prescribes a recognition threshold and measurement process for
      recording in the financial statements uncertain tax positions taken or expected
      to be taken in a tax return. FIN 48 also provides guidance on de-recognition,
      classification, interest and penalties, accounting in interim periods,
      disclosures and transitions. In connection with the adoption of FIN 48, the
      Company has analyzed the filing positions in all of the jurisdictions where
      the
      Company is required to file income tax returns, as well as all open tax years
      in
      these jurisdictions. There was no impact on the condensed consolidated financial
      statements. The Company did not have any unrecognized tax benefits and there
      was
      no effect on the financial condition or results of operations for the period
      ended March 31, 2008.





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





In
      accordance with FIN 48, the Company adopted the policy of recognizing interest
      and penalties, if any, related to unrecognized tax positions as income tax
      expense.




F-11


**GFR
          PHARMACEUTICALS, INC.**
 **NOTES
          TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
          expressed in United States Dollars (“US$”), except for number of
          shares)**
 **(Unaudited)**




· Net
        income (loss) per share





The
      Company calculates net income (loss) per share in accordance with SFAS No.
      128, *“Earnings
      per Share.”* Basic
      income (loss) per share is computed by dividing the net income by the
      weighted-average number of common shares outstanding during the period. Diluted
      income (loss) per share is computed similar to basic income (loss) 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.


· Comprehensive
        income





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


· 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 the United States dollar ("US$"). The
      Company's subsidiaries in the PRC, Hua Long, New Century and Bao Sai maintain
      their books and records in its local currency, the 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 SFAS No 52. “ *Foreign
      Currency Translation”* ,
      using
      the exchange rate on the balance sheet date. Revenues and expenses are
      translated at average rates prevailing during the period. The gains and losses
      resulting from translation of financial statements of foreign subsidiaries
      are
      recorded as a separate component of accumulated other comprehensive income
      within the statement of stockholders’ equity.





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




2008
            
            2007Months
                end RMB:US$ exchange rate
            
            
            7.0222
            
            
            7.7697Average
                daily RMB:US$ exchange rate
            
            
            7.1757
            
            
            7.8635




F-12


**GFR
          PHARMACEUTICALS, INC.**
 **NOTES
          TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
          expressed in United States Dollars (“US$”), except for number of
          shares)**
 **(Unaudited)**




· Stock-based
        compensation





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


· Related
        parties





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


· Segment
        reporting





SFAS
      No.
      131 *“Disclosures
      about Segments of an Enterprise and Related Information”* establishes standards for reporting information about operating segments on
      a
      basis consistent with the Company’s internal organization structure as well as
      information about geographical areas, business segments and major customers
      in
      the financial statements. Starting from 2008, the Company operates in two
      reportable segments: Medical Business and Extraction Business in the
      PRC.


· Fair
        value of financial instruments





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





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





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




F-13


**GFR
          PHARMACEUTICALS, INC.**
 **NOTES
          TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
          expressed in United States Dollars (“US$”), except for number of
          shares)**
 **(Unaudited)**




· Recently
        issued accounting standards





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





In
      February 2007, the FASB issued SFAS No. 159, *"The
      Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No.
      159").* SFAS No.
      159 permits entities to choose to measure, on an item-by-item basis, specified
      financial instruments and certain other items at fair value. Unrealized gains
      and losses on items for which the fair value option has been elected are
      required to be reported in earnings at each reporting date. SFAS No. 159 is
      effective for fiscal years beginning after November 15, 2007, the provisions
      of
      which are required to be applied prospectively. The Company believes that SFAS
      159 should not have a material impact on the consolidated financial position
      or
      results of operations.





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





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





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





F-14


**GFR
          PHARMACEUTICALS, INC.**
 **NOTES
          TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
          expressed in United States Dollars (“US$”), except for number of
          shares)**
 **(Unaudited)**
  **NOTE
        4**  **ACQUISITION
        OF INTEREST IN BAO SAI**





On
      January 1, 2008, the Company acquired 96.77% equity interest in Bao Sai in
      exchange for notes payable aggregating $4,500,211 as described below. Upon
      the
      completion of the transaction, Bao Sai became a subsidiary of the Company.
      The
      acquisition was accounted for under the purchase method of accounting. The
      following table summarizes the historical value of the assets acquired and
      liabilities assumed at the date of acquisition.





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





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




F-15


**GFR
          PHARMACEUTICALS, INC.**
 **NOTES
          TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
          expressed in United States Dollars (“US$”), except for number of
          shares)**
 **(Unaudited)**




As
      of
      March 31, 2008 ,
      the
      purchase price consideration is payable are as follows:


Years
                  ending December 31,
              
              Approximately
              
              Equal to RMB2008
              
              
              2,100,248
              
              
              15,401,1002009
              
              
              2,399,963
              
              
              17,598,900Total:
              
              $
              4,500,211
              
              
              33,000,000


The
      accompanying unaudited condensed consolidated financial statement presents
      the
      combined results of operating of the Company with the operations of Bao Sai
      for
      the three months ended March 31, 2008, from the effective date of acquisition.
      The results of operations of Bao Sai for the three months ended March 31, 2007
      assuming that the purchase had occurred at the beginning of that period to
      include:





Revenue
            
            $
            508,313Net
                loss
            
            
            (211,769
            )Net
                loss per share
            
            
            (0.01
            )





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





The
      majority of the Company’s sales are on open credit terms and in accordance with
      terms specified in the contracts governing the relevant transactions. The
      Company evaluates the need of an allowance for doubtful accounts based on
      specifically identified amounts that management believes to be uncollectible.
      If
      actual collections experience changes, revisions to the allowance may be
      required. Based upon the aforementioned criteria, management has determined
      that
      no allowance for doubtful accounts was required. No allowance for doubtful
      accounts was charged to operations during the three months ended March 31,
      2008.





March 31, 2008
            
            December 31, 2007(audited)Accounts
                receivable, cost
            
            $
            978,113
            
            $
            343,087Less:
                allowance for doubtful accounts
            
            
            (15,854
            )
            
            -Accounts
                receivable, net
            
            $
            962,259
            
            $
            343,087




F-16


**GFR
            PHARMACEUTICALS, INC.**
 **NOTES
            TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
            THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
            expressed in United States Dollars (“US$”), except for number of
            shares)**
 **(Unaudited)**


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





March 31, 2008
            
            December 31, 2007(audited)Notes
                receivable, cost
            
            $
            2,492,097
            
            $
            -Less:
                allowance for doubtful accounts
            
            
            (24,921
            )
            
            -Notes
                receivable, net
            
            $
            2,467,176
            
            $
            -





On
      September 3, 2007, the Company disposed of its investment in 75% of Hua Yang
      for
      a cash consideration of $1,068,042 (equivalent to RMB 7,500,000) and recognized
      a gain on disposal of $428,899. As of March 31, 2008, the balance was unsecured
      and interest-free and repayable in 4 installments due in full, by December
      31,
      2008.





On
      December 10, 2007, the Company disposed of a building for a cash consideration
      of $1,424,055 (equivalent to RMB10,000,000) and recognized a loss on disposal
      of
      $764,143. As of March 31, 2008, the balance was unsecured and interest-free
      and
      repayable in 3 installments due in full, by December 31, 2008.





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





Inventories
      consisted of the followings:





March 31, 2008
            
            December 31, 2007(audited)Raw
                materials
            
            $
            131,236
            
            $
            -Work
                in process
            
            
            5,130
            
            
            -Finished
                goods
            
            
            483,440
            
            
            -619,806
            
            
            -Less:
                inventory allowances
            
            
            (360,163
            )
            
            -Inventories,
                net
            
            $
            259,643
            
            $
            -





No
      provision for inventory allowance was charged to operations during the three
      months ended March 31, 2008.




F-17


**GFR
            PHARMACEUTICALS, INC.**
 **NOTES
            TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
            THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
            expressed in United States Dollars (“US$”), except for number of
            shares)**
 **(Unaudited)**
  **NOTE
          8**  **AMOUNT
          DUE FROM (TO) RELATED PARTIES**





(a)  Amount
      due from related companies





March 31, 2008
            
            December 31, 2007(audited)Amount
                due from related parties, cost
            
            $
            1,178,638
            
            $
            -Less:
                allowance for doubtful accounts
            
            
            (19,344
            )
            
            -Amount
                due from related parties, net
            
            $
            1,159,294
            
            $
            -





As
      of
      March 31, 2008, a net balance of $1,159,294 due from a former subsidiary of
      the
      Company, represented temporary advance from the Company which was unsecured,
      interest-free and had fixed term of repayment.





(b)  Amount
      due to a stockholder





As
      of
      March 31, 2008, a balance of $1,455,024 due to a stockholder, Mr Lian Guo
      represented temporary advance to the Company which was unsecured, interest-free
      and repayable on demand.





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





Prepayments
      and other receivables consisted of the following:




March 31, 2008
            
            December 31, 2007(audited)Deposits
            
            $
            164,642
            
            $
            -Advances
                to employees
            
            
            152,682
            
            
            18,587Prepayment
                for equipment purchase
            
            
            79,177
            
            
            256,358Prepayments
            
            
            183,214
            
            
            39,240$
            579,715
            
            $
            314,185




F-18


**GFR
        PHARMACEUTICALS, INC.**
 **NOTES
        TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
        expressed in United States Dollars (“US$”), except for number of
        shares)**
 **(Unaudited)**





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





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





March 31, 2008
            
            December 31, 2007(audited)Buildings
            
            $
            2,260,861
            
            $
            608,053Plant
                and equipment
            
            
            5,968,757
            
            
            5,379,652Motor
                vehicles
            
            
            226,260
            
            
            -Furniture,
                fixture and office equipment
            
            
            139,504
            
            
            18,944Foreign
                translation difference
            
            
            929,927
            
            
            547,3669,525,309
            
            
            6,554,015Less:
                accumulated depreciation
            
            
            (1,520,913
            )
            
            (914,000
            )Less:
                foreign translation difference
            
            
            (116,582
            )
            
            (54,304
            )Property,
                plant and equipment, net
            
            $
            7,887,814
            
            $
            5,585,711





Depreciation
      expense for the three months ended March 31, 2008 and 2007 were $172,431 and
      $111,638, respectively.





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





March 31, 2008
            
            December 31, 2007(audited)Technical
                know-how
            
            $
            1,091,703
            
            $
            -Land
                use right
            
            
            153,437
            
            
            -Foreign
                translation difference
            
            
            154,863
            
            
            -1,400,003
            
            
            -Less:
                accumulated amortization
            
            
            (777,691
            )
            
            -Less:
                accumulated impairment charge
            
            
            (406,571
            )
            
            -Less:
                foreign translation difference
            
            
            (56,570
            )
            
            -Net
                book value
            
            $
            159,171
            
            $
            -





Amortization
      expenses for the years ended March 31, 2008 were $1,728.





As
      of
      March 31, 2008, the carrying value of the technical know-how was stated as
      zero.
      The Company recognized a full impairment charge in
      prior
      years for recoverability test.





F-19




**GFR
          PHARMACEUTICALS, INC.**
 **NOTES
          TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
          expressed in United States Dollars (“US$”), except for number of
          shares)**
 **(Unaudited)**




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





The
      Company has 75% equity interest in Xi’an Bao Sai Medicine Co., Ltd (“Medicine”),
      which was registered as a limited liability company in the PRC. Its principal
      activity was the leasing business of the business license. The Company owns
      more
      than 50% but does not control policy decisions in Medicine, therefore, the
      75%-investment in Medicine is accounted for under the equity
      method.





As
      of
      March 31, 2008, the investment in an unconsolidated affiliate is presented
      as
      follows:-




Investment
                in Medicine at the date of acquisition
            
            $
            106,804Amount
                due from Medicine
            
            
            1,243,356Share
                of accumulated losses in Medicine
            
            
            (870,823
            )Equity
                in net income of unconsolidated affiliate
            
            
            3,275Net
                investment
            
            $
            482,612





Summarized
      the operating result of Medicine for the three months ended March 31, 2008
      is
      described as below:





Revenue
            
            $
            4,367Net
                income
            
            
            4,367





The
      balance of $1,243,356 due from Medicine, represented temporary advance from
      the
      Company which was unsecured and interest-free with a fixed term of repayment
      in
      5 installments and is due in full, no later than 2012. As of March
      31,
      2008 ,
      the
      future installments to be received are as follows:





Periods ending December 31,
            
            Approximately2008
            
            $
            158,9852009
            
            
            273,4482010
            
            
            273,4482011
            
            
            273,4482012
            
            
            264,027Total:
            
            $
            1,243,356





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





As
      of
      March 31, 2008, a balance of $427,217 represented temporary advance from Shaanxi
      Zhai Hua Nuan Tong Zhileng Gongcheng Co., Ltd to the Company. Interest is
      charged at 10.46% per annum, payable monthly, with principle due December 20,
      2008.





F-20




**GFR
          PHARMACEUTICALS, INC.**
 **NOTES
          TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
          THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
          expressed in United States Dollars (“US$”), except for number of
          shares)**
 **(Unaudited)**




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





Other
      payables and accrued liabilities consisted of the followings:





March 31, 2008
            
            December 31, 2007(audited)Business
                tax payable
            
            $
            89,999
            
            $
            17,154Salaries
                payable
            
            
            17,036
            
            
            1,292Welfare
                payable
            
            
            76,354
            
            
            -Temporary
                advances
            
            
            123,429
            
            
            -Accrued
                expenses
            
            
            105,422
            
            
            6,216Other
                payable
            
            
            10,888
            
            
            35,013$
            423,128
            
            $
            59,675





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





The
      Company is registered in the United States of America and has operations in
      two
      tax jurisdictions: the United States of America and the PRC. The Company’s
      operations in the United States of America have resulted in net operating losses
      for income tax purposes. The Company generated substantially its net income
      from
      the operation of its subsidiaries in the PRC and subject to the PRC tax law.
      The
      Company has recorded income tax expenses for the three months ended March 31,
      2008 and 2007.





The
      components of income before income taxes and minority interest separating U.S.
      and PRC tax jurisdictions are as follows:




Three months ended March 31,2008
            
            2007Loss
                subject to U.S. tax
            
            $
            (7,000
            )
            $
            (199,615
            )Income
                subject to PRC tax
            
            
            210,105
            
            
            211,957Income
                before income taxes and minority interest
            
            $
            203,105
            
            $
            12,342





*United
      States of America*





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





As
      of
      March 31, 2008, the Company’s U.S. operations incurred $408,015 of net operating
      losses available for federal tax purposes, which are available to offset future
      taxable income. The net operating loss carry forwards begin to expire in 2029.
      The Company has provided for a full valuation allowance of $142,805 for future
      tax benefits from the net operating loss carry forwards as the management
      believes it is more likely than not that these assets will not be realized
      in
      the future.




F-21




**GFR
            PHARMACEUTICALS, INC.**
 **NOTES
            TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
            THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
            expressed in United States Dollars (“US$”), except for number of
            shares)**
 **(Unaudited)**




*The
      PRC*





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





The
      reconciliation of income tax rate to the effective income tax rate based on
      income before income taxes and minority interest under the PRC tax jurisdiction
      for the period ended March 31, 2008 and 2007 are as follows:




Three months ended March 31,2008
            
            2007Income
                before income taxes
            
            $
            210,105
            
            $
            211,957Statutory
                income tax rate
            
            
            25
            %
            
            33
            %52,526
            
            
            69,946Expenses
                not deductible for the PRC income tax
            
            
            3,495
            
            
            -Net
                operating loss carryforwards
            
            
            (9,597
            )
            
            2,004Income
                tax expenses
            
            $
            46,424
            
            $
            71,950





Under
      the
      PRC tax jurisdiction, its effective income tax rate for the three months ended
      March 31, 2008 and 2007 were 22.1% and 33.9%, respectively.





For
      the
      three months ended March 31, 2008, Hua Long and Bao Sai were exempted from
      CIT
      due to cumulative tax losses.





As
      of
      March 31, 2008, the Company has approximately an aggregate $3,676,452 of
      cumulative tax losses which can be carried forward indefinitely to offset future
      taxable income. The deferred tax assets of the Company consisted mainly of
      tax
      losses and for which a full valuation allowance has been provided, as the
      management believes it is more likely than not that these assets will not be
      realized in the future.





F-22




**GFR
            PHARMACEUTICALS, INC.**
 **NOTES
            TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
            THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
            expressed in United States Dollars (“US$”), except for number of
            shares)**
 **(Unaudited)**


The
      following table sets forth the significant components of the aggregate net
      deferred tax assets of the C ompany
      as
      of March 31, 2008 and December 31, 2007:





March 31, 2008
            
            December 31, 2007(audited)Deferred
                tax assets:-
                Net operating loss carryforwards
            
            $
            959,914
            
            $
            140,355Less:
                valuation allowance
            
            
            (959,914
            )
            
            (140,355
            )Net
                deferred tax assets
            
            $
            -
            
            $
            -





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





The
      Company’s business units have been aggregated into two reportable segments, as
      defined by SFAS 131:




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




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





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





The
      accounting policies of the segments are the same as those described in the
      summary of significant accounting policies (see Note 3). The Company had no
      inter-segment sales for the periods ended March 31, 2008 and 2007. The Company’s
      reportable segments are strategic business units that offer different products
      and services. They are managed separately based on the different technology
      and
      marketing strategies of each business unit for making internal operating
      decisions.





F-23




**GFR
            PHARMACEUTICALS, INC.**
 **NOTES
            TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
            THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
            expressed in United States Dollars (“US$”), except for number of
            shares)**
 **(Unaudited)**


Summarized
      financial information concerning the Company’s reportable segments is shown in
      the following table for the three months ended March 31, 2008 and 2007:


Three months ended March 31, 2008Medical
                Business
              
              Extraction
                Business
              
              TotalOperating
                  revenues
              
              $
              475,695
              
              $
              206,712
              
              $
              682,407Cost
                  of revenues
              
              
              -
              
              
              (108,118
              )
              
              (108,118
              )Gross
                  profit
              
              
              475,695
              
              
              98,594
              
              
              574,289Depreciation
                  and amortization
              
              
              131,587
              
              
              42,572
              
              
              174,159Net
                  income
              
              $
              111,868
              
              $
              37,110
              
              $
              148,978Expenditure
                  for long-lived assets
              
              $
              167,231
              
              $
              14,587
              
              $
              181,818





Three months ended March 31, 2007Medical
                Business
              
              Extraction
                Business
              
              TotalOperating
                  revenues
              
              $
              399,879
              
              $
              -
              
              $
              399,879Depreciation
                  and amortization
              
              
              111,638
              
              
              -
              
              
              111,638Net
                  loss
              
              $
              (70,509
              )
              $
              -
              
              $
              (70,509
              )Expenditure
                  for long-lived assets
              
              $
              3,521
              
              $
              -
              
              $
              3,521


F-24




**GFR
            PHARMACEUTICALS, INC.**
 **NOTES
            TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
            THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
            expressed in United States Dollars (“US$”), except for number of
            shares)**
 **(Unaudited)**




**NOTE
      17**  **CONCENTRATION
      AND RISK**





(a)  Major
      customers





For
      both
      periods ended March 31, 2008 and 2007, 100% of the Company’s assets were located
      in the PRC and 100% of the Company’s revenues were derived from customers
      located in the PRC.





The
      following is a table summarizing the revenue from customers that individually
      represent greater than 10% of the total revenue for each of the three months
      ended March 31, 2008 and 2007 and their outstanding balances at period-end
      date:





Three months ended March 31, 2008
            
            
            
            March 31, 2008Revenues
            
            Percentage
              of revenues
            
            
            
            Accounts
              receivable, tradeCustomer
                A
            
            $
            475,695
            
            
            70%
            
            
            
            
            $
            220,548Customer
                B
            
            
            196,532
            
            
            29%
            
            
            
            
            
            371,173Total:
            
            $
            672,227
            
            
            99%
            
            
            Total:
            
            $
            591,721





For
      the
      three months ended March 31, 2007, one customer represented more than 10% of
      the
      Company’s revenue and accounts receivable, respectively. As of March 31, 2007,
      this customer accounted for both 100% of revenues amounting to $399,879 and
      $473,533 of accounts receivable, respectively.





(b)  Major
      vendors





For
      the
      three months ended March 31, 2008, one vendor represented more than 10% of
      the
      Company’s purchases and accounts payable, respectively.





For
      the
      three months ended March 31, 2007, no vendor represented more than 10% of the
      Company’s purchases and accounts payable, respectively.





(c)  Credit
      risk





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




F-25




**GFR
            PHARMACEUTICALS, INC.**
 **NOTES
            TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
            THE THREE MONTHS ENDED MARCH 31, 2008**
 **(Currency
            expressed in United States Dollars (“US$”), except for number of
            shares)**
 **(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.





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





The
      Company rented office premises under non-cancelable operating lease agreements
      for a period of one to two years, due March 2009 and June 2009. Costs incurred
      under these operating leases are recorded as rental expense and totaled
      approximately $3,010 for the period ended March 31, 2008.





As
      of
      March 31, 2008, future minimum annual operating lease payments are as
      follows:





Years
                ending March 31:2009
            
            $
            4,7082010
            
            
            440Total
                future minimum operating lease payments
            
            $
            5,148





**NOTE
      19****SUBSEQUENT
      EVENTS**





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




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




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




F-26


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





**GENERAL
      DESCRIPTION OF BUSINESS**




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





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




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




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




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




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




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


1


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




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




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





**RESULTS
      OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2008**





FORWARD
      LOOKING STATEMENTS





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




2




CRITICAL
      ACCOUNTING POLICIES





*Revenue
      recognition*





a)Service
                revenue





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





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





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





b)Interest
                income





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





*Stock-based
      compensation*





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





3


*Property,
      plant and equipment, net*





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





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





Expenditure
      for maintenance and repairs is expensed as incurred.




**Revenues**




We
      recorded revenues of $682,407 and $ 399,879 _for
      the
      three months ended March 31, 2008 and March 31, 2007, respectively. New
      Century owns radiology and oncology equipment and provides it to Tangdu
      Hospital’s Gamma Knife Therapeutic Center (the “Center”) in Shan Xi province,
      which is affiliated with the Fourth Military Medical University. New Century
      currently owns three different devices used for radiological imaging for the
      brain and body and cancer treatment. The Center averaged 137 cases per month
      in
      2006 and 204 cases per month in 2007. New Century receives a percentage of
      profits from the Center.





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





We
      recognize net revenues based on the total amount received from the patients
      during the month, less the monthly operating costs incurred at the centers.
      The
      services 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. Net revenues of $682,407
      for
      the quarter ended March 31, 2008 represent an increase of $282,528, as compared
      to net revenues from the same period ended March 31, 2007. Such increase was
      due
      primarily to the additional revenue from sales of Bao Sai’s products, which
      totaled $206,712.





4


**Net
      Income**





Our
      net
      income was $148,978 for the three months ended March 31, 2008, an increase
      of
      $219,487, as compared to net income of $(70,509) for the three months ended
      March 31, 2007. Such increase was due primarily to the increase in revenues
      covering the operating expenses in these periods.





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





**Expenses**




Operating
      expenses for the three months ended March 31, 2008 were $374,521, as compared
      to
      operating expenses of $363,181 for the same period ended March 31, 2007.
      Increased operating expenses during the three months ended March 31, 2008 were
      due primarily to the increase of our business scope and scale.





**Impact
      of Inflation**




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




**Liquidity
      and Capital Resources**




Cash
      flows provided by operating activities were $158,800 for the three months ended
      March 31, 2008, compared to cash flows of $60,370 from operating activities
      for
      the three months ended March 31, 2007. Positive cash flows from operations
      for
      the three months ended March 31, 2008 were due primarily to the net income
      of
      $148,978, the increase in t he
      non-cash depreciation expenses to $174,159 ,
      the
      decrease in prepayments by $146,423, and the increase in income tax payable
      of
      $172,939. The positive cash flow was also attributable to a ccounts
      receivable of
      $63,191 and other
      payables of
      $90,912. Cash flows provided by operating activities for the three months ended
      March 31, 2007 were due primarily to t he
      non-cash depreciation expenses of $111,638 ,
      the
      increase in stock-based
      compensation of $192,000, the increase in receivable from a third
      party of
      $319,120,the increase in income tax payable by $71,950 and the increase in
      other
      payable by $34,495, partially offset by the increase in net income which was
      $70,509, respectively.





Cash
      flows used in investment activities were $387,419 for the three months ended
      March 31, 2008, respectively, due to cash
      received from acquisition and the
      purchase of property and equipment in these periods.


5




Cash
      flows used in financing activities were $(132,046) for the three months ended
      March 31, 2008, due primarily to a dvances
      to related companies of
      $ (395,200) and contribution
      from stockholders of
      $ 263,136 ,
      compared to cash flow of $25,122 used in financing activities during the three
      months ended March 31, 2007 due to a dvances
      to related companies .




Overall,
      we have funded our cash needs from inception through March 31, 2008 with a
      series of debt and equity transactions, including accounts
      payable of
      $924,366, and a mount
      due
      to related parties of $1,455,024 .
      If we
      are unable to receive additional cash from our related parties, we may need
      to
      rely on financing from outside sources through debt or equity transactions.
      Our
      related parties are under no legal obligation to provide us with capital
      infusions. Failure to obtain such financing could have a material adverse effect
      on operations and financial condition.




6


**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, 2008, there has been no change in our
      internal control over financial reporting (as defined in Rule 13a-15(f) and
      15d-15(f) under the Exchange Act) that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial
      reporting.





7


**PART
      II. OTHER INFORMATION**





**Item
      1. Legal Proceedings**





**Item
      1A. Risk Factors**





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





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





None.





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





None.





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





None.





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





None





**Item
      6. Exhibits**


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




8




**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 19, 2008
              By
              /s/Zhao Yan DingZhao
                  Yan Ding, Chief Executive
                  Officer