SECURITIES AND EXCHANGE COMMISSION
Washington , DC 20549

Form 10-QSB

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

For the quarterly period ended June 30, 2007

oTransition 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. YesxNoo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. YesoNox

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 August 1, 2007.

Transitional Small Business Disclosure Format (check one): YesoNox



---

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

C O N T E N T S

|                                                |  |  | PAGE  
|----------------------------------------------- |  |  | ------
|CONSOLIDATED BALANCE SHEET                      |  |  | 3     
|                                                |  |  |       
|CONSOLIDATED STATEMENTS OF OPERATONS            |  |  | 4     
|                                                |  |  |       
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |  |  | 5     
|                                                |  |  |       
|CONSOLIDATED STATEMENT OF STOCHOLDERS EQUITY   |  |  | 6     
|                                                |  |  |       
|CONSOLIDATED STATEMENTS OF CASH FLOWS           |  |  | 7  8 
|                                                |  |  |       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      |  |  | 9  16
|                                                |  |  |       



-2-



---

GULF RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30 , 2007 AND DECEMBER 31, 2006



|                                                                                                                      |  |        | June 30, 2007 |            | December 31, 2006 |  
|--------------------------------------------------------------------------------------------------------------------- |  | ------ | ------------- | ---------- | ----------------- | -
|                                                                                                                      |  |        |               |           
|                                                                                                                      |  |        | (Unaudited)   |            | (Audited)         |  
|ASSETS                                                                                                                |  |        |               |            |                   |  
|CURRENT ASSETS                                                                                                        |  |        |               |            |                   |  
|Cash                                                                                                                  |  |        | $             | 7,203,247  |                   | $
|Accounts receivable                                                                                                   |  |        |               | 1,570,650  |                   |  
|Inventories                                                                                                           |  |        |               | 479,264    |                   |  
|Prepaid expenses                                                                                                      |  |        |               | 623,753    |                   |  
|Due from related party                                                                                                |  |        |               |           |                   |  
|Prepaid land lease                                                                                                    |  |        |               | 12,755     |                   |  
|Income tax receivable                                                                                                 |  |        |               | 723,639    |                   |  
|                                                                                                                      |  |        |               |           
|                                                                                                                      |  |        |               | 10,613,308 |                   |  
|PROPERTY, PLANT AND EQUIPMENT, Net                                                                                    |  |        |               | 16,106,594 |                   |  
|DUE FROM RELATED PARTY                                                                                                |  |        |               |           |                   |  
|PREPAID LAND LEASE, Net of current portion                                                                            |  |        |               | 615,037    |                   |  
|                                                                                                                      |  |        |               |           
|TOTAL ASSETS                                                                                                          |  |        | $             | 27,334,939 |                   | $
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                  |  |        |               |            |                   |  
|                                                                                                                      |  |        |               |            |                   |  
|CURRENT LIABILITIES                                                                                                   |  |        |               |            |                   |  
|Accounts payable and accrued expenses                                                                                 |  |        |               | 1,626,922  |                   |  
|Loan payable                                                                                                          |  |        |               | 5,917,500  |                   |  
|Due to related party                                                                                                  |  |        |               | 32,230     |                   |  
|Taxes payable                                                                                                         |  |        |               | 954,528    |                   |  
|                                                                                                                      |  |        |               |           
|TOTAL LIABILITIES                                                                                                     |  |        |               | 8,531,180  |                   |  
|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 |                   |  
|RETAINED EARNINGS - UNAPPROPRIATED                                                                                    |  |        |               | 4,453,346  |                   |  
|RETAINED EARNINGS - APPROPRIATED                                                                                      |  |        |               |            |                   |  
|Statutory Common Reserve Fund                                                                                         |  |        |               | 1,616,796  |                   |  
|Statutory Public Welfare Fund                                                                                         |  |        |               | 538,932    |                   |  
|CUMULATIVE TRANSLATION ADJUSTMENT                                                                                     |  |        |               | 856,221    |                   |  
|                                                                                                                      |  |        |               |           
|TOTAL STOCKHOLDERS EQUITY                                                                                            |  |        |               | 18,803,759 |                   |  
|                                                                                                                      |  |        |               |           
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                            |  |        | $             | 27,334,939 |                   | $
|                                                                                                                      |  |        |               |           

See
accompanying notes to consolidated financial statements.

-3-



---

GULF
RESOURCES, INC.
AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF OPERATIONS
  (UNAUDITED)

|                                     |  |  | Three Months Ended June 30, |            | Six Months Ended June 30, |  
|------------------------------------ |  |  | --------------------------- | ---------- | ------------------------- | -
|                                     |  |  | 2007                        |            | 2006                      |  
|                                     |  |  |                             |            |                           |  
|REVENUE                              |  |  |                             |            |                           |  
|Net sales                            |  |  | $                           | 12,259,799 |                           | $
|Maintenance service income           |  |  |                             | 130,152    |                           |  
|                                     |  |  |                             |            |                           |  
|                                     |  |  |                             | 12,389,951 |                           |  
|                                     |  |  |                             |            |                           |  
|OPERATING EXPENSES                   |  |  |                             |            |                           |  
|Cost of net revenue                  |  |  |                             | 7,270,962  |                           |  
|General and administrative expenses  |  |  |                             | 347,017    |                           |  
|                                     |  |  |                             |            |                           |  
|                                     |  |  |                             | 7,617,979  |                           |  
|                                     |  |  |                             |            |                           |  
|INCOME FROM OPERATIONS               |  |  |                             | 4,771,972  |                           |  
|OTHER INCOME                         |  |  |                             |            |                           |  
|Interest expense                     |  |  |                             | (24,082    | )                         |  
|Interest income                      |  |  |                             | 8,368      |                           |  
|                                     |  |  |                             |            |                           |  
|INCOME BEFORE INCOME TAXES           |  |  |                             | 4,756,258  |                           |  
|INCOME TAXES - current               |  |  |                             | 1,655,377  |                           |  
|                                     |  |  |                             |            |                           |  
|NET INCOME                           |  |  | $                           | 3,100,881  |                           | $
|                                     |  |  |                             |            |                           |  
|BASIC AND DILUTED EARNINGS PER SHARE |  |  | $                           | 0.06       |                           | $
|                                     |  |  |                             |            |                           |  
|BASIC AND DILUTED WEIGHTED AVERAGE   |  |  |                             |            |                           |  
|NUMBER OF SHARES                     |  |  |                             | 49,476,819 |                           |  
|                                     |  |  |                             |            |                           |  

See
accompanying notes to consolidated financial statements.

-4-



---

GULF
RESOURCES, INC.
AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
  (UNAUDITED)

|                                        |  |  | Three Months Ended June 30, |           | Six Months Ended June 30, |  
|--------------------------------------- |  |  | --------------------------- | --------- | ------------------------- | -
|                                        |  |  | 2007                        |           | 2006                      |  
|                                        |  |  |                             |           |                           |  
|NET INCOME                              |  |  | $                           | 3,100,881 |                           | $
|                                        |  |  |                             |           |                           |  
|OTHER COMPREHENSIVE INCOME              |  |  |                             |           |                           |  
|Foreign currency translation adjustment |  |  |                             | 420,584   |                           |  
|                                        |  |  |                             |           |                           |  
|                                        |  |  |                             |           |                           |  
|COMPREHENSIVE INCOME                    |  |  | $                           | 3,521,465 |                           | $
|                                        |  |  |                             |           |                           |  

See
accompanying notes to consolidated financial statements.

-5-



---

GULF
RESOURCES, INC.
AND SUBSIDIARIES
  CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
  SIX MONTHS ENDED JUNE 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  |       | $
|                                                    |  |  |                  |            |              |   |                            |  |                               |            |                               |   |                   |  |                                   |          |       |  
|Common stock issues as payment for accrued expenses |  |  |                  | 4,989,900  |              |   | 4,990                      |  |                               | 5,339,405  |                               |   |                  |  |                                   |         |       |  
|                                                    |  |  |                  |            |              |   |                            |  |                               |            |                               |   |                   |  |                                   |          |       |  
|Common stock issuance for prepaid expenses          |  |  |                  | 450,000    |              |   | 450                        |  |                               | 892,050    |                               |   |                  |  |                                   |         |       |  
|                                                    |  |  |                  |            |              |   |                            |  |                               |            |                               |   |                   |  |                                   |          |       |  
|Common stock issuance for acquiring assets          |  |  |                  | 779,286    |              |   | 779                        |  |                               | 1,986,400  |                               |   |                  |  |                                   |         |       |  
|                                                    |  |  |                  |            |              |   |                            |  |                               |            |                               |   |                   |  |                                   |          |       |  
|Common stock issuance for acquiring assets          |  |  |                  | 409795     |              |   | 410                        |  |                               | 940,890    |                               |   |                  |  |                                   |         |       |  
|                                                    |  |  |                  |            |              |   |                            |  |                               |            |                               |   |                   |  |                                   |          |       |  
|Transfer from Statutory Welfare Fund                |  |  |                  |           |              |   |                           |  |                               |           |                               |   | 538,932           |  |                                   | (538,932 | )     |  
|                                                    |  |  |                  |            |              |   |                            |  |                               |            |                               |   |                   |  |                                   |          |       |  
|Cumulative translation adjustment                   |  |  |                  |           |              |   |                           |  |                               |           |                               |   |                  |  |                                   |         |       |  
|                                                    |  |  |                  |            |              |   |                            |  |                               |            |                               |   |                   |  |                                   |          |       |  
|Dividend distribution                               |  |  |                  |           |              |   |                           |  |                               |           |                               |   |                  |  |                                   |         |       |  
|                                                    |  |  |                  |            |              |   |                            |  |                               |            |                               |   |                   |  |                                   |          |       |  
|Net income for the six months ended June 30, 2007   |  |  |                  |           |              |   |                           |  |                               |           |                               |   |                  |  |                                   |         |       |  
|                                                    |  |  |                  |            |              |   |                            |  |                               |            |                               |   |                   |  |                                   |         
|                                                    |  |  |                  |            |              |   |                            | 
|                                                    |  |  |                  |            |              |   |                            |  |                               |            |                               |   |                   |  |                                   |          |       |  
|BALANCE AT JUNE 30, 2007 (UNAUDITED)                |  |  |                  | 49,834,421 |              | $ | 49,834                     |  | $                             | 11,827,562 |                               | $ | 1,616,796         |  | $                                 |         |       | $
|                                                    |  |  |                  |            |              |   |                            |  |                               |            |                               |   |                   |  |                                   |         

See
accompanying notes to consolidated financial statements.

-6-



---

GULF
RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)

|                                                      |  |  | 2007 |            | 2006 |  
|----------------------------------------------------- |  |  | ---- | ---------- | ---- | -
|                                                      |  |  |      |           
|CASH FLOWS FROM OPERATING ACTIVITIES                  |  |  |      |            |      |  
|Net income                                            |  |  | $    | 5,657,694  |      | $
|Adjustments to reconcile net income                   |  |  |      |            |      |  
|to net cash provided by operating activities          |  |  |      |            |      |  
|Depreciation and amortization                         |  |  |      | 326,244    |      |  
|(Increase) decrease in assets                         |  |  |      |            |      |  
|Accounts receivable                                   |  |  |      | (129,174   | )    |  
|Inventories                                           |  |  |      | 3,419      |      |  
|                                                      |  |  |      |            |      |  
|Prepaid expense                                       |  |  |      | 268,747    |      |  
|                                                      |  |  |      |            |      |  
|Income tax receivable                                 |  |  |      | 410,453    |      |  
|Increase (decrease) in liabilities                    |  |  |      |            |      |  
|Accounts payable and accrued expenses                 |  |  |      | (2,119,944 | )    |  
|Taxes payable                                         |  |  |      | 454,460    |      |  
|                                                      |  |  |      |           
|Net cash provided by operating activities             |  |  |      | 4,871,899  |      |  
|                                                      |  |  |      |           
|CASH FLOWS FROM INVESTING ACTIVITIES                  |  |  |      |            |      |  
|Purchase of property, plant and equipment             |  |  |      | (5,834,194 | )    |  
|                                                      |  |  |      |           
|CASH FLOWS FROM FINANCING ACTIVITIES                  |  |  |      |            |      |  
|Decrease in due to/from director                      |  |  |      |           |      |  
|Capital contribution                                  |  |  |      | 50,000     |      |  
|Advances from related party                           |  |  |      | 1,227,222  |      |  
|Loan due to a third party                             |  |  |      | 5,836,950  |      |  
|Dividends paid                                        |  |  |      | (4,739,600 | )    |  
|                                                      |  |  |      |           
|Net cash provided from (used in) financing activities |  |  |      | 2,374,572  |      |  
|                                                      |  |  |      |           
|EFFECTS OF EXCHANGE RATE CHANGE ON CASH               |  |  |      | 98,362     |      |  
|                                                      |  |  |      |           
|NET INCREASE (DECREASE)  IN CASH                      |  |  |      | 1,510,639  |      |  
|CASH - BEGINNING OF PERIOD                            |  |  |      | 5,692,608  |      |  
|                                                      |  |  |      |           
|CASH - END OF PERIOD                                  |  |  | $    | 7,203,247  |      | $
|                                                      |  |  |      |           

See
accompanying notes to consolidated financial statements.

-7-



---

GULF
RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
  SIX MONTHS ENDED JUNE 30, 2007 AND 2006
  (UNAUDITED)

|                                                                             |  |  | 2007 |           | 2006 |  
|---------------------------------------------------------------------------- |  |  | ---- | --------- | ---- | -
|                                                                             |  |  |      |          
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW                                         |  |  |      |           |      |  
|INFORMATION                                                                  |  |  |      |           |      |  
|Cash paid during the period for:                                             |  |  |      |           |      |  
|Income taxes                                                                 |  |  | $    | 1,657,319 |      | $
|                                                                             |  |  |      |          
|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 fixed assets including mineral rights |  |  | $    | 2,928,479 |      | $
|                                                                             |  |  |      |          

See
accompanying notes to consolidated financial statements.

-8-



---

GULF RESOURCES,
    INC.
  AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  JUNE 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 six months ended June 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,  Shangdong 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.

-9-



---

GULF
    RESOURCES, INC.                                                            
  AND
  SUBSIDIARIES                                               
  NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS
  JUNE
  30, 2007
(UNAUDITED)

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

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.

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 Renminibi (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.

-10-



---

GULF
    RESOURCES, INC.                                                            
  AND
  SUBSIDIARIES                                               
  NOTES TO CONSOLIDATED
  FINANCIAL STATEMENTS
  JUNE
  30, 2007
(UNAUDITED)

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

Recently
Issued Accounting Pronouncements - Continued

|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 position or results of operations.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In
February 2007, the FASB issued SFAS No. 159,  The Fair Value Option for Financial Assets
and Financial  Liabilities (SFAS          No. 159).  SFAS No. 159  permits  entities
to choose to measure 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 June 30, 2007 and
    2006,  shipping and handling  costs were  $107,800 and  $107,053,  and for the six months
ended June 30, 2007 and 2006, shipping and handling costs were $186,564 and $207,629,

|NOTE 2 - | INCOME TAX RECEIVABLE
|-------- | ---------------------

The amount of
$723,639 represents income tax receivable in Shouguang City Haoyuan Chemical Company
Limited.

|NOTE 3 - | LOAN PAYABLE
|-------- | ------------

The amount of
$5,917,500  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.

-11-



---

|NOTE 4 - | TAXES PAYABLE
|-------- | -------------

|                                    |  |  |  
|----------------------------------- |  |  | -
|
|Income tax payable                  |  |  | $
|                                    |  |  |  
|Value added tax  payable and others |  |  |  
|                                    |  | 
|Total                               |  |  | $
|                                    |  | 

The amount of
$585,087 represents income tax payable in Shouguang Yuxin Chemical Industry Co., Limited.

|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),  for acquiring the assets from Mr. Wenbo Yu.

In June 2007,
    the Company issued  409,795  shares of its common stock,  valued at $941,300 (fair
value),  for acquiring the assets from Mr. Donghua Yang.

|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.

-12-



---

|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 June
30, 2007 and 2006.

-13-



---

GULF
RESOURCES, INC.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 Salt |            | Chemical Products |   | Segment Total |  | Corporate |            | Consolidated Total |  
|------------------------------------ |  |  | ---------------------- | ---------- | ----------------- | - | ------------- |  | --------- | ---------- | ------------------ | -
|                                     |  |  |                        |            |                   |   |               |  |           |            |                    |  
|Three Months Ended
    June 30, 2007 |  |  |                        |            |                   |   |               |  |           |            |                    |  
|                                     |  |  |                        |            |                   |   |               |  |           |            |                    |  
|Net revenue                          |  |  | $                      | 7,703,140  |                   | $ | 4,686,811     |  | $         | 12,389,951 |                    | $
|Income (loss) from operations        |  |  |                        | 3,257,477  |                   |   | 1,753,629     |  |           | 5,011,106  |                    |  
|Total assets                         |  |  |                        | 20,832,156 |                   |   | 5,836,921     |  |           | 26,669,077 |                    |  
|Depreciation and amortization        |  |  |                        | 162,999    |                   |   | 46,571        |  |           | 209,570    |                    |  
|Three Months Ended                   |  | 
|June 30, 2006                        |  | 
|                                     |  |  |                        |            |                   |   |               |  |           |            |                    |  
|Net revenue                          |  |  | $                      | 4,118,699  |                   | $ | 3,742,479     |  | $         | 7,861,178  |                    | $
|Income from operations               |  |  |                        | 1,556,883  |                   |   | 1,144,921     |  |           | 2,701,804  |                    |  
|Total assets                         |  |  |                        | 4,284,733  |                   |   | 4,194,518     |  |           | 8,479,251  |                    |  
|Depreciation and amortization        |  |  |                        | 65,539     |                   |   | 21,325        |  |           | 86,864     |                    |  
|                                     |  |  |                        |            |                   |   |               |  |           |            |                    |  
|                                     |  |  | Bromine and Crude Salt |            | Chemical Products |   | Segment Total |  | Corporate |            | Consolidated Total |  
|                                     |  |  |                        |            |                   |   |               |  |           |            |                    |  
|Six Months Ended                     |  | 
|June 30, 2007                        |  | 
|                                     |  |  |                        |            |                   |   |               |  |           |            |                    |  
|Net revenue                          |  |  | $                      | 13,004,867 |                   | $ | 9,448,411     |  | $         | 22,453,278 |                    | $
|Income (loss) from operations        |  |  |                        | 5,498,985  |                   |   | 3,454,905     |  |           | 8,953,890  |                    |  
|Total assets                         |  |  |                        | 20,832,156 |                   |   | 5,836,921     |  |           | 26,669,077 |                    |  
|Depreciation and amortization        |  |  |                        | 233,084    |                   |   | 93,160        |  |           | 326,244    |                    |  
|Six Months Ended                     |  | 
|June 30, 2006                        |  | 
|                                     |  |  |                        |            |                   |   |               |  |           |            |                    |  
|Net revenue                          |  |  | $                      | 8,073,618  |                   | $ | 7,246,013     |  | $         | 15,319,631 |                    | $
|Income from operations               |  |  |                        | 3,139,223  |                   |   | 2,136,655     |  |           | 5,275,878  |                    |  
|Total assets                         |  |  |                        | 4,284,733  |                   |   | 4,194,518     |  |           | 8,479,251  |                    |  
|Depreciation and amortization        |  |  |                        | 105,278    |                   |   | 31,485        |  |           | 136,763    |                    |  

-14-



---

|                               |  |  | Three Months Ended
    June 30, |            | Six Months Ended 
    June 30, |  
|------------------------------ |  |  | ------------------------------- | ---------- | ------------------------------ | -
|                               |  |  |                                 |            |                                |  
|Reconciliations                |  |  | 2007                            |            | 2006                           |  
|                               |  |  |                                 |            |                                |  
|Total segment operating income |  |  | $                               | 5,011,106  |                                | $
|Corporate overhead expenses    |  |  |                                 | (239,134   | )                              |  
|Other income (expense)         |  |  |                                 | (15,714    | )                              |  
|Income tax expense             |  |  |                                 | (1,655,377 | )                              |  
|                               |  |  |                                 |            |                                |  
|Total consolidated net income  |  |  | $                               | 3,100,881  |                                | $
|                               |  |  |                                 |            |                                |  

NOTE 10 -
ASSETS ACQUISITIONS

On April 7,
2007, the Company acquired substantially all of the assets from Mr. Wenbo Yu in exchange
for 779,286 newly issued shares of the Companys common stock and $3,051,282.

The assets
include a 50 year mineral rights and land lease covering 1,846 acres, or 7.5 square
kilometers of real property, with approximately proven and probable reserves of 223,000
metric tons and approximately annual ideal production capacity of 4,500 metric 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 substantially all of the assets from Mr. Donghua Yang in
exchange for 409,795 newly issued shares of the Companys common stock and $4,837,233 in
cash and interest-free promissory note in the aggregate principal amount of $889,005,
with a maturity date of July 8, 2007. The Company issued the promissory note, and the
promissory note was fully paid in June 2007.

The Assets
include a 50-year mineral rights and land lease covering 2,317.85 acres, or 9.38 square
kilometers of real property, with approximately proven and probable reserves of 235,000
metric tons and approximately annual ideal production capacity of 3,700 metric 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.

-15-



---

GULF
RESOURCES, INC.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
  (UNAUDITED)

NOTE 11 -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 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 the Company 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 $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.

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

MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

The following discussion of our financial condition and plan of operations constitutes
 managements review of the factors that affected our financial and operating performance for the six months ended June 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 two quarters of fiscal 2007, we have continued to see consistent
 sales performance of bromine and crude salt, as well as development of our chemical business. We continue to generate significantly higher gross profit margins for the three and six months
  ended June 30, 2007, as compared to the same periods in fiscal 2006. Our gross profit margins for the three and six months ended June 30, 2007 was 41% as compared to 36% for the three and
   six months ended June 30, 2006. Our net profit margins for the three and six months ended June 30, 2007 was 25% as compared to 23% for the three and six months ended June 30, 2006.

-16-



---

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 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.

Our Business

We are one of the largest manufacturers 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 is
used in the following applications:

|Fumigants                   
|----------------------------
|Brominated flame retardants 
|Water purification compounds
|Dyes                        
|Medicines                   
|Disinfectants               

Our other
chemical products are as follows:

|Hydroxyl guar gum                       
|----------------------------------------
|Demulsified agent                       
|Corrosion inhibitor for acidizing       
|Bactericide                             
|Chelant                                 
|Iron ion stabilizer                     
|Clay stabilizing agent                  
|Flocculants agent                       
|Remaining agent                         
|Expanding agent with enhanced gentleness

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.

-17-



---

GENERAL

As previously reported, on December 12, 2006, as a result of a transaction accounted for as a reverse acquisition, we acquired Shougang City Haoyuan Chemical Company Limited (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 Shougnag Yuxin Chemical Industry Company Limited (SYCI), a company 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 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 t
he Co
mpany
 tran
sferr
ed at
 their carrying amounts. Share and per share amounts stated have been retroactively adjusted to reflect the merger.

On
April 7, 2007, the Company acquired substantially all of the assets located in the
Shouguang City Qinshuibo Area and owned by Mr. Wenbo Yu. The 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 of
bromine with an ideal annual production capacity of 4,500 metric tons 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, we, acting through SCHC, acquired substantially all of the assets of Mr.
Dong Hua Yang in the Dong Ying City Liu Hu area in exchange for 409,795 newly issued
shares of the Companys common stock and $4,837,233 in cash and 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
assets acquired from Mr. Yang 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 of bromine and annual ideal production
capacity of approximately 3,700 metric 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.

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 six months ended
June 30, 2007 and 2006.

-18-



---

|                                    | Three months
      ended
    June 30,2007 |            | Three months
      ended
    June 30,2006 | Percentage
    Change
|----------------------------------- | ----------------------------------------- | ---------- | ----------------------------------------- | ---------------------
|Revenue                             | $                                         | 12,389,951 |                                           | $                    
|                                    |                                           |            |                                           |                      
|Cost of net revenue                 | $                                         | 7,270,962  |                                           | $                    
|                                    |                                           |            |                                           |                      
|Gross profit                        | $                                         | 5,118,989  |                                           | $                    
|                                    |                                           |            |                                           |                      
|General and Administrative expenses | $                                         | 347,017    |                                           | $                    
|                                    |                                           |            |                                           |                      
|Income from operations              | $                                         | 4,771,972  |                                           | $                    
|                                    |                                           |            |                                           |                      
|Other (expense) revenue             | $                                         | (15,714    | )                                         | $                    
|                                    |                                           |            |                                           |                      
|Income before taxes                 | $                                         | 4,756,258  |                                           | $                    
|                                    |                                           |            |                                           |                      
|Income Taxes                        | $                                         | 1,655,377  |                                           | $                    
|                                    |                                           |            |                                           |                      
|Net Income                          | $                                         | 3,100,881  |                                           | $                    



|                                    | Six months ended June 30,2007 |            | Six months ended June 30,2006 | Percentage Change
|----------------------------------- | ----------------------------- | ---------- | ----------------------------- | -----------------
|Revenue                             | $                             | 22,453,278 |                               | $                
|                                    |                               |            |                               |                  
|Cost of net revenue                 | $                             | 13,295,664 |                               | $                
|                                    |                               |            |                               |                  
|Gross profit                        | $                             | 9,157,614  |                               | $                
|                                    |                               |            |                               |                  
|General and Administrative expenses | $                             | 529,197    |                               | $                
|                                    |                               |            |                               |                  
|Income from operations              | $                             | 8,628,417  |                               | $                
|                                    |                               |            |                               |                  
|Other (expense) revenue             | $                             | (8,872     | )                             | $                
|                                    |                               |            |                               |                  
|Income before taxes                 | $                             | 8,619,545  |                               | $                
|                                    |                               |            |                               |                  
|Income Taxes                        | $                             | 2,961,851  |                               | $                
|                                    |                               |            |                               |                  
|Net Income                          | $                             | 5,657,694  |                               | $                

Revenue Revenues were $12,389,951 in the quarter ended June 30, 2007 (Second Quarter 2007), an increase of $4,528,773 (or
approximately 58%) from revenue of $7,861,178 in the quarter ended June 30, 2006 (Second Quarter 2006). The increase in revenue was
primarily attributable to continued strong growth in our sales of bromine which increased from $ 4,118,699 in the Second Quarter of 2006 to
$7,703,140 in the Second Quarter 2007 primarily as a result of the completion of 280 new bromine wells in December, 2006, three new
customers, and the purchase of assets from Mr. Wenbo Yu described above which started to generate revenues in April 2007. The completion of asset
purchase from Mr. Dong Hua Yang in June will begin operations in July. Below are the quantities of bromine and crude
salt we produced in the Second Quarter 2007 and Second Quarter 2006, and the six months ended June 30, 2007 and 2006. The demand for
bromine within China exceeds the available domestic supply. We expect our sales of bromine to increase future quarters, based on the
continued demand we have from our customers and others wanting to purchase Bromine from us. Second factor contributing to the increase in
sales was the addition of new chemical products and new customers. Sales of chemical products increased from $3,742,479 in the Second
Quarter 2006 to $4,686,811 in the Second Quarter 2007.

|Shouguang City Haoyuan Chemical Company Limited ("SCHC") | Three months ended June 30, 2007 |        | Three months ended June 30, 2006 | Percentage Change
|-------------------------------------------------------- | -------------------------------- | ------ | -------------------------------- | -----------------
|Product sold in metric tons                             
|Bromine                                                  |                                  | 3,956  |                                  |                  
|                                                         |                                  |        |                                  |                  
|Crude Salt                                               |                                  | 26,000 |                                  |                  

|Shouguang City Haoyuan Chemical Company Limited ("SCHC") | Six months ended June 30, 2007 |        | Six months ended June 30, 2006 | Percentage Change
|-------------------------------------------------------- | ------------------------------ | ------ | ------------------------------ | -----------------
|Product sold in metric tons                             
|Bromine                                                  |                                | 6,824  |                                |                  
|                                                         |                                |        |                                |                  
|Crude Salt                                               |                                | 28,000 |                                |                  

-19-




---

3,956 metric tons bromine and 26,000 metric tons of crude salt were sold respectively
during the quarter ended June 30, 2007 at average prices of $1,850 and $13 per metric ton.

SCHC ended the June 30,2007 quarter with approximately 19,100 metric tons of annual bromine production
 capacity and its facility was operating at approximately 70 percent capacity utilization.  In addition, we currently maintain 50-year leaseholds for approximately 14,300 acres of property
  which contain approximately 1,234,000 metric tons of proven and probably bromine reserves. We anticipate completing further acquisitions while making prudent capital investments
   to increase overall production capacity and capacity utilization.

Revenues were $22,453,278 for six months ended June 30, 2007, an increase of $7,133,647 (or approximately 47%) from revenues of $15,319,631 for six months end June 30, 2006. The revenues for six months ended June 30, 2007 were primarily due to a result of the completion of 280 new bromine wells in December, 2006, and new development of chemical products.

Cost of net revenue The reported cost of net revenue reflects raw materials consumed, direct salaries and benefits, electricity and other manufacturing costs. Our cost of net revenue was $7,270,962 in the Second Quarter 2007, an increase of $2,220,939 (or approximately 44%) from the cost of net revenue of $5,050,023 in the Second Quarter 2006.  The increase in the cost of net revenue (approximately 44%) resulted primarily from the increase in our revenue (approximately 58%).  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 stock management on the stock level of chemical products. However, the depreciation increased 212% due to the addition of property plant and equipment in the Second Quarter, 2007 compared to
Second Quarter, 2006.

Our cost of net revenue was $13,295,664 for six months end June 30, 2007, an increase of $3,463,994 (or approximately 35%) from the cost of net revenue of $9,831,670 for six months ended June 30, 2006.  The increase in the cost of net revenue (approximately 35%) resulted primarily from the increase in our revenue (approximately 47%). The favorable attributes to the comparatively lower increase in costs of revenue compared to the increase of revenue 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 revenue because of reductions and reassignments of workforce the percentage increase in the cost of revenue was significantly below the rate of increase in revenue. However, the depreciation increased 145% due to the addition of property plant and equipment from June 30, 2006 to June 30,
2007.

Gross ProfitGross profit was 41% of revenue in the Second Quarter 2007, compared to 36% the
Second Quarter 2006, an improvement of 5%. These improvements were due to a number of factors as discussed above.

General and
Administrative Expenses General and administrative expenses were $347,017 in the Second
Quarter 2007, an increase of $237,666 (or approximately 217%) from the general and
administrative expenses of $109,351 during the Second Quarter 2006. This significant
increase in general and administrative expenses was primarily due to SEC filing, legal,
accounting, auditing, stock transfer agent, and investor relations expenses of $239,135.

General
and administrative expenses were $529,197 for six months ended June 30, 2007, an increase
of $317,114 (or approximately 150%) from the general and administrative expenses of
$212,083 compared with same period of 2006. This significant increase in general and
administrative expenses was primarily due to SEC filing, legal, accounting, auditing,
stock transfer agent, and investor relations expenses of $325,474.

Income from
Operations Income from operations was $4,771,972 in the Second Quarter 2007, an increase
of $2,070,168 (or approximately 77%) from income from operations of $2,701,804 in the

-20-



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Second Quarter 2006. The increase in income from operations resulted primarily from the
increase in revenues and relatively lower increase in cost of net revenue as discussed
above. The increase in income from operations resulted from increases in both the bromine
and chemical divisions of the Company. In the Second Quarter 2007, income from operations
in the bromine division was $3,257,477, an increase of 109% from income from operations
of in this division of $1,556,883 in the Second Quarter 2006. In the Second Quarter 2007,
income from operations in the chemical products division was $1,753,629, an increase of
53% from income from operations in this division of $1,144,921 in the Second Quarter 2006.

For
six months ended June 30, 2007, income from operations in the bromine division was
$5,498,985, an increase of 75% from income from operations of in this division of
$3,139,223 in the same period of 2006. For six months ended June 30, 2007, income from
operations in the chemical products division was $3,454,905, an increase of 62% from
income from operations in this division of $2,136,655 in the same period of 2006. The
increase in income from operations resulted primarily from the increase in revenues and
relatively lower increase in cost of revenue as discussed above.

Other income Other income was -$15,714 in the Second Quarter 2007, a decrease of $15,835 (or approximately 13,087%) from the other income of $121 during the Second Quarter 2006. Other income was -$8,872 for the six months end June 30 2007, a decrease of $9,413 (or approximately 1,740%) from the other income of $541 during the same period of 2006. These significant decreases in both periods in other income were primarily due to interest expense.

Net Income Net
income was $3,100,881 in the Second Quarter 2007, an increase of $1,287,815 (or
approximately 71%) from net income of $1,813,066 in the Second Quarter 2006. Net income
was $5,657,694 for six months ended June 30, 2007, an increase of $2,145,055 (or
approximately 61%) from net income of $3,512,639 compared with the same period of 2006.
This increase of net income in both periods resulted primarily from the increase in
revenues and relatively lower increase in cost of revenue as discussed above and
reflects positive trends in both of the Companys divisions.

LIQUIDITY
AND CAPITAL RESOURCES

Cash Flow

|                                                    |  |  | Six Months Ended June 30 |           
|--------------------------------------------------- |  |  | ------------------------ | ----------
|                                                    |  |  | 2007                     |           
|Net cash provided by operating activities           |  |  | $                        | 4,871,899 
|                                                    |  | 
|Net cash (used in) investing activities             |  |  | $                        | (5,834,194
|                                                    |  | 
|Net cash provided by (used in) financing activities |  |  | $                        | 2,374,572 
|                                                    |  | 
|Net cash inflow (outflow)                           |  |  | $                        | 1,510,639 

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

-21-



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

Net Cash



 Provided by   Operating Activities

As
of June 30, 2007, the Company had cash on hand of $7,203,247. During the six month period
ended June 30, 2007, we had positive cash flow from operating activities of $4,871,899,
primarily attributable to net income of $5,657,694 partially offset by an increase in
accounts receivable of $129,174 and a decrease in accounts payable and accrued expenses
of $2,119,944.

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

We
used approximately $5,834,194 to acquire additional property, plant and equipment during
the six month periods ended June 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 $5,836,950 and advances from related parties, on a net basis, of $1,227,222. 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 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 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. 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.

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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 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.

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

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.

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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.

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

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

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

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

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

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

-25-



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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 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.

-25-



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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 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.

-26-



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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.

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.

-27-



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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.

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.
|- | ------------------------------------------------------------------------------------

-28-



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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.

-29-



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PART II

OTHER
INFORMATION

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).
|---- | -- | ----------------------------------------------------------------------------------------------------------------------------------------------

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:   August
13, 2007

| | GULF RESOURCES, INC.
| | --------------------
| |                     
| | By:                 
| |                     
| |                     
| |                     
| |                     
| |                     
| | /s/ Ming Li         
| |                     
| |                     
| |                     



-30-



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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).
|---- | -- | --------------------------------------------------------------------------------------------------------------------

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