Unassociated Document

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-QSB

ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2007

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to ________________

Commission file number 000-20936

GULF RESOURCES, INC.

(Exact name of small business as specified in its charter)

Delaware	13-3637458
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

Chenming Industrial Park, Unit – Haoyuan Chemical Company Limited,
Shouguang City, Shandong, China 262714

(Address of principal executive offices)

(310)470-2886

(Issuer’s telephone number, including area code)

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 49,834,421 shares of Common Stock, $.001 per share, as of November 7, 2007.

Transitional Small Business Disclosure Format (check one): Yes o No ý

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

GULF RESOURCES, INC.

AND SUBSIDIARIES

C O N T E N T S

						PAGE

CONSOLIDATED BALANCE SHEETS						2


CONSOLIDATED STATEMENTS OF OPERATIONS						3


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME						4


CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY						5


CONSOLIDATED STATEMENTS OF CASH FLOWS						6-7


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS						8-15

GULF RESOURCES, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2007 AND DECEMBER 31, 2006

	September 30,		December 31,
	2007		2006
	(Unaudited)		(Audited)
ASSETS
CURRENT ASSETS
Cash	$	11,367,729	$	5,692,608
Accounts receivable, net of allowance of $ -		3,993,770		1,403,564
Inventories		363,748		470,615
Prepaid expenses		384,619		—
Prepayment and deposit		355,288		—
Due from related party		—		555,464
Prepaid land lease		12,940		12,436
Income tax receivable		296,488		1,111,154
		16,774,582		9,245,841

PROPERTY, PLANT AND EQUIPMENT, Net		15,908,392		4,462,407

DUE FROM RELATED PARTY		—		641,000

PREPAID LAND LEASE, Net of current portion		620,688		605,820
TOTAL ASSETS	$	33,303,662	$	14,955,068

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable and accrued expenses		2,934,064		6,225,818
Loan payable		6,003,000		—
Due to related party		32,230		15,384
Taxes payable		1,273,740		481,405
TOTAL LIABILITIES		10,243,034		6,722,607

STOCKHOLDERS' EQUITY

COMMON STOCK; $0.001 par value; 70,000,000 shares authorized; 49,834,421 and 43,205,440 shares issued and outstanding		49,834		43,205

ADDITIONAL PAID-IN CAPITAL		11,827,562		2,668,817

RETAINED EARNINGS - UNAPPROPRIATED		8,399,687		3,535,252

RETAINED EARNINGS - APPROPRIATED
Statutory Common Reserve Fund		1,616,796		1,077,864
Statutory Public Welfare Fund		—		538,932

CUMULATIVE TRANSLATION ADJUSTMENT		1,166,749		368,391

TOTAL STOCKHOLDERS' EQUITY		23,060,628		8,232,461
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	33,303,662	$	14,955,068

See accompanying notes to consolidated financial statements.

- 2 -

GULF RESOURCES, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2007			2006		2007			2006
REVENUE
Net sales	$	16,276,184		$	9,054,281	$	38,470,184		$	24,373,912
Maintenance service income		142,427			—		401,705			—
		16,418,611			9,054,281		38,871,889			24,373,912

OPERATING EXPENSES
Cost of net revenue		9,558,866			6,066,498		22,854,530			15,898,168
Research and development costs		143,269			—		143,269			—
General and administrative expenses		530,486			81,358		1,059,683			293,441
		10,232,621			6,147,856		24,057,482			16,191,609

INCOME FROM OPERATIONS		6,185,990			2,906,425		14,814,407			8,182,303

OTHER INCOME (EXPENSES)
Interest expense		(49,516	)		—		(73,598	)		—
Interest income		10,974			673		26,184			1,214

INCOME BEFORE INCOME TAXES		6,147,448			2,907,098		14,766,993			8,183,517

INCOME TAXES - current		2,201,107			974,550		5,162,958			2,738,330

NET INCOME	$	3,946,341		$	1,932,548	$	9,604,035		$	5,445,187

BASIC AND DILUTED EARNINGS PER SHARE	$	0.08		$	0.04	$	0.20		$	0.13

BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES		49,834,421		____43,205,440		____47,842,071			____43,205,440

See accompanying notes to consolidated financial statements.

- 3 -

GULF RESOURCES, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
NET INCOME	$	3,946,341	$	1,932,548	$	9,604,035	$	5,445,187

OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustment		310,528		168,964		798,358		265,030

COMPREHENSIVE INCOME	$	4,256,869	$	2,101,512	$	10,402,393	$	5,710,217

See accompanying notes to consolidated financial statements.

- 4 -

GULF RESOURCES, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2007

	Number of Shares		Common Stock		Additional Paid-in Capital		Statutory Common Reserve Fund		Statutory Public Welfare Fund			Retained Earnings			Cumulative Translation Adjustment		Total
BALANCE AT DECEMBER 31, 2006 (AUDITED)		43,205,440	$	43,205	$	2,668,817	$	1,077,864	$	538,932		$	3,535,252		$	368,391	$	8,232,461

Common stock issues as payment for accrued expenses		4,989,900		4,990		5,339,405		—		—			—			—		5,344,395

Common stock issuance for prepaid expenses		450,000		450		892,050		—		—			—			—		892,500

Common stock issuance for acquiring assets		779,286		779		1,986,400		—		—			—			—		1,987,179

Common stock issuance for acquiring assets		409,795		410		940,890		—		—			—			—		941,300

Transfer from Statutory Welfare Fund		—		—		—		538,932		(538,932	)		—			—		—

Cumulative translation adjustment		—		—		—		—		—			—			798,358		798,358

Dividend distribution		—		—		—		—		—			(4,739,600	)		—		(4,739,600	)

Net income for the nine months ended September 30, 2007		—		—		—		—		—			9,604,035			—		9,604,035

BALANCE AT SEPTEMBER 30, 2007 (UNAUDITED)		49,834,421	$	49,834	$	11,827,562	$	1,616,796	$	—		$	8,399,687		$	1,166,749	$	23,060,628

See accompanying notes to consolidated financial statements.

- 5 -

GULF RESOURCES, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

(UNAUDITED)

	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	9,604,035		$	5,445,187
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of prepaid expenses by shares issued for consulting fee		507,881			—
Depreciation and amortization		753,757			205,523
(Increase) decrease in assets
Accounts receivable		(2,480,862	)		322,645
Inventories		123,351			335,941
Prepaid expense		—			33,432
Prepayment and Deposit		(347,938	)		—
Income tax receivable		841,949			(322,501	)
Increase (decrease) in liabilities
Accounts payable and accrued expenses		2,041,189			50,720
Taxes payable		771,993			(30,851	)

Net cash provided by operating activities		11,815,355			6,040,096

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment		(8,803,161	)		(21,981	)

CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in due to/from director		—			(62,490	)
Capital contribution		50,000			882,359
Advances from related party		1,235,790			(1,268,547	)
Proceeds from third party loan		5,878,800			—
Dividends paid		(4,739,600	)		(5,649,096	)

Net cash provided from (used in) financing activities		2,424,990			(6,097,774	)

EFFECTS OF EXCHANGE RATE CHANGE ON CASH		237,937			115,179

NET INCREASE IN CASH		5,675,121			35,520

CASH - BEGINNING OF PERIOD		5,692,608			5,542,388

CASH - END OF PERIOD	$	11,367,729		$	5,577,908

See accompanying notes to consolidated financial statements.

- 6 -

GULF RESOURCES, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

(UNAUDITED)

	2007		2006
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:

Income taxes	$	3,895,301	$	3,011,544

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES

Issuance of common stock as payment for accrued expenses	$	5,344,395	$	—

Issuance of common stock for prepaid expenses	$	892,500	$	—

Issuance of common stock for acquiring assets	$	2,928,479	$	—

See accompanying notes to consolidated financial statements.

- 7 -

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

NOTE 1 –

NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated financial statements have been prepared by Gulf Resources, Inc. and Subsidiaries (collectively, the “Company”). These statements include all adjustments (consisting only of their normal recurring adjustments) which management believes necessary for a fair presentation of the statements and have been prepared on a consistent basis using the accounting policies described in the Form 10-KSB for the year ended December 31, 2006 (“2006 Form 10-KSB”). Certain financial information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company firmly believes that the accompanying disclosures are adequate to make the information presented not misleading. The Notes to Financial Statements included in the 2006 Form 10-KSB should be read in conjunction with the accompanying interim financial statements. The interim operating results for the three and nine months ended September 30, 2007 may not be indicative of operating results expected for the full year.

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 (“SCHC”). SCHC is an operating company incorporated in Shouguang City, Shandong Province, the People’s Republic of China (the “PRC”) on May 18, 2005. Since the ownership of Upper Class Group Limited and SCHC 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, SCHC (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 retroactively adjusted to reflect the merger.

On February 5, 2007, Upper Class Group Limited acquired Shouguang Yuxin Chemical Industry Co., Limited (“SYCI”) incorporated in PRC on October 30, 2000. Under the terms of the merger agreement, all stockholders of SYCI received a total amount of 16,188,118 shares of voting common stock of Gulf Resources, Inc. in exchange for all shares of SYCI’s common stock held by all stockholders. Also, upon the completion of the merger, Gulf Resources, Inc. paid a $2,550,000 dividend to the original stockholders of SYCI. Since the ownership of Gulf Resources, Inc. and SYCI are substantially the same, the merger was accounted for as a transaction between entities under common control, whereby Gulf Resources, Inc. recognized the assets and liabilities of the Company transferred at their carrying amounts. Share and per share amounts stated have been retroactively adjusted to reflect the merger.

Basis of Consolidation

The unaudited consolidated financial statements include the accounts of Gulf Resources, Inc. and its wholly-owned subsidiaries, Upper Class Group Limited, SCHC and SYCI (collectively the “Company”). All material intercompany transactions have been eliminated in consolidation.

The consolidated financial statements have been restated for all periods prior to the merger to include the financial position, results of operations and cash flows of the commonly controlled companies.

- 8 -

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

NOTE 1 –

NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Nature of the Business

Gulf Resources, Inc. and Subsidiaries manufactures and trades bromine and crude salt through its SCHC subsidiary, and manufactures chemical products for use in the oil industry and paper manufacturing industry through its SYCI subsidiary.

Reporting Currency

The Company’s functional currency is Renminbi (“RMB”); however, the reporting currency is the United States dollar (“USD”).

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).

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.

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, 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 adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not require an adjustment to the opening balance of retained earnings as of January 1, 2007.

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 SFAS No. 157 relate to the definition of fair value, the methods used to measure fair value and the expanded disclosures about fair value measurement. SFAS No. 157 is effective for fiscal years 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 statements or footnote disclosures.

- 9 -

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

NOTE 1 –

NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and will become effective for the Company beginning with the first quarter of 2008. The Company has not yet determined the impact of the adoption of SFAS No. 159 on its financial statements and footnote disclosures.

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 three months ended September 30, 2007 and 2006, shipping and handling costs were $107,331 and $154,364, and for the nine months ended September 30, 2007 and 2006, shipping and handling costs were $293,896 and $361,993,

NOTE 2 – INCOME TAX RECEIVABLE

The amount of $296,488 represents income tax receivable in Shouguang City Haoyuan Chemical Company Limited.

NOTE 3 – LOAN PAYABLE

The amount of $6,003,000 represents loan due to a third party, with interest at 3.33% per annual. Outstanding principal and accrued interest are payable till on March 19, 2008, the maturity date.

As of September 30, 2007, the balance of accrued interest of $75,153 is included in accrued expenses.

NOTE 4 – TAXES PAYABLE

	September 30, 2007

Income tax payable	$	669,850
Value added tax payable and others		603,890
Total	$	1,273,740

The amount of $669,850 represents income tax payable in Shouguang Yuxin Chemical Industry Co., Limited.

- 10 -

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

NOTE 5 – 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

Prior to January 1, 2007, the Company was 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. Due to a change in the PRC Company Law, appropriation of profit to the statutory welfare fund is no longer required. Therefore, the Company transferred the balance in the statutory welfare fund to the statutory common reserve fund on January 1, 2007.

NOTE 6 – COMMON STOCK

In March 2007, the Company issued 4,989,900 shares of its common stock as payment for $5,344,395 of accrued consulting expenses.

In March 2007, the Company issued 450,000 shares of its common stock, valued at $892,500 (fair value), for two consulting contracts, one that expires on December 31, 2007 and one that expires in March 2008. These issuances were recorded in prepaid expenses on the balance sheet and expensed over the terms of the contracts.

In April 2007, the Company issued 779,286 shares of its common stock, valued at $1,987,179 (fair value), to acquire assets owned by Mr. Wenbo Yu, (Note 10).

In June 2007, the Company issued 409,795 shares of its common stock, valued at $941,300 (fair value), to acquire assets owned by Mr. Donghua Yang, (Note 10).

NOTE 7 – DIVIDEND DISTRIBUTION

On January 31, 2007, SYCI distributed a dividend to two stockholders in the amount of $2,189,600.

On February 5, 2007, in conjunction with the merger of SYCI, Gulf Resources, Inc. paid a $2,550,000 dividend to the original stockholders of SYCI.

NOTE 8 – INCOME TAXES

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 September 30, 2007 and 2006.

- 11 -

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

NOTE 9 – BUSINESS SEGMENTS

The Company follows SFAS No. 131, Disclosures about Segments of and Enterprise and Related Information, which requires the Company to provide certain information about their operating segments. The Company has two reportable segments: bromine and crude salt and chemical products.

	Bromine
	and Crude		Chemical		Segment					Consolidated
	Salt		Products		Total		Corporate			Total
Three Months Ended
September 30, 2007
Net revenue	$	10,875,675	$	5,542,936	$	16,418,611	$	—		$	16,418,611
Income (loss) from operations		4,629,467		1,943,911		6,573,378		(387,388	)		6,185,990
Total assets		24,782,174		8,086,869		32,869,043		434,619			33,303,662
Depreciation and amortization		379,931		47,582		427,513		—			427,513

Three Months Ended
September 30, 2006
Net revenue	$	4,686,488	$	4,367,793	$	9,054,281	$	—		$	9,054,281
Income from operations		1,906,794		999,631		2,906,425		—			2,906,425
Total assets		6,733,552		5,008,073		11,741,625		—			11,741,625
Depreciation and amortization		53,095		15,666		68,760		—			68,760

	Bromine
	and Crude		Chemical		Segment					Consolidated
	Salt		Products		Total		Corporate			Total
Nine Months Ended
September 30, 2007
Net revenue	$	23,880,542	$	14,991,347	$	38,871,889	$	—		$	38,871,889
Income (loss) from operations		10,128,452		5,398,816		15,527,268		(712,861	)		14,814,407
Total assets		24,782,174		8,086,869		32,869,043		434,619			33,303,662
Depreciation and amortization		613,015		140,742		753,757		—			753,757

Nine Months Ended
September 30, 2006
Net revenue	$	12,760,106	$	11,613,806	$	24,373,912	$	—		$	24,373,912
Income from operations		5,046,017		3,136,286		8,182,303		—			8,182,303
Total assets		6,733,552		5,008,073		11,741,625		—			11,741,625
Depreciation and amortization		158,373		47,151		205,523		—			205,523

- 12 -

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

NOTE 9 – BUSINESS SEGMENTS (Continued)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Reconciliations	2007			2006			2007			2006
Total segment operating income	$	6,573,378		$	2,906,425		$	15,527,268		$	8,182,303
Corporate overhead expenses		(387,388	)		—			(712,861	)		—
Other income (expense)		(38,542	)		673			(47,414	)		1,214
Income tax expense		(2,201,107	)		(974,550	)		(5,162,958	)		(2,738,330	)

Total consolidated net income	$	3,946,341		$	1,932,548		$	9,604,035		$	5,445,187

NOTE 10 – ASSETS ACQUISITIONS

On April 7, 2007, the Company acquired certain assets from Mr. Wenbo Yu located in the Shougang City Qinshuibo Area (the “Qinshuibo Assets”) in exchange for 779,286 shares of the Company’s common stock valued at $1,987,179 and $3,076,923 in cash.

The Qinshuibo Assets include a 50 year mineral rights and land lease covering 1,846 acres, or 7.5 square kilometers of real property, with proven and probable reserves of 223,000 tons of bromine being serviced by 575 wells, as well as the related production facility, the wells, the pipelines, other production equipment, and the buildings located on the property.

On June 8, 2007, the Company acquired certain assets from Mr. Donghua Yang located in the Dong Ying City Liu Hu Area (the “Liu Hu Assets”) in exchange for 409,795 shares of the Company’s common stock valued at $941,300 and $4,837,233 in cash and an interest-free promissory note in the aggregate principal amount of $889,005, with a maturity date of July 8, 2007. The promissory note was fully paid in June 2007.

The Liu Hu Assets include a 50-year mineral rights and land lease covering 2,317.85 acres of real property, with annual production of 3,700 tons of bromine being serviced by 405 wells. The assets acquired include the 405 wells and the related production facility, the wells, the pipelines, other production equipment, and the buildings located on the property.

NOTE 11 – MAJOR SUPPLIER

During the nine months ended September 30, 2007, the Company purchased 48% of its raw material from two suppliers. At September 30, 2007, amounts due to those suppliers included in accounts payable were approximately $1,513,000. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.

NOTE 12 – CUSTOMER CONCENTRATION

The Company sells a substantial portion of its product to a limited number of customers. During the nine months ended September 30, 2007, sales to the Company’s three largest customers, based on net revenue made to such customers, aggregated $13,897,666, or approximately 36% of total net revenue. At September 30, 2007, amounts due from these customers were approximately $2,663,000. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.

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GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

NOTE 13 – FIXED PRICE STANDBY EQUITY DISTRIBUTION AGREEMENT

On May 7, 2007, the Company entered into a Fixed Price Standby Equity Distribution Agreement with eight investors (the “Investors”). Pursuant to the Fixed Price Standby Equity Distribution Agreement, the Company may, at its discretion, periodically sell to the Investors up to 30 million shares of the Company’s common stock for a total purchase price of up to $60 million (a per share purchase price of $2.00 per share). The Investors’ obligation to purchase shares of common stock under the Fixed Price Standby Equity Distribution Agreement is subject to certain conditions, including the Company obtaining an effective registration statement for the resale of the common stock sold under the Fixed Price Standby Equity Distribution Agreement. The maximum amount of advance under the Fixed Price Standby Equity Distribution Agreement cannot exceed $10 million. In no event can the number of shares issued to any Investor pursuant to an advance cause any Investor to own more than 9.9% of the shares of common stock outstanding.

The commitment period under the Fixed Price Standby Equity Distribution Agreement expires on the earliest to occur of (i) the date on which the Investors have purchased an aggregate amount of $60 million shares of our common stock under the Fixed Price Standby Equity Distribution Agreement, (ii) the date occurring eighteen months after the Effective Date, or (iii) the date the Agreement is earlier terminated as defined in the agreement.

NOTE 14 – ESTABLISHMENT OF CO-OP RESEARCH AND DEVELOPMENT CENTER

On June 11, 2007, the Company’s wholly-owned subsidiary, Shouguang Yuxin Chemical Industry Company Limited ("SYCI"), and East China University of Science and Technology entered into a 5 year agreement to set up a Co-Op Research and Development Center. The research center is equipped with state of the art chemical engineering instruments for the purpose of pursuing targeted research and development of refined bromide compounds and end products. Professor Ji of East China University is the Center’s Manager. He will provide his expertise in chemical applications and medicine engineering. SYCI will make payment of $500,000 due each year until the agreement expires on June 14, 2012. The first annual payment was made in August 2007. The payment is reported as a prepayment expense and is amortized monthly as research and development costs.

NOTE 15 – SUBSEQUENT EVENTS

Forward Stock Split

On October 19, 2007, the board of directors recommended and the holders of a majority of the outstanding Common Stock voted in favor of resolutions in connection with the following actions:

Amending the Company's Certificate of Incorporation, as amended, (i) to effect a forward stock split of the issued and outstanding shares of the Company's Common Stock on the basis of two (2) post-split shares of Common Stock for every one (1) pre-split share of Common Stock (the "Forward Stock Split") and (ii) to increase the total number of authorized shares of Common Stock from 70,000,000 to 400,000,000 (the "Authorized Shares Increase").

The decision to effect the forward stock split and increase the authorized shares of common stock was approved by the Board of Directors and shareholders owning a majority of the outstanding shares of the Company's Common Stock in order to provide greater availability of common stock in the public marketplace, to help improve future liquidity and further diversify the Company's shareholder base.

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GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(UNAUDITED)

NOTE 15 – SUBSEQUENT EVENTS (CONTINUED)

The accompanying unaudited consolidated financial statements do not reflect the forward stock split since the resolutions will not be deemed effective until 20 days after the Schedule 14C (Information Statement Pursuant to Section 14(c) of the Securities Exchange Act of 1934) is mailed. The Schedule 14C was mailed on November 8, 2007.

Acquisition of Assets in Shouguang City Renjia Area

On October 25, 2007, Shuoguang City Haoyuan Chemical Company Limited (“SCHC”), the Company’s wholly-owned subsidiary, acquired certain assets owned by Mr. Jiancia Wang located in the Shouguang City Renjia Area for approximately $6.4 million in total cash consideration.

The assets include a 50-year mineral rights and land lease covering 2,165 acres through December, 2054, which has been paid in the full. The property has approximately 225,000 metric tons of proven bromine reserves. Additional assets to be conveyed with the purchase include the related production facility, wells, pipelines and other production equipment, in addition to the current buildings and other assets on the property.

Acquisition of Assets in Shouguang City Houxing Area

On October 26, 2007, SCHC acquired certain assets owned by Mr. Xingji Liu located in the Shouguang City Houxing Area for approximately $6.7 million in total cash consideration.

The assets include a 50-year mineral rights and land lease covering 2,310 acres through October, 2054, which has been paid in the full. The property has approximately 240,000 metric tons of proven bromine reserves. Additional assets to be conveyed with the purchase include the related production facility, wells, pipelines and other production equipment, in addition to the current buildings and other assets on the property.

Election of Directors and Grant of Options

On October 30, 2007, the Company announced that the Board of Directors increased the size of the Company's Board of Directors from two to four and elected Richard Khaleel and Min Li as directors of the Company to fill such vacancies created by such increase to the number of members constituting the Board of Directors. In addition, the Board of Directors appointed Mr. Khaleel to the Company's Audit Committee.

Mr. Khaleel will receive three annual grants of options to purchase 25,000 shares of the Company's common stock, at an exercise price of the closing sale price of such stock on each respective grant date, contingent upon his continued service to the Company.

On November 6, 2007, the Company signed an agreement with Mr. Biagio Vignolo to retain him as a member of the Board of Directors, and also appointed him to the Audit Committee.

Mr. Vignolo will receive three annual grants of options to purchase 25,000 shares of the Company's common stock, at an exercise price of the closing sale price of such stock on each respective grant date, contingent upon his continued service to the Company.

Item 2. Management’s Discussion and Analysis or Plan of Operation

Forward Looking Statements

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

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and expectations with respect to our business, strategies, future results and events and financial performance. All statements made in this 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 distributor channels, volume growth, 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 below in “Risk Factors” 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.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

The following discussion of the financial condition and plan of operations of Gulf Resources, Inc. (the “company” or “we”) constitutes management’s review of the factors that affected our financial and operating performance for the nine months ended September 30, 2007 and 2006. This discussion should be read in conjunction with the financial statements and notes thereto contained elsewhere in this report and in our Form 10-KSB, for the year ended December 31, 2006.

Overview

Overall, during the first three quarters of the fiscal year ending December 31, 2007, we have continued to see consistent sales performance of bromine and crude salt, as well as development of our chemical business. We generated significantly higher gross profit margins for the three and nine months ended September 30, 2007, as compared to the same periods in the fiscal year ended December 31, 2006. Our gross profit margins for the three and nine months ended September 30, 2007 were 42% and 41%, respectively, as compared to 33% and 35%, respectively, for the three and nine months ended September 30, 2006. Our net profit margins for the three and nine months ended September 30, 2007 were 24% and 25%, respectively, as compared to 21% and 22%, respectively, for the three and nine months ended September 30, 2006.

In the near-term, we do not anticipate that we will experience pricing pressure or increased overhead costs, including the costs of salaries and benefits as well as the costs of our anticipated capital improvements as we increase our production capabilities. In response to this challenge, while we believe that we will remain among the low cost manufacturers in the industry, we are seeking to reduce the purchase costs of raw materials and other unit costs of production while pursuing opportunities to raise selling prices where it would benefit our financial results. In addition, we are seeking to identify alternative raw material suppliers to the extent there are viable alternatives and to expand our use of alternative raw materials. We have also restructured our operations in an effort to streamline corporate resources and improve internal efficiency, with a particular focus on manufacturing and sales.

From a long-term perspective, we believe that our investment in higher-margin and value-added products and increasing our production capacity will ultimately improve our profitability and competitiveness as increased volume absorbs the higher fixed overhead costs of the investment in applicable equipment and infrastructure.

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Our Business

We are one of the largest manufacturers of Bromine in China, as measured by production output. Elemental bromine is used to manufacture a wide variety of bromine compounds used in industry and agriculture. Bromine is also used to form intermediates in organic synthesis, in which it is somewhat preferable over iodine due to its lower cost.

Our Bromine, which is produced and distributed by Shougang City Haoyuan Chemical Company Limited (“SCHC”) is commonly used in brominated flame retardants, fumigants, water purification compounds, dyes, medicines and disinfectants.

The below list contains ten (10) of the chemical products that are produced by Shougang Yuxin Chemical Industry Company Limited (“SYCI”).

Product name	Application sector
Hydroxyl guar gum	Oil Exploration & Production
Demulsified agent	Oil Exploration & Production
Corrosion inhibitor for acidizing	Oil Exploration & Production
Bactericide	Oil Exploration / Agricultural
Chelant	Paper Making
Iron ion stabilizer	Oil Exploration & Production
Clay stabilizing agent	Oil Exploration & Production
Flocculants agent	Paper Making
Remaining agent	Paper Making
Expanding agent with enhanced gentleness	Paper Making

We conduct all of our operations in China, in close proximity to China’s petrochemical and oil refinery manufacturing base and its rapidly growing market.

GENERAL

As previously reported, on December 12, 2006, as a result of a transaction accounted for as a “reverse acquisition,” we acquired SCHC, a company organized under the laws of China engaged in manufacturing and trading bromine and crude salt. Subsequently, on February 5, 2007, pursuant to a share exchange agreement, we acquired SYCI, a company organized under the laws of China and engaged in the production and sale of chemical products used in oil and gas filed exploration, oil and gas distribution, oil field drilling, wastewater processing, papermaking chemical agents and inorganic chemicals. Since the ownership of the Company and SYCI were substantially the same, the merger was accounted for as a transaction between entities under common control, whereby the Company recognized the assets and liabilities of SYCI transferred at their carrying amounts. Share and per share amounts stated have been retroactively adjusted to reflect the above transactions.

On April 7, 2007, the Company acquired certain assets owned by Mr. Wenbo Yu located in the Shougang City Qinshuibo Area (the “Qinshuibo Assets”) in exchange for 779,286 shares of the Company’s common stock and $3,076,923. The Qinshuibo Assets include a 50 year mineral rights and land lease covering 1,846 acres, or 7.5 square kilometers of real property, with proven and probable reserves of approximately 223,000 metric tons and annual production capacity of approximately 4,500 metric tons of bromine being serviced by 575 wells. The Qinshuibo Assets acquired also include the 575 wells and the related production facility, the pipelines, other production equipment, and the buildings located on the property.

On June 8, 2007, the Company acquired certain assets owned by Mr. Donghua Yang locate in the Dong Ying City Liu Hu Area (the “Liu Hu Assets”) in exchange for 409,795 shares of the Company’s common stock, $4,837,233 in cash and an interest-free promissory note in the aggregate principal amount of $889,005, with a maturity date of July 8, 2007. The promissory note was fully paid in June 2007. The Liu Hu Assets include a 50-year mineral rights and land lease covering 2,317.85 acres, or 9.38 square kilometers of real property, with proven and probable reserves of approximately 235,000 metric tons and annual production capacity of approximately 3,700 metric tons of bromine being serviced by 405 wells. The Liu Hu Assets acquired also include the 405 wells and the related production facility, the pipelines, other production equipment, and the buildings located on the property.

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On October 25, 2007, the Company acquired certain assets owned by Mr. Jiancai Wang in the Shouguang City Renjia Area (the “Renjia Assets”) in exchange for $6,399,147. The Renjia Assets include a 50-year mineral rights and land lease covering 2,165 acres, or 8.76 square kilometers, of real property, with proven and probable reserves of approximately 225,000 metric tons and annual production capacity of approximately 3,700 tons of bromine being serviced by 398 wells. The Renjia Assets acquired also include the 398 wells and the related production facility, the wells, the pipelines, other production equipment, and the buildings located on the property.

On October 26, 2007, SCHC, the Company acquired certain assets owned by Xingji Liu in the Shouguang City Houxing Area (the “Houxing Assets”) in exchange for $6,665,778. The Houxing Assets include a 50-year mineral rights and land lease covering 2,310 acres, or 9.35 square kilometers, of real property, with proven and probable reserves of approximately 240,000 metric tons and annual production capacity of approximately 3,900 tons of bromine being serviced by 432 wells. The Houxing Assets also acquired include the 432 wells and the related production facility, the wells, the pipelines, other production equipment, and the buildings located on the property.

Collectively, as a result of the acquisitions of the Qinshuibo Assets, the Liu Hu Assets, the Renjia Assets and the Houxing Assets combined with the Company’s 50-year mineral rights and land lease covering 10,132 acres or 42 square kilometers of real property, with proven and probable reserves of approximately 776,000 metric tons and annual production capacity of approximately 10,900 metric tons of bromine, the Company has proven and probable reserves of approximately 1,699,000 metric tons and annual production capacity of approximately 26,700 metric tons of bromine.

The acquisition of the Renjia Assets and the Houxing Assets occurred subsequent to the end of the third quarter and, consequently, their results are not reflected in the Company’s financial statements.

Our historical financial statements, the numbers in the table below and the Management’s Discussion and Analysis which follow reflect the accounts of SCHC and SYCI. See Note 1 to our Consolidated Financial Statements.

RESULTS OF OPERATIONS

The following tables present certain consolidated statement of operations information derived from the consolidated statements of operations for the three months and nine months ended September 30, 2007 and 2006.

	Three months ended September 30,2007	Three months ended September 30,2006	Percentage Change
Net Sales	$16,418,611	$9,054,281	+81%

Cost of net sales	$9,558,866	$6,066,498	+58%

Gross profit	$6,859,745	$2,987,783	+130%

Research and development costs	$143,269	----------	---------

General and Administrative expenses	$530,486	$81,358	+552%

Income from operations	$6,185,990	$2,906,425	+113%

Other Income (expenses)	($38,542)	$673	(5827%)

Income before taxes	$6,147,448	$2,907,098	+111%

Income Taxes	$2,201,107	$974,550	+126%

Net Income	$3,946,341	$1,932,548	+104%

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	Nine months ended September 30,2007	Nine months ended September 30,2006	Percentage Change
Net Sales	$38,871,889	$24,373,912	+59%

Cost of net sales	$22,854,530	$15,898,168	+44%

Gross profit	$16,017,359	$8,475,744	+89%

Research and development costs	$143,269	----------	-------

General and Administrative expenses	$1,059,683	$293,441	+261%

Income from operations	$14,814,407	$8,182,303	+81%

Other Income (expenses)	($47,414)	$1,214	(4006%)

Income before taxes	$14,766,993	$8,183,517	+80%

Income Taxes	$5,162,958	$2,738,330	+89%

Net Income	$9,604,035	$5,445,187	+76%

Net Sales

Net Sales Net sales were $16,418,611 in the quarter ended September 30, 2007 (the “Third Quarter 2007”), an increase of $7,364,330 (or approximately 81%) from net sales of $9,054,281 in the quarter ended September 30, 2006 (the “Third Quarter 2006”). The increase in net sales was primarily attributable to continued strong growth in our sales of bromine and crude salt, which increased from $4,686,488 in the Third Quarter of 2006 to $10,875,675 in the Third Quarter 2007, an increase of approximately 132%, and in our sales of chemical products, which increased from $4,367,793 in the Third Quarter 2006 to $5,542,936 in the Third Quarter 2007, an increase of approximately 27%. Such increase was primarily as a result of the completion of 280 new bromine wells in December 2006, the addition of new customers, the purchase of the Qinshuibo Assets and the Liu Hu Assets described above which started to generate revenues in April 2007 and in July 2007, respectively, the completion of equipment upgrade and the development of new chemical products. The demand for bromine within China exceeds the available domestic supply. We expect our sales of bromine to increase in the future quarters, based on the continued demand we have from our customers and others wanting to purchase Bromine from us, as well as a result from our recent acquisitions of the Renjia Assets and the Houxing Assets.

	Net Sales by Segment
	Three Months Ended					Three Months Ended
	September 30, 2007					September 30, 2006
Segments			Percent of total					Percent of total
Bromine and Crude salt	$	10,875,675		66	%	$	4,686,488		52	%
Chemical Products	$	5,542,936		34	%	$	4,367,793		48	%
Total sales	$	16,418,611		100	%	$	9,054,281		100	%

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	Three Months Ended September 30
	2007 vs. 2006
Segments	Percent of Net Sales Increase
Bromine and Crude salt	132%
Chemical Products	27%

SCHC Product sold in metric tons	Three months ended September 30, 2007	Three months ended September 30, 2006	Percentage Change
Bromine	5,662	2,675	+112%

Crude Salt	16,000	No Production

Net sales were $38,871,889 for nine months ended September 30, 2007, an increase of $14,979,977 (or approximately 59%) from net sales of $24,373,912 for nine months end September 30, 2006. The increase in net sales for nine months ended September 30, 2007 was primarily due to a result of the completion of 280 new bromine wells in December 2006, the acquisition of the Qinshuibo Assets and the Liu Hu Assets and new development of chemical products, which led to an increase in our sales of bromine and crude salt from $12,760,106 in the nine-month period ended September 30, 2006 to $23,880,542 in the nine-month period ended September 30, 2007, an increase of approximately 87%, and in our sales of chemical products from $11,613,806 in the nine-month period ended September 30, 2006 to $14,991,347 in the nine-month period ended September 30, 2007, an increase of approximately 29%.

	Net Sales by Segment
	Nine Months Ended					Nine Months Ended
	September 30, 2007					September 30, 2006
Segments			Percent of total					Percent of total
Bromine and Crude salt	$	23,880,542		61	%	$	12,760,106		52	%
Chemical Products	$	14,991,347		39	%	$	11,613,806		48	%
Total sales	$	38,871,889		100	%	$	24,373,912		100	%

	Nine Months Ended September 30
	2007 vs. 2006
Segments	Percent of Net Sales Increase
Bromine and Crude salt	87%
Chemical Products	29%

SCHC Product sold in metric tons	Nine months ended September 30, 2007	Nine months ended September 30, 2006	Percentage Change
Bromine	12,486	7,198	+73%

Crude Salt	44,000	No Production

The portion of our total net sale represented by bromine and crude salt in the three and nine month periods ended September 30, 2007, increased as compared to the comparable periods in 2006. This increase reflects the fact that though sales in both segments grew, the growth of sales of bromine and crude salt was greater than that of our chemical products operations.

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Cost of net sales The reported cost of net sales reflects raw materials consumed, direct salaries and benefits, electricity and other manufacturing costs. Our cost of net sales was $9,558,866 in the Third Quarter 2007, an increase of $3,492,368 from the cost of net sales of $6,066,498 in the Third Quarter 2006. The increase in the cost of net sales (approximately 58%) resulted primarily from the increase in our net sales (approximately 81%). The favorable variance was due to greater production capacity of bromine and tighter control of direct costs and indirect costs such as salaries, transportation and consumables as a result of economies of scale achieved, and improvement of inventory management on the inventory level of chemical products. However, the depreciation and amortization increased 522% due to the addition of property plant and equipment in the Third Quarter 2007 compared to the Third Quarter 2006.

Our cost of net sales was $22,854,530 for nine months ended September 30, 2007, an increase of $6,956,362 (or approximately 44%) from the cost of net sales of $15,898,168 for nine months ended September 30, 2006. The increase in the cost of net sales (approximately 44%) resulted primarily from the increase in our net sales (approximately 59%). The favorable attributes to the comparatively lower increase in costs of net sales compared to the increase of net sales were due to the shifting of transportation costs to the customer and the fact that the cost of direct salaries and benefits remained approximately unchanged despite the increase in net sales because of reductions and reassignments of workforce the percentage increase in the cost of net sales was significantly below the rate of increase in net sales. However, the depreciation and amortization increased 267% due to the addition of property plant and equipment from nine months ended September 30, 2006 to nine months ended September 30, 2007.

Gross Profit Gross profit was 42% of net sales in the Third Quarter 2007, compared to 33%of net sales in the Third Quarter 2006, an improvement of 9%. Gross profit was 41% of net sales for nine months ended September 30, 2007, compared to 35% of net sales for the same period of 2006, an improvement of 6%. These improvements were due to the factors discussed above.

Research and development costs Research and development costs were $143,269 in the Third Quarter 2007. The research and development costs were recorded in the Third Quarter 2007 as a result of SYCI entering into an agreement, on June 11, 2007, with East China University of Science and Technology to jointly establish a Co-Op Research and Development Center.

General and Administrative Expenses General and administrative expenses were $530,486 in the Third Quarter 2007, an increase of $449,128 (or approximately 552%) from the general and administrative expenses of $81,358 during the Third Quarter 2006. This significant increase in general and administrative expenses was primarily due to expenses related to SEC reporting, legal, accounting, auditing, stock transfer agent, and investor relations, which amounted to $387,388.

General and administrative expenses were $1,059,683 for nine months ended September 30, 2007, an increase of $766,242 (or approximately 261%) from the general and administrative expenses of $293,441 compared with same period of 2006. This significant increase in general and administrative expenses was primarily due to expenses related to SEC reporting, legal, accounting, auditing, stock transfer agent, and investor relations, which amounted to $712,861.

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Income from Operations

	Income from operations by Segment
	Three Months Ended						Three Months Ended
	September 30, 2007						September 30, 2006
Segments				Percent of total					Percent of total
Bromine and Crude salt	$	4,629,467			70	%	$	1,906,794		66	%
Chemical Products	$	1,943,911			30	%	$	999,631		34	%
Income from operations before corporate costs	$	6,573,378			100	%	$	2,906,425		100	%
Corporate Costs	$	(387,388	)					-----
Income from operations	$	6,185,990					$	2,906,425

Income from operations was $6,185,990 in the Third Quarter 2007, an increase of $3,279,565 (or approximately 113%) from income from operations of $2,906,425 in the Third Quarter 2006. The increase in income from operations resulted primarily from the increase in net sales and relatively lower increase in cost of net sales as discussed above. The increase in income from operations resulted from increases in sales and production in both the bromine and chemical divisions of the Company. In the Third Quarter 2007, income from operations in the bromine division was $4,629,467, an increase of 143% from income from operations of in this division of $1,906,794 in the Third Quarter 2006. In the Third Quarter 2007, income from operations in the chemical products division was $1,943,911, an increase of 94% from income from operations in this division of $999,631 in the Third Quarter 2006.

	Income from operations by Segment
	Nine Months Ended						Nine Months Ended
	September 30, 2007						September 30, 2006
Segments				Percent of total					Percent of total
Bromine and Crude salt	$	10,128,452			65	%	$	5,046,017		62	%
Chemical Products	$	5,398,816			35	%	$	3,136,286		38	%
Income from operations before corporate costs	$	15,527,268			100	%	$	8,182,303		100	%
Corporate costs	$	(712,861	)					-----
Incomes from operations	$	14,814,407					$	8,182,303

For the nine-month period ended September 30, 2007, income from operations in the bromine division was $10,128,452, an increase of 101% from income from operations of in the bromine division of $5,046,017 for the nine-month period ended September 30, 2006. For the nine-month period ended September 30, 2007, income from operations in the chemical products division was $5,398,816, an increase of 72% from income from operations in the chemical products division of $3,136,286 for the nine-month period ended September 30, 2006. The increase in income from operations resulted primarily from the increase in revenues and relatively lower increase in cost of net sales as discussed above.

Other Income (Expenses) Other income was ($38,542) in the Third Quarter 2007, a decrease of $39,215 (or approximately 5,827%) from the other income of $673 during the Third Quarter 2006. Other income was ($47,414) for the nine-month period ended September 30 2007, a decrease of $48,628 (or approximately 4,006%) from the other income of $1,214 for the nine-month period ended September 30, 2006. These significant decreases in both periods in other income were primarily due to an increase in interest expense as compared to comparable periods in 2006, where there was no interest expense incurred.

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Net Income Net income was $3,946,341 in the Third Quarter 2007, an increase of $2,013,793 (or approximately 104%) from net income of $1,932,548 in the Third Quarter 2006. Net income was $9,604,035 for nine-month period ended September 30, 2007, an increase of $4,158,848 (or approximately 76%) from net income of $5,445,187 for the nine-month period ended September 30, 2006. This increase of net income in both periods resulted primarily from the increase in revenues and relatively lower increase in cost of net sales as discussed above and reflects positive trends in both of the Company’s divisions.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow

	Nine Months Ended September 30
	2007			2006
Net cash provided by (used in) operating activities	$	11,815,355		$	6,040,096
Net cash used in investing activities	$	(8,803,161	)	$	(21,981	)
Net cash provided by (used in) financing activities	$	2,424,990		$	(6,097,774	)
Net cash inflow	$	5,675,121		$	35,520

The company meets its working capital and capital investment requirements mainly by using operating cash flows and short-term loans.

As previously disclosed, the Company will continue to explore synergistic opportunities relating to asset purchases or mergers with other Companies.

Net Cash Used in Operating Activities

As of September 30, 2007, the Company had cash on hand of $11,367,729. During nine month period ended September 30, 2007, we had positive cash flow from operating activities of $11,815,355, primarily attributable to net income of $9,604,035, an increase in accounts receivable of $2,480,862, which was partially offset by an increase in accounts payables of $2,041,189, and non-cash items (amortization of prepaid consulting expenses, depreciation and amortization, prepayment and deposit, income tax receivable, inventories and taxes payable) aggregating a total of $2,650,993.

Net Cash Provided (Used) by Investing Activities and Financing Activities

We used approximately $8,803,161 to acquire additional property, plant and equipment during the nine month periods ended September 30, 2007. These acquisitions were financed out of cash flows from operations and a portion of the proceeds of a short-term loan from a third party of $5,878,800 and advances from related parties, on a net basis, of $1,235,790. The proceeds of our financing activities were also used to pay dividends aggregating $4,739,600 in connection with the acquisition of SYCI.

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 for the next twelve (12) months. 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.

On May 7, 2007, we entered into a Fixed Price Standby Equity Distribution Agreement with eight investors listed therein (each, an “Investor”, collectively, the “Investors”). Pursuant to the Fixed Price Standby Equity Distribution Agreement, the Company may, at its discretion, periodically sell to the Investors up to 30 million shares of the Company’s common stock, par value $.001 per share, for a total purchase price of up to $60 million (a per share purchase price of $2.00 per share). The Investors’ obligation to purchase shares of common stock under the Fixed Price Standby Equity Distribution Agreement is subject to certain conditions, including the Company obtaining an

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effective registration statement for the resale of the common stock sold under the Fixed Price Standby Equity Distribution Agreement. The maximum amount of advance under the Fixed Price Standby Equity Distribution Agreement cannot exceed $10 million. In no event can the number of shares issued to any Investor pursuant to an advance cause any Investor to own more than 9.9% of the shares of common stock outstanding.

The commitment period under the Fixed Price Standby Equity Distribution Agreement commences on the earlier to occur of (i) the date that the Registration Statement is declared effective by the Securities and Exchange Commission (the “Effective Date”), or (ii) such earlier date as we and the Investors may mutually agree in writing. The commitment period under the Fixed Price Standby Equity Distribution Agreement expires on the earliest to occur of (i) the date on which the Investors have purchased an aggregate amount of 5 million shares of our common stock under the Fixed Price Standby Equity Distribution Agreement, (ii) the date occurring eighteen months after the Effective Date, or (iii) the date the Agreement is earlier terminated (in the event that (x) there occurs any stop order or suspension of the effectiveness of the Registration Statement for an aggregate of sixty trading days, other than due to the acts of the Investors, during the commitment period, and (y) we fail materially to comply with any of the covenants contained in the Standby Equity Distribution Agreement and such failure is not cured within thirty days after receipt of written notice from the Investors, provided, however, that this termination provision does not apply to any period commencing upon the filing of a post-effective amendment to the Registration Statement and ending upon the date on which such post effective amendment is declared effective by the SEC). There can be no assurance that the Company will be able to satisfy the conditions precedent to its right to cause the Investors to purchase its securities under the Standby Equity Distribution Agreement or that if it the Investors are unable or unwilling to honor their obligations, that the Company would be able to obtain debt or equity from other parties or that if obtained, that such debt or equity would be on terms acceptable to the Company.

There can be no assurance that the Company will be able to satisfy the conditions precedent to its right to cause the Investors to purchase its securities under the Standby Equity Distribution Agreement or that if the Investors were unable or unwilling to do so, that the Company would be able to obtain debt or equity from other parties or that if obtained, that such debt or equity would be on terms acceptable to the Company.

On October 19, 2007, the Company's Board of Directors and holders of a majority of the Company's then outstanding shares of Common Stock consented in writing, without a meeting, to amend our Certificate to Incorporation to effect a two-for-one-hundred (2-for-1) forward stock split (the "Forward Stock Split") of the outstanding shares of the Company's Common Stock and to increase the total number of authorized shares of Common Stock from 70,000,000 to 400,000,000 (the "Authorized Shares Increase").

OFF-BALANCE SHEET ARRANGEMENTS

We have never entered into any off-balance sheet financing arrangements and have never established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

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.

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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.

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.

Management changed the Company's business focus from the photocopy service industry to the bromine and chemical products industry. Accordingly, a substantial portion of our management’s time will be directed toward the pursuit of identifying and acquiring business opportunities in the chemical 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.

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

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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.

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

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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.

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.

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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.

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.

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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.

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 3. Controls and Procedures

As of the end of the period covered by this report, our management, including our principal executive officer and our principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934). Based upon that evaluation, our principal executive officer and our chief financial officer have concluded that our disclosure controls and procedures are effective in timely alerting them of material information relating to us that is required to be disclosed by us in the reports we file or submit under the Exchange Act. There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

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

On October 19 2007, shareholders holding 26,236,918 shares (approximately 53%) of the shares of our Common Stock outstanding at such time consented in writing, without a meeting, to amend our Certificate of Incorporation to implement the Forward Stock Split and Authorized Shares Increase. On or about November 8, 2007, we mailed to

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our shareholders an information statement on Schedule 14C with respect to such matters and, we expect that the Forward Stock Split and the Authorized Shares Increase will become effective on November 28, 2007.

Item 6. Exhibits The following exhibits are filed as part of this report:
Exhibit No.	Description of Exhibit

31.1 --	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2 --	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1 --	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

32.2 --	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

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SIGNATURES

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

Dated: November 13, 2007


	GULF RESOURCES, INC.

	By:	/s/ Ming Yang
		Chief Executive Officer


	/s/ Min Li
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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EXHIBIT INDEX
Exhibit No.	Description of Exhibit

31.1 --	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2 --	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1 --	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

32.2 --	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).