<DOCUMENT>
<TYPE>10KSB
<SEQUENCE>1
<FILENAME>e601860_10ksb-gulf.txt
<DESCRIPTION>FORM 10-KSB
<TEXT>

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington D.C. 20549
                                   FORM 10-KSB

|X|   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934

                   For the fiscal year ended December 31, 2006

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

              For the transition period from _________ to _________

                         Commission File Number 0-20936

                              GULF RESOURCES, INC.
                    ----------------------------------------
                 (Name of Small Business Issuer in Its Charter)

           DELAWARE                                      13-3637458
--------------------------------           -------------------------------------
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
Incorporation or Organization)

       Chenming Industrial Park, Unit - Haoyuan Chemical Company Limited,
                     Shouguang City, Shandong, China 262714
                    (Address of Principal Executive Offices)

                                 (212) 561-3604
                 (Issuer's Telephone Number Including Area Code)

            SHENNAN ZHONG ROAD, P O BOX 031-114, SHENZEN, CHINA 51800
          (Former name or former address, if changed since last report)

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
value $.001 per share

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Company was required to file such reports), and (2)has been
subject to such filing requirements for the past 90 days. YES |X| NO |_|

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Company's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES |_| NO |X|

The issuer's revenues for its most recent fiscal year: $17,825,097.

As of March 22, 2007, the aggregate market value of the voting stock held by
non-affiliates of the issuer was $21,052,644, based on the closing price of
$2.00 per share of its common stock on the OTC Bulleting Board on March 22,
2007. As of March 22, 2007, 48,195,340 shares of the issuer's common stock, par
value $.001 per share were outstanding.

Transitional Small Business Disclosure Format (check one): YES |_| NO |X|

Documents incorporated by reference: None

<PAGE>

PART I

ITEM 1: DESCRIPTION OF BUSINESS

Cautionary Notice Regarding Forward Looking Statements

      Gulf Resources, Inc. (referred to herein as "we" or the "Company") desires
to take advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. This report contains a number of forward-looking
statements that reflect management's current views and expectations with respect
to our business, strategies, future results and events and financial
performance. All statements made in this annual report other than statements of
historical fact, including statements that address operating performance, events
or developments that management expects or anticipates will or may occur in the
future, including statements related to future reserves, cash flows, revenues,
profitability, adequacy of funds from operations, statements expressing general
optimism about future operating results and non-historical information, are
forward-looking statements. In particular, the words "believe," "expect,"
"intend," "anticipate," "estimate," "may," "will," variations of such words and
similar expressions identify forward-looking statements, but are not the
exclusive means of identifying such statements and their absence does not mean
that the statement is not forward-looking. These forward-looking statements are
subject to certain risks and uncertainties, including those discussed below. Our
actual results, performance or achievements could differ materially from
historical results as well as those expressed in, anticipated or implied by
these forward-looking statements. We do not undertake any obligation to revise
these forward-looking statements to reflect any future events or circumstances.

      Readers should not place undue reliance on these forward-looking
statements, which are based on management's current expectations and projections
about future events, are not guarantees of future performance, are subject to
risks, uncertainties and assumptions (including those described below) and apply
only as of the date of this report. Our actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed in "Risk
Factors" below as well as those discussed elsewhere in this report, and the
risks discussed in our press releases and other communications to shareholders
issued by us from time to time, which attempt to advise interested parties of
the risks and factors that may affect our business. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.

Item 1. Description of Business.

History and Organization

      The Company was incorporated on February 28, 1989, in and under the laws
of the state of Delaware. At the time of our incorporation we were engaged in
the self-service public fax machine business. Since November 1993 through August
10, 2006, the Company had been engaged in the Business of owning, leasing and
operating coin and debit card pay-per copy photocopy machines, fax machines
microfilm reader-printers and accessory equipment. Due to the increased use of
internet services, demand for the services provided by the Company had declined
sharply, and on August 10, 2006, the Board of Directors of the Company therefore
decided to discontinue its operations and eliminate all of its debt. In
connection therewith, on August 10, 2006, the Company entered into, and
consummated, that certain Asset Transfer and Debt Resolution Agreement with
Irwin A. Horowitz, the then Company's chief executive officer, director and
controlling stockholder ("Horowitz"), whereby the Company transfer all of its
asserts to Horowitz in exchange the forgiveness of debt and liabilities of the
Company, which consisted of loans plus accrued interest thereon and unpaid
compensation, owed to Horowitz.


                                       1
<PAGE>

      On August 25, 2006, Ms. Juxiang Yu ("Yu"), the Company's former officer
and director, and Horowitz consummated Yu's purchase of shares of capital stock
of the Company in accordance with the terms and conditions of that certain Stock
Purchase Agreement, dated as of August 25, 2006, by and between Yu and Horowitz
(the "Purchase Agreement"). Pursuant to the Purchase Agreement, Yu acquired
362,083 (on a post-reverse stock split adjusted basis (see below)) shares of the
Company's Common Stock, for an aggregate purchase price of $425,000 (the "Stock
Transaction"). Therefore, after giving effect to the Stock Transaction, Yu held,
on a post-reverse stock split adjusted basis (see below), an aggregate of
362,083 shares of the 517,262 (on a post-reverse stock split adjusted basis (see
below)) shares of the Company's Common Stock issued and outstanding,
constituting, in the aggregate, 70% of the issued and outstanding shares of
Common Stock of the Company, effecting a change in the controlling interest of
the Company.

      The Stock Transaction effected a change in control of the Company. Prior
to the closing of the Stock Transaction, Horowitz had been Chairman, Chief
Executive Officer, President and a director of the Company, and Lonnie L.
Sciambi had been a director of the Company. Effective upon the closing of the
Stock Transaction and the filing and distribution of such documents as required
under the Securities Exchange Act of 1934, as amended, and the expiration of all
applicable grace periods, Yu was appointed to, and Messrs. Horowitz and Sciambi
resigned from, the Board of Directors of the Company. In addition, Yu was
elected to serve as President and Secretary of the Company.

      On September 11, 2006, the Company's Board of Directors and the then
holder of a majority of the Company's then outstanding Common Stock approved the
implementation of a one-for-one-hundred (1-for-100) reverse stock split (the
"Reverse Stock Split") of the outstanding shares of the Company's Common Stock.
The Reverse Stock Spit became effective on October 23, 2006, whereby each 100
shares of the Company's issued and outstanding Common Stock was automatically
combined into and became one share of Common Stock, thereby reducing the
51,726,200 of shares of Common Stock which were outstanding on a fully diluted
basis immediately prior to the effectiveness of the Reverse Stock Split to
approximately 517,262 shares of Common Stock.

      On December 11, 2006 (the "Effective Date"), the Company consummated that
certain Agreement and Plan of Merger, dated as of December 10, 2006, by and
among the Company, DFAX Acquisition Vehicle, Inc. ("DFAX"), a wholly owned
subsidiary of the Company, Upper Class Group Limited ("UCG"), and the
shareholders of UCG (the "Merger Agreement"), whereby DFAX merged with and into
UCG and the UCG Shareholders received 26,500,000 shares of Common Stock of the
Company in exchange for their shares of UCG (the "Merger Transaction"), which
were divided proportionally among the UCG Shareholders in accordance with their
respective ownership interests in UCG immediately before the consummation of the
Merger Transaction. As a result of the Merger Transaction, UCG, the surviving
corporation, became the Company's wholly owned subsidiary, and DFAX ceased to
exist. UCG owns all of the issued and outstanding capital stock of Shouguang
City Haoyuan Chemical Company Limited, a company organized under the laws of
China ("SCHC").

      As a result of the Merger Transaction, a change of control of the Company
occurred as of the Effective Date. Prior to the Effective Date, the controlling
shareholder of Company was Yu, who held approximately 70% of the then issued and
outstanding shares of Common Stock of the Company. As of the Effective Date, the
UCG Shareholders became the controlling shareholders of the Company, owning in
the aggregate 98% of the issued and outstanding shares of Common Stock of the
Company as of the Effective Date. Ming Yang ("Yang"), the Company's present
Chairman and Chief Executive Officer acquired 5,024,000 shares of the Common
Stock of the Company. After giving effect to the Merger Transaction, Yang held
18.6% of the then-issued and outstanding shares of the Common Stock of the
Company.


                                       2
<PAGE>

      Prior to the closing of the Merger Transaction, Yu had been President,
Secretary and sole director of the Company. Effective upon the filing and
distribution of such documents as are required under the Securities Exchange Act
of 1934, as amended, and the expiration of all applicable grace periods, which
occurred on January 15, 2007, Yang, who prior to the Share Exchange Transaction
was a shareholder of UCG, and Naihui Miao were appointed to, and Yu resigned
from, the Board of Directors of the Company.

      Effective upon the close of business of December 29, 2006, Yu resigned
from his position as President and Secretary of the Company. As Sole Director of
the Company, Yu appointed Yang to the positions of Chairman and Chief Executive
Officer, Naihui Miao to the position of Secretary and Min Li to the position of
Chief Financial Officer, such appointments became effective upon the close of
business of December 29, 2006.

      On February 5, 2007, the Company entered into, and consummated, the Share
Exchange Agreement with UCG, SCHC, Shouguang Yuxin Chemical Industry Company
Limited ("SYCI"), and the shareholders of SYCI (the "SYCI Shareholders"),
pursuant to which SCHC acquired SYCI from the SYCI Shareholders in exchange for
issuance of 16,188,118 shares of Common Stock of the Company to the SCYI
Shareholders (the "Share Exchange Transaction"), which was divided
proportionally among the SCYI Shareholders in accordance with their respective
ownership interests in SCYI immediately before the completion of the Share
Exchange Transaction, and non-interest bearing promissory notes in the aggregate
principal amount of $2,550,000 to the SYCI Shareholders.

Our Business

Shouguang City Haoyuan Chemical Company Limited

      SCHC is engaged in manufacturing and trading Bromine and Crude Salt in
China. Bromine (Br2) is a halogen element and it is a red volatile liquid at
standard room temperature which has reactivity between chlorine and iodine.
Elemental bromine is used to manufacture a wide variety of bromine compounds
used in industry and agriculture. Bromine is also used in the manufacture of
fumigants, brominated flame-retardants, water purification compounds, dyes,
medicines, sanitizers, inorganic bromides for photography, and other items.

      The main competitors of SCHC include Shandong Hai Hua Holding Limited,
Shouguang Fu Kang Medicines Manufacturing Company Limited, Shouguang Wei Dong
Chemical Company Limited, and Shandong Cai Yang Zi Salt Field Company.

      The four largest suppliers of SCHC for the period January 2006 to June
2006 were Shandong Hai Ke Sheng Li Electrochemical Company Limited, Shouguang
Rui Tai Chemical Company Limited, Mao Xin Chemical Company Limited, and Heng
Lian Chemical Company Limited. The five largest suppliers of SCHC for year 2005
were Shandong Hai Ke Sheng Li Electrochemical Company Limited, Shouguang Rui Tai
Chemical Company Limited, Shouguang Xin Yi Fuel Trading Company Limited,
Dongying City Rui Xin Chemical Company Limited, and Mao Xin Chemical Company
Limited.

      The five largest customers for SCHC in year 2005 were Shouguang City Wei
Dong Chemical Company Limited, Shouguang City Rui Tai Chemical Company Limited,
Weifang City Lu Guang Chemical Company Limited, Shouguang City Fu Hai Chemical
Company Limited, and Dongying Hong Ze Chemical Company Limited.


                                       3
<PAGE>

Shouguang Yuxin Chemical Industry Company Limited

      SYCI, a company organized under the laws of China, is engaged in
manufacturing and sales of chemical products, with its headquarters located in
Shouguang City at 2nd Living District, Qinghe Oil Factory, Shouguang City,
Shandong Province, China. The company has certified with ISO9001-2000 and
received the Quality Products and Services Guarantee Certificate from China
Association for Quality, accredited by the Shandong as the Provincial Credit
Enterprises and is a Class One supplier for both China Petroleum & Chemical
Corporation (SINOPC) and PetroChina Company Limited. SYCI has been engaged in
the product innovation and R&D projects with Shandong University, Shandong
Institute of Light Industry, Southeast University and other higher education
institutions. SYCI also has hired 3 college professors and 3 professionals who
hold PhD degree to lead their R& D department.

      SYCI concentrates its effort on the production and sale of chemical
products that arein use in oil and gas field explorations, oil and gas
distribution, oil field drilling, wastewater processing, papermaking chemical
agents, and inorganic chemical. SYCI also spends a high amount of R&D on
commonly used chemical products as well as medicine intermediates. Currently,
SYCI's annual productions of oil & gas field explorations and related chemical
products are over 10,000 tons, and papermaking-related chemical products are
over 7,000 tons. The sales of these products are mainly distributed to large
domestic papermaking manufacturers and major oilfields such as Shengli Oilfield,
Daqing Oilfield, Zhongyuan Oilfield, Huabei Oilfield, and Talimu Oilfields.

Employees

      At the current time, in addition to our officers, we have 103 full-time
employees.

Risk Factors

The reader should carefully consider each of the risks described below. If any
of the following risks develop into actual events, our business, financial
condition or results of operations could be materially adversely affected and
the trading price of our common stock could decline significantly.

Risk Factors of the Company

There is a limited public market for our common stock.

      There is currently a limited public market for the common stock. Holders
of our common stock may, therefore, have difficulty selling their common stock,
should they decide to do so. In addition, there can be no assurances that such
markets will continue or that any shares of common stock, which may be
purchased, may be sold without incurring a loss. Any such market price of the
common stock may not necessarily bear any relationship to our book value,
assets, past operating results, financial condition or any other established
criteria of value, and may not be indicative of the market price for the common
stock in the future. Further, the market price for the common stock may be
volatile depending on a number of factors, including business performance,
industry dynamics, and news announcements or changes in general economic
conditions.


                                       4
<PAGE>

Our common stock may be deemed penny stock with a limited trading market.

      Our common stock is currently listed for trading in the Over-The-Counter
Market on the NASD Electronic Bulletin Board or in the "pink sheets" maintained
by the National Quotation Bureau, Inc., which are generally considered to be
less efficient markets than markets such as NASDAQ or other national exchanges,
and which may cause difficulty in conducting trades and difficulty in obtaining
future financing. Further, our securities are subject to the "penny stock rules"
adopted pursuant to Section 15 (g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The penny stock rules apply to non-NASDAQ
companies whose common stock trades at less than $5.00 per share or which have
tangible net worth of less than $5,000,000 ($2,000,000 if the company has been
operating for three or more years). Such rules require, among other things, that
brokers who trade "penny stock" to persons other than "established customers"
complete certain documentation, make suitability inquiries of investors and
provide investors with certain information concerning trading in the security,
including a risk disclosure document and quote information under certain
circumstances. Many brokers have decided not to trade "penny stock" because of
the requirements of the penny stock rules and, as a result, the number of
broker-dealers willing to act as market makers in such securities is limited. In
the event that we remain subject to the "penny stock rules" for any significant
period, there may develop an adverse impact on the market, if any, for our
securities. Because our securities are subject to the "penny stock rules"
investors will find it more difficult to dispose of our securities. Further, for
companies whose securities are traded in the Over-The-Counter Market, it is more
difficult: (i) to obtain accurate quotations; (ii) to obtain coverage for
significant news events because major wire services, such as the Dow Jones News
Service, generally do not publish press releases about such companies, and (iii)
to obtain needed capital.

New management's decision to change the business focus of the Company from the
photocopy and fax service industry to the chemical industry could ultimately
prove to be unsuccessful, harming our business operations and prospects.

      New management has recently changed the Company's business focus from the
photocopy service industry to the chemical industry. Accordingly, a substantial
portion of our management's time will be directed toward the pursuit of
identifying and acquiring business opportunities in the education industry.
There can be no assurance that new management will be able to properly manage
the direction of the Company or that any ultimate change in the Company's
business focus will be successful. If new management fails to properly manage
and direct the Company, the Company may be forced to scale back or abandon its
existing operations, which will cause the value of our shares to decline.

We have not and do not anticipate paying any dividends on our common stock;
because of this our securities could face devaluation in the market.

      We have paid no dividends on our common stock to date and it is not
anticipated that any dividends will be paid to holders of our common stock in
the foreseeable future. While our dividend policy will be based on the operating
results and capital needs of the business, it is anticipated that any earnings
will be retained to finance our future expansion and for the implementation of
our new business plan. As an investor, you should take note of the fact that a
lack of a dividend can further affect the market value of our stock, and could
significantly affect the value of any investment in our Company.

We will continue to incur significant increased costs as a result of operating
as a public company, and our management will be required to devote substantial
time to new compliance requirements.

      As a public company we incur significant legal, accounting and other
expenses under the Sarbanes-Oxley Act of 2002, together with rules implemented
by the Securities and Exchange Commission and applicable market regulators.
These rules impose various requirements on public companies, including requiring
certain corporate governance practices. Our management and other personnel will
need to devote a substantial amount of time to these new compliance
requirements. Moreover, these rules and regulations will increase our legal and
financial compliance costs and will make some activities more time-consuming and
costly.


                                       5
<PAGE>

      In addition, the Sarbanes-Oxley Act requires, among other things, that we
maintain effective internal controls for financial reporting and disclosure
controls and procedures. In particular, commencing in 2007, we must perform
system and process evaluations and testing of our internal controls over
financial reporting to allow management and our independent registered public
accounting firm to report on the effectiveness of our internal controls over
financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our
testing, or the subsequent testing by our independent registered public
accounting firm, may reveal deficiencies in our internal controls over financial
reporting that are deemed to be material weaknesses. Compliance with Section 404
may require that we incur substantial accounting expenses and expend significant
management efforts. If we are not able to comply with the requirements of
Section 404 in a timely manner, or if our accountants later identify
deficiencies in our internal controls over financial reporting that are deemed
to be material weaknesses, the market price of our stock could decline and we
could be subject to sanctions or investigations by the SEC or other applicable
regulatory authorities.

Our Board of Directors has the authority, without stockholder approval, to issue
preferred stock with terms that may not be beneficial to common stock holders
and with the ability to adversely affect stockholder voting power and perpetuate
the board's control over the Company.

      Our certificate of incorporation authorizes the issuance of up to
1,000,000 shares of preferred stock, par value $0.001 per share.

      The specific terms of the preferred stock have not been determined,
including: designations; preferences; conversions rights; cumulative, relative;
participating; and optional or other rights, including: voting rights;
qualifications; limitations; or restrictions of the preferred stock.

      The Board of Directors is entitled to authorize the issuance of up to
1,000,000 shares of preferred stock in one or more series with such limitations
and restrictions as may be determined in its sole discretion, with no further
authorization by security holders required for the issuance thereof.

      The issuance of preferred stock could adversely affect the voting power
and other rights of the holders of common stock. Preferred stock may be issued
quickly with terms calculated to discourage, make more difficult, delay or
prevent a change in control of our Company or make removal of management more
difficult. As a result, the Board of Directors' ability to issue preferred stock
may discourage the potential hostile acquirer, possibly resulting in beneficial
negotiations. Negotiating with an unfriendly acquirer may result in, among other
things, terms more favorable to us and our stockholders. Conversely, the
issuance of preferred stock may adversely affect any market price of, and the
voting and other rights of the holders of the common stock. We presently have no
plans to issue any preferred stock.

The inability to successfully manage the growth of our business may have a
material adverse effect on our business, results or operations and financial
condition.

      We expect to experience growth in the number of employees and the scope of
our operations as a result of internal growth and acquisitions. Such activities
could result in increased responsibilities for management.

      Our future success will be highly dependent upon our ability to manage
successfully the expansion of operations. Our ability to manage and support our
growth effectively will be substantially dependent on our ability to implement
adequate improvements to financial, inventory, management controls, reporting,
union relationships, order entry systems and other procedures, and hire
sufficient numbers of financial, accounting, administrative, and management
personnel. There can be no assurance that we will be able to identify, attract
and retain experienced accounting and financial personnel.


                                       6
<PAGE>

      Our future success depends on our ability to address potential market
opportunities and to manage expenses to match our ability to finance operations.
The need to control our expenses will place a significant strain on our
management and operational resources. If we are unable to control our expenses
effectively, our business, results of operations and financial condition may be
adversely affected.

The unsuccessful integration of a business or business segment we acquire could
have a material adverse effect on our results.

      As part of our business strategy, we expect to acquire assets and
businesses relating to or complementary to our operations. These acquisitions
will involve risks commonly encountered in acquisitions. These risks include,
among other things, exposure to unknown liabilities of the acquired companies,
additional acquisition costs and unanticipated expenses. Our quarterly and
annual operating results will fluctuate due to the costs and expenses of
acquiring and integrating new businesses. We may also experience difficulties in
assimilating the operations and personnel of acquired businesses. Our ongoing
business may be disrupted and our management's time and attention diverted from
existing operations. Our acquisition strategy will likely require additional
debt or equity financing, resulting in additional leverage or dilution of
ownership. We cannot assure you that any future acquisition will be consummated,
or that if consummated, that we will be able to integrate such acquisition
successfully.

We depend on revenues from a few significant relationships, and any loss,
cancellation, reduction, or interruption in these relationships could harm our
business.

      In general, the Company has derived a material portion of its revenue from
a limited number of customers and suppliers. We expect that in future periods we
may enter into contracts with customers and suppliers which represent a
significant concentration of our revenues. If such contracts were terminated,
our revenues and net income could significantly decline. Our success will depend
on our continued ability to develop and manage relationships with significant
customers and suppliers. Any adverse change in our relationship with such
customer could have a material adverse effect on our business. Although we are
attempting to expand our customer base, we expect that our customer
concentration will not change significantly in the near future. We cannot be
sure that we will be able to retain our largest customers and suppliers or that
we will be able to attract additional customers and suppliers, or that our
customers and suppliers will continue to buy our products in the same amounts as
in prior years. The loss of one or more of our largest customers or suppliers,
any reduction or interruption in sales to these customers or suppliers, our
inability to successfully develop relationships with additional customers or
suppliers or future price concessions that we may have to make, could
significantly harm our business.

Attracting and retaining key personnel is an essential element of our future
success.

      Our future success depends to a significant extent upon the continued
service of our executive officers and other key management and technical
personnel and on our ability to continue to attract, retain and motivate
executive and other key employees, including those in managerial, technical,
marketing and information technology support positions. Attracting and retaining
skilled workers and qualified sales representatives is also critical to us.
Experienced management and technical, marketing and support personnel in the
defense and aerospace industries are in demand and competition for their talents
is intense. The loss of the services of one or more of our key employees or our
failure to attract, retain and motivate qualified personnel could have a
material adverse effect on our business, financial condition and results of
operations.


                                       7
<PAGE>

Risks related to doing business in China

Our business operations take place primarily in China. Because Chinese laws,
regulations and policies are continually changing, our Chinese operations will
face several risks summarized below.

Limitations on Chinese economic market reforms may discourage foreign investment
in Chinese businesses.

      The value of investments in Chinese businesses could be adversely affected
by political, economic and social uncertainties in China. The economic reforms
in China in recent years are regarded by China's central government as a way to
introduce economic market forces into China. Given the overriding desire of the
central government leadership to maintain stability in China amid rapid social
and economic changes in the country, the economic market reforms of recent years
could be slowed, or even reversed.

Any change in policy by the Chinese government could adversely affect
investments in Chinese businesses.

      Changes in policy could result in imposition of restrictions on currency
conversion, imports or the source of suppliers, as well as new laws affecting
joint ventures and foreign-owned enterprises doing business in China. Although
China has been pursuing economic reforms for the past two decades, events such
as a change in leadership or social disruptions that may occur upon the proposed
privatization of certain state-owned industries, could significantly affect the
government's ability to continue with its reform.

We face economic risks in doing business in China.

      As a developing nation, China's economy is more volatile than that of
developed Western industrial economies. It differs significantly from that of
the U.S. or a Western European country in such respects as structure, level of
development, capital reinvestment, resource allocation and self-sufficiency.
Only in recent years has the Chinese economy moved from what had been a command
economy through the 1970s to one that during the 1990s encouraged substantial
private economic activity. In 1993, the Constitution of China was amended to
reinforce such economic reforms. The trends of the 1990s indicate that future
policies of the Chinese government will emphasize greater utilization of market
forces. For example, in 1999 the Government announced plans to amend the Chinese
Constitution to recognize private property, although private business will
officially remain subordinated to the state-owned companies, which are the
mainstay of the Chinese economy. However, there can be no assurance that, under
some circumstances, the government's pursuit of economic reforms will not be
restrained or curtailed. Actions by the central government of China could have a
significant adverse effect on economic conditions in the country as a whole and
on the economic prospects for our Chinese operations.

The Chinese legal and judicial system may negatively impact foreign investors.

      In 1982, the National Peoples Congress amended the Constitution of China
to authorize foreign investment and guarantee the "lawful rights and interests"
of foreign investors in China. However, China's system of laws is not yet
comprehensive. The legal and judicial systems in China are still rudimentary,
and enforcement of existing laws is inconsistent. Many judges in China lack the
depth of legal training and experience that would be expected of a judge in a
more developed country. Because the Chinese judiciary is relatively
inexperienced in enforcing the laws that do exist, anticipation of judicial
decision-making is more uncertain than would be expected in a more developed
country. It may be impossible to obtain swift and equitable enforcement of laws
that do exist, or to obtain enforcement of the judgment of one court by a court
of another jurisdiction. China's legal system is based on written statutes; a
decision by one judge does not set a legal precedent that is required to be
followed by judges in other cases. In addition, the interpretation of Chinese
laws may be varied to reflect domestic political changes.


                                       8
<PAGE>

      The promulgation of new laws, changes to existing laws and the pre-emption
of local regulations by national laws may adversely affect foreign investors.
However, the trend of legislation over the last 20 years has significantly
enhanced the protection of foreign investment and allowed for more control by
foreign parties of their investments in Chinese enterprises. There can be no
assurance that a change in leadership, social or political disruption, or
unforeseen circumstances affecting China's political, economic or social life,
will not affect the Chinese government's ability to continue to support and
pursue these reforms. Such a shift could have a material adverse effect on our
business and prospects.

      The practical effect of the Peoples Republic of China legal system on our
business operations in China can be viewed from two separate but intertwined
considerations. First, as a matter of substantive law, the Foreign Invested
Enterprise laws provide significant protection from government interference. In
addition, these laws guarantee the full enjoyment of the benefits of corporate
Articles and contracts to Foreign Invested Enterprise participants. These laws,
however, do impose standards concerning corporate formation and governance,
which are not qualitatively different from the general corporation laws of the
several states. Similarly, the Peoples Republic of China accounting laws mandate
accounting practices, which are not consistent with U.S. Generally Accepted
Accounting Principles. China's accounting laws require that an annual "statutory
audit" be performed in accordance with Peoples Republic of China accounting
standards and that the books of account of Foreign Invested Enterprises are
maintained in accordance with Chinese accounting laws. Article 14 of the Peoples
Republic of China Wholly Foreign-Owned Enterprise Law requires a Wholly
Foreign-Owned Enterprise to submit certain periodic fiscal reports and
statements to designate financial and tax authorities, at the risk of business
license revocation. Second, while the enforcement of substantive rights may
appear less clear than United States procedures, the Foreign Invested
Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered
companies, which enjoy the same status as other Chinese registered companies in
business-to-business dispute resolution. Generally, the Articles of Association
provide that all business disputes pertaining to Foreign Invested Enterprises
are to be resolved by the Arbitration Institute of the Stockholm Chamber of
Commerce in Stockholm, Sweden, applying Chinese substantive law. Any award
rendered by this arbitration tribunal is, by the express terms of the respective
Articles of Association, enforceable in accordance with the "United Nations
Convention on the Recognition and Enforcement of Foreign Arbitral Awards
(1958)." Therefore, as a practical matter, although no assurances can be given,
the Chinese legal infrastructure, while different in operation from its United
States counterpart, should not present any significant impediment to the
operation of Foreign Invested Enterprises.

Economic Reform Issues

      Although the Chinese government owns the majority of productive assets in
China, during the past several years the government has implemented economic
reform measures that emphasize decentralization and encourage private economic
activity. Because these economic reform measures may be inconsistent or
ineffectual, there are no assurances that:

-     We will be able to capitalize on economic reforms;
-     The Chinese government will continue its pursuit of economic reform
      policies;
-     The economic policies, even if pursued, will be successful;
-     Economic policies will not be significantly altered from time to time; and
-     Business operations in China will not become subject to the risk of
      nationalization.


                                       9
<PAGE>

      Since 1979, the Chinese government has reformed its economic systems.
Because many reforms are unprecedented or experimental, they are expected to be
refined and improved. Other political, economic and social factors, such as
political changes, changes in the rates of economic growth, unemployment or
inflation, or in the disparities in per capita wealth between regions within
China, could lead to further readjustment of the reform measures. This refining
and readjustment process may negatively affect our operations.

      Over the last few years, China's economy has registered a high growth
rate. Recently, there have been indications that rates of inflation have
increased. In response, the Chinese government recently has taken measures to
curb this excessively expansive economy. These measures have included
devaluations of the Chinese currency, the Renminbi (RMB), restrictions on the
availability of domestic credit, reducing the purchasing capability of certain
of its customers, and limited re-centralization of the approval process for
purchases of some foreign products. These austerity measures alone may not
succeed in slowing down the economy's excessive expansion or control inflation,
and may result in severe dislocations in the Chinese economy. The Chinese
government may adopt additional measures to further combat inflation, including
the establishment of freezes or restraints on certain projects or markets.

      To date, reforms to China's economic system have not adversely impacted
our operations and are not expected to adversely impact operations in the
foreseeable future; however, there can be no assurance that the reforms to
China's economic system will continue or that we will not be adversely affected
by changes in China's political, economic, and social conditions and by changes
in policies of the Chinese government, such as changes in laws and regulations,
measures which may be introduced to control inflation, changes in the rate or
method of taxation, imposition of additional restrictions on currency conversion
and remittance abroad, and reduction in tariff protection and other import
restrictions.

ITEM 2: DESCRIPTION OF PROPERTY

      Presently, our executive offices are located in China at Unit - Haoyuan
Chemical Company Limited, Chenming Industrial Park, Shouguang City, Shandong,
P.R. China. The headquarters building is located on approximately 17,342 square
meters of state-owned land owned by Shouguang City Wo Pu Town Ba Mian He
Village. The lease for the land expires on March 31, 2054. The annual rent for
the land is RMB 46,230, or approximately US$5,778.75. The building area is
approximately 3,335 square meters and is owned by SCHC.

      SYCI has its headquarters located in Shouguang City at 2nd Living
District, Qinghe Oil Factory, Shouguang City, Shandong Province, China.

      As a result of the Merger Transaction, the executive offices of the
Company were relocated from Shennan Zhong Road, Shenzhen City, China to our
current location, which is also the headquarters of SCHC. Prior the closing of
Stock Transaction, our executive offices were located at 4274 Independence
Court, Sarasota, Florida 34234.

ITEM 3: LEGAL PROCEEDINGS

      The Company is not a party to any material legal proceedings.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      In September 2006, our then majority shareholder (holding 362,083 shares,
on a post-Reverse Stock Split adjusted basis (approximately 70%) of the shares
of our Common Stock outstanding at such time) consented in writing, without a
meeting, to implement the Reverse Stock Split. On or about October 3, 2006, we
mailed to our shareholders an information statement on Schedule 14C with respect
to such matter and, on October 23, 2006, we implemented the Reverse Stock Split
as described above.

      In January 2007, shareholders holding 16,747,200 shares (approximately
62%) of the shares of our Common Stock outstanding at such time consented in
writing, without a meeting, to change our Company's name from Diversifax, Inc.
to Gulf Resources, Inc. On or about January 26, 2007, we mailed to our
shareholders an information statement on Schedule 14C with respect to such
matter, and, on February 20, 2007, we changed our name as described above.


                                       10
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      The Company's Common Stock is traded on the over-the-counter market (the
OTC Bulletin Board) with quotations reported on the National Association of
Securities Dealers Automatic Quotation System (NASDAQ), Small Cap Market, under
the symbol "GUFR."

      As March 15, 2007, there were approximately 291 holders of record of the
Common Stock, including record holders which may hold such stock for beneficial
owners and which have not been polled to determine the extent of beneficial
ownership.

      The prices set forth below reflect the quarterly high and low bid price
information for shares of our common stock during the fiscal year ended December
31, 2006. These quotations reflect inter-dealer prices, without retail markup,
markdown or commission, and may not represent actual transactions.

            Quarterly summary of stock price for the last fiscal year
--------------------------------------------------------------------------------
                                      High                  Low
                                      ----                  ---
                Q1 2006              $ 1.00               $ 0.50
                Q2 2006              $ 1.50               $ 1.00
                Q3 2006              $ 5.50               $ 1.30
                Q4 2006              $ 1.50               $ 1.10

      Additionally, the Company is authorized to issue 1,000,000 shares, $0.001
par value, of Preferred Stock. As of the date of this Annual Report, no shares
of Preferred Stock were issued or outstanding.

      Our Common Stock is covered by an SEC rule that imposes additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors. Established customers
are generally institutions with assets in excess of $5,000,000, and accredited
investors are individuals with net worth in excess of $1,000,000 or annual
income exceeding $200,000 individually or $300,000 jointly with their spouse.
For transactions covered by the rule, the broker-dealer must make a special
suitability determination for the purchaser and transaction prior to the sale.
Consequently, the rule may affect the ability of broker-dealers to sell our
securities, and also may affect the ability of purchasers of our common stock to
sell their shares in the secondary market. It may also cause fewer
broker-dealers to be willing to make a market in our common stock, and it may
affect the level of news coverage we receive.

      The Company has never paid cash dividends on its Common Stock. Holders of
Common Stock are entitled to receive such dividends as may be declared and paid
from time to time by the Board of Directors out of funds legally available. The
Company intends to retain any earnings for the operation and expansion of its
business and does not anticipate paying cash dividends in the foreseeable
future. Any future determination as to the payment of cash dividends will depend
upon future earnings, results of operations, capital requirements, the Company's
financial condition and such other factors as the Board of Directors may
consider.


                                       11
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION

PLAN OF OPERATIONS

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the financial statements and the
related notes thereto included elsewhere in this annual report for the year
ended December 31, 2006. This annual report contains certain forward-looking
statements and the Company's future operating results could differ materially
from those discussed herein. Certain statements contained in this Report,
including, without limitation, statements containing the words "believes,"
"anticipates," "expects", "intends", "may", or "should" and the like, constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Given these uncertainties, readers are cautioned not
to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to announce publicly the
results of any revisions of the forward-looking statements contained or
incorporated by reference herein to reflect future events or developments.

      In the last quarter of the fiscal year ended December 31, 2006, the
Company consummated the Merger Transaction, whereby the Company acquired UCG and
SCHC from the shareholders of UCG in exchange to the issuance of 26,500,000
shares of the Company's common stock to the shareholders of UCG. The Merger
Transaction is treated as a capital transaction, rather than a business
combination, and is equivalent to the issuance of stock by UCG for the net
monetary assets of the Company, accompanied by a recapitalization, and is
accounted for as a change in capital structure. Accordingly, the accounting for
the Merger Transaction will be identical to that resulting from a reverse
acquisition, except no goodwill will be recorded. The operations of the Company
will continue as that of UCG and SCHC.

      In addition to the Merger Transaction, the Company, subsequent to the
fiscal year ended December 31, 2006, the Company consummated the Share Exchange
Transaction, whereby the Company acquired SYCI from the SYCI Shareholders in
exchange for the issuance of 16,188,118 shares of the Company's common stock to
the SYCI Shareholders.

      The financial statements of SYCI are incorporated by reference into this
Report; reference is made to the Company's Report on Form 8-K dated February 5,
2007, for information regarding financial results for SYCI. For the immediate
future the Company intends to focus its efforts on the activities of SCHC and
SYCI. The Company's short to mid-term strategic plan is to focus on Chinese
domestic market expansion. The Company's long-term strategic goal is to expand
its market to overseas countries.

      The Company may issue additional shares of its capital stock to raise
additional cash for working capital during the next twelve months. The Company
has not decided on the amount of cash needed for working capital at this point.
Working capital will be used for expanding the Chinese domestic market by
establishing more sales points or owned chain stores in eastern China, hiring
more sales persons, and expanding current distribution channels.


                                       12
<PAGE>

RESULTS OF OPERATIONS PERIOD ENDED DECEMBER 31, 2006 and 2005

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                                      For the year ended              For the period May 18, 2005
                                                      December 31, 2006               through December 31, 2005
-----------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                             <C>
Net Sales                                             $17,825,097                     $14,344,296

Cost of net sales                                     $10,481,566                     $9,095,301

Gross profit                                          $7,343,530                      $5,248,994

General and Administrative expenses                   $5,614,783                      $304,450

Income from operations                                $1,728,746                      $4,944,544

Other revenue                                         $5,989                          $445

Income before taxes                                   $1,734,736                      $4,944,990

Income Taxes                                          $572,462                        $1,632,760

-----------------------------------------------------------------------------------------------------------------
Net Income                                            $1,162,273                      $3,312,229
-----------------------------------------------------------------------------------------------------------------
</TABLE>

Net Sales

Net sales were $17,825,697 in the year ended December 31, 2006 (the "Fiscal
2006, an increase of $3,480,801 (or approximately 24%) of the net sales of
$14,344,296 in the period ended December 31, 2005 (the "Fiscal 2005"). The
increase in net sales was attributable to the production activity in Fiscal 2005
of seven months, whereas in Fiscal 2006 there were twelve months of production.
Monthly production and sales in Fiscal 2006 was below that of Fiscal 2005,
because the concentration of bromine in the ground decreased in Fiscal 2006
after the initial exploitation in Fiscal 2005. Furthermore, the price of bromine
was more stable during Fiscal 2006. Our net sales for the period were derived
wholly from the sales of bromine. No sales of crude salt were included, as all
the crude salt plants were only completed in December 2006.

The Company focused on larger value of sales transactions to increase efficiency
during the year. Therefore, sales were made to the large customers with large
orders. Two of the Company customers represented 74% of the total sales in
Fiscal 2006 as compared to 60% in Fiscal 2005.

Cost of net sales

Cost of net sales was $10,481,566 in Fiscal 2006, an increase of $1,386,265 (or
approximately 15%) from the cost of net sales of $9,095,301 in Fiscal 2005. The
increase in the cost of net sales resulted from an increase in the cost of
electricity. However, the cost of net sales decreased from approximately 63% of
net sales in Fiscal 2005 to approximately 59% of net sales in Fiscal 2006. This
improvement cost of net sales percentage was attributable to an improved
learning curve of newly trained employees, a greater final bromine yield and the
introduction of an advanced integrated production process in Fiscal 2006.

As noted above the cost of electricity increased in Fiscal 2006 to $2,738,295,
as compared to $1,062,181 in Fiscal 2005. The significant increase of 158% in
Fiscal 2006 compared to Fiscal 2005 was mainly due to the fact that SCHC shared
electricity with its supplier, (Shengli Oilfield), and supplier recharged SCHC
at a lower price in Fiscal 2005. No such sharing was in place for Fiscal 2006,
and SCHC paid at the standard rate to the local electricity company. Also
included in the cost of net sales is amortization of prepaid lease payments. The
land that the Company uses for the manufacture of bromine is leased for 50 years
ending on March 31, 2054. Cost of net sales included raw material consumed,
direct salaries and welfare, and other manufacturing costs.


                                       13
<PAGE>

Two of the Company's largest suppliers represented 74% of the total purchases in
Fiscal 2006 as compared to 61% in Fiscal 2005. The top five suppliers in Fiscal
2006 represented 100% of the total purchases, whereas in Fiscal 2005, the top
five suppliers represented 79% of the total purchases. The increase in
percentage of top five suppliers indicates that SCHC has built up good
relationships and improved our business reputation among the suppliers, thereby
increasing suppliers' confidence when trading with the Company.

Gross Profit

Gross profit was $7,343,530 in Fiscal 2006, an increase of $2,094,535 (or
approximately 40%) from gross profit of $5,248,994 in Fiscal 2005. The gross
profit increased from approximately 36% of net sales in Fiscal 2005 to
approximately 41% of net sales in Fiscal 2006. This improvement in gross profit
percentage was mostly due to more effective use of raw materials and recyclable
packaging materials. In addition, the increase was also attributable to the
shipping costs being borne by the Company's customers.

General and Administrative Expenses

General and administrative expenses were $5,614,784 in Fiscal 2006, an increase
of $5,310,333 (or approximately 1,744%) from the general and administrative
expenses of $304,451 in Fiscal 2005. This significant increase in general and
administrative expenses was mostly due to consulting expenses of $5,344,295
which were incurred Fiscal 2006. The company issued 4,413,450 shares of the
common stock in March 2007 as a payment for consulting fees. The consulting fees
accounted for 95% of total general and administrative expenses in Fiscal 2006.
Unless we will have future acquisitions, we expect the general and
administrative expenses to be much lower in the year ending December 31, 2007.

Income from Operation

Income from operation was $1,734,736 in Fiscal 2006, a decrease of $3,215,798
(or approximately 65%) from income from operation of $4,944,544 in Fiscal 2005.
The decrease of income from operation in Fiscal 2006 resulted primarily from the
increase of general and administrative expenses as discussed above.

Net Income

Net income was $1,162,273 in Fiscal 2006, a decrease of $2,149,957 (or
approximately 65%) from net income of $3,312,229 in Fiscal 2005. This decrease
of net income in Fiscal 2006 resulted primarily from the significant increase in
the general and administrative expenses as discussed above.

LIQUIDITY AND CAPITAL RESOURCES

The company meets its working capital and capital investment requirements mainly
by using operating cash flows and, to a limited extent, bank loans. We believe
that our cash requirements in the next twelve months will be met by our revenues
from operations and our cash reserves.


                                       14
<PAGE>

We ended Fiscal 2006 with a cash position of $3,725,825. We had positive cash
flow from operating activities of $3,466,559, primarily attributable to net
income of $1,162,227 and an increase of accounts payable and accrued expenses of
$5,703,271, with an offset by an increase in accounts receivable of $834,052 and
an increase of income tax receivable of $1,169,196.

We had a decreased investing cash flow of $581,665. This aggregate change in the
company's cash position resulted from amounts spent on investments in capital
assets such as plant and equipment.

We had negative financing cash flow totaled $1,674,771. The negative financing
cash flow is mainly due to the dividend payments of $2,450,680 and $71,822 due
to directors which were partially offset by capital contribution from
stockholders of $936,524.

We anticipate that our available funds and cash flows generated from operations
will be sufficient to meet our anticipated needs for working capital
expenditures and business expansion through December 31, 2007. We may need to
raise additional funds in the future, however, in order to fund acquisitions,
develop new projects, or if our business otherwise grows more rapidly than we
currently predict. If we do need to raise such additional funds, we expect to
raise those funds through the issuance of additional shares of our equity
securities in one or more public or private offerings, or through credit
facilities obtained with lending institutions. There can be no guarantee that we
will be able to obtain such funding, whether through the issuance of debt or
equity, on terms satisfactory to management and our board of directors.

      During the first quarter of the 2007 fiscal year, the Company acquired
SYCI, as a result of the Share Exchange Transaction. The Company anticipates
that it will generate sufficient revenues from SCHC and SYCI to fund its
operations. If the Company were to need additional cash to fund operations, it
could seek to raise such monies in the form of debt or equity. There can be no
assurance that any such debt or equity would be available to the Company or, if
available, the terms thereof.

CRITICAL ACCOUNTING POLICIES

      The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

      We have identified the policies below as critical to our business
operations and the understanding of our financial results.

Revenue Recognition

      The Company recognizes revenue in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 104, Revenue Recognition. The Company
recognizes revenue when persuasive evidence of a customer or distributor
arrangement exists or acceptance occurs, receipt of goods by a customer occurs,
the price is fixed or determinable, and the sales revenues are considered
collectible. Subject to these criteria, the Company generally recognizes revenue
at the time of shipment or delivery to the customer, and when the customer takes
ownership and assumes the risk of loss based on shipping terms.


                                       15
<PAGE>

Income Taxes

      The Company accounts for income taxes under SFAS No. 109, Accounting for
Income Taxes, which requires an asset and liability approach to financial
accounting and reporting from income taxes. Under the liability method, deferred
income tax assets and liabilities are computed annually for temporary
differences between the financial statements and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expenses is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.

Mineral Rights

      The Company follows FASB Staff Position amending SFAS No. 141 and 142
which provides that certain mineral rights are considered tangible assets and
that mineral rights should be accounted for based on their substance. Mineral
rights, granted on two pieces of land located in China, are recorded at cost and
are amortized ratably over the 50-year term of the land leases. This method is
equivalent to the units of production method since the proven and probable
reserves of 780,000 tons exceed the expected production over 50 years
(8,000-12,000 tons of annual practical capacity).

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes.
FIN 48 prescribes detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. Tax positions must meet a more-likely-than-not
recognition threshold at the effective date to be recognized upon adoption of
FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal years
beginning after December 15, 2006 and the provisions of FIN 48 will be applied
to all tax positions under Statement No. 109 upon initial adoption. The
cumulative effect of applying the provisions of this interpretation will be
reported as an adjustment to the opening balance of retained earnings for that
fiscal year. The Company is currently evaluating the potential impact of FIN 48
on its consolidated financial statements.

      In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 ("SAB No. 108") SAB No. 108 addresses the process
and diversity in practice of quantifying financial statement misstatements
resulting in the potential build up of improper amounts on the balance sheet.
The company is required to adopt the provisions of SAB No. 108 in fiscal 2006.
The adoption of SAB No. 108 did not have a material impact on its consolidated
financial statements.

      In September 2006, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 157, Fair Value Measurements ("SFAS No. 157"). SFAS No.
157 establishes a framework for measuring fair value and expands disclosures
abut fair value measurements. The changes to current practice resulting from the
application of SFAS no. 157 relate to the definition of fair value, the methods
used to measure fair value, and the expanded disclosure about fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. The Company
does not believe that the adoption of the provisions of SFAS No. 157 will
materially impact its financial position and results of operations.


                                       16
<PAGE>

ITEM 7: FINANCIAL STATEMENTS

The response to this Item is submitted as a separate section to this report on
pages F-1 through F-13.

ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

      On February 20, 2007, the Company appointed the firm of Morison Cogen LLP
("New Auditor") as the Company's independent auditor and, as of such date,
dismissed the firm of Pender Newkirk & Company LLP ("Former Auditor"), which had
been serving as the Company's independent auditor up to such date. The New
Auditor had been the auditor of UCG and SCHC prior to its engagement by the
Company. The Former Auditor was the Company's auditor prior to the acquisition
of the Company by UCG and SCHC.

      The reports of the Former Auditor on the Company's financial statements
for the fiscal years ended November 30, 2005 and November 30, 2006 did not
contain an adverse opinion, a disclaimer of opinion or any qualifications or
modifications related to uncertainty, limitation of audit scope or application
of accounting principles, except that report of the Former Auditor on the
Company's financial statements for the fiscal year ended November 30, 2005
expressed "substantial doubt about the Company's ability to continue as a going
concern" and state that "The financial statements do not include any adjustments
that might result from the outcome of this uncertainty". During the fiscal years
ending November 30, 2005 and November 30, 2006 and the period from November 30,
2006 to February 20, 2007, the Company did not have any disagreements (within
the meaning of Instruction 4 of Item 304 of Regulation S-K) with the Former
Auditor as to any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure and there have been no
reportable events (as defined in Item 304 of Regulation S-K).

ITEM 8A: CONTROLS AND PROCEDURES

      The Company's management, under supervision and with the participation of
the principal executive officer and principal financial officer, has evaluated
the effectiveness of controls and procedures related to the Company's reporting
and disclosure obligations as of the end of the period covered by this Annual
Report in Form 10-KSB. Based on that evaluation, the principal executive officer
and the principal financial officer have concluded that the Company's disclosure
controls and procedures are effective.

      There were no changes that occurred during the fiscal quarter ended
December 31, 2006, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

ITEM 8B. OTHER INFORMATION.

      None.


                                       17
<PAGE>

                                    PART III

ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS: COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT

DIRECTORS AND EXECUTIVE OFFICERS

      The following table sets forth information with respect to the current
directors and executive officers of the Company.

Name                  Age         Title
----                  ---         -----
Ming Yang              40         Chairman, Chief Executive Officer and Director
Min Li                 30         Chief Financial Officer
Naihui Miao            38         Secretary and Director

Ming Yang -

      Since July 2000, Ming Yang has served as Chairman of Shouguang City Yuxin
Chemical Company Limited. Since May 2005, Mr. Yang has served as Chairman of
Shouguang City Haoyuan Chemical Company Limited, Shouguang City He Mao Yuan
Bromize Company Limited, and Shouguang City Qing River Real Estate Construction
Company.

Min Li -

      Since January 2006, Min Li has served as Chief Financial Officer for
Shouguang City Haoyuan Chemical Company Limited. From 2004 to 2006, Mr. Li
served as Manager of Financial and Asset Management Department for Shouguang
City Yuxin Chemical Company Limited. From 2000 to 2004, Mr. Li served as Manager
of Accounting Department for the Yang Kou Brach of the China Construction Bank.

Naihui Miao -

      Since January 2006, Naihui Miao has served as Vice President of Shouguang
City Haoyuan Chemical Company Limited. From 2005 to 2006, Mr. Miao served as
Vice President of Shouguang City Yuxin Chemical Company Limited. From 1991 to
2005, Mr. Miao served as a Manager and then Vice President of Shouguang City
Commercial Trading Center Company Limited.

CODE OF ETHICS

      The Company has not yet adopted a code of ethics to apply to its principal
executive officer, principal financial officer, principal accounting officer and
controller, or persons performing similar functions because, until recently, we
have not been an operating company. The Company expects to prepare a Code of
Ethics in the near future.

AUDIT COMMITTEE

      Presently we do not have an Audit Committee. We intend to establish an
Audit Committee and such other committees as may be required when sufficient
members and resources are available, and at such time the Company's Board of
Directors will establish the Audit Committee. The Audit Committee will have a
designated Audit Committee Financial Expert who will be responsible for
reviewing the results and scope of the audit, and other services provided by the
independent auditors, and review and evaluate the system of internal controls.
No final determination has yet been made as to the memberships of these
committees or when we will have sufficient members to establish the committees.


                                       18
<PAGE>

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

The Company's officers, directors and beneficial owners of more than 10% of any
class of its equity securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934 ("Reporting Persons") are required under that
Act to file reports of ownership and changes in beneficial ownership of the
Company's equity securities with the Securities and Exchange Commission. Copies
of those reports must also be furnished to the Company. Based solely on a review
of the copies of reports furnished to the Company pursuant to that Act, the
Company believes that during fiscal year ended December 31, 2006 all filing
requirements applicable to Reporting Persons were complied with, and no Form 5
is required.

ITEM 10: EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

      The following table sets forth information with respect to the
compensation of each of the named executive officers for services provided in
all capacities to the Company and its subsidiaries in the fiscal years ended
December 31, 2006, 2005, and 2004. No other executive officer or former
executive officer received more than $100,000 in compensation in the fiscal
years reported below. For the purposes of this table, warrants are deemed to be
equivalent of stock options.

                           Summary Compensation Table

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
      Name         Year      Salary    Bonus   Stock     Option      Non-Equity       Change in      All Other            Total
       and                    ($)       ($)   Awards     Awards    Incentive Plan   Pension Value   Compensation           ($)
    Principal                                   ($)        ($)      Compensation         and            ($)
    Position                                                            ($)         Nonqualified
                                                                                       Deferred
                                                                                     Compensation
                                                                                       Earnings
                                                                                         ($)
       (a)          (b)       (c)       (d)     (e)        (f)           (g)             (h)            (i)                (j)
------------------------------------------------------------------------------------------------------------------------------------
<S>                <C>    <C>           <C>     <C>    <C>               <C>             <C>            <C>        <C>
     Irwin         2006   $93,750 (2)   N/A     N/A    1561.31 (3)       N/A             N/A            N/A        95,311,31 (2)(3)
  Horowitz (1)     2005   $125,000 (2)                 1561.31 (3)                                                 126,561.31 (2)(3)
                   2004   $125,000 (2)                 561.31 (3)                                                  125,561.31 (2)(3)
------------------------------------------------------------------------------------------------------------------------------------
 Juxiang Yu (4)    2006   $0            N/A     N/A        N/A           N/A             N/A            N/A        $0
                   2005   N/A                                                                                      N/A
                   2004   N/A                                                                                      N/A
------------------------------------------------------------------------------------------------------------------------------------
    Ming Yang      2006   $0            N/A     N/A        N/A           N/A             N/A            N/A        $0
Chairman & Chief   2005   $0                                                                                       $0
Executive Officer  2004   N/A                                                                                      N/A
------------------------------------------------------------------------------------------------------------------------------------
     Min Li,       2006   $4,487        N/A     N/A        N/A           N/A             N/A            N/A        $4,487
 Chief Financial   2005   $4,487                                                                                   $4,487
     Officer       2004   None                                                                                     None
------------------------------------------------------------------------------------------------------------------------------------
  Naihui Miao,     2006   $4,487        N/A     N/A        N/A           N/A             N/A            N/A        $4,487
   Secretary       2005   $4.487                                                                                   $4,487
                   2004   None                                                                                     None
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)   Mr. Horowitz, our former Chairman, Chief Executive Officer and President,
      resigned from all offices he held in, and as a Director of, the Company
      pursuant to the Purchase Agreement.
(2)   Mr. Horowitz's salary for the years 2004, 2005 and 2006 was accrued and
      was waived pursuant to the Purchase Agreement.
(3)   The options granted to Mr. Horowitz were cancelled and rescinded pursuant
      to the Purchase Agreement.
(4)   Ms. Yu resigned from all offices (President and Secretary) she held in,
      and as director of, the Company pursuant to Merger Transaction.


                                       19
<PAGE>

      The following table indicates the total number and value of exercisable
stock options held by the Named Executive Officers during the 2006 fiscal year.

               Outstanding Equity Awards at Fiscal Year-End Table

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                          Option Awards                                                     Stock Awards
------------------------------------------------------------------------------------------------------------------------------------
Name                 Number of      Number of        Equity       Option      Option      Number     Market     Equity      Equity
                    Securities     Securities       incentive    Exercise   Expiration      of       Value    Incentive    Incentive
                    Underlying     Underlying         Plan         Price       Date       Shares       of        Plan        Plan
                    Unexercised    Unexercised       Awards:        ($)                  or Units    Shares    Awards:      Awards:
                      Options        Options        Number of                               of         or       Number      Market
                        (#)            (#)         Securities                              Stock     Units        of       or Payout
                    Exercisable   Unexercisable    Underlying                              That        of      Unearned    Value of
                                                   Unexercised                             Have      Stock     Shares,     Unearned
                                                    Unearned                                Not       That     Units or     Shares,
                                                     Options                              Vested      Have      Other      Units or
                                                       (#)                                  (#)       Not       Rights       Other
                                                                                                     Vested      That       Rights
                                                                                                      ($)      Have Not      That
                                                                                                                Vested     Have Not
                                                                                                                  (#)       Vested
                                                                                                                              ($)
        (a)             (b)            (c)             (d)          (e)         (f)         (g)       (h)         (i)         (j)
------------------------------------------------------------------------------------------------------------------------------------
<S>                  <C>              <C>              <C>          <C>        <C>          <C>        <C>       <C>         <C>
Ming Yang  CEO       None             None             None         None       None         None       None      None        None
------------------------------------------------------------------------------------------------------------------------------------
Min Li  CFO          None             None             None         None       None         None       None      None        None
------------------------------------------------------------------------------------------------------------------------------------
Naihui Miao          None             None             None         None       None         None       None      None        None
Secretary
------------------------------------------------------------------------------------------------------------------------------------
Irwin Horowitz,      156,131 (1)      0                N/A          0.01       (1)          None       None      None        None
Former CEO
------------------------------------------------------------------------------------------------------------------------------------
Juxiang Yu, Former   None             None             None         None       None         None       None      None        None
President
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)   The options granted to Mr. Horowitz were cancelled and rescinded pursuant
      to the Purchase Agreement.

EMPLOYMENT AGREEMENT

      On October 29, 1996, the Company entered into a renewable one year
Employment Agreement with Irwin Horowitz, pursuant to which the Company agreed
to pay Irwin Horowitz a salary of $125,000, together with an annual incentive
bonus equal to a percentage, which ranges from 6% to 18%, of the Company's
pre-tax profits. This Agreement was terminated pursuant to the Purchase
Agreement.

      Currently, the Company has no formal written salary agreement with its
Chief Executive Officer and Chief Financial Officer.

COMPENSATION OF DIRECTORS

      The directors of the Company are not currently compensated, nor were they
during the last fiscal year.


                                       20
<PAGE>

INDEMNIFICATION OF DIRECTORS

      The Company's Certificate of Incorporation eliminates the liability of a
director of the Company for monetary damages for breach of duty as a director,
subject to certain exceptions. In addition, the Certificate of Incorporation
provides for the Company to indemnify, under certain conditions, directors,
officers, employees and agents of the Company against all expenses, liabilities
and losses reasonably incurred by such persons in connection therewith. The
foregoing provisions may reduce the likelihood of derivative litigation against
directors and may discourage or deter stockholders or management from suing
directors for breaches of their duty of care, even though such an action, if
successful, might otherwise benefit the Company and its stockholders.

ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

      The Company has 48,195,340 shares of Common Stock outstanding as of March
22, 2007. The following table sets forth certain information regarding the
beneficial ownership of our Common Stock as of March 22, 2007 by (i) each person
who, to our knowledge, beneficially owns more than 5% of our Common Stock; (ii)
each of our current directors and executive officers; and (iii) all of our
current directors and executive officers as a group:

<TABLE>
<CAPTION>
            Name and Address                                     Number of Shares of Stock              Percentage of
         Of Beneficial Owner (1)                                    Beneficially Owned                    Class (2)
         -----------------------                                    ------------------                    ---------
<S>                                                                    <C>                                  <C>
Ming Yang                                                              5,024,400 (3)                        10.4%
Min Li                                                                       0                                0%
Naihui Miao                                                                  0                                0%
Wenxiang Yu                                                             12,963,053                          26.9%
Shandong Haoyuan Industry Group Ltd.                                     8,249,465                          17.1%
Zhi Yang                                                                 3,349,600                           6.9%
First Capital Limited                                                    2,915,000                           6.0%
China US Bridge Capital Limited                                          2,650,000                           5.4%
Shenzhen Dingyi Investment Company Limited                               2,517,500                           5.2%

Executive Officers and Directors as a Group                            5,024,400 (3)                        10.4%
</TABLE>

----------
(1)   A person is deemed to be the beneficial owner of securities that can be
      acquired by such person within 60 days from the date of this report upon
      the exercise of warrants or options. Each beneficial owner's percentage
      ownership is determined by assuming that options or warrants that are held
      by such person (but not those held by any other person) and which are
      exercisable within 60 days from the date of this report have been
      exercised. The address for each beneficial owner is Chenming Industrial
      Park, Unit - Haoyuan Chemical Company Limited, Shouguang City, Shandong,
      China 262714.

(2)   The percentages listed in the "Percent of Class" column are based upon
      48,195,340 issued and outstanding shares of Common Stock.

(3)   Excludes 8,249,465 shares of our Common Stock beneficially owned by
      Shandong Haoyuan Industry Group Ltd. ("SHIG"), of which Ming Yang, our
      Chairman and Chief Executive Officer, is the controlling shareholder, a
      director and Chairman and Chief Executive Officer of SHIG.


                                       21
<PAGE>

ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      On July 20, 2006, the Company issued a total of 250,000 (on a post-Reverse
Stock Split adjusted basis) shares of its common stock to Horowitz, the
Company's then chief executive officer, an accredited investor. Horowitz
purchased the shares at $0.017 per share, for an aggregate purchase price of
$425,000. Instead of the payment of cash consideration, the purchase price
reduced the Company's preexisting liability to Horowitz. Prior to the
transaction, Horowitz owned approximately 64% of our then outstanding shares
Common Stock. After the transaction, Horowitz owned approximately 81% of our
then outstanding shares of Common Stock. The transaction was exempt from
registration under Section 4(2) of the Securities Act of 1933 and Rule 506
promulgated thereunder and was not underwritten.

      Pursuant to the Stock Transaction, Yu acquired 362,083 (on a post-Reverse
Stock Split adjusted basis) shares of the Company's common stock. After giving
effect to the Stock Transaction, Yu held, on a post-Reverse Stock Split adjusted
basis, a total of 362,083 shares of the 517,262 shares of the Company's common
stock then issued and outstanding, constituting, in the aggregate, 70% of the
then issued and outstanding shares of the Company's common stock. Upon the
completion of the Stock Transaction, Yu became an officer and director of the
Company.

      Pursuant to the Merger Transaction, Yang acquired 5,024,400 shares of the
Company's common stock. After giving effect to the Merger Transaction, Yang held
a total of 5,024,400 shares of the 27,017,262 shares of the Company's common
stock then issued and outstanding, constituting, in the aggregate, 18.6% of the
then issued and outstanding shares of the Company's common stock. Upon the
completion of the Merger Transaction, Yang became an officer and director of the
Company. In addition, Wenxiang Yu held a total of 5,024,400 shares of the
27,017,262 shares of the Company's common stock then issued and outstanding,
constituting, in the aggregate, 18.6% of the then issued and outstanding shares
of the Company's common stock.

      Pursuant to the Share Exchange Transaction, Wenxiang Yu acquired 7,938,653
shares of the Company's common stock. After giving effect to the Share Exchange
Transaction, Wenxiang Yu held a total of 12,962,653 shares of the 43,205,380
shares of the Company's common stock issued and outstanding, constituting, in
the aggregate, 30% of the issued and outstanding shares of the Common Stock.

      During the fiscal year ended December 31, 2005, SCHC, our subsidiary,
advanced to Shanguang Hong Ye Economic Trading Co. Ltd. ("Hong Ye"), a company
organized under the laws of China, of which Ming Yang, our Chairman and Chief
Executive Officer, is the controlling stockholder and an executive officer and
director, approximately $1,913,000, of which approximately $1,409,000 was repaid
by Hong Ye, leaving a balance of $503,787 as of December 31, 2005. During the
fiscal year ended December 31, 2006, SCHC advanced approximately $1,568,000 to
Hong Ye, of which approximately $1,532,000 was repaid, leaving a balance of
$540,081 as of December 31, 2006. On February 27, 2007, Hong Ye repaid the
remaining balance on this loan in full.


                                       22
<PAGE>

ITEM 13: EXHIBITS

(a) Exhibits. The Exhibits are filed as part of, or incorporated by reference
into this report.

Exhibit #                              Description
---------                              -----------

   31.1        Certification pursuant to Section 302 of the Sarbanes-Oxley Act
               of 2002.

   32.1        Certification pursuant to 18 U.S.C. Section 1350, as adopted
               pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES

      For fiscal year 2006 and fiscal year 2005, the aggregate fees billed by
Morison Cogen LLP, our principal independent accounting firm, and Pender Newkirk
& Company LLP, our former principal independent accounting firm, for
professional services were as follows:

Morison Cogen                                        Fiscal Year Ended

                                 December 31, 2006             December 31, 2005

Audit Fees                                 $35,000                       $65,000
Tax Fees                                      None                        None
All Other Fees                                None                        None

Pender Newkirk                                       Fiscal Year Ended

                                 December 31, 2006             December 31, 2005

Audit Fees                                 $42,000                       $32,500
Tax Fees                                      None                        None
All Other Fees                                None                        None

Board of Directors Pre-Approval Process, Policies and Procedures

Our principal auditors have performed their audit procedures in accordance with
pre-approved policies and procedures established by our Board of Directors. Our
principal auditors have informed our Board of Directors of the scope and nature
of each service provided. With respect to the provisions of services other than
audit, review, or attest services, our principal accountants brought such
services to the attention of our Board of Directors prior to commencing such
services.


                                       23
<PAGE>

                                   SIGNATURES

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

                                                   GULF RESOURCES,  INC.


Date: March 23, 2007                               By: /s/ Ming Yang
                                                       -------------------------
                                                   Ming Yang
                                                   Chief Executive Officer

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

Signature                                          Date


/s/ Ming Yang                                      March 23, 2007
----------------------
Ming Yang
Chairman and Chief Executive Officer


/s/ Min Li                                         March 23, 2007
----------------------
Min Li
Chief Financial Officer
(Principal Financial and Accounting Officer)


/s/ Naihui Miao                                    March 23, 2007
----------------------
Naihui Miao
Director and Secretary


                                       24
<PAGE>

                GULF RESOURCES, INC. (formerly DIVERSIFAX, INC.)
                                AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2006 AND 2005

<PAGE>

                GULF RESOURCES, INC. (formerly DIVERSIFAX, INC.)
                                AND SUBSIDIARIES

                                 C O N T E N T S

                                                                           PAGE
                                                                           ----

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                     1


CONSOLIDATED BALANCE SHEETS                                                 2


CONSOLIDATED STATEMENTS OF OPERATIONS                                       3


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                             4


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                             5


CONSOLIDATED STATEMENTS OF CASH FLOWS                                       6


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                7 - 13

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors
Gulf Resources, Inc. (formerly Diversifax, Inc.) and Subsidiaries
Shouguang City, Shandong Province

We have audited the accompanying consolidated balance sheets of Gulf Resources,
Inc. (formerly Diversifax, Inc.) and Subsidiaries as of December 31, 2006 and
2005, and the related consolidated statements of operations, comprehensive
income, stockholders' equity, and cash flows for the year ended December 31,
2006 and for the period May 18, 2005 (date of inception) through December 31,
2005. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Gulf Resources, Inc.
(formerly Diversifax, Inc.) and Subsidiaries as of December 31, 2006 and 2005,
and the results of their operations and their cash flows for the year ended
December 31, 2006 and for the period May 18, 2005 (date of inception) through
December 31, 2005, in conformity with accounting principles generally accepted
in the United States.


/s/ MORISON COGEN LLP

Bala Cynwyd, Pennsylvania
March 2, 2007


                                      -1-
<PAGE>

                GULF RESOURCES, INC. (formerly DIVERSIFAX, INC.)
                                AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2006 AND 2005

<TABLE>
<CAPTION>
                                                                 2006          2005
                                                              ----------    ----------
<S>                                                           <C>           <C>
                                     ASSETS

CURRENT ASSETS
  Cash                                                        $3,725,824    $2,409,781
  Accounts receivable                                          1,187,727       325,193
  Inventories                                                     53,263        89,383
  Due from related party                                         540,081       503,787
  Prepaid land lease                                              11,923           496
  Income tax receivable                                        1,111,154            --
                                                              ----------    ----------
                                                               6,629,972     3,328,640

PROPERTY, PLANT AND EQUIPMENT, Net                             2,673,281     2,220,319

PREPAID LAND LEASE, Net of current portion                       582,231        23,808
                                                              ----------    ----------

TOTAL ASSETS                                                  $9,885,484    $5,572,767
                                                              ==========    ==========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable and accrued expenses                       $6,148,974    $  330,472
  Due to director                                                     --        70,924
  Due to related party                                            15,384        46,322
  Taxes payable                                                  177,087     1,325,863
                                                              ----------    ----------

TOTAL LIABILITIES                                              6,341,445     1,773,581
                                                              ----------    ----------

                              STOCKHOLDERS' EQUITY

COMMON STOCK; $0.001 par value; 70,000,000 shares
  authorized; 27,017,322 and 26,500,000 shares issued and
  outstanding                                                     27,017        26,500

ADDITIONAL PAID-IN CAPITAL                                     1,355,413       419,900

RETAINED EARNINGS - UNAPPROPRIATED                             1,352,648     2,815,396

RETAINED EARNINGS - APPROPRIATED
  Statutory Common Reserve Fund                                  447,450       331,223
  Statutory Public Welfare Fund                                  223,725       165,611

CUMULATIVE TRANSLATION ADJUSTMENT                                137,786        40,556
                                                              ----------    ----------

TOTAL STOCKHOLDERS' EQUITY                                     3,544,039     3,799,186
                                                              ----------    ----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                    $9,885,484    $5,572,767
                                                              ==========    ==========
</TABLE>

                 The accompanying notes are an integral part of
                    these consolidated financial statements.


                                      -2-
<PAGE>

                GULF RESOURCES, INC. (formerly DIVERSIFAX, INC.)
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                        YEAR ENDED DECEMBER 31, 2006 AND
                   THE PERIOD MAY 18, 2005 (DATE OF INCEPTION)
                            THROUGH DECEMBER 31, 2005

                                                        2006             2005
                                                    -----------      -----------

NET SALES                                           $17,825,097      $14,344,296
                                                    -----------      -----------

OPERATING EXPENSES
  Cost of net sales                                  10,481,567        9,095,301
  General and administrative expenses                 5,614,784          304,451
                                                    -----------      -----------
                                                     16,096,351        9,399,752
                                                    -----------      -----------

INCOME FROM OPERATIONS                                1,728,746        4,944,544

OTHER INCOME
  Interest income                                         5,990              446
                                                    -----------      -----------

INCOME BEFORE INCOME TAXES                            1,734,736        4,944,990

INCOME TAXES - current                                  572,463        1,632,760
                                                    -----------      -----------

NET INCOME                                          $ 1,162,273      $ 3,312,230
                                                    ===========      ===========

BASIC AND DILUTED EARNINGS PER SHARE                $      0.04      $      0.12
                                                    ===========      ===========

BASIC AND DILUTED WEIGHTED AVERAGE
  NUMBER OF SHARES                                   27,017,322       26,500,000
                                                    ===========      ===========

                 The accompanying notes are an integral part of
                    these consolidated financial statements.


                                      -3-
<PAGE>

                GULF RESOURCES, INC. (formerly DIVERSIFAX, INC.)
                                AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                        YEAR ENDED DECEMBER 31, 2006 AND
                   THE PERIOD MAY 18, 2005 (DATE OF INCEPTION)
                            THROUGH DECEMBER 31, 2005

                                                         2006            2005
                                                      ----------      ----------

NET INCOME                                            $1,162,273      $3,312,230

OTHER COMPREHENSIVE INCOME
  Foreign currency translation adjustment                 97,230          40,556
                                                      ----------      ----------

COMPREHENSIVE INCOME                                  $1,259,503      $3,352,786
                                                      ==========      ==========

                 The accompanying notes are an integral part of
                    these consolidated financial statements.


                                      -4-
<PAGE>

                GULF RESOURCES, INC. (formerly DIVERSIFAX, INC.)
                                AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                        YEAR ENDED DECEMBER 31, 2006 AND
                   THE PERIOD MAY 18, 2005 (DATE OF INCEPTION)
                            THROUGH DECEMBER 31, 2005

<TABLE>
<CAPTION>
                                                                                                    Statutory
                                                       Number         Common        Additional       Common
                                                      of Shares       Stock      Paid-in Capital  Reserve Fund
                                                     -----------    -----------  ---------------  ------------
<S>                                                   <C>           <C>            <C>             <C>
BALANCE AT MAY 18, 2005 (DATE OF INCEPTION)                   --    $        --    $        --     $        --

Initial capitalization                                26,500,000         26,500        419,900              --

Transfer to reserve funds                                     --             --             --         331,223

Cumulative translation adjustment                             --             --             --              --

Net income for the period ended December 31, 2005             --             --             --              --
                                                     -----------    -----------    -----------     -----------

BALANCE AT DECEMBER 31, 2005                          26,500,000         26,500        419,900         331,223

Issuance of common stock at merger                       517,322            517           (517)             --

Capital contribution                                          --             --        936,030              --

Transfer to reserve funds                                     --             --             --         116,227

Cumulative translation adjustment                             --             --             --              --

Dividend distribution                                         --             --             --              --

Net income for the year ended December 31, 2006               --             --             --              --
                                                     -----------    -----------    -----------     -----------

                                                      27,017,322    $    27,017    $ 1,355,413     $   447,450
                                                     ===========    ===========    ===========     ===========

<CAPTION>
                                                       Statutory     Retained       Cumulative
                                                        Public       Earnings      Translation
                                                     Welfare Fund    (Deficit)      Adjustment        Total
                                                     ------------   -----------    ------------    -----------
<S>                                                  <C>            <C>             <C>            <C>
BALANCE AT MAY 18, 2005 (DATE OF INCEPTION)          $        --    $        --     $        --    $        --

Initial capitalization                                        --             --              --        446,400

Transfer to reserve funds                                165,611       (496,834)             --             --

Cumulative translation adjustment                             --         40,556          40,556

Net income for the period ended December 31, 2005             --      3,312,230              --      3,312,230
                                                     -----------    -----------     -----------    -----------

BALANCE AT DECEMBER 31, 2005                             165,611      2,815,396          40,556      3,799,186

Issuance of common stock at merger                            --             --              --             --

Capital contribution                                          --             --              --        936,030

Transfer to reserve funds                                 58,114       (174,341)             --             --

Cumulative translation adjustment                             --             --          97,230         97,230

Dividend distribution                                         --     (2,450,680)             --     (2,450,680)

Net income for the year ended December 31, 2006               --      1,162,273              --      1,162,273
                                                     -----------    -----------     -----------    -----------

                                                     $   223,725    $ 1,352,648     $   137,786    $ 3,544,039
                                                     ===========    ===========     ===========    ===========
</TABLE>

                 The accompanying notes are an integral part of
                    these consolidated financial statements.


                                      -5-
<PAGE>

                GULF RESOURCES, INC. (formerly DIVERSIFAX, INC.)
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                        YEAR ENDED DECEMBER 31, 2006 AND
                   THE PERIOD MAY 18, 2005 (DATE OF INCEPTION)
                            THROUGH DECEMBER 31, 2005

<TABLE>
<CAPTION>
                                                             2006            2005
                                                         -----------     -----------
<S>                                                      <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                             $ 1,162,273     $ 3,312,230
  Adjustments to reconcile net income
    to net cash provided by operating activities
      Depreciation and amortization                          213,092         108,605
      (Increase) decrease in assets
        Accounts receivable                                 (834,051)       (321,259)
        Inventories                                           38,346         (88,302)
        Prepaid land lease                                  (558,787)        (24,500)
        Income tax receivable                             (1,088,359)             --
      Increase (decrease) in liabilities
        Accounts payable and accrued expenses              5,703,241         326,474
        Taxes payable                                     (1,169,196)      1,309,824
                                                         -----------     -----------

  Net cash provided by operating activities                3,466,559       4,623,072
                                                         -----------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of property, plant and equipment                 (581,665)     (2,301,576)
                                                         -----------     -----------

CASH FLOWS FROM FINANCING ACTIVITIES
  Increase (decrease) in due to/from director                (71,822)         70,066
  Capital contribution                                       936,524         441,000
  Advances from related party                                (65,744)       (451,931)
  Dividends paid                                          (2,473,729)             --
                                                         -----------     -----------

  Net cash provided by (used in) financing activities     (1,674,771)         59,135
                                                         -----------     -----------

EFFECTS OF EXCHANGE RATE CHANGE ON CASH                      105,920          29,150
                                                         -----------     -----------

NET INCREASE  IN CASH                                      1,316,043       2,409,781

CASH - BEGINNING OF PERIOD                                 2,409,781              --
                                                         -----------     -----------

CASH - END OF PERIOD                                     $ 3,725,824     $ 2,409,781
                                                         ===========     ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION
    Cash paid during the period for:

      Income taxes                                       $ 2,580,363     $   735,701
                                                         ===========     ===========
</TABLE>

                 The accompanying notes are an integral part of
                    these consolidated financial statements.


                                      -6-
<PAGE>

                GULF RESOURCES, INC. (formerly DIVERSIFAX, INC.)
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2006 AND 2005

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Upper Class Group Limited was incorporated with limited liability in the British
Virgin Islands on July 28, 2006 and was inactive until October 9, 2006 when
Upper Class Group Limited acquired all the issued and outstanding stock of
Shouguang City Haoyuan Chemical Company Limited ("Haoyuan"). Haoyuan is an
operating company incorporated in Shouguang City, Shangdong Province, the
People's Republic of China (the "PRC") on May 18, 2005. Since the ownership of
Upper Class Group Limited and Haoyuan were the same, the merger was accounted
for as a transaction between entities under common control, whereby Upper Class
Group Limited recognized the assets and liabilities transferred at their
carrying amounts.

On December 12, 2006, Gulf Resources, Inc. (formerly Diversifax, Inc.), a public
"shell" company, acquired Upper Class Group Limited and its wholly-owned
subsidiary, Haoyuan (together "Upper Class"). Under the terms of the agreement,
all stockholders of Upper Class Group Limited received a total amount of
26,500,000 shares of voting common stock of Gulf Resources, Inc. in exchange for
all shares of Upper Class Group Limited common stock held by all stockholders.
Under accounting principles generally accepted in the United States, the share
exchange is considered to be a capital transaction in substance, rather than a
business combination. That is, the share exchange is equivalent to the issuance
of stock by Upper Class Group Limited for the net monetary assets of Gulf
Resources, Inc., accompanied by a recapitalization, and is accounted for as a
change in capital structure. Accordingly, the accounting for the share exchange
will be identical to that resulting from a reverse acquisition, except no
goodwill will be recorded. Under reverse takeover accounting, the post reverse
acquisition comparative historical financial statements of the legal acquirer,
Gulf Resources, Inc., are those of the legal acquiree, Upper Class Group Limited
and Subsidiary, which are considered to be the accounting acquirer. Share and
per share amounts stated have been adjusted to reflect the merger.

Nature of the Business

Gulf Resources, Inc. and Subsidiary (the "Company"), manufactures and trades
bromine and crude salt.

Reporting Currency

The Company's functional currency is Renminibi ("RMB"); however, the reporting
currency is the United States dollar ("USD").

Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the use of estimates based on
management's knowledge and experience. The more significant areas requiring the
use of management estimates and assumptions relate to mineral reserves that are
the basis for future cash flow estimates and units-of-production depreciation
and amortization calculations. Accordingly, actual results could differ from
those estimates.

Foreign Currency Translation

Assets and liabilities of the Company have been translated using the exchange
rate at the balance sheet date. The average exchange rate for the period has
been used to translate revenues and expenses. Translation adjustments are
reported separately and accumulated in a separate component of equity
(cumulative translation adjustment).

Comprehensive Income

The Company follows the Statement of Financial Accounting Standard ("SFAS") No.
130, Reporting Comprehensive Income. Comprehensive income is a more inclusive
financial reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the calculation of net
income.


                                      -7-
<PAGE>

                GULF RESOURCES, INC. (formerly DIVERSIFAX, INC.)
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2006 AND 2005

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         (Continued)

Fair Value of Financial Instruments

The fair value of financial instruments classified as current assets or
liabilities, including cash, receivables, payables and due to director,
approximates carrying value due to the short-term maturity of the instruments.

Concentration of Credit Risk

Certain financial instruments potentially subject the Company to concentrations
of credit risk. These financial instruments consist primarily of cash and
accounts receivable. The Company places its temporary cash investments with high
credit quality financial institutions to limit its credit exposure.
Concentrations of credit risk with respect to accounts receivable are limited
since the Company performs ongoing credit evaluations of its customers'
financial condition and due to the generally short payment terms.

Accounts Receivable

The Company considers accounts receivable to be fully collectible; accordingly,
the Company has not provided for an allowance for doubtful accounts. As amounts
become uncollectible, they will be charged to an allowance or operations in the
period when a determination of uncollectibility is made.

Revenue Recognition

In accordance with Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin ("SAB") No. 104, Revenue Recognition, the Company recognizes revenue
when persuasive evidence of a customer or distributor arrangement exists or
acceptance occurs, receipt of goods by customer occurs, the price is fixed or
determinable, and the sales revenues are considered collectible. Subject to
these criteria, the Company generally recognizes revenue at the time of shipment
or delivery to the customer, and when the customer takes ownership and assumes
risk of loss based on shipping terms.

Asset Retirement Obligation

The Company follows SFAS No. 143, Accounting for Asset Retirement Obligations,
which established a uniform methodology for accounting for estimated reclamation
and abandonment costs. SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period in which the legal
obligation associated with the retirement of the long-lived asset is incurred.
When the liability is initially recorded, the offset is capitalized by
increasing the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. To settle the
liability, the obligation is paid, and to the extent there is a difference
between the liability and the amount of cash paid, a gain or loss upon
settlement is recorded. Currently, there are no reclamation or abandonment
obligations associated with the land being utilized for exploitation.

Recoverability of Long Lived Assets

The Company follows SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. The Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. The Company is not aware of any events or circumstances which
indicate the existence of an impairment which would be material to the Company's
annual financial statements.


                                      -8-
<PAGE>

                GULF RESOURCES, INC. (formerly DIVERSIFAX, INC.)
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2006 AND 2005

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         (Continued)

Mineral Rights

The Company follows FASB Staff Position amending SFAS No. 141 and 142 which
provides that certain mineral rights are considered tangible assets and that
mineral rights should be accounted for based on their substance. Mineral rights
are included in property, plant and equipment.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is provided to write off the cost of property, plant and equipment
over their estimated useful lives using the straight-line method at the
following rates per annum:

      Buildings                                                20 years
      Plant and machinery                                       8 years
      Mineral rights                                           50 years
      Office furniture and equipment                            8 years

The gain or loss arising on the disposal or retirement of an asset is determined
as the difference between the sales proceeds and the carrying amount of the
asset and is recognized in the income statement.

Mineral rights, granted on two pieces of land located in the PRC, are recorded
at cost. Mineral rights are amortized ratably over the 50 year term of the
leases. This method is equivalent to the units of production method since the
proven and probable reserves of 780,000 tons exceed the expected production over
50 years (8,000 - 12,000 tons of annual practical capacity).

Construction in progress represents manufacturing plants under construction.
Construction in progress is stated at cost which includes the cost of
construction and purchase cost of plant and machinery. Construction in progress
for manufacturing plants is transferred to property, plant and equipment on the
commissioning date. Manufacturing plants are considered to be commissioned when
they are capable of producing saleable quality output in commercial quantities
on an ongoing basis.

Prepaid Land Lease

Prepaid land lease is stated at cost and amortized over the period of the lease
on the straight-line basis.

Inventories

Inventories are stated at the lower of cost and net realizable value. Cost which
comprises direct materials and, where applicable, direct labor costs and those
overhead costs that have been incurred in bringing the inventories and work in
progress to their present locations and condition, is calculated using the
first-in, first-out method. Net realizable value is based on estimated selling
prices less estimated selling expenses.

Income Taxes

The Company accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes, which requires an asset and liability approach to financial accounting
and reporting for income taxes. Under the liability method, deferred income tax
assets and liabilities are computed annually for temporary differences between
the financial statements and tax bases of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities.


                                      -9-
<PAGE>

                GULF RESOURCES, INC. (formerly DIVERSIFAX, INC.)
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2006 AND 2005

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         (Continued)

Employee Benefits

The Company participates in employee social security plans, including pension,
medical, housing and other welfare benefits, organized by the government
authorities in accordance with relevant regulations. Except for the above social
security benefits, the Company has no additional commitment to other employee
welfare benefits.

According to the relevant regulations, premium and welfare benefit contributions
are remitted to the social welfare authorities and are calculated based on
percentages of the total salary of employees, subject to a certain ceiling.
Contributions to the plans are charged to the income statement as incurred.

Shipping and Handling Fees and Costs

The Company follows Emerging Issues Task Force ("EITF") No. 00-10, Accounting
for Shipping and Handling Fees and Costs. The Company does not charge its
customers for shipping and handling. The Company classifies shipping and
handling costs as part of the cost of net sales. For the year ended December 31,
2006 and for the period ended December 31, 2005, shipping and handling costs
were $237,662 and $362,465, respectively.

Start-up Costs

Start-up costs are expensed when incurred.

Advertising Costs

Advertising costs are expensed as incurred.

Recently Issued Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes.
FIN 48 prescribes detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. Tax positions must meet a more-likely-than-not
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal years
beginning after December 15, 2006 (our fiscal year 2008) and the provisions of
FIN 48 will be applied to all tax positions under Statement No. 109 upon initial
adoption. The cumulative effect of applying the provisions of this
interpretation will be reported as an adjustment to the opening balance of
retained earnings for that fiscal year. The Company is currently evaluating the
potential impact of FIN 48 on its consolidated financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB No.
108"). SAB No. 108 addresses the process and diversity in practice of
quantifying financial statement misstatements resulting in the potential build
up of improper amounts on the balance sheet. The Company is required to adopt
the provisions of SAB No. 108 in fiscal 2006. The adoption of SAB No. 108 did
not have a material impact on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS
No. 157"). SFAS No. 157 establishes a framework for measuring fair value and
expands disclosures about fair value measurements. The changes to current
practice resulting from the application of this Statement relate to the
definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value measurements. The Statement is effective
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The Company does not believe that the adoption of the
provisions of SFAS No. 157 will materially impact their financial position and
results of operations.


                                      -10-
<PAGE>

                GULF RESOURCES, INC. (formerly DIVERSIFAX, INC.)
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2006 AND 2005

NOTE 2 - INVENTORIES

Inventories consist entirely of raw materials used in the production of bromine.

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

                                                   2006            2005
                                                ----------      ----------

      Buildings                                 $  413,697      $   71,982
      Plant and machinery                        2,068,064       1,622,595
      Mineral rights                               501,326         484,784
      Office furniture and equipment                19,432          18,795
                                                ----------      ----------
                                                 3,002,519       2,198,156
      Less: Accumulated depreciation               329,238         108,605
                                                ----------      ----------
                                                 2,673,281       2,089,551
      Construction in progress                          --         130,768
                                                ----------      ----------

                                                $2,673,281      $2,220,319
                                                ==========      ==========

Depreciation and amortization expense for the year ended December 31, 2006 and
for the period ended December 31, 2005 was $213,092 and $108,605.

NOTE 4 - PREPAID LAND LEASE

The prepaid land lease represents land use rights granted for the usage of three
pieces of land located in the PRC for a term of 50 years. The prepaid lease is
amortized on a straight-line basis over the term of the lease.

NOTE 5 - DUE FROM RELATED COMPANY

Amount represents receivable due from a company whose stockholder and director
is also a stockholder and director of the Company. The amount was repaid in full
to the Company on February 27, 2007.

NOTE 6 - DUE TO DIRECTOR

The amount due is unsecured, interest-free and with no stated repayment terms.

NOTE 7 - DUE TO RELATED PARTY

Amount represents payable due to a company whose stockholder and director is
also a stockholder and director of the Company.


                                      -11-
<PAGE>

                GULF RESOURCES, INC. (formerly DIVERSIFAX, INC.)
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2006 AND 2005

NOTE 8 - RETAINED EARNINGS - APPROPRIATED

In accordance with the relevant PRC regulations and the Company's Articles of
Association, the Company is required to allocate its profit after tax to the
following reserves:

Statutory Common Reserve Funds

The Company is required each year to transfer 10% of the profit after tax as
reported under the PRC statutory financial statements to the statutory common
reserve funds until the balance reaches 50% of the registered share capital.
This reserve can be used to make up any loss incurred or to increase share
capital. Except for the reduction of losses incurred, any other application
should not result in this reserve balance falling below 25% of the registered
capital.

Statutory Public Welfare Funds

The Company is required each year to transfer 5% of the profit after tax as
reported under the PRC statutory financial statements to the statutory public
welfare funds. This reserve is restricted to capital expenditure for employees'
collective welfare facilities that are owned by the Company. The statutory
public welfare funds are not available for distribution to the stockholders
(except on liquidation). Once capital expenditure for staff welfare facilities
has been made, an equivalent amount must be transferred from the statutory
public welfare funds to the discretionary common reserve funds.

NOTE 9 - OPERATING LEASE COMMITMENTS

The Company was obligated under a noncancellable operating lease for rental of
motor vehicles expiring December 31, 2006 for annual minimum lease payments of
approximately $15,000. The lease expired December 31, 2006, with an option to
renew the lease. The lease was not renewed as of December 31, 2006.

The rent expense for the year ended December 31, 2006 and for the period ended
December 31, 2005 was approximately $15,000.

NOTE 10 - INCOME TAXES

As discussed in Note 1, the Company utilizes the asset and liability method of
accounting for income taxes in accordance with SFAS No. 109. The statutory PRC
tax rate of 33% is equivalent to the Company's effective tax rate.

No provision for deferred taxes has been made as there were no material
temporary differences at December 31, 2006 and 2005.

NOTE 11 - MAJOR SUPPLIER

During 2006, the Company purchased 77% of its products from three suppliers. At
December 31, 2006, amounts due to those suppliers included in accounts payable
were $641,232. This concentration makes the Company vulnerable to a near-term
severe impact, should the relationships be terminated.

During 2005, the Company purchased 89% of it products from four suppliers. At
December 31, 2005, amounts due to those suppliers included in accounts payable
were $39,600.


                                      -12-
<PAGE>

                GULF RESOURCES, INC. (formerly DIVERSIFAX, INC.)
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2006 AND 2005

NOTE 12 - CUSTOMER CONCENTRATION

The Company sells a substantial portion of its product to a limited number of
customers. During the year ended December 31, 2006, sales to the Company's four
largest customers, based on net sales made to such customers, aggregated
$16,670,873, or approximately 94% of total net sales, and sales to the Company's
largest customer represented approximately 49% of total net sales. At December
31, 2006, amounts due from these customers were $1,187,727. This concentration
makes the Company vulnerable to a near-term severe impact, should the
relationships be terminated.

For the period ended December 31, 2005, sales to these customers aggregated
$12,660,000, or approximately 89% of total net sales, and sales to the Company's
largest customer represented approximately 37% of total net sales. At December
31, 2005, amounts due from these customers were $325,193.

NOTE 13 - SUBSEQUENT EVENTS

On February 5, 2007, the Company acquired all of the issued and outstanding
stock of Shouguang Yuxin Chemical Industry Co., Limited ("Yuxin"). Under the
terms of the merger agreement, all of the stockholders of Yuxin will receive a
total amount of 16,188,118 shares of voting common stock of Gulf Resources, Inc.
in exchange for all shares of Yuxin's common stock held by all stockholders.
Also, upon completion of the merger, Gulf Resources, Inc. will be obligated to
pay a $2,550,000 dividend to the original stockholders of Yuxin. Since the
ownership of Gulf Resources, Inc. and Yuxin are substantially the same, the
merger will be accounted for as a transaction between entities under common
control, whereby Gulf Resources, Inc. will recognize the assets and liabilities
of Yuxin transferred at their carrying amounts.

As of December 31, 2006, the Company accrued $5,344,395 of consulting expense.
In March 2007, the Company granted 4,413,450 shares of its common stock as
payment for this accrued consulting liability.


                                      -13-
</TEXT>
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