GFR PHARMACEUTICALS INC - FORM 10-K/A

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EX-32.2 - GFR PHARMACEUTICALS INC	v189486_ex32-2.htm
EX-31.1 - GFR PHARMACEUTICALS INC	v189486_ex31-1.htm
EX-32.1 - GFR PHARMACEUTICALS INC	v189486_ex32-1.htm
EX-31.2 - GFR PHARMACEUTICALS INC	v189486_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

AMENDMENT NO. 1

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

¨	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. Employer Identification No.)

NEVADA

(State or Other Jurisdiction of Incorporation 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 42,079,940 shares 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.

This amendment is being filed to revise certain disclosures, including the Company’s controls and procedures in Item 9A and the officer’s certifications in Exhibits 31.1 and 31.2.

TABLE OF CONTENTS

		PAGE

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

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.

Recent Developments

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 40 employees.

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.

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:

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);

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


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

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.

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.

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.

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.

	High		Low
2008
Quarter Ended March 31, 2008	$	0.34	$	0.20
Quarter Ended June 30, 2008	$	0.25		0.09
Quarter Ended September 30, 2008	$	0.40		0.04
Quarter Ended December 31, 2008	$	0.05		0.03

2007
Quarter Ended March 31, 2007	$	0.49	$	0.49
Quarter Ended June 30, 2007	$	0.31		0.31
Quarter Ended September 30, 2007	$	0.60		0.60
Quarter 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.

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.

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.

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, 2007
Working Capital	$	(3,672,850	)	$	412,210	)
Stockholders’ Equity	$	3,145,525		$	6,006,921
Total 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.

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

Not Applicable

Item 9A. 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 Framework issued 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 concluded that the required provision for bad debt had not been brought to the attention of management on a timely basis but that, overall, the financial statements could be prepared in accordance with GAAP. Management has reviewed its internal controls regarding uncollectible accounts receivables to ensure that it is aware of debt that may need to be classified as bad debt as it relates to uncollectable accounts receivable. Management determined that the reporting of bad debt was a significant deficiency but did not rise to the level of being a material weakness. Management concluded that the issue is not a deficiency such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The Company has remedied the deficiency by more carefully monitoring its collection of accounts receivables and having the collection efforts reviewed more closely by its chief financial officer, who is responsible for oversight of the Company’s financial reporting. The Company believes that these steps will remediate the significant deficiency, and will continue to monitor the effectiveness of these steps and make any changes that management deems appropriate.

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

DIRECTORS AND OFFICERS

Name	Age	Position	Period In Office

Zhao Yan Ding	35	Chief Executive Officer &	January 2008 - Present
		Director

Zhong Ya Li	29	Chief Financial Officer &	January 2008 - Present
		Director

Wang 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.

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 Li qualifies 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.

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 ($)		Nonqualified Deferred Compensation Earnings ($)		All Other 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		15,867
Director, former	2007		15,000
CEO & former	2006		15,000
President

Zhi Dong Wang,	2008		4244
former director,	2007		3698
former CFO &	2006		3778
former VP

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		0

Ms. Zhong Ya Li c/o GFR Pharmaceuticals, Inc. 99 Yan Xiang Road, Biosep Building Xi An, Shaan Xi Province, P.R. China 710054		0		0

Mr. Zhao Ya Ding c/o GFR Pharmaceuticals, Inc. 99 Yan Xiang Road, Biosep Building Xi An, Shaan Xi Province, P.R. China 710054		0		0

Officers and directors as a group (3 persons)		0		0

___________________

(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, 2009 plus, (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)	$	2,170,350
Wang Zhidong (b)		1,143,073
Guo 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.

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.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) Exhibits.

Exhibit Number	Description

2.1	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 Stock

4.2	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, 2008

16.1	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 Officer

31.2	Rule 13a-14(a)/15d-14(a) Certifications of Zhong Ya Li, Chief Financial Officer

32.1	Section 1350 Certifications of Zhao Yan Ding, Chief Executive Officer

32.2	Section 1350 Certifications of Zhong 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

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: July 22, 2010

	GFR PHARMACEUTICALS, INC.

By:	/s/ Zhao Yan Ding
	Zhao Yan Ding, Chief Executive Officer

By:	/s/ Zhong Ya Li
	Zhong 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	July 22, 2010
Zhao Yan Ding

/s/ Zhang Ya Li	Director	July 22, 2010
Zhong Ya Li

/s/ Wang Li-An	Director	July 22, 2010
Wang Li-An

GFR PHARMACEUTICALS INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page

Report of AGCA, Inc,.Independent Registered Public Accounting Firm		F-2
Report of ZYCPA Company Limited (formerly Zhong Yi (Hong Kong) C.P.A. Company Limited), Independent Registered Public Accounting Firm		F-4
Consolidated Balance Sheets		F-5
Consolidated Statements of Operations And Comprehensive Income		F-6
Consolidated Statements of Cash Flows		F-7
Consolidated Statements of Stockholders’ Equity		F-8
Notes 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 Board
California 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.

/s/ AGCA, Inc.

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 Limited

Zhong Yi (Hong Kong) C.P.A. Company Limited

Certified Public Accountants

April 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			2007
ASSETS
Current assets:
Cash and cash equivalents	$	552,398		$	9,951
Trade accounts receivable, net of allowance of $515,026		659,329			343,087
Note receivable, net of allowance of $1,097,538		-			-
Inventories, net of allowance of $367,390		282,307			-
Prepayments and other receivables		243,242			314,185
Other 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		-			28,232
Operating lease prepaid - current portion		7,255			-

Total current assets		1,744,531			695,455

Non-current assets:
Property, plant and equipment, net		6,862,609			5,585,711
Intangible asset, net		-			-
Operating lease prepaid – non-current portion		150,844			-
Long term prepayment		589,822			-

TOTAL ASSETS	$	9,347,806		$	6,281,166

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current 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			214,570
Other payables and accrued liabilities		456,641			59,675
Total current liabilities		5,417,181			274,245

Loss in excess of investment in unconsolidated affiliate		785,100			-

Total liabilities		6,202,281			274,245

Stockholders’ 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			42,080
Additional paid-in capital		3,712,120			3,712,120
Accumulated other comprehensive income		210,695			134,797
Statutory reserve		423,760			236,818
Non-controlling interest		432,598			328,605
Retained earnings (accumulated deficit)		(1,675,728	)		1,552,501

Total stockholders’ equity		3,145,525			6,006,921

TOTAL 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			2007
REVENUE, NET
Service revenue	$	3,454,009		$	3,201,088
Product sales		223,063			-

Total revenue, net		3,677,072			3,201,088

COST OF REVENUE (exclusive of depreciation)
Depreciation and amortization		660,743			460,850
Cost of products		268,278			-

GROSS PROFIT		2,748,051			2,740,238

OPERATING EXPENSES:
Allowance for doubtful accounts		3,826,074			-
General and administrative		1,888,182			633,110
Total operating expenses		5,714,256			633,110

(LOSS) INCOME FROM OPERATIONS		(2,966,205	)		2,107,128

OTHER INCOME (EXPENSE):
Interest income		47,263			273
Rental 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	)		2,029,031

Income tax expenses		(628,747	)		(780,300	)

(LOSS) INCOME AFTER INCOME TAXES	$	(3,113,236	)	$	1,248,731

Non-controlling interest		71,949			(78,717	)

NET (LOSS) INCOME		(3,041,287	)		1,170,014

Other comprehensive income:
- Foreign currency translation gain		75,898			45,219

TOTAL COMPREHENSIVE (LOSS) INCOME	$	(2,965,389	)	$	1,215,233

Net (loss) income per share - Basic and diluted	$	(0.07	)	$	0.03

Weighted 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			2007
Cash flows from operating activities:
Net (loss) income	$	(3,041,287	)	$	1,170,014

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		660,743			460,850
Allowance for doubtful accounts		3,826,074			-
Stock issued for service rendered, non-cash		-			300,000
Non-controlling interest		(71,949	)		78,717
Change in operating assets and liabilities:
Trade accounts receivable, net		(248,866	)		156,401
Other 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	)		195,452
Other payables and accrued liabilities		(92,355	)		(96,517	)

Net cash provided by operating activities		553,987			2,153,936

Cash 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			2,061

NET CHANGE IN CASH AND CASH EQUIVALENTS		542,447			(54,592	)

CASH AND BANK BALANCE, BEGINNING OF YEAR		9,951			64,543

CASH AND BANK BALANCE, END OF YEAR	$	552,398		$	9,951

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes	$	681,927		$	584,848
Cash 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)

	Common stock
	No. of shares		Amount		Additional paid-in capital		Accumulated other comprehensive income		Statutory reserve		Retained earnings (accumulated deficit)			Non-controlling interest		Total Stockholders’ equity

Balance as of January 1, 2007		41,079,940	$	41,080	$	3,413,120	$	89,578	$	77,579	$	541,726		$	221,163	$	4,384,246

Shares issued to complete reverse acquisition		1,000,000		1,000		299,000		-		-		-			-		300,000

Foreign currency translation adjustment		-		-		-		45,219		-		-			-		45,219

Net income for the year		-		-		-		-		-		1,170,014			-		1,170,014

Transfer from retained earnings to statutory reserve		-		-		-		-		159,239		(159,239	)		-		-

Non-controlling interest		-		-		-		-		-		-			107,442		107,442

Balance as of January 1, 2008		42,079,940	$	42,080	$	3,712,120	$	134,797	$	236,818	$	1,552,501		$	328,605	$	6,006,921

Foreign currency translation adjustment		-		-		-		75,898		-		-			-		75,898

Net 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		103,993

Balance 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.

NOTE 3 SUMMARY OF 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 value
Buildings	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.

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		2007
Year end RMB:US$ exchange rate		6.8346		7.314
Average 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. 51 or SFAS No. 160" ("SFAS No. 160"). SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company believes that SFAS 160 should not have a material impact on the consolidated financial position or results of operations.

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

In 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 With Generally Accepted Accounting Principles”. The Company does not expect the adoption of SFAS No. 162 to have a material effect on the financial condition or results of operations of the Company.

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

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

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

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.

NOTE 4 ACQUISITION OF INTEREST IN BAO SAI

On January 1, 2008, the Company acquired 96.77% equity interest in Bao Sai in exchange for notes payable aggregating $4,500,211 as described below. Bao Sai is engaged in research, development, manufacture and sale of biological separation medium products, which is technological know-how and devices engineered to separate and purify biological products and medicines. Separation medium products are used in the production of antibiotics, genetic recombinant medicine, 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, 2008
Acquired assets:
Cash and cash equivalents	$	539,790
Accounts receivable, net of reserve for bad debts of $15,222		518,786
Inventories, net		258,365
Amount due from related parties		743,887
Notes receivables, net		2,368,745
Prepayment and other receivables, net		399,712
Plant and equipment, net		1,978,200
Intangible assets, net		154,515
Investment in an unconsolidated affiliate		478,795
Total assets acquired	$	7,440,795

Less: Liabilities assumed
Accounts 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	$	4,500,211

Satisfied 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

NOTE 4 ACQUISITION OF INTEREST IN BAO SAI (Continued)

The sellers of Bao Sai and consideration are as follows:

A non-related party	$	616,182

Related parties
X’ian Bio-sep Biological Filler Engineering Technology Co., Ltd. (a)	$	2,170,350
Wang Zhidong (b)		1,143,073
Guo 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,		Approximately
2009		$	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	$	2,322,436
Amounts still outstanding		2,493,318
Exchange difference		(315,543	)
Total consideration	$	4,500,211

NOTE 5 TRADE ACCOUNTS RECEIVABLE, NET

The majority of the Company’s sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required. Based upon the aforementioned criteria, management has determined that 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			2007

Accounts receivable, cost	$	1,174,355		$	343,087
Less: allowance for doubtful accounts		(515,026	)		-

Accounts receivable, net	$	659,329		$	343,087

NOTE 6 NOTE RECEIVABLE, NET

	As of December 31,
	2008			2007

Note 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

NOTE 7 INVENTORIES, NET

Inventories consisted of the followings:

	As of December 31,
	2008			2007

Raw materials	$	74,270		$	-
Work in process		7,109			-
Finished goods		568,318			-
		649,697			-
Less: inventory allowances		(367,390	)		-

Inventories, net	$	282,307		$	-

NOTE 8 OTHER RECEIVABLE

	As of December 31,
	2008			2007

Other 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	$	73,157
2010		131,683
2011		219,472
2012		424,312
2013		274,026

Total:	$	1,122,650

NOTE 9 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

NOTE 9 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)

NOTE 10 PREPAYMENTS AND OTHER RECEIVABLES

Prepayments and other receivables consisted of the following:

	As of December 31,
	2008		2007

Deposits	$	77,617	$	-
Advances to employees		25,334		18,587
Prepayment for equipment purchase		-		256,358
Prepaid expenses for operating purpose		140,291		39,240

	$	243,242	$	314,185

NOTE 11 PROPERTY, PLANT AND EQUIPMENT, NET

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

	As of December 31,
	2008			2007

Buildings	$	2,293,130		$	608,053
Plant and equipment		6,322,678			5,379,652
Motor vehicles		246,806			-
Furniture, fixture and office equipment		151,356			18,944
Foreign translation difference		33,264			547,366
		9,047,234			6,554,015
Less: 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

NOTE 12 INTANGIBLE ASSET, NET

	As of December 31,
	2008			2007

Technical 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.

NOTE 13 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.

NOTE 14 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	$	106,804
Amount due from Medicine		1,111,828
Less: 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

NOTE 14 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 RMB
2009	$	244,024		1,667,805
2010		292,629		2,000,000
2011		292,629		2,000,000
2012		282,546		1,931,093

Total:	$	1,111,828		7,598,898

NOTE 15 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.

NOTE 16 OTHER PAYABLES AND ACCRUED LIABILITIES

Other payables and accrued liabilities consisted of the followings:

	2008		2007

Business tax payable	$	82,554	$	17,154
Government levy payable		20,321		1,292
Salaries and welfare payable		100,405		6,216
Temporary 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

NOTE 17 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		2007

Current – PRC	$	628,747	$	780,300
Deferred		-		-

	$	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			2007

Pre-tax (loss) income	$	(2,484,489	)	$	2,335,946
PRC EIT		25	%		33	%
Income tax computed at PRC EIT		(621,122	)		770,862
Reconciling 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			6,170
Provisions and accrued liabilities		-			3,268

Effective 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			2007

Deferred tax assets:
- Net operating loss carryforwards	$	214,777		$	140,355
- Allowance for doubtful debts		956,519			-
		1,171,296			140,355
Less: 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

NOTE 18 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, 2008
	Medical Business		Extraction Business			Total

Operating revenues	$	3,454,009	$	223,063		$	3,677,072
Cost of revenues		-		(268,278	)		(268,278	)

Gross profit		3,454,009		(45,215	)		3,408,794
Depreciation and amortization		483,753		176,990			660,743
Net income (loss)	$	1,577,548	$	(4,690,784	)	$	(3,113,236	)

Expenditure for long-lived assets	$	20,617	$	19,212		$	39,829

	December 31, 2007
	Medical Business		Extraction Business		Total

Operating revenues	$	3,201,088	$	-	$	3,201,088
Depreciation and amortization		460,850		-		460,850
Net income	$	1,170,014	$	-	$	1,170,014

Expenditure 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

NOTE 19 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			2007
Basis and diluted net income per share calculation
Numerator:
- Net (loss) income in computing basic and diluted net income per share	$	(3,041,287	)	$	1,170,014

Denominator:
- Weighted average ordinary shares outstanding		42,079,940			42,007,718
Basic and diluted net (loss) income per share	$	(0.07	)	$	0.03

NOTE 20 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.

NOTE 21 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.

NOTE 22 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

NOTE 23 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.

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.

NOTE 25 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	$	957

Total future minimum operating lease payments	$	957

F-25

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