UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549









FORM
10-K









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





For the fiscal year ended December 31, 2008


OR


 ̈
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934.








For the transition period from _________ to _________







GFR PHARMACEUTICALS,
INC.


(Name of
Small Business Issuer in Its Charter)









000-27959


(Commission
file number)





77-0517964


(I.R.S. EmployerIdentification
No.)





NEVADA


(State or Other Jurisdiction
ofIncorporation or
Organization)





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


(Address
of Principal Executive Office)





(8629)
8339-9676


(Issuer’s
Telephone Number, Including Area Code)







Securities
Registered Pursuant to Section 12(b) of the Exchange Act: NONE





Securities
Registered Pursuant to Section 12(g) of the Exchange Act:





COMMON STOCK, $.001 PAR
VALUE


(Title of
Class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 406 of the Securities Act.    Yes  ̈ No
þ





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.    Yes  ̈ No
þ





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Sections 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  þ   No
 ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405) is not contained herein, and will not be
contained,  to the best of
registrant's  knowledge,  in definitive proxy or
information  statements incorporated  by
reference  in Part III of this Form 10-K or any  amendment
to this Form 10-K.  ̈





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 the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check One)




Large
accelerated filer  ̈Accelerated filer  ̈Non-accelerated filer  ̈Small reporting company x





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





The
aggregate market value of the common stock held by non-affiliates (26,079,940
shares)  was approximately $3,911,991, based an the average closing
bid and ask price of $0.47 for the Common Stock on April 6, 2009.





As of
April 6, 2009, there were 42,079,940shares
of common stock outstanding.





Documents
incorporated by reference: NONE








CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION




The
discussion contained in this 10-K under the Securities Exchange Act of 1934, as
amended, (the “Exchange Act”) contains forward-looking statements that involve
risks and uncertainties. The issuer’s actual results could differ significantly
from those discussed herein. These include statements about our expectations,
beliefs, intentions or strategies for the future, which we indicate by words or
phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,”
“the Company believes,” “management believes” and similar language, including
those set forth in the discussion under “Description of Business,” including the
“Risk Factors” described in that section, and “Management’s Discussion and
Analysis or Plan of Operation” as well as those discussed elsewhere in this Form
10-k. We base our forward-looking statements on information currently available
to us, and we assume no obligation to update them. Statements contained in this
Form 10-k that are not historical facts are forward-looking statements that are
subject to the “safe harbor” created by the Private Securities Litigation Reform
Act of 1995.




TABLE OF
CONTENTS




PAGEPART
      IItem
      1.
                      Business
                      3Item
      1A.
                      Risk
      Factors
                      6Item
      1B.
                      Unresolved
      Staff Comments
                      8Item
      2.
                      Properties
                      8Item
      3.
                      Legal
      Proceedings
                      8Item
      4.
                      Submission
      Of Matters To A Vote Of Security Holders
                      8PART
      IIItem
      5.
                      Market
      For Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
                      8Item
      6.
                      Selected
      Consolidated Financial Information
                      10Item
      7.
                      Management’s
      Discussion And Analysis Of Financial Condition And Results Of
      Operations
                      10Item7A.
                      Quantitative
      And Qualitative Disclosures About Market Risk
                      12Item
      8.
                      Financial
      Statements And Supplementary Data
                      12Item
      9.
                      Changes
      In And Disagreements With Accountants Or Accounting And Financial
      Disclosure
                      13Item
      9A.
                      Control
      And Procedures
                      13Item
      9B.
                      Other
      Information
                      13PART
      IIIItem
      10.
                      Directors
      And Executive Officers Of The Registrant
                      13Item
      11.
                      Executive
      Compensation
                      16Item
      12.
                      Security
      Ownership Of Certain Beneficial Owners And Management And Related
      Stockholder Matters
                      17Item
      13.
                      Certain
      Relationships And Related Transactions, And Director
      Independence
                      18Item
      14.
                      Principal
      Accountant Fees And Services
                      19PART
      IV.Item
      15.
                      Exhibits,
      Financial Statement Schedules
                      20




2




PART I




Item 1. Business




History




We were
incorporated under the laws of the State of Nevada on December 18, 1996 under
the name Laredo Investment Corp.  (“Laredo”).





On
January 21, 2000, Laredo entered into an acquisition agreement with GFR Pharma,
Ltd. (“Pharma”) (formerly GFR Nutritionals, Ltd.), a British Columbia
corporation.  . The transaction was recorded as a reverse acquisition.
In June 1998 Pharma changed its name to GFR Nutritionals Ltd.. Business
operations began in October 1998 after acquiring manufacturing equipment and
arranging to manufacture nutritional supplements under a private label
contract.




On June
21, 2000, we entered into an acquisition agreement with Nutritionals (USA)
Direct.Com, a Washington corporation, (“NDC”), to acquire 100% of the
outstanding common stock of NDC in exchange for $1,000. The transaction has been
recorded as a purchase. NDC’s operations were wound down in October 2002 and we
became dormant.




On
November 1, 2000, we entered into an acquisition agreement with GFR Health, Inc.
(Formerly R & L Health, Inc.), a British Columbia corporation, to acquire
100% of the outstanding common stock of GFR Health, Inc. in exchange for $0.01.
The transaction was recorded as a purchase.




On April
5, 2004, GFR Nutritionals Ltd. and R&L Health Inc changed their names to GFR
Pharma Ltd. and GFR Health Inc., respectively.  On August 9, 2004,
Laredo Investment Corp. changed its name to GFR Pharmaceuticals, Inc.
(“GFR”).





On June
26, 2006, we and our predecessor executed a Plan of Exchange with Shan Xi New
Century Technology Investment Development Company, Ltd. (“New Century”), a
corporation organized and existing under the laws of the Peoples’ Republic of
China, with Richard Pierce, the former president and our former majority
shareholder and Mr. Li An Guo, the majority shareholder of New
Century.





On
October 15, 2006, we executed an acquisition agreement (the “Hua Long
Agreement”) with Xi'an Hua Long Yu Tian Ke Ji Shi Ye Co., Ltd., a corporation
organized and existing under the laws of the Peoples’ Republic of China (“Hua
Long”), Dong, Jian Zhong and Guo, Li Zheng, the shareholders of Hua Long
(collectively "Hua Long Shareholders").





Pursuant
to the Hua Long Agreement, we paid Hua Long Shareholders approximately $187,500
in cash to acquire 100% interest in the shares of registered capital of Hua
Long. Hua Long acts as the holding company of New Century. The acquisition of
Hua Long allowed us to complete the legal processing regarding the share
exchange with New Century in China. Upon completion of the acquisition, we owned
100% interest of Hua Long and 95% interest of New Century through Hua Long.
Consolidated financial statements are filed in this annual report for the year
ended December 31, 2008.




On
December 11, 2006, pursuant to the Plan of Exchange Agreement, Mr. Pierce
delivered 200,000 shares of our common stock to New Century and/or its nominee
in exchange for total payments of $325,000 in cash and we issued to the New
Century shareholders an amount equal to 40,000,000 new investment shares of our
common stock pursuant to Regulation S under the Securities Act of 1933, as
amended, representing approximately 95% of our then outstanding shares of common
stock, in exchange for a 95% interest in the shares of registered capital of New
Century. Upon completion of the exchange, New Century became our 95% owned
indirect subsidiary.


3


Recent
Developments





On
January 1, 2008, New Century entered into a stock purchase agreement with the
holders of all 60,000,000 shares of the capital stock of Xi’an Jiaoda Bao Sai
Bio-technology Co., Ltd (“Bao Sai”) to acquire 58,060,000 shares of its capital
stock of Bao Sai, or 96.77% of its capital stock.  The purchase price
for Bao Sai will equal 96.77%  of Bao Sai’s stockholders’ equity based
on Bao Sai’s audited financial statements for the fiscal year ended December 31,
2008 prepared in accordance with Generally Accepted Accounting
Principals.





On May
14, 2008, the Company completed the acquisition of Bao Sai for a consideration
of $4,500,211 (approximately RMB33,000,000) for 96.77% of its equity interest in
Bao Sai, based on the aggregate net book value of total assets and liabilities
of Bao Sai as of December 31, 2007. The closing date was January 1, 2008. Upon
the completion of the transaction, Bao Sai became a subsidiary of the
Company.  Prior to the closing of the transaction, the Company and Bao
Sai were under common control and the principal owners of Bao Sai were
affiliated with the Company.





Payment
of the purchase price, is in two cash installments commencing in 2008, first to
Xi’an Bio-sep Biological Filling Engineering Technology Company, Ltd., the owner
of 28 million shares, or 46.67% of Bao Sai, and the balance in 2009 to the other
three selling stockholders, in amounts equal to their respective percentage of
share ownership of Bao Sai.





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 40employees.





Mr. Wang
Li-An, one of the Company’s directors, is also a director of Bao
Sai.  Xi’an Bio-sep Biological Filling Engineerings Technology
Company, Ltd., which holds 46.67% of Bao Sai’s common stock, is controlled by
Mr. Guo Li An, who owns 38.03% of the Company.   Mr. Guo Li
Zheng, who is Guo Li An’s brother, owns   15.5% of the Bao Sai
common stock and no shares of the Company.  Mr. Guo Li Zheng will be
selling 12.27% of Bao Sai and retaining 3.23%. Additionally, Mr. Zhao Yan Ding
and Ms. Zhong Ya Li, the Company’s Chief Executive Officer and Chief Financial
Officer, respectively, were officers of Bao Sai through the date of the
acquisition agreement.




Overview
of Business





GFR
Pharmaceuticals, Inc. is a holding company with two business
segments.  The Company is involved in a Cancer Diagnosis and Treatment
Center, which is a joint operation of PET Scanner
and Rotary Gamma Ray Stereotactic Neurosurgery System imaging center in the PRC.
The Company also operates a biological extraction business that extracts raw
materials to medicine ingredients and distributes the extracted ingredients for
medicine manufacturing uses.





The
Company owns 100% of Hua Long’s outstanding common stock. Hua Long is approved
in China to, among other things, engage in industrial chromatography to separate
and purify chemical components for further use in agricultural and biotechnology
products and in medicines, as well as for the research, development, manufacture
and sale of biological separation medium products. However, Hua Long currently
has no operating business and serves as a holding company for the operating
subsidiary, New Century. Hua Long owns 95% of the outstanding stock of New
Century.


4


Cancer
Diagnosis and Treatment Center





New
Century 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”).





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. The respective
profit sharing ratios and time periods are as follows:





1.
            From
      January 2002 through December 2003, 90% to
  Masep;


2.
            From
      January 2004 through December 2008, 80% to Masep (or to New Century,
      giving effect to the assignment as of February
  2006);




3.
            From
      January 2009 through December 2011, 70% to New
  Century;


4.
            From
      January 2012 through December 2014, 60% to New
  Century;




5.
            From
      January 2015 through December 2017, 50% to New
  Century.





Pursuant
to the Tangdu Agreement, New Century has the power to appoint the Director of
the Gamma Knife Center. Upon the termination of the Tangdu Agreement, the Tangdu
Hospital has an option to purchase the equipment for fifty percent of its
residual value.





As of
December 2008, New Century owned three different devices used in the medical
centers, and the profit sharing percentage to New Century was 80%. The cases
processed in Tangdu Gamma Knife Therapeutithec Center (the “Center”),
averaged   218  cases per month in 2008, 204 cases per
month in 2007, and 137 cases in 2006.  For the year ended December 31,
2008, the Center accounted for $3,655,036, or 94%, of the Company’s
revenues.


Tangdu
Hospital is located in Xi’an a city of over 8-million people and is the capital
of Shan Xi province.. With our competitive facilities, services, and reputation
of Tangdu Hospital in Northwest China including Shan Xi province and four other
adjacent provinces, our medical center business has a good potential to grow. To
grasp this market opportunity, New Century intends to expand the operation by
investing in an additional tumor therapy center or hospital and a modernized
tumor institute.




Biological Separation Medium
Product and Pharmaceutical Business





In 2008,
New Century acquired 96.77% equity in Jiaoda Bao Sai Bio-technology Co Ltd.
(“Bao Sai”). Bao Sai is engaged in research, development, manufacture and
distribution of biological separation medium products which are used to recover
and purify biosynthetic products, particularly pharmaceuticals, from natural
sources such as animal or plant tissue or fermentation broth, including the
recycling of salvageable components and the proper treatment and disposal of
waste. Biological separation medium products are integral to the production of
pharmaceuticals such as antibiotics, hormones (e.g. insulin and human growth
hormone), antibodies, and vaccines; antibodies and enzymes used in diagnostics;
industrial enzymes; and natural fragrance and flavor
compounds.


5


The
operations of Bao Sai are in the development stage and most of its efforts are
focused on the research and development of new pharmaceutical and agricultural
medium products, and the networking and advertisement to market these products
in the future.  In 2008, Bao Sai spent approximately $690,991 in
research and development of new biological separation medium products and new
medicine. Most of the money was used to fund local medical institutions in the
development of new products. Pursuant to this effort, Bao Sai entered into a
Research and Development Cooperation Contract with XiAn Jiao Tong University
R&D Center for Natural Chinese Medicine and Engineering (“the University”) in
2005.  According to the Cooperation Contract, Bao Sai provides funds
in the research on the use of biological separation technology in the
development of Xin Kang Ping medicine to treat heart diseases. The
University  performs all the laboratory work related to the general
research project and toxic tests as the prerequisites of the clinical trial
process for the  application of a new medicine. The University
presents the research result to Bao Sai, and Bao Sai has all the right to the
project report and possible patent right as a result of the project. This
contract expired on August 25, 2008 and was not renewed. However, we have been
able to continue the pharmacodynamics test and toxicology test as the
prerequisite to the commencement of clinical trials for the development of Xin
Kang Ping medicine. At present, these two tests are close to successful
completion, and we are in the process of applying for the clinical trial process
with the State Food and Drug Administration of China ( “SFDA”). Upon the
approval by SFDA, we will start clinical trials for Xin Kang Ping. Less time is
generally required in China than in the United States to complete the clinical
trials for a new medicine, and the cost of clinical trials in China is also
generally lower than those held in the US. We therefore expect that we can
complete the clinical trials sooner than would be the case  in the
United States and at lower cost. Should the tests be successful and we obtain
the approval of SFDA for the new medicine, we expect this new pharmaceutical
product will be marketed in the PRC.


In 2008,
Bao Sai’s operations consisted of research and development of new products. We
have not yet developed a distribution system for any products that may be
developed. We plan to commercialize new products in 2009 should development be
completed.


Employees




We are
divided into five departments, including administration, marketing, facility
management, network and finance. We currently have 72 full-time employees, with
32 in New Century and 40 in Bao Sai.  We believe that our relations
with our employees are good.





Item
1A.  Risk Factors.





You
should consider each of the following risk factors and any other information set
forth in this Form 10-K and our other reports that we have filed with the
Securities and Exchange Commission ("SEC"), including the Company's financial
statements and related notes, in evaluating the Company's business and
prospects. The risks and uncertainties described below are not the only ones
that impact on the Company's operations and business. Additional risks and
uncertainties not presently known to the Company, or that the Company
currently considers immaterial, may also impair its business or operations. If
any of the following risks actually occur, our business and financial condition,
results or prospects could be harmed.




Risks
Related to Our Business




Because
there is no assurance that we will generate significant revenues, we face a high
risk of business failure.




Our
ability to increase sales depends on numerous factors, including market
acceptance of existing products, the successful introduction of new products,
growth of consumer discretionary spending, and the ability to recruit new
independent sales consultants. Business in all of our segments is driven by
consumer preferences. Accordingly, there can be no assurances that our current
or future products will maintain or achieve market acceptance. We can provide
investors with no assurance that revenues will increase to a level which will
reflect profitability. If we are unsuccessful in generating significant
revenues, our business will most likely fail and our investors could lose their
investment.


6


Dependence
on key corporate management personnel.




Our
success depends in large part on the contributions of our key corporate
management. We do not maintain any key person life insurance policies. The loss
of our key corporate management personnel could have a material adverse effect
on us.





Our
Company and all of its assets are located in a jurisdiction that may not enforce
the judgment of a US court.





Although
we are incorporated in Nevada, the Company’s principal place of business and all
of its assets are located in the People’s Republic of China.  In the
past, some U.S. plaintiffs and/or judgment creditors have found it difficult or
impossible to enforce U.S. court orders and/or judgments in the People’s
Republic of China.  We can make no assurance that any shareholder or
Company creditor who obtains a judgment or order against the Company, in Nevada
or any other US jurisdiction, will be able to successfully enforce that judgment
or order against the Company.




One
customer accounts for all of our revenues.





Tangdu
Hospital accounts for over 90% of our revenues and all our gross
profit.  In 2008, our extraction business operated at a significant
loss. In the event we lose Tangdu Hospital or the business suffers adverse
development,  our financial condition will be materially and adversely
affected.





Bao
Sai’s efforts to develop and commercialize medical products may
fail.





Bao Sai
is attempting to develop new pharmaceutical and agricultural medium products,
and to then market any products that are successfully
developed.  There can be no assurance that the clinical trials will be
successful, that the necessary government approvals will be obtained or that the
products, if any, can be successfully marketed or that Bao Sai will have
sufficient resources to complete the development and commercialization of any
products.





Risks
Related to Our Common Stock




Our
Common Stock has been relatively thinly traded and we cannot predict the extent
to which an active trading market will develop.




Our
Common Stock is currently traded on the Over the Counter Bulletin Board. Our
Common Stock is thinly traded compared to larger more widely known companies.
Thinly traded Common Stock can be more volatile than Common Stock trading in an
active public market. We cannot predict the extent to which an active public
market for our Common Stock will develop or be sustained.




We
may need to raise additional capital which may not be available on acceptable
terms or at all.




In the
future, we may be required to raise funds. There can be no assurance that
financing will be available in amounts or on terms acceptable to us. The
inability to obtain capital may reduce our ability to continue to conduct
business operations. If we are unable to obtain additional financing, we will
likely be required to curtail our development plans. Any equity financing may
involve substantial dilution to our then existing stockholders.




We
do not intend to pay dividends on any investment in the shares of our
stock.




We have
never paid any cash dividends and currently do not intend to pay any dividends
for the foreseeable future. To the extent that we require additional funding
currently not provided for in our financing plan, our funding sources may
prohibit the payment of a dividend. Because we do not intend to declare
dividends, any gain on an investment in us will need to come through an increase
in the stock’s price. This may never happen and investors may lose all of their
investment in us.


7


Because
our securities are subject to penny stock rules, you may have difficulty
reselling your shares.




Our
shares as penny stocks are covered by Section 15(g) of the Securities Exchange
Act of 1934 which imposes additional sales practice requirements on
broker/dealers who sell our securities including the delivery of a standardized
disclosure document; disclosure and confirmation of quotation prices; disclosure
of compensation the broker/dealer receives; and, furnishing monthly account
statements. These rules apply to companies whose shares are not traded on a
national stock exchange or on the NASDAQ system, trade at less than $5.00 per
share, or who do not meet certain other financial requirements specified by the
SEC. These rules require brokers who sell “penny stocks” to persons other than
established customers and “accredited investors” to complete certain
documentation, make suitability inquiries of investors, and provide investors
with certain information concerning the risks of trading in such penny stocks.
These rules may discourage or restrict the ability of brokers to sell our shares
of Common Stock and may affect the secondary market for our shares of Common
Stock. These rules could also hamper our ability to raise funds in the primary
market for our shares of Common Stock.





Item
1B. Unresolved Staff Comments


Not Applicable.





Item 2.Properties




Our main
office is located at 99 Yan Xiang Road, Biosep Building, Xi An, Shaan Xi
Province, P.R. China 710054, People’s Republic of China and has a total area of
372 square meters. The Company rents the office under from Bao Sai for a term of
one year, commencing January 1, 2008 and ending December 31, 2008 at an annual
rent of $3,534.  Through December 31, 2008, we paid no rent on the
premises.  No other businesses operate from this office.





We also
rent an operating office for New Century at Xi An Shi Gao Xin Qu Keji 2 Lu 68
Hao, Xi An Ruanjian Yuan C Zuo 2401 Shi at an annual rent of
$1,969.  These two spaces are adequate for our present and planned
future operations.





There is
no private ownership of land in China.  Land use rights are obtained
from the government for periods ranging from 50 to 70 years, and are typically
renewable. Land use rights can be transferred upon approval by the land
administrative authorities of China (State Land Administration Bureau) upon
payment of the required transfer fee.





We own three different imaging and
radiation oncology devices which we provide to Tongdu Hospital for use in their
Gamma Knife Center.




Item 3.Legal Proceedings




None




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




None.





PART
II




Item
      5.
            Market
      for Common Equity and Related and
Stockholder




Market
for Common Stock




Our
Common Stock is quoted on the OTC Electronic Bulletin Board, a service
maintained by The NASDAQ Stock Market, Inc., under the symbol “GFRP.OB”. Trading
in our Common Stock in the over-the-counter market has been limited and sporadic
and the quotations set forth below are not necessarily indicative of actual
market conditions. Further, these quotations reflect inter-dealer prices,
without retail mark-up, markdown, or commission, and do not necessarily reflect
actual transactions. Set forth below is the range high and low bid information
for our Common Stock for each quarter of the years ended December 31, 2008 and
2007.


8




High
                    
                    
                    Low2008Quarter
      Ended March 31, 2008
                    
                    $
                    0.34
                    
                    
                    $
                    0.20Quarter
      Ended June 30, 2008
                    
                    $
                    0.25
                    
                    
                    
                    0.09Quarter
      Ended September 30, 2008
                    
                    $
                    0.40
                    
                    
                    
                    0.04Quarter
      Ended December 31, 2008
                    
                    $
                    0.05
                    
                    
                    
                    0.032007Quarter
      Ended March 31, 2007
                    
                    $
                    0.49
                    
                    
                    $
                    0.49Quarter
      Ended June 30, 2007
                    
                    $
                    0.31
                    
                    
                    
                    0.31Quarter
      Ended September 30, 2007
                    
                    $
                    0.60
                    
                    
                    
                    0.60Quarter
      Ended December 31, 2007
                    
                    $
                    0.34
                    
                    
                    
                    0.34




On April
4, 2009, the closing price of our Common Stock was $.46 per share.




As of
April 4, 2009 there were approximately 3,764 stockholders of record of our
Common Stock. Our registrar and transfer agent is Guardian Registrar &
Transfer, 7951 South West 6th Street, Suite 216, Plantation, FL
33324.  Recently our Board of Directors decided to change our transfer
agent to Securities Transfer Corporation located at 2591 Dallas Parkway Suite
102, Frisco Texas 75034. Their telephone number is (469) 633-0101.





Limited
Market for Common Stock




There is
currently a limited trading market for our shares of Common Stock, and there can
be no assurance that a more substantial market will ever develop or be
maintained. Any market price for our shares of Common Stock is likely to be very
volatile, and numerous factors beyond our control may have a significant adverse
effect. In addition, the stock markets generally have experienced, and continue
to experience, extreme price and volume fluctuations which have affected the
market price of many small capital companies and which have often been unrelated
to the operating performance of these companies. These broad market
fluctuations, as well as general economic and political conditions, may also
adversely affect the market price of our Common Stock. Further, there is no
correlation between the present limited market price of our Common Stock and our
revenues, book value, assets or other established criteria of value. The present
limited quotations of our Common Stock should not be considered indicative of
the actual value of our Common Stock.




Dividends




We have
not paid any cash dividends to date and does not anticipate or contemplate
paying cash dividends in the foreseeable future until earnings would generate
funds in excess of those required to provide for our growth needs. We currently
intend to retain any future earnings to fund the development and growth of its
business.




Recent
Sales of Unregistered Securities




On
December 11, 2006, GFRP issued to New Century’s owners an amount equal to
40,000,000 new investment shares of common stock of GFRP pursuant to Regulation
S under the Securities Act of 1933, as amended, in exchange for 95% of the
registered capital of New Century.


9


On January 16, 2007, the Company issued
1,000,000 shares of common stock to Greentree Financial Group, Inc. in
consideration for business advisory services, pursuant to Section 4(2) of the
Securities Act of 1933, as amended.  The fair value of this stock
issuance was determined using the fair value of the Company’s common stock on
the date of issuance, at a price of $0.30 per share.





Securities
Authorized for Issuance under Equity Compensation Plans.





The Board
of Directors has authorized and GFRP has established the 2002 Incentive and
Non-qualified Stock Option Plan (the “Plan”) under which GFRP may grant to
employees, officers, directors, attorneys, consultants or other advisers of the
Company or affiliated companies up to 10,000,000 shares of GFRP’s common stock
with such exercise price and vesting periods as the Board of Directors deems to
be in the best interest of the Company. As of December 31, 2008, no options or
shares have been granted under the Plan.  A copy of the Plan is filed
as an exhibit to our Form S-8 filed with the Commission in June 19,
2002.





Item
6.  Selected Financial Information


Not
Applicable





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





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





Results
of Operations




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





New
Century’s strategic purchase of Bao Sai will provides us with key technology in
the biotech purification field and an experienced R&D team.  We
feel that the acquisition will put us in a strong position for increasing our
market share and revenue in 2009. The acquisition increased the number or our
full time employees by about 50. The Bao Sai employees are primarily in sales,
research and development and administrative areas.





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





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


10


Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007




Net
revenue increased from $3,201,088 for the year ended December 31, 2007 to
$3,677,072 for the year ended December 31, 2008, an increase of 14.9%. Such an
increase was principally the result of increased cases processed in the Tangdu
Center commonly operated by New Century operation (averaging 218 cases per month
in 2008, compared to 204 cases per month in 2007 ).  The operations of
Bao Sai, the newly acquired business, are still in the development stage of
development of new pharmaceutical products. We expect that as soon as we
complete the government approval process for the new products, we will be able
to find another means to increase our revenues.





Our
operating expenses incurred a substantial increase from 2007 ($633,110) to 2008
($5,714,256) .  The increase is partly  attributable to the
increase of general and administrative expenses in the amount of 1,888,182 for
the year ended December 31, 2008, compared to $633,110 for the year ended
December 31, 2007. Such an increase was attributed to our newly acquisition of
Bao Sai business in January, 2008. We also incurred the allowance for doubtful
accounts  in the amount of $3,826,074 for the year ended December 31,
2008.  We evaluate the need of an allowance for doubtful accounts
based on specifically identified amounts that we believe to be uncollectible,
including $515,026 from our trade accounts receivables, $1,097,358 from the
notes receivables and $1,122,650 from other receivable. However, we will
continue our efforts to collect these amounts in 2009.  As of December
31, 2007, the Company has determined that no allowance for doubtful accounts is
required.





Despite of the increase of our revenues
in 2008 we still incurred a net loss of $3,041,287 (($.07) per share) due to the
substantial increase of our operation expenses , compared to the net income of
$1,170,014 ($.03 per share) for the year ended December 31, 2007.





Our business operates entirely in
Chinese Renminbi, but we report our results in our SEC filings in U.S.
Dollars.  The conversion of our accounts from RMB to Dollars results
in translation adjustments.  While our net income is added to the
retained earnings on our balance sheet; the translation adjustments are added to
a line item on our balance sheet labeled “other comprehensive income,” since it
is more reflective of changes in the relative values of U.S. and Chinese
currencies than of the success of our business.  During 2008, the
effect of converting our financial results to Dollars was to add $75,898 to our
other comprehensive income.





Liquidity and
Capital Resources





Working
capital decreased from $412,210 at December 31, 2007 to $(3,672,650)at December 31,
2008, and stockholder’s equity decreased from $6,006,921 to $3,145,525 for the
same periods. The primary reason for the decrease in working capital in 2008 was
the substantial increase of our debts to our related parties. In connection with
our acquisition of Bao Sai on January 1, 2008, we incurred a payment obligation
in the amount of $4,500,211 payable to the former owners.  As of
December 31, 2008, we still have a note payable in the amount of $2,493,318 due
on December 31, 2009. In addition, our principal shareholder, Mr. Lian Guo
contributed a loan to fund our operations. As of December 31,
2008,  the balance of the loan was $1,951,203 which was unsecured,
interest-free and repayable on demand. Also included in the current liability as
of December 31, 2008 a note payable to Shanxi Ze Hua Nuan Tong Zhileng Gongcheng
co., Ltd, secured by our building with the value of $ 1,753,706. Interest on
this note is 10.46% per annum, payable monthly, with the total amount due on
December 20, 2008. This note was paid in February 2009, and the property was
released accordingly.





We also
advanced to Xi’an Bao Sai Medicine Co., Ltd(“Medicine”) a loan in the principal amount of $1,111,828 which was
unsecured and interest-free. The loan is repayable in four installments with the
total amount due no later than 2012.  We have a 75% equity interest in
Medicine.





We have
two business segments – the Cancer Diagnosis and Treatment Center at Tangdu
Hospital and the  biological extraction business that extracts raw
materials to medicine ingredients and distributes the extracted ingredients for
medicine manufacturing uses.  We are dependent on the continued
success of the operations at the cancer diagnostic and treatment business to
continue our operations. In 2008, the cancer treatment business accounted for
$3,454,009 (94%) of our revenue and generated $1,577,548 of net
income.  The extraction business accounted for $223,063 of revenue but
lost $4,690,784 in 2008.


11





In
addition, allowance for doubtful accounts receivable was $515,026 as of December
31, 2008 with total accounts receivable totaling $1,174,355, compared to no such
allowance as of December 31, 2007. The inability to collect more outstanding
receivables can aversely affect our operations.  Tangdu Hospital
accounted for all of the revenues  from the cancer diagnosis and treatment
center and $360,043 of accounts receivable as of December 31, 2008.





Based on
the financial resources available, management believes the Company’s ability to
continue as a going concern depends upon its ability to maintain profitable
operations in its medical business and to obtain additional financing or
 refinancing as may be required. The Company has generated positive cash
inflows from operating activities during the years of 2007 and 2008. The Company
will devote more resources on marketing in order to increase the market share
and improve the operating performance. Management believes the Company will
generate sufficient cash flow and either obtain additional financing or
refinancing to meet its obligations on a timely basis for the foreseeable
future.




Liquidity
Analysis




December
      31,
                                2008
                              
                              
                              December
      31,
                                2007Working
      Capital
                              
                              $
                              (3,672,850
                              )
                              
                              $
                              412,210
                              )Stockholders’
      Equity
                              
                              $
                              3,145,525
                              
                              
                              $
                              6,006,921Total
      Liabilities
                              
                              $
                              6,202,281
                              
                              
                              $
                              274,245




Critical
Accounting Policies and Estimates





In
preparing our financial statements we are required to formulate working policies
regarding valuation of our assets and liabilities and to develop estimates of
those values.  In our preparation of the financial statements for
2008, there were no estimates made which were (a) subject to a high degree of
uncertainty and (b) material to our results.





We made
no material changes to our critical accounting policies in connection with the
preparation of financial statements for 2008.





Impact
of Accounting Pronouncements





There were no recent accounting
pronouncements that have had a material effect on the Company’s financial
position or results of operations.





Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition or results of
operations.





Item
7A. Quantitative and Qualitative Disclosures About Market Risk


Not
Applicable.





Item 8.  Financial Statements


The
information required by Item 8 appears after the signature page to this
report.


12


Item
9.     Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure





Not Applicable





Item9A.Controls and
Procedures





We are
responsible for establishing and maintaining adequate internal control over
financial reporting in accordance with Exchange Act Rule 13a-15. With the
participation of our Chief Executive Officer and Chief Financial Officer, our
management conducted an evaluation of the effectiveness of our internal control
over financial reporting as of December 31, 2008 based on the criteria
established in Internal
Control-Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, management
concluded that our internal control over financial reporting was effective as of
December 31, 2008, based on those criteria. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected.





Management
has reviewed its internal controls and has determined that the internal controls
were not sufficient to prepare the financial statements in accordance with GAAP,
and the required provision for bad debt had not been brought to the attention of
management on a timely basis.  Management is taking steps to improve
its internal controls.





This annual report does not include
an attestation report of the Company’s registered accounting firm regarding
internal control over financial reporting. Management’s report was not subject
to attestation by the Company’s registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission





Item 9B. Other Information





Not
Applicable. There was no information required to be filed on Form 8-k during the
fourth quarter of the Company's fiscal year ended December 31, 2008 and not
reported.




PART
III




Item 10.Directors and Executive Officers of the
Registrant and Corporate Governance




Identification
of Directors and Executive Officers




The
following table sets forth the names and ages of our directors and executive
officers, the positions and offices held with us, and the period during which
each served in such positions and offices. Each director and executive officer
serves for a term of one (1) year and until his successor is duly elected and
qualified.. Directors are
elected annually by our stockholders at the annual meeting. Each director holds
his office until his successor is elected and qualified or his earlier
resignation or removal


13


DIRECTORS
AND OFFICERS




Name
              
              Age
              
              Position
              
              Period In OfficeZhao
      Yan Ding
              
              35
              
              Chief
      Executive Officer &
              
              January
      2008 - PresentDirectorZhong
      Ya Li
              
              29
              
              Chief
      Financial Officer &
              
              January
      2008 - PresentDirectorWang
      Li An
              
              45
              
              Director
              
              September
      2006 - Present





The
following is a summary of the business experience and other biographical
information with respect to each of the Company’s officers and directors listed
in the above-referenced table.




Zhao
Yan Ding – Chief Executive Officer and Director





Mr. Zhao
Yan Ding, our new Chief Executive Officer and Director is 34 year
old.  He holds a university degree as a senior engineer. He worked for
Xi'an Herbal Medicine Company in the Administration and Marketing Department
from 1997 to 2001, and gained the honor of advanced staff within two years. In
2001, he took a position with Xi'an Rising Bio-sep Bio-technique Co., Ltd.
in the Researches & Production Department.  He also worked for
Zhejiang Haikang Bio-Products Co., Ltd, to set up their bio research department
within company. From 2003 to the present, he has worked with the Xi'an Bio-sep
Bio-technique Co., Ltd. as their chief of research and the supervisor of the
company.





Zhong
Ya Li – Chief Financial Officer and Director





Ms. Zhong
Ya Li, our new Chief Financial Officer and Director is 28 years
old.  She holds a university degree in accounting.  Ms.
Zhong Ya Li previously worked at Xi'an Rising Building Management Co., Ltd as a
cashier and the chief accountant from 1999 to 2003. Then she worked for the
Xi'an Bio-sep Bio-technique Co., Ltd as their Chief Accountant. In 2006, she was
promoted to Vice Chief Financial Officer of the Xi'an Bio-sep Bio-technique Co.,
Ltd.





Wang
Li An - Director




Mr. Wang
Li An has been a director of the Company since September 2006 and the Chairman
of the Board of Director of New Century since March 2006. Mr. Li An is also the
Vice General Manager and Director of Bao Sai since June 2005. From July 2002 to
May 2005, Mr. Wang was the Secretary of the Board of Bao Sai and was responsible
for corporate finance, taxation, capital restructure, operational management,
and government relations. From October 1997 to June 2002, Mr. Wang was the dean
of Security Investment Department of Shaanxi Rising Group Corp. and was
responsible for the initial set up of the subsidiaries and capital investment.
Mr. Wang graduated from Xia Men University in 1987 with a bachelor degree in
Mathematics.





Board
Committees





Our board
of directors is currently composed of three directors: Mr. Zhao Yan Ding, Mr.
Zhong Ya Li, and Mr. Wang Li An. All board action requires the approval of
a majority of directors in attendance at a meeting at which a quorum is
present.  We currently do not have standing audit, nominating or
compensation committees.  Our entire board of directors handles the
functions that would otherwise be handled by each of the
committees.


14


Audit
Committee Financial Expert




We do not
have a separately designated standing audit committee. The entire Board of
Directors acts as an audit committee for the purpose of overseeing the
accounting and financial reporting processes, and audits of our financial
statements. The Commission recently adopted new regulations relating to audit
committee composition and functions, including disclosure requirements relating
to the presence of an “audit committee financial expert” serving on its audit
committee. In connection with these new requirements, our Board of Directors
examined the Commission’s definition of “audit committee financial expert” and
concluded that Zhong Ya Liqualifies as
such an expert. Presently, there are three directors serving on our Board,
Each of our directors, by virtue of his past employment experience, has
considerable knowledge of financial statements, finance, and accounting, and has
significant employment experience involving financial oversight
responsibilities. Accordingly, we believe that our current directors capably
fulfill the duties and responsibilities of an audit committee in the absence of
such an expert.




Involvement
in Certain Legal Proceedings





No event
listed in Sub-paragraphs of Subparagraph (f) of Item 401 of Regulation S-K, has
occurred with respect to any of our present executive officers or directors or
any nominee for director during the past five years which is material to an
evaluation of the ability or integrity of such director or officer.





Code
of Ethics




We have
adopted a code of ethics that applies to our principal chief executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions (the “Code of Ethics”). The Code of Ethics
is designed to deter wrongdoing, and to promote the following:




·
            Honest
      and ethical conduct, including the ethical handling of actual or apparent
      conflicts of interest between personal and professional
      relationships.





·
            Full,
      fair, accurate, timely and understandable disclosure in reports and
      documents that a small business issuer files with, or submits to, the
      Commission and in other public communications made by the small business
      issuer.





·
            Compliance
      with applicable governmental laws, rules and
  regulations.





·
            The
      prompt internal reporting of violations of the code to an appropriate
      person or persons identified in the
code.





·
            Accountability
      for adherence to the code.




Additionally, the
Chief Financial Officer, Zhong Ya Li, carries out her functions under the
code of ethics and rules of professional conduct as outlined by the Peoples
Republic of China.





Section
16(a) Beneficial Ownership Reporting Compliance




Under
Section 16(a) of the Exchange Act, all executive officers, directors, and each
person who is the beneficial owner of more than 10% of the common stock of a
company that files reports pursuant to Section 12 of the Exchange Act, are
required to report the ownership of such common stock, options, and stock
appreciation rights (other than certain cash-only rights) and any changes in
that ownership with the Commission. Specific due dates for these reports have
been established, and we are required to report, in this Form 10-k, any failure
to comply therewith during the fiscal year ended December 2008. We believe that
all of the officers and directors satisfied the filing requirements of Section
16(a) in 2008.


15


Item 11.Executive
Compensation





Compensation
Philosophy





Our board
of directors have historically determined the compensation to be paid to our
executive officers based on our financial and operating performance and
prospects, and contributions made by the officers’ to our
success.  Each of the named officers will be measured by a series of
performance criteria by the board of directors, on a yearly
basis.  Such criteria will be based on certain objective parameters
such as job characteristics, required professionalism, management skills,
interpersonal skills, related experience, personal performance and overall
corporate performance.





Our board
of directors have not adopted or established a formal policy or procedure for
determining the amount of compensation paid to our executive
officers.  As our executive leadership and board of directors grow,
our board of directors may decide to form a compensation committee charged with
the oversight of executive compensation plans, policies and
programs.





We
provide our executive officers solely with a base salary to compensate them for
services rendered during the year.  Our policy of compensating our
executives with a cash salary has served us well.  To date, we have
not believed it necessary to provide our executives discretionary bonuses,
equity incentives, or other benefits in order for us to continue to be
successful.  However, as the Company grows and the operations become
more complex, the Board of Directors may deem it in the best interest of the
Company to provide such additional compensation to existing executives and in
order to attract new executives.




Summary Compensation
Table





The
following table sets forth compensation earned by the executive officers during
the three years preceding December 31, 2008.





Name
                                                    and
                                                    Principal
                                                    Position
                                                  
                                                  Year
                                                  
                                                  Salary
                                                    ($)
                                                  
                                                  
                                                  Bonus
                                                    ($)
                                                  
                                                  
                                                  Stock
                                                    Awards
                                                    ($)
                                                  
                                                  
                                                  Option
                                                    Awards
                                                    ($)
                                                  
                                                  
                                                  Non-Equity
                                                    Incentive
                                                    Plan
                                                    Compensation
                                                    ($)
                                                  
                                                  
                                                  Nonqualified
                                                    Deferred
                                                    Compensation
                                                    Earnings
                                                    ($)
                                                  
                                                  
                                                  AllOther
                                                    Compensation
                                                    ($)
                                                  
                                                  
                                                  Total
                                                    ($)Zhao
      Yan Ding
                                                  
                                                  2008
                                                  
                                                  
                                                  4753
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Chief
      Executive
                                                  
                                                  2007
                                                  
                                                  
                                                  4445
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Officer
                                                  
                                                  2006
                                                  
                                                  
                                                  4232
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Zhong
      Ya Li,
                                                  
                                                  2008
                                                  
                                                  
                                                  3734
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Chief
      Financial
                                                  
                                                  2007
                                                  
                                                  
                                                  3492
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Officer
                                                  
                                                  2006
                                                  
                                                  
                                                  3323
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Jie
      Su, former
                                                  
                                                  2008
                                                  
                                                  
                                                  15,867Director, former
                                                  
                                                  2007
                                                  
                                                  
                                                  15,000CEO
      & former
                                                  
                                                  2006
                                                  
                                                  
                                                  15,000PresidentZhi
      Dong Wang,
                                                  
                                                  2008
                                                  
                                                  
                                                  4244former
      director,
                                                  
                                                  2007
                                                  
                                                  
                                                  3698former
      CFO &
                                                  
                                                  2006
                                                  
                                                  
                                                  3778former
      VP




16


Stock
Option Plan




The
Company has established the 2002 Incentive and Non-qualified Stock Option Plan
(“the Plan”) under which we may grant to employees, officers, directors,
attorneys, consultants or other advisers of the Company or affiliated companies
up to 10,000,000 shares of common stock with such exercise price and vesting
periods as the Board of Directors deems to be in the best interest of the
Company. As of December 31, 2008 and 2007, no options or shares have been
granted under the Plan.




Compensation
of Independent Directors





None.
 No compensation had been paid to any director solely in connection with
their role as a director.




Employment
Agreements





There are
no written employment agreements with any of the Company's
officers.





Item 12.Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters




The
following table sets forth certain information regarding the beneficial
ownership of our Common Stock as of April 7, 2009 (i) each person known to us to
be the beneficial owner of more than 5% of its Common Stock, (ii) each of our
directors and executive officers, and (iii) all directors and executive officers
as a group. As of April 7, 2009,




Name and Address of Beneficial
      Owner(1)
                      
                      Amount
      and Nature
                        of Beneficial
      Ownership(2)(3)
                      
                      
                      Percentage
                        of Class(3)Li An Guo
                        XinChengQuChangLeXiLu169Hao
                        Xi’An
      ShanXi
                      
                      
                      16,000,000
                      
                      
                      
                      38.0
                      %Mr.
      Wang Li An
                        c/o
      GFR Pharmaceuticals, Inc.
                        99
      Yan Xiang Road, Biosep Building
                        Xi
      An, Shaan Xi Province, P.R. China 710054
                      
                      
                      0
                      
                      
                      
                      0Ms.
      Zhong Ya Li
                        c/o
      GFR Pharmaceuticals, Inc.
                        99
      Yan Xiang Road, Biosep Building
                        Xi
      An, Shaan Xi Province, P.R. China 710054
                      
                      
                      0
                      
                      
                      
                      0Mr.
      Zhao Ya Ding
                        c/o
      GFR Pharmaceuticals, Inc.
                        99
      Yan Xiang Road, Biosep Building
                        Xi
      An, Shaan Xi Province, P.R. China 710054
                      
                      
                      0
                      
                      
                      
                      0Officers
      and directors as a group (3 persons)
                      
                      
                      0
                      
                      
                      
                      0


17


___________________




(1)As used herein, a person
is deemed to be the “beneficial owner” of a security if he or she has or shares
voting or investment power with respect to such security, or has the right to
acquire such ownership within sixty (60) days. As used herein, “voting power”
includes the power to vote or to direct the voting of shares, and “investment
power” includes the power to dispose or to direct the disposition of shares,
irrespective of any economic interest therein.




(2)Except as otherwise
indicated by footnote, the persons named in the table have sole voting and
investment power with respect to all Common Stock beneficially owned by
them.




(3)Percentage ownership for a
given individual or group is calculated on the basis of (i) the amount of
outstanding shares owned as of April 7, 2009plus, (ii) the number of
shares that such individual or group has the right to acquire within sixty (60)
days pursuant to options, warrants, conversion privileges or other
rights.





Item 13.Certain Relationships and Related
Transactions and Director Independence





Certain
Relationships




On
January 1, 2008, New Century entered into a stock purchase agreement with the
holders of all 60,000,000 shares of the capital stock of Xi’an Jiaoda Bao Sai
Bio-technology Co., Ltd (“Bao Sai”) to acquire 58,060,000 shares of its capital
stock of Bao Sai, or 96.77% of its capital stock.  In connection with
our acquisition of Bao Sai operation on January 1, 2008, we incurred a payment
obligation in the amount of $4,500,211 payable to the former owners, including
Xi’an Bio-sep Biological Filling Engineering Technology Company, Ltd. (“Xi’an
Bio-sep”) the former owner of 46.67%. Our CEO, Mr. Wang Li-An, was the director
of Xi’an Bio-sep; and our Chief Executive Officer was and Chief Financial
Officer, Mr. Zhao Yan Ding and Ms. Zhong Ya Li,were also officers of Bao Sai
prior to the date of acquisition. Payment of the purchase price is to be made in
two cash installments commencing in 2008, first to Xi’an Bio-sep, the owner of
28 million shares, or 46.67% of Bao Sai, and the balance in 2009 to the other
three selling stockholders, in amounts equal to their respective percentage of
share ownership of Bao Sai.





The
purchase price is payable as follows. For the year ended December 31, 2008, the
Company made a payment of purchase price consideration totaling $2,322,436. As
of December 31, 2008, we still have note payable in the amount of $2,493,318 due
on December 31, 2009. The portion of the purchase price payable to related
parties is:




X’ian
      Bio-sep Biological Filler Engineering Technology Co., Ltd.
    (a)
                    
                    $
                    2,170,350Wang
      Zhidong (b)
                    
                    
                    1,143,073Guo
      Lizheng (c)
                    
                    
                    570,606$
                    3,884,029





The
Company rents an office from Bao Sai for a term of one year, commencing January
1, 2008 and ending December 31, 2008, at an annual rent of $3,534. Mr. Guo
Li An, who owns 38.03% of the Company, beneficially owns 46.67% of Bao Sai. This
lease was not renewed.


18





In
addition, our shareholder, Mr. Lian Guo contributed a loan to fund our
operations. As of December 31, 2008, the balance of the loan was $1,951,203
which was unsecured, interest-free and repayable on demand.





We also advanced to our affiliate
Medicine a loan in the principal amount of $1,111,828 which was unsecured and
interest-free with a fixed repayment term of 4 installments with the total
amount due no later than 2012. We own 75% equity interest in Medicine. We expect
to collect this amount according to the schedule agreed.





Director
Independence




None of the members of the Company’s
Board of Directors is an independent director, pursuant to the definition of
“independent director” under the Rules of FINRA.





ITEM
14.            PRINCIPAL
ACCOUNTANT FEES AND SERVICES





Change of Name





Our auditor, Yu and Associates CPA
corporation changed its name to AGCA, Inc. and issued its report under its now
name.





Audit Fees





AGCA, Inc billed $ 38,000 to the
Company for professional services rendered for the audit of fiscal 2008
financial statements; and our former independent accountants, ZYCPA Company
Limited (formerly Zhong Yi (Hong Kong) C.P.A. Company Limited) billed $
0   to the Company for the review of the financial statements
included in fiscal 2008 10-QSB filings.  ZYCPA Company Limited
(formerly Zhong Yi (Hong Kong) C.P.A. Company Limited) billed $ 29,000 to the
Company for professional services rendered for the audit of fiscal 2007
financial statements.





Audit-Related Fees





The former independent accountants,
ZYCPA Company Limited (formerly Zhong Yi (Hong Kong) C.P.A. Company Limited) and
current independent accountants AGCA, Inc billed $0 to the Company during 2008
for assurance and related services that are reasonably related to the
performance of the 2008 audit or review of the quarterly financial
statements.





Tax Fees





The former and current independent
accountants billed $2,000 to the Company during 2008 for professional services
rendered for tax compliance, tax advice and tax planning.  ZYCPA
Company Limited (formerly Zhong Yi (Hong Kong) C.P.A. Company Limited) billed
$3,000 to the Company during 2007 for professional services rendered for tax
compliance, tax advice and tax planning.





All Other Fees





The former independent accountants,
ZYCPA Company Limited (formerly Zhong Yi (Hong Kong) C.P.A. Company Limited) and
current accounts AGCA, Inc billed $0 to the Company in 2008 and in 2007 for
services not described above.





It is the policy of the Company
that all services other than audit, review or attest services must be
pre-approved by the Board of Directors.  No such services have been
performed by either the former independent accountants, ZYCPA Company Limited
(formerly Zhong Yi (Hong Kong) C.P.A. Company Limited) or current independent
accountants AGCA, Inc.


19





PART
IV




Item 15.Exhibitsand Financial Statement
Schedules




(a) Exhibits.


Exhibit
                                    Number
                                  Description2.1
                                  Purchase
      Agreement for Bao Sai, dated January 1, 2008 (1)3.1
                                  Articles
      of Incorporation as Amended (2)3.2
                                  Bylaws(2)4.1
                                  See
      Exhibits 3.1 and 3.2 for the provisions of our Articles of Incorporation
      and Bylaws that define the rights of holders of our Common
      Stock4.2
                                  Specimen
      of Common Stock Certificate (3)4.3
                                  2002
      Non-Qualified Stock Incentive Plan(4)10.1
                                  Cooperation
      Agreement with Tangdu Hospital, as last amended on February 2, 2006
      (English & Chinese versions)10.2
                                  Bao
      Sai Purchase Agreement, dated January 1, 200816.1
                                  Letter on Change in Certifying
      Accountant(5)17.1
                                  Plan
      of Exchange and Letter of Intent (6)14.1
                                  Code of Ethics (7)31.1
                                  Rule
      13a-14(a)/15d-14(a) Certifications of Zhao Yan Ding, Chief Executive
      Officer31.2
                                  Rule
      13a-14(a)/15d-14(a) Certifications of Zhong Ya Li, Chief
      Financial Officer32.1
                                  Section 1350
      Certifications of Zhao Yan
      Ding, Chief Executive Officer32.2
                                  Section
      1350 Certifications ofZhong Ya Li, Chief
      Financial
Officer





(1)
                        Filed
      as an Exhibit to our Form 8-K filed with the Commission on March 23,
      2008(2)
                        Filed
      as an Exhibit to our Form 10-SB12G, as filed with the Commission on
      November 5, 1999.(3)
                        Filed
      as an Exhibit to the Company’s Annual Report on Form 10-k, as filed with
      the Commission on April 21, 2006.(4)
                        Filed
      as Exhibit 4.1 to our Form S-8 filed June 19, 2002(5)
                        Filed
      as an Exhibit to the Company’s Current Report on Form 8-K, as filed with
      the Commission on February 2, 2007(6)
                        Contained
      in Form 8-K, as filed with the Commission on July 3,
  2006.(7)
                        Filed
      as an Exhibit to our Form 10-k filed with the commission April 13,
      2007


20


SIGNATURES




In
accordance with the Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.




Date:
April  29 , 2009




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





By:
              /s/Zhong Ya LiZhong Ya
      Li, Chief Financial
Officer




In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.




Signature
              
              Title
              
              Date/s/Zhao Yan Ding
              
              Director
              
              April
      29 , 2009Zhao
      Yan Ding/s/Zhang Ya Li
              
              Director
              
              April  29
      , 2009Zhong
      Ya Li/s/Wang
    Li-An
              
              Director
              
              April  29
      , 2009Wang
      Li-An


21


GFR
PHARMACEUTICALS INC.
 
 INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 PageReport
      of AGCA, Inc,.Independent Registered Public Accounting
Firm
                                
                                F-2Report
      of ZYCPA Company Limited (formerly Zhong Yi (Hong Kong) C.P.A. Company
      Limited), Independent Registered Public Accounting Firm
                                
                                F-4Consolidated
      Balance Sheets
                                
                                F-5Consolidated
      Statements of Operations And Comprehensive Income
                                
                                F-6Consolidated
      Statements of Cash Flows
                                
                                F-7Consolidated
      Statements of Stockholders’ Equity
                                
                                F-8Notes
      to Consolidated Financial Statement
                                
                                F-9 to F-25


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders of
 GFR
Pharmaceuticals, Inc.
 Xi’an
 China
 
 We have
audited the accompanying consolidated balance sheet of GFR Pharmaceuticals, Inc.
and subsidiaries as of December 31, 2008 and the related consolidated statements
of operations and comprehensive income, stockholders’ equity, and cash flows for
the year then ended.  GFR Pharmaceuticals, Inc.’s management is
responsible for these financial statements.  Our responsibility is to
express an opinion on these financial statements based on our
audits.  The Consolidated financial statements of GFR Pharmaceuticals,
Inc. and subsidiaries for the year ended December 31, 2007 were audited by other
auditors whose report dated April 7, 2008 expressed an unqualified opinion on
those statements.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 Member:
                Registered:American
      Institute of Certified Public Accountants
                Public
      Company Accounting Oversight BoardCalifornia
      Society of Certified Public Accountants
  F-2
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of GFR Pharmaceuticals ,Inc. and
subsidiaries as of December 31, 2008 and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern, as discussed in Note 2 to the
consolidated financial statements.  Management’s plans regarding those
matters are also described in the said note.  The consolidated
financial statements do not include any adjustment that might result from the
outcome of this uncertainty.
  As
disclosed in note 4, the Company acquired 96.77% of Xi’an Jiaoda Bao Sai
Bio-Technology Co., Ltd. for $4,500,211 from mostly related
parties.  $3,884,029 of the consideration was paid or payable to the
related parties.
 
 Arcadia,
California
 April 3,
2009
  F-3


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 The Board
of Directors and Stockholders of
 GFR
Pharmaceuticals Inc
 
 We have
audited the accompanying consolidated balance sheets of GFR Pharmaceuticals Inc
and its subsidiaries (“the Company”) as of December 31, 2007 and the related
consolidated statements of operations and comprehensive income, cash flows and
stockholders’ equity for the year ended December 31, 2007. The financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2007 and the results of operations and cash flows for the year ended
December 31, 2007 and in conformity with accounting principles generally
accepted in the United States of America.
 
 /s/ Zhong Yi (Hong Kong) C.P.A. Company
      LimitedZhong
      Yi (Hong Kong) C.P.A. Company LimitedCertified
      Public AccountantsApril
      7, 2008
  F-4


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


AS
OF DECEMBER 31, 2008 AND 2007


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





2008
                              
                              
                              2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                              
                              $
                              552,398
                              
                              
                              $
                              9,951Trade
      accounts receivable, net of allowance of $515,026
                              
                              
                              659,329
                              
                              
                              
                              343,087Note
      receivable, net of allowance of $1,097,538
                              
                              
                              -
                              
                              
                              
                              -Inventories,
      net of allowance of $367,390
                              
                              
                              282,307
                              
                              
                              
                              -Prepayments
      and other receivables
                              
                              
                              243,242
                              
                              
                              
                              314,185Other
      receivable, net of allowance of $1,122,650
                              
                              
                              -
                              
                              
                              
                              -Amount
      due from unconsolidated affiliate, net of allowance of
      $1,111,828
                              
                              
                              -
                              
                              
                              
                              -Amount
      due from related party
                              
                              
                              -
                              
                              
                              
                              28,232Operating
      lease prepaid - current portion
                              
                              
                              7,255
                              
                              
                              
                              -Total
      current assets
                              
                              
                              1,744,531
                              
                              
                              
                              695,455Non-current
      assets:Property,
      plant and equipment, net
                              
                              
                              6,862,609
                              
                              
                              
                              5,585,711Intangible
      asset, net
                              
                              
                              -
                              
                              
                              
                              -Operating
      lease prepaid – non-current portion
                              
                              
                              150,844
                              
                              
                              
                              -Long
      term prepayment
                              
                              
                              589,822
                              
                              
                              
                              -TOTAL
      ASSETS
                              
                              $
                              9,347,806
                              
                              
                              $
                              6,281,166LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Amount
      due to related party
                              
                              $
                              1,951,203
                              
                              
                              $
                              -Note
      payable, related parties
                              
                              
                              2,493,318
                              
                              
                              
                              -Trade
      accounts payable
                              
                              
                              124,700
                              
                              
                              
                              -Note
      payable
                              
                              
                              219,472
                              
                              
                              
                              -Tax
      payable
                              
                              
                              171,847
                              
                              
                              
                              214,570Other
      payables and accrued liabilities
                              
                              
                              456,641
                              
                              
                              
                              59,675Total
      current liabilities
                              
                              
                              5,417,181
                              
                              
                              
                              274,245Loss
      in excess of investment in unconsolidated affiliate
                              
                              
                              785,100
                              
                              
                              
                              -Total
      liabilities
                              
                              
                              6,202,281
                              
                              
                              
                              274,245Stockholders’
      equity:Common
      stock, $0.001 par value; 100,000,000 shares authorized; 42,079,940 shares
      issued and outstanding as of December 31, 2008 and 2007
                              
                              
                              42,080
                              
                              
                              
                              42,080Additional
      paid-in capital
                              
                              
                              3,712,120
                              
                              
                              
                              3,712,120Accumulated
      other comprehensive income
                              
                              
                              210,695
                              
                              
                              
                              134,797Statutory
      reserve
                              
                              
                              423,760
                              
                              
                              
                              236,818Non-controlling
      interest
                              
                              
                              432,598
                              
                              
                              
                              328,605Retained
      earnings (accumulated deficit)
                              
                              
                              (1,675,728
                              )
                              
                              
                              1,552,501Total
      stockholders’ equity
                              
                              
                              3,145,525
                              
                              
                              
                              6,006,921TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                              
                              $
                              9,347,806
                              
                              
                              $
                              6,281,166




See
accompanying notes to consolidated financial statements.


F-5


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007


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





2008
                                    
                                    
                                    2007REVENUE,
      NETService
      revenue
                                    
                                    $
                                    3,454,009
                                    
                                    
                                    $
                                    3,201,088Product
      sales
                                    
                                    
                                    223,063
                                    
                                    
                                    
                                    -Total
      revenue, net
                                    
                                    
                                    3,677,072
                                    
                                    
                                    
                                    3,201,088COST OF REVENUE
      (exclusive of depreciation)Depreciation
      and amortization
                                    
                                    
                                    660,743
                                    
                                    
                                    
                                    460,850Cost
      of products
                                    
                                    
                                    268,278
                                    
                                    
                                    
                                    -GROSS
      PROFIT
                                    
                                    
                                    2,748,051
                                    
                                    
                                    
                                    2,740,238OPERATING
      EXPENSES:Allowance
      for doubtful accounts
                                    
                                    
                                    3,826,074
                                    
                                    
                                    
                                    -General
      and administrative
                                    
                                    
                                    1,888,182
                                    
                                    
                                    
                                    633,110Total
      operating expenses
                                    
                                    
                                    5,714,256
                                    
                                    
                                    
                                    633,110(LOSS)
      INCOME FROM OPERATIONS
                                    
                                    
                                    (2,966,205
                                    )
                                    
                                    
                                    2,107,128OTHER
      INCOME (EXPENSE):Interest
      income
                                    
                                    
                                    47,263
                                    
                                    
                                    
                                    273Rental
      income
                                    
                                    
                                    556,098
                                    
                                    
                                    
                                    -Interest
      expense
                                    
                                    
                                    (121,433
                                    )
                                    
                                    
                                    (78,370
                                    )Other
      expenses
                                    
                                    
                                    (212
                                    )
                                    
                                    
                                    -Total
      other income (expense)
                                    
                                    
                                    481,716
                                    
                                    
                                    
                                    (78,097
                                    )(LOSS)
      INCOME BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST
                                    
                                    
                                    (2,484,489
                                    )
                                    
                                    
                                    2,029,031Income
      tax expenses
                                    
                                    
                                    (628,747
                                    )
                                    
                                    
                                    (780,300
                                    )(LOSS)
      INCOME AFTER INCOME TAXES
                                    
                                    $
                                    (3,113,236
                                    )
                                    
                                    $
                                    1,248,731Non-controlling
      interest
                                    
                                    
                                    71,949
                                    
                                    
                                    
                                    (78,717
                                    )NET
      (LOSS) INCOME
                                    
                                    
                                    (3,041,287
                                    )
                                    
                                    
                                    1,170,014Other
      comprehensive income:-
      Foreign currency translation gain
                                    
                                    
                                    75,898
                                    
                                    
                                    
                                    45,219TOTAL
      COMPREHENSIVE (LOSS) INCOME
                                    
                                    $
                                    (2,965,389
                                    )
                                    
                                    $
                                    1,215,233Net
      (loss) income per share - Basic and diluted
                                    
                                    $
                                    (0.07
                                    )
                                    
                                    $
                                    0.03Weighted
      average number of shares outstanding during the year - Basic and
      diluted
                                    
                                    
                                    42,079,940
                                    
                                    
                                    
                                    42,007,718





See
accompanying notes to consolidated financial statements.


F-6


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007


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




Years
      ended December 31,2008
                                                                                                    
                                                                                                    
                                                                                                    2007Cash
      flows from operating activities:Net
      (loss) income
                                                                                                    
                                                                                                    $
                                                                                                    (3,041,287
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    1,170,014Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Depreciation
                                                                                                    
                                                                                                    
                                                                                                    660,743
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    460,850Allowance
      for doubtful accounts
                                                                                                    
                                                                                                    
                                                                                                    3,826,074
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Stock
      issued for service rendered, non-cash
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    300,000Non-controlling
      interest
                                                                                                    
                                                                                                    
                                                                                                    (71,949
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    78,717Change
      in operating assets and liabilities:Trade
      accounts receivable, net
                                                                                                    
                                                                                                    
                                                                                                    (248,866
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    156,401Other
      receivable
                                                                                                    
                                                                                                    
                                                                                                    175,958
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Inventories
                                                                                                    
                                                                                                    
                                                                                                    (5,628
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    -Prepayments
      and deposits
                                                                                                    
                                                                                                    
                                                                                                    173,997
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (110,981
                                                                                                    )Operating
      lease prepaid
                                                                                                    
                                                                                                    
                                                                                                    7,017
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Trade
      accounts payable
                                                                                                    
                                                                                                    
                                                                                                    (795,258
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    -Income
      tax payable
                                                                                                    
                                                                                                    
                                                                                                    (34,459
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    195,452Other
      payables and accrued liabilities
                                                                                                    
                                                                                                    
                                                                                                    (92,355
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (96,517
                                                                                                    )Net
      cash provided by operating activities
                                                                                                    
                                                                                                    
                                                                                                    553,987
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    2,153,936Cash
      flows from investing activities:Acquisition
      of a subsidiary, net of cash acquired
                                                                                                    
                                                                                                    
                                                                                                    (1,687,382
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    -Repayment
      from an unconsolidated affiliate
                                                                                                    
                                                                                                    
                                                                                                    188,507
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Proceeds
      of disposal of property, plant and equipment
                                                                                                    
                                                                                                    
                                                                                                    1,400,857
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Purchase
      of property, plant and equipment
                                                                                                    
                                                                                                    
                                                                                                    (39,829
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (281,425
                                                                                                    )Net
      cash used in investing activities
                                                                                                    
                                                                                                    
                                                                                                    (137,847
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (281,425
                                                                                                    )Cash
      flows from financing activities:Advances
      to related companies
                                                                                                    
                                                                                                    
                                                                                                    (304,983
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    -Repayment
      of notes payable
                                                                                                    
                                                                                                    
                                                                                                    (212,251
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    -Repayment
      of short-term bank loan
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (1,322,227
                                                                                                    )Repayment
      from stockholders
                                                                                                    
                                                                                                    
                                                                                                    686,901
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Repayment
      to stockholders
                                                                                                    
                                                                                                    
                                                                                                    (63,283
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (606,937
                                                                                                    )Net
      cash provided by (used in) financing activities
                                                                                                    
                                                                                                    
                                                                                                    106,384
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (1,929,164
                                                                                                    )Foreign
      currency translation adjustment
                                                                                                    
                                                                                                    
                                                                                                    19,923
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    2,061NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                                                                                                    
                                                                                                    
                                                                                                    542,447
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (54,592
                                                                                                    )CASH
      AND BANK BALANCE, BEGINNING OF YEAR
                                                                                                    
                                                                                                    
                                                                                                    9,951
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    64,543CASH
      AND BANK BALANCE, END OF YEAR
                                                                                                    
                                                                                                    $
                                                                                                    552,398
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    9,951SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for income taxes
                                                                                                    
                                                                                                    $
                                                                                                    681,927
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    584,848Cash
      paid for interest expenses
                                                                                                    
                                                                                                    $
                                                                                                    44,538
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    -





See
accompanying notes to consolidated financial statements.


F-7


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


CONSOLDIATED
STATEMENT OF STOCKHOLDERS’ EQUITY


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007


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




CommonstockNo. of
                            shares
                          
                          
                          Amount
                          
                          
                          Additional
                            paid-in
                            capital
                          
                          
                          Accumulated
                            other
                            comprehensive
                            income
                          
                          
                          Statutory
                            reserve
                          
                          
                          Retained
                            earnings
                            (accumulated
      deficit)
                          
                          
                          Non-controlling
                            interest
                          
                          
                          Total
                            Stockholders’
                            equityBalance
      as ofJanuary
      1, 2007
                          
                          
                          41,079,940
                          
                          
                          $
                          41,080
                          
                          
                          $
                          3,413,120
                          
                          
                          $
                          89,578
                          
                          
                          $
                          77,579
                          
                          
                          $
                          541,726
                          
                          
                          $
                          221,163
                          
                          
                          $
                          4,384,246Shares
      issued to complete reverse acquisition
                          
                          
                          1,000,000
                          
                          
                          
                          1,000
                          
                          
                          
                          299,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          300,000Foreign
      currency translation adjustment
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          45,219
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          45,219Net
      income for the year
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,170,014
                          
                          
                          
                          -
                          
                          
                          
                          1,170,014Transfer
      from retained earnings to statutory reserve
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          159,239
                          
                          
                          
                          (159,239
                          )
                          
                          
                          -
                          
                          
                          
                          -Non-controlling
      interest
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          107,442
                          
                          
                          
                          107,442Balance
      as of January 1, 2008
                          
                          
                          42,079,940
                          
                          
                          $
                          42,080
                          
                          
                          $
                          3,712,120
                          
                          
                          $
                          134,797
                          
                          
                          $
                          236,818
                          
                          
                          $
                          1,552,501
                          
                          
                          $
                          328,605
                          
                          
                          $
                          6,006,921Foreign
      currency translation adjustment
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          75,898
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          75,898Net
      loss for the year
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (3,041,287
                          )
                          
                          
                          -
                          
                          
                          
                          (3,041,287
                          )Transfer
      from retained earnings to statutory reserve
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          186,942
                          
                          
                          
                          (186,942
                          )
                          
                          
                          -
                          
                          
                          
                          -Non-controlling
      interest
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          103,993
                          
                          
                          
                          103,993Balance
      as of December 31, 2008
                          
                          
                          42,079,940
                          
                          
                          $
                          42,080
                          
                          
                          $
                          3,712,120
                          
                          
                          $
                          210,695
                          
                          
                          $
                          423,760
                          
                          
                          $
                          (1,675,728
                          )
                          
                          $
                          432,598
                          
                          
                          $
                          3,145,525




See
accompanying notes to consolidated financial
statements.


F-8




GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007





NOTE 1
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 Scientific and Technological Industry Co., Ltd. (“Hua Long”) is a
wholly-owned subsidiary of the Company, which was incorporated as a limited
liability company in the PRC on December 23, 1999. Its principal activity is an
investment holding of 95% equity interest in New Century Scientific Investment
Ltd. (“New Century”).





New
Century was incorporated as a limited liability company in the PRC on November
23, 2001 with a registered capital of RMB30,000,000 (equivalent to
US$3,636,000). It jointly operates a PET Scanner and Rotary Gamma Ray
Stereotactic Neurosurgery System imaging center with Tong Du Hospital ("the
Hospital") in Xian City, Shaanxi Province, the PRC. The duration of the
operation was 11 years and it will expire in 2017.





On May
14, 2008, the Company completed the acquisition of Xi’an Jiaoda Bao Sai
Bio-Technology Co., Ltd ("Bao Sai") pursuant to the terms of a Stock Purchase
Agreement (“the Agreement”) dated January 1, 2008, between GFRP and Bao Sai
for a consideration of $4,500,211 (approximately RMB33,000,000) for 96.77%
of its equity interest in Bao Sai, based on the aggregate net book value of
total assets and liabilities of Bao Sai as of December 31, 2007. The closing
date was January 1, 2008. Upon the completion of the transaction, Bao Sai became
a subsidiary of the Company.





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





NOTE 2 GOING
CONCERN AND MANAGEMENT PLAN





The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. As of December 31, 2008, the Company had a net
working capital deficiency of $3,672,650 that indicates the Company may need
additional financing to meet cash requirements for its operations in order to
continue as a going concern.





The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of recorded amounts of assets or the amounts
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. Management believes the Company’s ability
to continue as a going concern is depending upon its ability to maintain
profitable operations and to obtain additional financing or refinancing as may
be required. The Company has generated positive cash inflows from operating
activities during the years of 2007 and 2008. The Company will devote more
resources on marketing in order to increase the market share and improve the
operating performance. Management believes the Company will generate
sufficient cash flow to meet its obligations on a timely basis in the
foreseeable future.





NOTE3 SUMMARYOF SIGNIFICANT ACCOUNTING
POLICIES





Basis of
presentation




These
accompanying 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 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.


F-9


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007




Basis of
consolidation





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





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





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”) is accounted for under the equity method of accounting whereby the
investment is initially recorded at the cost of acquisition and adjusted to
recognize the Company’s share in undistributed earnings or losses since
acquisition. The Company’s share in the earnings or losses for its
unconsolidated affiliate is reflected in equity share in income of
unconsolidated affiliates. If the investment in an unconsolidated affiliate is
reduced to a zero balance due to prior losses, the Company recognizes any
further losses related to its share to the extent that any receivables, loans or
advances to the unconsolidated affiliate are evaluated to be
uncollectible.





Equity
Method of Accounting





Under
Accounting Research Bulletin No. 51 “Consolidation of Financial Statements
(as Amended)” (“ARB 51”), consolidation of a majority-owned subsidiary is
precluded where control does not rest with the majority owner. From May 1, 2007,
GFRP’s subsidiary Medicine ceased business and leased out its business license.
Accordingly, GFRP deconsolidated Medicine and accounted Medicine for under the
equity method of accounting.





Generally
accepted accounting principles require that the investment in the investee be
reported using the equity method under Accounting Principles Board (“APB”)
Opinion No. 18, “The Equity Method of Accounting for Investments in Common
Stock” when an investor corporation can exercise significant influence over the
operations and financial policies of an investee corporation. When the equity
method of accounting is used, the investor initially records the investment in
the stock of an investee at cost. The investment account is then adjusted to
recognize the investor’s share of the income or losses of the investee when it
is earned by the investee. Such amounts are included when determining the net
income of the investor in the period they are reported by the
investee.





As a
result of deconsolidation and the application of the equity method under ARB 51,
GFRP had a negative basis in its investment in Medicine, the Equity Investee,
because the subsidiary generated significant losses and intercompany liabilities
in excess of its asset balances. This negative investment, “Loss in excess of
investment in Equity Investee,” is reflected as a single amount on the Company’s
consolidated balance sheet as an approximate $785,100 liability as of December
31, 2008. (See Note 14)





Since
Medicine’s results are no longer consolidated and GFRP believes that it is not
obligated to fund future operating losses at Medicine, any adjustments reflected
in Medicine’s financial statements subsequent to May 1, 2007 are not expected to
affect the results of operations of GFRP. The reversal of the Company’s
liability into income will occur when Medicine commences business and generates
operating profit. GFRP will continue to evaluate the equity method investment in
Medicine quarterly to review the reasonableness of the liability
balance.





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.





Trade
accounts receivable





Trade
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. As of December 31, 2008, there
was an allowance for doubtful accounts of $515,026. As of December 31, 2007, the
Company has determined that no allowance for doubtful accounts is
required.


F-10


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007





Allowance
for doubtful accounts





The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the failure of receivables to make required payments. The Company
reviews the receivable on a periodic basis and makes allowances where there is
doubt as to the collectability of individual balances. In evaluating the
collectability of individual receivable balances, the Company considers many
factors, including the age of the balance, the customer’s payment history, its
current credit-worthiness and current economic trends





Inventories





Inventories
are stated at the lower of cost or market, 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





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 includes 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.





Operating
lease prepaid





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





Fair
value of financial instruments




Fair
Value Measurements are determined by the Company's adoption of Statement of
Financial Accounting Standards ("SFAS") No. 157, “Fair Value Measurements”
("SFAS 157") as of January 1, 2008, with the exception of the
application of the statement to non-recurring, non-financial assets and
liabilities as permitted. The adoption of SFAS 157 did not have a material
impact on the Company's fair value measurements. SFAS 157 defines fair
value as the price that would be received to sell an asset or paid to transfer a
liability in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants at the
measurement date. SFAS 157 establishes a fair value hierarchy, which
prioritizes the inputs used in measuring fair value into three broad levels as
follows:


Level 1—Quoted
prices in active markets for identical assets or liabilities.


Level 2—Inputs,
other than the quoted prices in active markets, are observable either directly
or indirectly.


Level 3—Unobservable
inputs based on the Company's assumptions.


SFAS 157
requires the use of observable market data if such data is available without
undue cost and effort.


F-11


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007





Impairment
of long-lived assets





In
accordance with SFAS No. 144,“Accounting for the
Impairment or Disposal of Long-Lived Assets”, all long-lived assets such
as plant and equipment held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
evaluated by a comparison of the carrying amount of assets to estimated
discounted net cash flows expected to be generated by the assets. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amounts of the assets exceed the fair value of
the assets. There has been no impairment as of December 31, 2008 or
2007.





Revenue
recognition





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.





(a)
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


Sales are
recognized in accordance with Securities and Exchange Commission (“SEC”) Staff
Accounting Bulletin ("SAB") No. 104, when the following four revenue criteria
are met: persuasive evidence of an arrangement exists, delivery has occurred,
the selling price is fixed or determinable, and collectability is reasonably
assured. Revenues are presented net of value added tax (VAT). No return
allowance is made as products are normally not returnable upon acceptance by the
customers.





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





(c)
Interest income





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




Shipping
and handling costs





Shipping
and handling costs were included in operating expenses. During the years ended
December 31, 2008 and 2007, shipping and handling costs were
insignificant.





Advertising
costs





Advertising
costs are accounted for in accordance with SOP 93-7,“Reporting for Advertising
Costs”. No advertising expense was incurred for the years ended December
31, 2008 and 2007.





Research
and development expenses





Research
and development costs are charged to expense when incurred and are included in
operating expenses. During the years ended December 31, 2008 and 2007,
research and development costs expensed to operating expenses were approximately
$690,991 and $Nil respectively.


Retirement
plan costs





Contributions
to retirement schemes (which are defined contribution plans) are charged to
general and administrative expenses in the consolidated statements of operations
and comprehensive income as and when the related employee service is
provided.


F-12


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007




Income
taxes





The
Company accounts for income tax using SFAS No. 109“Accounting for Income Taxes”,
which requires the asset and liability approach for financial accounting and
reporting for income taxes. Under this approach, deferred income taxes are
provided for the estimated future tax effects attributable to temporary
differences between financial statement carrying amounts of assets and
liabilities and their respective tax bases, and for the expected future tax
benefits from loss carry-forwards and provisions, if any. Deferred tax assets
and liabilities are measured using the enacted tax rates expected in the years
of recovery or reversal and the effect from a change in tax rates is recognized
in the statements of operations and comprehensive income in the period of
enactment. A valuation allowance is provided to reduce the amount of deferred
tax assets





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
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 year ended December 31, 2008.





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





Net
(loss) income per share





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





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.





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 consolidated statement of
operations.





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





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





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




2008
                  
                  
                  2007Year
      end RMB:US$ exchange rate
                  
                  
                  6.8346
                  
                  
                  
                  7.314Average
      monthly RMB:US$ exchange rate
                  
                  
                  7.0671
                  
                  
                  
                  7.563


F-13


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007




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. Commencing this year,
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, amounts due from (to) related parties, notes receivable,
prepayments and other receivables, accounts payable, note payable, income tax
payable, other payables and accrued liabilities.





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





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
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No.
157, Fair Value Measurements, which defines fair value, establishes a
framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years.
Adoption of SFAS No. 157 did not have a material impact on our consolidated
financial statements.


F-14


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007




Recently
issued accounting standards (continued)





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





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





In April
2008, the FASB issued FASB Staff Position (“FSP”) no. 142-3, “Determination of
the Useful Life of Intangible Assets” (“FSP 142-3 amends the factors an entity
should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets under FASB Statement
No. 142, “Goodwill and Other Intangible Assets”. The new guidance applies
prospectively to intangible assets  that  are  acquired
individually or with a group of other assets in business  combinations
 and  asset acquisitions. FSP 142-3 is effective for financial
statements issued for fiscal years and interim periods beginning after
December 15, 2008.  Early adoption is prohibited.  We are
currently evaluating the impact, if any, that FSP 142-3 will have on our
consolidated financial statements.





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





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





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





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


F-15


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007





Recently
issued accounting standards (continued)


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




NOTE4 ACQUISITION OF INTEREST IN BAO
SAI





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





Upon the
completion of the transaction, Bao Sai became a subsidiary of the Company. As
the Company and Boa Sai were under common control before the acquisition, the
acquisition was accounted for under the purchase method of accounting with
initial measurement of assets and liabilities recognized at book value. 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:
      Non-controlling interest
                
                
                (150,209
                )Purchase
      price
                
                $
                4,500,211Satisfied
      by:Net
      cash to be paid to acquire Bao Sai
                
                $
                4,500,211


F-16


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007





NOTE4 ACQUISITION OF INTEREST IN BAO SAI
(Continued)





The
sellers of Bao Sai and consideration are as follows:





A
      non-related party
                      
                      $
                      616,182Related
      partiesX’ian
      Bio-sep Biological Filler Engineering Technology Co., Ltd.
    (a)
                      
                      $
                      2,170,350Wang
      Zhidong (b)
                      
                      
                      1,143,073Guo
      Lizheng (c)
                      
                      
                      570,606$
                      3,884,029





(a)
            This
      is a company owned mostly by the major shareholder of the
      Company.


(b)
            This
      is former director of the Company and a director of Bao
    Sai.


(c)
            This
      is the brother of the major shareholder of the
  Company.





The
purchase price is scheduled to be paid by the Company in two installments for a
term of over 2 years due December 31, 2009. The first installment has been 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. 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, during the year
ending December 31, 2009.





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





Year ending December 31,
                    
                    Approximately2009
                    
                    $
                    2,493,318





For the
year ended December 31, 2008, the Company made a payment of purchase price
consideration totaling $2,322,436 (equivalent to RMB15,872,920).





Consideration
of the acquisition was in RMB and as payment made during the year was accounted
for at exchange rate as on the date of payment and amount outstanding as of
December 31, 2008 was accounted for at exchange rate at year end, there is a
reconciliation difference of $315,543 represented by exchange difference as
follows:




Amount
      paid
                    
                    $
                    2,322,436Amounts
      still outstanding
                    
                    
                    2,493,318Exchange
      difference
                    
                    
                    (315,543
                    )Total
      consideration
                    
                    $
                    4,500,211




NOTE5 TRADEACCOUNTS 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
allowance for doubtful accounts was required. Allowance for doubtful accounts
was charged to operations during the years ended December 31, 2008 and nil for
2007.





As of December 31,2008
                                    
                                    
                                    2007Accounts
      receivable, cost
                                    
                                    $
                                    1,174,355
                                    
                                    
                                    $
                                    343,087Less:
      allowance for doubtful accounts
                                    
                                    
                                    (515,026
                                    )
                                    
                                    
                                    -Accounts
      receivable, net
                                    
                                    $
                                    659,329
                                    
                                    
                                    $
                                    343,087




NOTE6 NOTE RECEIVABLE, NET





As of December 31,2008
                  
                  
                  2007Note
      receivable, cost
                  
                  $
                  1,097,358
                  
                  
                  $
                  -Less:
      allowance for doubtful accounts
                  
                  
                  (1,097,358
                  )
                  
                  
                  -Note
      receivable, net
                  
                  $
                  -
                  
                  
                  $
                  -





On
September 3, 2007, the Company’s newly acquired subsidiary, Bao Sai, disposed of
its investment in 75% of HuaYang for a cash consideration of $1,097,358
(equivalent to RMB7,500,000). The balance was unsecured and interest-free and
repayable in 4 installments due in full, by December 31, 2008. The balance was
overdue as of December 31, 2008, of which additional agreement was entered
into by both parties to extend the payment up to December 31, 2009. Accordingly,
allowance of doubtful debt was made fully on the note receivable.


F-17


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007





NOTE7 INVENTORIES,
NET





Inventories
consisted of the followings:




As
      of December 31,2008
                            
                            
                            2007Raw
      materials
                            
                            $
                            74,270
                            
                            
                            $
                            -Work
      in process
                            
                            
                            7,109
                            
                            
                            
                            -Finished
      goods
                            
                            
                            568,318
                            
                            
                            
                            -649,697
                            
                            
                            
                            -Less:
      inventory allowances
                            
                            
                            (367,390
                            )
                            
                            
                            -Inventories,
      net
                            
                            $
                            282,307
                            
                            
                            $
                            -





NOTE8 OTHER
RECEIVABLE




As
      of December 31,2008
                                              
                                              2007Other
      receivable
                                              $
                                              1,122,650
                                              
                                              $
                                              -Less:
      allowance for doubtful accounts
                                              
                                              (1,122,650
                                              )
                                              -Other
      receivable, net
                                              $
                                              -
                                              
                                              $
                                              -





As of
December 31, 2008, the balance of $1,122,650 due from a former subsidiary
of the Company, represented temporary advance from the Company which was
unsecured, interest-free, with a with a fixed repayment term of 5 installments
and is due in full, no later than 2013. As of December 31, 2008, the future
installments to be received are as follows:





Years
      ending December 31,2009
                            
                            $
                            73,1572010
                            
                            
                            131,6832011
                            
                            
                            219,4722012
                            
                            
                            424,3122013
                            
                            
                            274,026Total:
                            
                            $
                            1,122,650





NOTE9 AMOUNT DUE FROM (TO) RELATED
PARTIES





(a) Amount
due from (to) a stockholder





As of
December 31, 2008, a balance of $1,951,203 due to a stockholder, Mr. Lian Guo
represented temporary advance to the Company which was unsecured, interest-free
and repayable on demand.





As of
December 31, 2007, a balance of $28,232 due from a stockholder, Mr. Lian Guo
represented temporary advance from the Company which was unsecured,
interest-free and repayable on demand.


F-18


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007





NOTE9 AMOUNT DUE FROM (TO) RELATED PARTIES (Continued)





(b) Note
payable





As of
December 31, 2008, note payable to related parties represented payable to
ex-shareholder of Xi'an Jiaoda Bao Sai Bio-Technology Co., Ltd for the transfer
of their shares to New Century. The amount will be paid to these ex-shareholders
preceding December 30, 2009. (Note 4)





NOTE10 PREPAYMENTS AND OTHER
RECEIVABLES





Prepayments
and other receivables consisted of the following:





As
      of December 31,2008
                    
                    
                    2007Deposits
                    
                    $
                    77,617
                    
                    
                    $
                    -Advances
      to employees
                    
                    
                    25,334
                    
                    
                    
                    18,587Prepayment
      for equipment purchase
                    
                    
                    -
                    
                    
                    
                    256,358Prepaid
      expenses for operating purpose
                    
                    
                    140,291
                    
                    
                    
                    39,240$
                    243,242
                    
                    
                    $
                    314,185




NOTE11 PROPERTY,PLANT AND EQUIPMENT,
NET





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





As of December 31,2008
                            
                            
                            2007Buildings
                            
                            $
                            2,293,130
                            
                            
                            $
                            608,053Plant
      and equipment
                            
                            
                            6,322,678
                            
                            
                            
                            5,379,652Motor
      vehicles
                            
                            
                            246,806
                            
                            
                            
                            -Furniture,
      fixture and office equipment
                            
                            
                            151,356
                            
                            
                            
                            18,944Foreign
      translation difference
                            
                            
                            33,264
                            
                            
                            
                            547,3669,047,234
                            
                            
                            
                            6,554,015Less:
      accumulated depreciation
                            
                            
                            (2,067,613
                            )
                            
                            
                            (914,000
                            )Less:
      foreign translation difference
                            
                            
                            (117,012
                            )
                            
                            
                            (54,304
                            )Property,
      plant and equipment, net
                            
                            $
                            6,862,609
                            
                            
                            $
                            5,585,711





The buildings
were pledged as security for banking facilities of Note payable (Note 15) and
released on March 11, 2009.





Depreciation
expense for years ended December 31, 2008 and 2007 were $660,743 and $460,850,
respectively.


F-19


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007





NOTE12 INTANGIBLE ASSET, NET





As of December 31,2008
                                    
                                    
                                    2007Technical
      know-how
                                    
                                    $
                                    1,131,064
                                    
                                    
                                    $
                                    -Less:
      accumulated impairment charge
                                    
                                    
                                    (1,131,064
                                    )
                                    
                                    
                                    -Net
      book value
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -





As of
December 31, 2008, the carrying value of the technical know-how was stated as
zero. The Company recognized a full impairment charge before the acquisition of
Bao Sai for recoverability test.





NOTE13 OPERATING LEASE
PREPAID





The
Company has recorded as operating lease prepaid for the costs paid to acquire a
long-term interest to utilize the land underlying the building and production
facility for its business.  This type of arrangement is common for the
use of land in the PRC.  The operating lease prepaid is amortized
on the straight-line method over the term of the operating lease prepaid of 50
years.





The lease
expenses on operating lease prepaid for the years ended December 31, 2008 and
2007 was $7,255 and nil, respectively.  The amount to be expensed on
operating lease prepaid over each of the next five years and thereafter is
$7,255 per annum.





NOTE14 INVESTMENT IN AN UNCONSOLIDATED
AFFILIATE





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





As of
December 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
                
                
                1,111,828Less:
      allowance for doubtful accounts
                
                
                (1,111,828
                )Share
      of accumulated losses in Medicine
                
                
                (870,823
                )Foreign
      translation difference
                
                
                (21,081
                )Loss
      in excess of investment in unconsolidated affiliate
                
                $
                (785,100
                )


F-20


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007





NOTE14 INVESTMENT IN AN UNCONSOLIDATED
AFFILIATE(continued)





The
balance of $1,111,828 due from Medicine represented a temporary advance from the
Company which was unsecured and interest-free with a fixed repayment term
of 4 installments and is due in full, no later than 2012. As of December
31, 2008, the future installments to be received are as follows:





Years
      ending December 31,
                        
                        Approximately
                        
                        
                        Equal
      to RMB2009
                        
                        $
                        244,024
                        
                        
                        
                        1,667,8052010
                        
                        
                        292,629
                        
                        
                        
                        2,000,0002011
                        
                        
                        292,629
                        
                        
                        
                        2,000,0002012
                        
                        
                        282,546
                        
                        
                        
                        1,931,093Total:
                        
                        $
                        1,111,828
                        
                        
                        
                        7,598,898





NOTE15 NOTE
PAYABLE





As of
December 31, 2008, a balance of $219,472 represented a temporary advance from
Shaanxi Ze Hua Nuan Tong Zhileng Gongcheng Co., Ltd to the Company. The note
payable was secured by the Company’s building (Note 11) with the amount of
USD1,753,706 (equal to RMB11,985,882). Interest on this note is charged at
10.46% per annum, payable monthly, with principal and accrued interest due on
December 20, 2008. The notes payable was repaid in February 2009 and the
property was released accordingly.





NOTE16 OTHER PAYABLES AND ACCRUED
LIABILITIES





Other
payables and accrued liabilities consisted of the followings:





2008
                    
                    
                    2007Business
      tax payable
                    
                    $
                    82,554
                    
                    
                    $
                    17,154Government
      levy payable
                    
                    
                    20,321
                    
                    
                    
                    1,292Salaries
      and welfare payable
                    
                    
                    100,405
                    
                    
                    
                    6,216Temporary
      advances
                    
                    
                    161,491
                    
                    
                    
                    -Customer
      deposits
                    
                    
                    8,457
                    
                    
                    
                    -Accrued
      expenses
                    
                    
                    83,413
                    
                    
                    
                    35,013$
                    456,641
                    
                    
                    $
                    59,675


F-21


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007





NOTE17 INCOME
TAXES





The PRC
subsidiaries within the Group are subject to PRC income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which they operate,
i.e. the PRC. The statutory PRC Enterprise Income Tax rate (“EIT”) for the years
ended December 31, 2008 and 2007 is generally 25% and 33%
respectively.





The
Company’s income tax consisted of:




Year
      ended December 31,2008
                              
                              
                              2007Current
      – PRC
                              
                              $
                              628,747
                              
                              
                              $
                              780,300Deferred
                              
                              
                              -
                              
                              
                              
                              -$
                              628,747
                              
                              
                              $
                              780,300





A
reconciliation of the provision for income taxes determined at PRC EIT to the
Company’s effective income tax rate is as follows:




Year
      ended December 31,2008
                
                
                2007Pre-tax
      (loss) income
                
                $
                (2,484,489
                )
                
                $
                2,335,946PRC
      EIT
                
                
                25
                %
                
                
                33
                %Income
      tax computed at PRC EIT
                
                
                (621,122
                )
                
                
                770,862Reconciling
      items:Loss
      not recognized as deferred tax assets
                
                
                214,776
                
                
                
                -Allowance
      for doubtful debts not recognized as deferred tax assets
                
                
                956,519
                
                
                
                -Non-deductible
      expenses
                
                
                78,574
                
                
                
                6,170Provisions
      and accrued liabilities
                
                
                -
                
                
                
                3,268Effective
      tax expense
                
                $
                628,747
                
                
                $
                780,300





On March
16, 2007, the PRC government promulgated a new tax law, China’s Unified
Enterprise Income Tax Law (“New EIT Law”), which took effect from January 1,
2008. Under the New EIT Law, foreign-owned enterprises as well as domestic
companies are subject to a uniform tax rate of 25%.





Deferred
tax assets and liabilities reflect the tax impact of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. Significant components of the net deferred tax assets
and liabilities as of December 31, 2008 were as follows:




2008
                
                
                2007Deferred
      tax assets:-
      Net operating loss carryforwards
                
                $
                214,777
                
                
                $
                140,355-
      Allowance for doubtful debts
                
                
                956,519
                
                
                
                -1,171,296
                
                
                
                140,355Less:
      valuation allowance
                
                
                (1,171,296
                )
                
                
                (140,355
                )Net
      deferred tax assets
                
                $
                -
                
                
                $
                -





As of
December 31, 2008 and 2007, valuation allowance of $1,171,296 and $140,355
was provided to the deferred tax assets due to the uncertainty surrounding their
realization.


F-22


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007





NOTE18 SEGMENT
REPORTING





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





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





o
            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 years ended December 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.





Summary
of financial information concerning the Company’s reportable segments is shown
in the following table for the years ended December 31, 2008 and
2007:





December
      31, 2008Medical
                          Business
                        
                        
                        Extraction
                          Business
                        
                        
                        TotalOperating
      revenues
                        
                        $
                        3,454,009
                        
                        
                        $
                        223,063
                        
                        
                        $
                        3,677,072Cost
      of revenues
                        
                        
                        -
                        
                        
                        
                        (268,278
                        )
                        
                        
                        (268,278
                        )Gross
      profit
                        
                        
                        3,454,009
                        
                        
                        
                        (45,215
                        )
                        
                        
                        3,408,794Depreciation
      and amortization
                        
                        
                        483,753
                        
                        
                        
                        176,990
                        
                        
                        
                        660,743Net
      income (loss)
                        
                        $
                        1,577,548
                        
                        
                        $
                        (4,690,784
                        )
                        
                        $
                        (3,113,236
                        )Expenditure
      for long-lived assets
                        
                        $
                        20,617
                        
                        
                        $
                        19,212
                        
                        
                        $
                        39,829





December
      31, 2007Medical
                                    Business
                                  
                                  Extraction
                                    Business
                                  
                                  TotalOperating
      revenues
                                  $
                                  3,201,088
                                  
                                  $
                                  -
                                  
                                  $
                                  3,201,088Depreciation
      and amortization
                                  
                                  
                                  460,850
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  460,850Net
      income
                                  $
                                  1,170,014
                                  
                                  $
                                  -
                                  
                                  $
                                  1,170,014Expenditure
      for long-lived assets
                                  $
                                  281,425
                                  
                                  $
                                  -
                                  
                                  $
                                  281,425




F-23





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007





NOTE19 NET(LOSS)INCOME PER
SHARE





Basic net
(loss) income per share is computed using the weighted average number of the
ordinary shares outstanding during the year. Diluted net income per share is
computed using the weighted average number of ordinary shares and ordinary share
equivalents outstanding during the year. Pursuant to stock exchange transaction
on November 30, 2006, the weighted average number of common shares issued and
outstanding was adjusted to account for the effects of the stock exchange
transaction as a reverse acquisition.





The
following table sets forth the computation of basic and diluted net income per
share for the year ended December 31, 2008 and 2007:





Year
      ended December 31,2008
                    
                    
                    2007Basis
      and diluted net income per share calculationNumerator:-
      Net (loss) income in computing basic and diluted net income per
      share
                    
                    $
                    (3,041,287
                    )
                    
                    $
                    1,170,014Denominator:-
      Weighted average ordinary shares outstanding
                    
                    
                    42,079,940
                    
                    
                    
                    42,007,718Basic
      and diluted net (loss) income per share
                    
                    $
                    (0.07
                    )
                    
                    $
                    0.03





NOTE20 STOCK-BASED
COMPENSATION





The Board
of Directors has authorized and GFRP has established the 2002 Incentive and
Non-qualified Stock Option Plan (“the Plan”) under which GFRP may grant to
employees, officers, directors, attorneys, consultants or other advisers of the
Company or affiliated companies up to 10,000,000 shares of GFRP’s common stock
with such exercise price and vesting periods as the Board of Directors deems to
be in the best interest of the Company. As of December 31, 2008 and 2007, no
options or shares have been granted under the Plan.




On
January 27, 2007, the Company issued 1,000,000 shares of common stock for
business advisory services to Greentree Financial Group, Inc, for services
through the two-year period ending December 31, 2007. The fair value of this
stock issuance was determined using the fair value of the Company’s common stock
on the date of issuance, at a price of $0.30 per share. The Company calculated a
stock-based compensation cost of $300,000 and recognized $300,000 for the year
ended December 31, 2007. As of December 31, 2007, deferred compensation has been
fully amortized to the statement of operation.





NOTE21 CHINA CONTRIBUTION
PLAN





Under the
PRC Law, full-time employees of its subsidiaries in the PRC, Hua Long, New
Century and Bao Sai are entitled to staff welfare benefits including medical
care, welfare subsidies, unemployment insurance and pension benefits through a
China government-mandated multi-employer defined contribution plan. Hua Long,
New Century and Bao Sai are required to accrue for these benefits based on
certain percentages of the employees’ salaries. The total contributions made for
such employee benefits were $9,685 and $1,426 for the years ended December 31,
2008 and 2007, respectively.





NOTE22 STATUTORY
RESERVES





Under the
PRC Law the Company’s subsidiaries, Hua Long, New Century and Bao Sai are
required to make appropriations to the statutory reserve based on after-tax net
earnings and determined in accordance with generally accepted accounting
principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to
the statutory reserve should be at least 10% of the after-tax net income until
the reserve is equal to 50% of the registered capital. The statutory reserve is
established for the purpose of providing employee facilities and other
collective benefits to the employees and is non-distributable other than in
liquidation.





For the
years ended December 31, 2008 and 2007, the Company’s PRC subsidiaries
contributed $186,942 and $159,239 to statutory reserve,
respectively.


F-24


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONSOLDIATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007




NOTE23 CONCENTRATION AND
RISK





(a) Major
customers





For both
years ended December 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.





For the
year ended December 31, 2008, one customer represented more than 10% of the
Company’s revenue and accounts receivable, respectively. As of December 31,
2008, this customer accounted for $3,655,036 of the Company’s revenues 94%
and $360,043 of accounts receivable.





For the
year ended December 31, 2007, one customer represented more than 10% of the
Company’s revenue and accounts receivable, respectively. As of December 31,
2007, this customer accounted for 100% of the Company’s revenues and accounts
receivable, amounting to $3,201,088 and $343,087, respectively.





(b) Major
vendors





For the
year ended December 31, 2008, two vendors represented more than 10% of the
Company’s purchases and one of which represented more than 10% of the Company’s
accounts payable.





For the
year ended December, 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.





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




NOTE
24 RELATED PARTY TRANSACTIONS





As
mentioned in note 4, the Company acquired its subsidiary, Bao Sai mostly from
related parties.





NOTE25 COMMITMENT AND
CONTINGENCIES





The
Company rented office premises under non-cancelable operating lease agreements
for a period of two years, due December 2008 and June 2009. Costs incurred under
these operating leases are recorded as rental expense and totaled approximately
$2,038 and $0 for the year ended December 31, 2008 and 2007.





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





Year
      ending December 31,2009
                                  
                                  $
                                  957Total
      future minimum operating lease payments
                                  
                                  $
                                  957


F-25