**SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        DC 20549**
  **Form
        10-QSB**
  ý
        Quarterly Report
        Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
        1934
  **For
        the quarterly period ended September 30, 2007**
  o
        Transition Report
        Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
        1934
  For
        the
        transition period from _______________ to ________________
  Commission
        file number 000-20936
  **GULF
        RESOURCES, INC.**
 (Exact
        name of small business as specified in its charter)
  **Delaware**
              **13-3637458**(State
                  or other jurisdiction of incorporation or organization)
              (IRS
                  Employer Identification Number)
 
  **Chenming
        Industrial Park, Unit – Haoyuan Chemical Company Limited,Shouguang City,
        Shandong, China 262714**
 (Address
        of principal executive offices)
  (310)470-2886
 (Issuer’s
        telephone number, including area code)
 
 
 Indicate
        by check mark whether the issuer (1) has filed all reports required to be
        filed
        by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.  Yes ýNo o
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act.  Yes oNo ý
  Indicate
        the number of shares outstanding of each of the issuer’s classes of common
        stock, as of the latest practicable date: 49,834,421 shares of Common Stock,
        $.001 per share, as of November 7, 2007.
  Transitional
        Small Business Disclosure Format (check one): Yes oNo ý
   
  **PART
        I.  FINANCIAL INFORMATION**
 
 **Item
        1. Financial Statements**
 
 GULF
        RESOURCES, INC.
 AND
        SUBSIDIARIES
 
 
 C
        O N
        T E N T S
 
 
 PAGECONSOLIDATED
                  BALANCE SHEETS
              2CONSOLIDATED
                  STATEMENTS OF OPERATIONS
              3CONSOLIDATED
                  STATEMENTS OF COMPREHENSIVE
                  INCOME
              4CONSOLIDATED
                  STATEMENT OF STOCKHOLDERS'
                  EQUITY
              5CONSOLIDATED
                  STATEMENTS OF CASH FLOWS
              6-7NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS
              8-15
 
 
  1
  GULF
        RESOURCES, INC.
 AND
        SUBSIDIARIES
 CONSOLIDATED
        BALANCE SHEETS
 SEPTEMBER
        30, 2007 AND DECEMBER 31, 2006
 
 September 30,
              
              
              December 31,2007
              
              
              2006(Unaudited)
              
              
              (Audited)ASSETSCURRENT
                  ASSETSCash
              
              $
              11,367,729
              
              
              $
              5,692,608Accounts
                  receivable, net of allowance of $ -
              
              
              3,993,770
              
              
              
              1,403,564Inventories
              
              
              363,748
              
              
              
              470,615Prepaid
                  expenses
              
              
              384,619
              
              
              
              —Prepayment
                  and deposit
              
              
              355,288
              
              
              
              —Due
                  from related party
              
              
              —
              
              
              
              555,464Prepaid
                  land lease
              
              
              12,940
              
              
              
              12,436Income
                  tax receivable
              
              
              296,488
              
              
              
              1,111,15416,774,582
              
              
              
              9,245,841PROPERTY,
                  PLANT AND EQUIPMENT, Net
              
              
              15,908,392
              
              
              
              4,462,407DUE
                  FROM RELATED PARTY
              
              
              —
              
              
              
              641,000PREPAID
                  LAND LEASE, Net of current portion
              
              
              620,688
              
              
              
              605,820TOTAL
                  ASSETS
              
              $
              33,303,662
              
              
              $
              14,955,068LIABILITIES
                  AND STOCKHOLDERS' EQUITYCURRENT
                  LIABILITIESAccounts
                  payable and accrued expenses
              
              
              2,934,064
              
              
              
              6,225,818Loan
                  payable
              
              
              6,003,000
              
              
              
              —Due
                  to related party
              
              
              32,230
              
              
              
              15,384Taxes
                  payable
              
              
              1,273,740
              
              
              
              481,405TOTAL
                  LIABILITIES
              
              
              10,243,034
              
              
              
              6,722,607STOCKHOLDERS'
                  EQUITYCOMMON
                  STOCK; $0.001 par value; 70,000,000 shares authorized; 49,834,421
                  and
                  43,205,440 shares issued and outstanding
              
              
              49,834
              
              
              
              43,205ADDITIONAL
                  PAID-IN CAPITAL
              
              
              11,827,562
              
              
              
              2,668,817RETAINED
                  EARNINGS - UNAPPROPRIATED
              
              
              8,399,687
              
              
              
              3,535,252RETAINED
                  EARNINGS - APPROPRIATEDStatutory
                  Common Reserve Fund
              
              
              1,616,796
              
              
              
              1,077,864Statutory
                  Public Welfare Fund
              
              
              —
              
              
              
              538,932CUMULATIVE
                  TRANSLATION ADJUSTMENT
              
              
              1,166,749
              
              
              
              368,391TOTAL
                  STOCKHOLDERS' EQUITY
              
              
              23,060,628
              
              
              
              8,232,461TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              33,303,662
              
              
              $
              14,955,068
 
 See
        accompanying notes to consolidated financial statements.
  -
            2 -
  GULF
        RESOURCES, INC.
 AND
        SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF OPERATIONS
 (UNAUDITED)
 
 
 Three
                  Months EndedSeptember 30,
              
              
              Nine
                  Months EndedSeptember 30,2007
              
              
              2006
              
              
              2007
              
              
              2006REVENUENet
                  sales
              
              $
              16,276,184
              
              
              $
              9,054,281
              
              
              $
              38,470,184
              
              
              $
              24,373,912Maintenance
                  service income
              
              
              142,427
              
              
              
              —
              
              
              
              401,705
              
              
              
              —16,418,611
              
              
              
              9,054,281
              
              
              
              38,871,889
              
              
              
              24,373,912OPERATING
                  EXPENSESCost
                  of net revenue
              
              
              9,558,866
              
              
              
              6,066,498
              
              
              
              22,854,530
              
              
              
              15,898,168Research
                  and development costs
              
              
              143,269
              
              
              
              —
              
              
              
              143,269
              
              
              
              —General
                  and administrative expenses
              
              
              530,486
              
              
              
              81,358
              
              
              
              1,059,683
              
              
              
              293,44110,232,621
              
              
              
              6,147,856
              
              
              
              24,057,482
              
              
              
              16,191,609INCOME
                  FROM OPERATIONS
              
              
              6,185,990
              
              
              
              2,906,425
              
              
              
              14,814,407
              
              
              
              8,182,303OTHER
                  INCOME (EXPENSES)Interest
                  expense
              
              
              (49,516
              )
              
              
              —
              
              
              
              (73,598
              )
              
              
              —Interest
                  income
              
              
              10,974
              
              
              
              673
              
              
              
              26,184
              
              
              
              1,214INCOME
                  BEFORE INCOME TAXES
              
              
              6,147,448
              
              
              
              2,907,098
              
              
              
              14,766,993
              
              
              
              8,183,517INCOME
                  TAXES - current
              
              
              2,201,107
              
              
              
              974,550
              
              
              
              5,162,958
              
              
              
              2,738,330NET
                  INCOME
              
              $
              3,946,341
              
              
              $
              1,932,548
              
              
              $
              9,604,035
              
              
              $
              5,445,187BASIC
                  AND DILUTED EARNINGS PER SHARE
              
              $
              0.08
              
              
              $
              0.04
              
              
              $
              0.20
              
              
              $
              0.13BASIC
                  AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
              
              
              49,834,421
              
              
              ____43,205,440
              
              
              ____47,842,071
              
              
              ____43,205,440
 
 See
        accompanying notes to consolidated financial statements.
  -
            3 -
  GULF
        RESOURCES, INC.
 AND
        SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF COMPREHENSIVE INCOME
 (UNAUDITED)
  Three
                  Months Ended
                September 30,
              
              
              Nine
                  Months Ended
                September 30,2007
              
              
              2006
              
              
              2007
              
              
              2006NET
                  INCOME
              
              $
              3,946,341
              
              
              $
              1,932,548
              
              
              $
              9,604,035
              
              
              $
              5,445,187OTHER
                  COMPREHENSIVE INCOMEForeign
                  currency translation adjustment
              
              
              310,528
              
              
              
              168,964
              
              
              
              798,358
              
              
              
              265,030COMPREHENSIVE
                  INCOME
              
              $
              4,256,869
              
              
              $
              2,101,512
              
              
              $
              10,402,393
              
              
              $
              5,710,217
 
 See
        accompanying notes to consolidated financial statements.
  -
            4 -
  GULF
        RESOURCES, INC.
 AND
        SUBSIDIARIES
 CONSOLIDATED
        STATEMENT OF STOCKHOLDERS’ EQUITY
 NINE
        MONTHS ENDED SEPTEMBER 30, 2007
 
 Number
                    of Shares
              
              
              Common
                    Stock
              
              
              Additional
                    Paid-in Capital
              
              
              Statutory
                      Common Reserve Fund
              
              
              Statutory
                      Public Welfare Fund
              
              
              Retained
                    Earnings
              
              
              Cumulative
                      Translation Adjustment
              
              
              TotalBALANCE
                  AT DECEMBER 31, 2006 (AUDITED)
              
              
              43,205,440
              
              
              $
              43,205
              
              
              $
              2,668,817
              
              
              $
              1,077,864
              
              
              $
              538,932
              
              
              $
              3,535,252
              
              
              $
              368,391
              
              
              $
              8,232,461Common
                  stock issues as payment for accrued expenses
              
              
              4,989,900
              
              
              
              4,990
              
              
              
              5,339,405
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              5,344,395Common
                  stock issuance for prepaid expenses
              
              
              450,000
              
              
              
              450
              
              
              
              892,050
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              892,500Common
                  stock issuance for acquiring assets
              
              
              779,286
              
              
              
              779
              
              
              
              1,986,400
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,987,179Common
                  stock issuance for acquiring assets
              
              
              409,795
              
              
              
              410
              
              
              
              940,890
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              941,300Transfer
                  from Statutory Welfare Fund
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              538,932
              
              
              
              (538,932
              )
              
              
              —
              
              
              
              —
              
              
              
              —Cumulative
                  translation adjustment
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              798,358
              
              
              
              798,358Dividend
                  distribution
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (4,739,600
              )
              
              
              —
              
              
              
              (4,739,600
              )Net
                  income for the nine months ended September 30, 2007
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              9,604,035
              
              
              
              —
              
              
              
              9,604,035BALANCE
                  AT SEPTEMBER 30, 2007 (UNAUDITED)
              
              
              49,834,421
              
              
              $
              49,834
              
              
              $
              11,827,562
              
              
              $
              1,616,796
              
              
              $
              —
              
              
              $
              8,399,687
              
              
              $
              1,166,749
              
              
              $
              23,060,628
 
 See
        accompanying notes to consolidated financial statements.
  -
            5 -
  GULF
        RESOURCES, INC.
 AND
        SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 NINE
        MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
 (UNAUDITED)
 
 2007
              
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  income
              
              $
              9,604,035
              
              
              $
              5,445,187Adjustments
                  to reconcile net income to net cash provided by operating
                  activitiesAmortization
                  of prepaid expenses by shares issued for consulting fee
              
              
              507,881
              
              
              
              —Depreciation
                  and amortization
              
              
              753,757
              
              
              
              205,523(Increase)
                  decrease in assetsAccounts
                  receivable
              
              
              (2,480,862
              )
              
              
              322,645Inventories
              
              
              123,351
              
              
              
              335,941Prepaid
                  expense
              
              
              —
              
              
              
              33,432Prepayment
                  and Deposit
              
              
              (347,938
              )
              
              
              —Income
                  tax receivable
              
              
              841,949
              
              
              
              (322,501
              )Increase
                  (decrease) in liabilitiesAccounts
                  payable and accrued expenses
              
              
              2,041,189
              
              
              
              50,720Taxes
                  payable
              
              
              771,993
              
              
              
              (30,851
              )Net
                  cash provided by operating activities
              
              
              11,815,355
              
              
              
              6,040,096CASH
                  FLOWS FROM INVESTING ACTIVITIESPurchase
                  of property, plant and equipment
              
              
              (8,803,161
              )
              
              
              (21,981
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESDecrease
                  in due to/from director
              
              
              —
              
              
              
              (62,490
              )Capital
                  contribution
              
              
              50,000
              
              
              
              882,359Advances
                  from related party
              
              
              1,235,790
              
              
              
              (1,268,547
              )Proceeds
                  from third party loan
              
              
              5,878,800
              
              
              
              —Dividends
                  paid
              
              
              (4,739,600
              )
              
              
              (5,649,096
              )Net
                  cash provided from (used in) financing activities
              
              
              2,424,990
              
              
              
              (6,097,774
              )EFFECTS
                  OF EXCHANGE RATE CHANGE ON CASH
              
              
              237,937
              
              
              
              115,179NET
                  INCREASE IN CASH
              
              
              5,675,121
              
              
              
              35,520CASH
                  - BEGINNING OF PERIOD
              
              
              5,692,608
              
              
              
              5,542,388CASH
                  - END OF PERIOD
              
              $
              11,367,729
              
              
              $
              5,577,908
 
 See
        accompanying notes to consolidated financial statements.
  -
            6 -
  
 GULF
        RESOURCES, INC.
 AND
        SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS (CONTINUED)
 NINE
        MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
 (UNAUDITED)
 
 2007
              
              
              2006SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATIONCash
                  paid during the period for:Income
                  taxes
              
              $
              3,895,301
              
              
              $
              3,011,544SUPPLEMENTAL
                  DISCLOSURE OF NON-CASH FINANCING ACTIVITIESIssuance
                  of common stock as payment for accrued expenses
              
              $
              5,344,395
              
              
              $
              —Issuance
                  of common stock for prepaid expenses
              
              $
              892,500
              
              
              $
              —Issuance
                  of common stock for acquiring assets
              
              $
              2,928,479
              
              
              $
              —
 
 See
        accompanying notes to consolidated financial statements.
  -
            7 -
  GULF
        RESOURCES, INC.
 AND
        SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 NOTE
                  1 –
              NATURE
                  OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
                  POLICIES
 The
        accompanying unaudited consolidated financial statements have been prepared
        by
        Gulf Resources, Inc. and Subsidiaries (collectively, the
“Company”).  These statements include all adjustments (consisting only
        of their normal recurring adjustments) which management believes necessary
        for a
        fair presentation of the statements and have been prepared on a consistent
        basis
        using the accounting policies described in the Form 10-KSB for the year ended
        December 31, 2006 (“2006 Form 10-KSB”).  Certain financial information
        and footnote disclosures normally included in financial statements prepared
        in
        accordance with accounting principles generally accepted in the United States
        have been condensed or omitted pursuant to the rules and regulations of the
        Securities and Exchange Commission, although the Company firmly believes
        that
        the accompanying disclosures are adequate to make the information presented
        not
        misleading.  The Notes to Financial Statements included in the 2006
        Form 10-KSB should be read in conjunction with the accompanying interim
        financial statements.  The interim operating results for the three and
        nine months ended September 30, 2007 may not be indicative of operating results
        expected for the full year.
 
 Basis
        of Presentation
 Upper
        Class Group Limited was incorporated with limited liability in the British
        Virgin Islands on July 28, 2006 and was inactive until October 9, 2006 when
        Upper Class Group Limited acquired all the issued and outstanding stock of
        Shouguang City Haoyuan Chemical Company Limited (“SCHC”).  SCHC is an
        operating company incorporated in Shouguang City, Shandong Province, the
        People’s Republic of China (the “PRC”) on May 18, 2005.  Since the
        ownership of Upper Class Group Limited and SCHC were the same, the merger
        was
        accounted for as a transaction between entities under common control, whereby
        Upper Class Group Limited recognized the assets and liabilities transferred
        at
        their carrying amounts.
 
 On
        December 12, 2006, Gulf Resources, Inc. (formerly Diversifax, Inc.), a public
        “shell” company, acquired Upper Class Group Limited and its wholly-owned
        subsidiary, SCHC (together “Upper Class”).  Under the terms of the
        agreement, all stockholders of Upper Class Group Limited received a total
        amount
        of 26,500,000 shares of voting common stock of Gulf Resources, Inc. in exchange
        for all shares of Upper Class Group Limited common stock held by all
        stockholders.  Under accounting principles generally accepted in the
        United States, the share exchange is considered to be a capital transaction
        in
        substance, rather than a business combination.  That is, the share
        exchange is equivalent to the issuance of stock by Upper Class Group Limited
        for
        the net monetary assets of Gulf Resources, Inc., accompanied by a
        recapitalization, and is accounted for as a change in capital structure.
        Accordingly, the accounting for the share exchange will be identical to that
        resulting from a reverse acquisition, except no goodwill will be
        recorded.  Under reverse takeover accounting, the post reverse
        acquisition comparative historical financial statements of the legal acquirer,
        Gulf Resources, Inc., are those of the legal acquiree, Upper Class Group
        Limited
        and Subsidiary, which are considered to be the accounting
        acquirer.  Share and per share amounts stated have been retroactively
        adjusted to reflect the merger.
 
 On
        February 5, 2007, Upper Class Group Limited acquired Shouguang Yuxin Chemical
        Industry Co., Limited (“SYCI”) incorporated in PRC on October 30,
        2000.  Under the terms of the merger agreement, all stockholders of
        SYCI received a total amount of 16,188,118 shares of voting common stock
        of Gulf
        Resources, Inc. in exchange for all shares of SYCI’s common stock held by all
        stockholders.   Also, upon the completion of the merger, Gulf
        Resources, Inc. paid a $2,550,000 dividend to the original stockholders of
        SYCI.  Since the ownership of Gulf Resources, Inc. and SYCI are
        substantially the same, the merger was accounted for as a transaction between
        entities under common control, whereby Gulf Resources, Inc. recognized the
        assets and liabilities of the Company transferred at their carrying
        amounts.  Share and per share amounts stated have been retroactively
        adjusted to reflect the merger.
 
 Basis
        of Consolidation
 The
        unaudited consolidated financial statements include the accounts of Gulf
        Resources, Inc. and its wholly-owned subsidiaries, Upper Class Group Limited,
        SCHC and SYCI (collectively the “Company”).  All material intercompany
        transactions have been eliminated in consolidation.
 
 The
        consolidated financial statements have been restated for all periods prior
        to
        the merger to include the financial position, results of operations and cash
        flows of the commonly controlled companies.
  -
            8 -
 
 GULF
        RESOURCES, INC.
 AND
        SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
  NOTE
                    1 –
                NATURE
                    OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    (Continued)
  Nature
        of the Business
 Gulf
        Resources, Inc. and Subsidiaries manufactures and trades bromine and crude
        salt
        through its SCHC subsidiary, and manufactures chemical products for use in
        the
        oil industry and paper manufacturing industry through its SYCI
        subsidiary.
 
 Reporting
        Currency
 The
        Company’s functional currency is Renminbi (“RMB”); however, the reporting
        currency is the United States dollar (“USD”).
 
 Foreign
        Currency Translation
 Assets
        and liabilities of the Company have been translated using the exchange rate
        at
        the balance sheet date. The average exchange rate for the period has been
        used
        to translate revenues and expenses.  Translation adjustments are
        reported separately and accumulated in a separate component of equity
        (cumulative translation adjustment).
 
 Revenue
        Recognition
 In
        accordance with Securities and Exchange Commission (“SEC”) Staff Accounting
        Bulletin (“SAB”) No. 104, *Revenue Recognition*, the Company recognizes
        revenue when persuasive evidence of a customer or distributor arrangement
        exists
        or acceptance occurs, receipt of goods by customer occurs, the price is fixed
        or
        determinable, and the sales revenues are considered
        collectible.  Subject to these criteria, the Company generally
        recognizes revenue at the time of shipment or delivery to the customer, and
        when
        the customer takes ownership and assumes risk of loss based on shipping
        terms.
 
 Recently
        Issued Accounting Pronouncements
 In
        June
        2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
        No. 48 (“FIN 48”), *Accounting for Uncertainty in Income Taxes*. FIN
        48 prescribes detailed guidance for the financial statement recognition,
        measurement and disclosure of uncertain tax positions recognized in an
        enterprise’s financial statements in accordance with FASB Statement
        No. 109, *Accounting for Income Taxes*. Tax positions must meet a
        more-likely-than-not recognition threshold at the effective date to be
        recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48
        will be
        effective for fiscal years beginning after December 15, 2006, and the
        provisions of FIN 48 will be applied to all tax positions under Statement
        No. 109 upon initial adoption. The cumulative effect of applying the
        provisions of this interpretation will be reported as an adjustment to the
        opening balance of retained earnings for that fiscal year. The Company adopted
        FIN 48 effective January 1, 2007.  The adoption of FIN 48 did not
        require an adjustment to the opening balance of retained earnings as of January
        1, 2007.
  In
        September 2006, the FASB issued SFAS No. 157, *Fair Value
        Measurements* (“SFAS No. 157”). SFAS No. 157 establishes a
        framework for measuring fair value and expands disclosures about fair value
        measurements. The changes to current practice resulting from the application
        of
        SFAS No. 157 relate to the definition of fair value, the methods used to
        measure fair value and the expanded disclosures about fair value measurement.
        SFAS No. 157 is effective for fiscal years after November 15, 2007 and
        interim periods within those fiscal years. The Company does not believe that
        the
        adoption of the provisions of SFAS No. 157 will materially impact its
        financial statements or footnote disclosures.
  -
            9 -
  GULF
        RESOURCES, INC.
 AND
        SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007 (UNAUDITED)
  NOTE
                  1 –
              NATURE
                  OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                  (Continued)
  The Fair
        Value Option for Financial Assets and Financial Liabilities
 
 Shipping
        and Handling Fees and Costs
 The
        Company follows Emerging Issues Task Force (“EITF”) No. 00-10, *Accounting
        for Shipping and Handling Fees and Costs*.  The Company does not
        charge its customers for shipping and handling.  The Company
        classifies shipping and handling costs as part of the cost of net
        sales.  For the three months ended September 30, 2007 and 2006,
        shipping and handling costs were $107,331 and $154,364, and for the nine
        months
        ended September 30, 2007 and 2006, shipping and handling costs were $293,896
        and
        $361,993,
 
 NOTE
        2 –
INCOME TAX RECEIVABLE
 
 The
        amount of $296,488 represents income tax receivable in Shouguang City Haoyuan
        Chemical Company Limited.
 
 NOTE
        3 –
LOAN PAYABLE
 
 The
        amount of $6,003,000 represents loan due to a third party, with interest
        at
        3.33% per annual. Outstanding principal and accrued interest are payable
        till on
        March 19, 2008, the maturity date.
 As
        of
        September 30, 2007, the balance of accrued interest of $75,153 is included
        in
        accrued expenses.
  NOTE
          4 –
TAXES PAYABLE
  September 30,
                  2007Income
                  tax payable
              
              $
              669,850Value
                  added tax  payable and others
              
              
              603,890Total
              
              $
              1,273,740
  The
        amount of $669,850 represents income tax payable in Shouguang Yuxin Chemical
        Industry Co., Limited.
  -
            10 -
  GULF
        RESOURCES, INC.
 AND
        SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 NOTE
        5 –
RETAINED EARNINGS – APPROPRIATED
 
 In
        accordance with the relevant PRC regulations and the Company’s Articles of
        Association, the Company is required to allocate its profit after tax to
        the
        following reserves:
 
 *Statutory
        Common Reserve Funds*
 The
        Company is required each year to transfer 10% of the profit after tax as
        reported under the PRC statutory financial statements to the statutory common
        reserve funds until the balance reaches 50% of the registered share
        capital.  This reserve can be used to make up any loss incurred or to
        increase share capital.  Except for the reduction of losses incurred,
        any other application should not result in this reserve balance falling below
        25% of the registered capital.
 
 *Statutory
        Public Welfare Funds*
 Prior
        to
        January 1, 2007, the Company was required each year to transfer 5% of the
        profit
        after tax as reported under the PRC statutory financial statements to the
        statutory public welfare funds.  This reserve is restricted to capital
        expenditure for employees’ collective welfare facilities that are owned by the
        Company.  The statutory public welfare funds are not available for
        distribution to the stockholders (except on liquidation).  Once
        capital expenditure for staff welfare facilities has been made, an equivalent
        amount must be transferred from the statutory public welfare funds to the
        discretionary common reserve funds.  Due to a change in the PRC
        Company Law, appropriation of profit to the statutory welfare fund is no
        longer
        required.  Therefore, the Company transferred the balance in the
        statutory welfare fund to the statutory common reserve fund on January 1,
        2007.
 
 NOTE
        6 –
COMMON STOCK
 
 In
        March
        2007, the Company issued 4,989,900 shares of its common stock as payment
        for
        $5,344,395 of accrued consulting expenses.
 
 In
        March
        2007, the Company issued 450,000 shares of its common stock, valued at $892,500
        (fair value), for two consulting contracts, one that expires on December
        31,
        2007 and one that expires in March 2008.  These issuances were
        recorded in prepaid expenses on the balance sheet and expensed over the terms
        of
        the contracts.
 
 In
        April
        2007, the Company issued 779,286 shares of its common stock, valued at
        $1,987,179 (fair value), to acquire assets owned by Mr. Wenbo Yu, (Note
        10).
 
 In
        June
        2007, the Company issued 409,795 shares of its common stock, valued at $941,300
        (fair value), to acquire assets owned by Mr. Donghua Yang, (Note
        10).
 
 NOTE
        7 –
DIVIDEND DISTRIBUTION
 
 On
        January 31, 2007, SYCI distributed a dividend to two stockholders in the
        amount
        of $2,189,600.
  On
        February 5, 2007, in conjunction with the merger of SYCI, Gulf Resources,
        Inc.
        paid a $2,550,000 dividend to the original stockholders of SYCI.
  NOTE
          8 –
INCOME TAXES
  The
        Company utilizes the asset and liability method of accounting for income
        taxes
        in accordance with SFAS No. 109.  The statutory PRC tax rate of 33% is
        equivalent to the Company’s effective tax rate.
 
 No
        provision for deferred taxes has been made as there were no material temporary
        differences at September 30, 2007 and 2006.
  -
            11 -
  GULF
        RESOURCES, INC.
 AND
        SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 NOTE
        9 –
BUSINESS SEGMENTS
 
 The
        Company follows SFAS No. 131, *Disclosures about Segments of and Enterprise
        and Related Information,*which requires the Company to provide certain
        information about their operating segments.  The Company has two
        reportable segments:  bromine and crude salt and chemical
        products.
 
 Bromineand
                  Crude
              
              
              Chemical
              
              
              Segment
              
              
              
              
              
              ConsolidatedSalt
              
              
              Products
              
              
              Total
              
              
              Corporate
              
              
              TotalThree
                  Months EndedSeptember 30,
                  2007Net
                  revenue
              
              $
              10,875,675
              
              
              $
              5,542,936
              
              
              $
              16,418,611
              
              
              $
              —
              
              
              $
              16,418,611Income
                  (loss) from operations
              
              
              4,629,467
              
              
              
              1,943,911
              
              
              
              6,573,378
              
              
              
              (387,388
              )
              
              
              6,185,990Total
                  assets
              
              
              24,782,174
              
              
              
              8,086,869
              
              
              
              32,869,043
              
              
              
              434,619
              
              
              
              33,303,662Depreciation
                  and amortization
              
              
              379,931
              
              
              
              47,582
              
              
              
              427,513
              
              
              
              —
              
              
              
              427,513Three
                  Months EndedSeptember 30,
                  2006Net
                  revenue
              
              $
              4,686,488
              
              
              $
              4,367,793
              
              
              $
              9,054,281
              
              
              $
              —
              
              
              $
              9,054,281Income
                  from operations
              
              
              1,906,794
              
              
              
              999,631
              
              
              
              2,906,425
              
              
              
              —
              
              
              
              2,906,425Total
                  assets
              
              
              6,733,552
              
              
              
              5,008,073
              
              
              
              11,741,625
              
              
              
              —
              
              
              
              11,741,625Depreciation
                  and amortization
              
              
              53,095
              
              
              
              15,666
              
              
              
              68,760
              
              
              
              —
              
              
              
              68,760Bromineand
                  Crude
              
              
              Chemical
              
              
              Segment
              
              
              
              
              
              
              ConsolidatedSalt
              
              
              Products
              
              
              Total
              
              
              Corporate
              
              
              TotalNine
                  Months EndedSeptember 30,
                  2007Net
                  revenue
              
              $
              23,880,542
              
              
              $
              14,991,347
              
              
              $
              38,871,889
              
              
              $
              —
              
              
              $
              38,871,889Income
                  (loss) from operations
              
              
              10,128,452
              
              
              
              5,398,816
              
              
              
              15,527,268
              
              
              
              (712,861
              )
              
              
              14,814,407Total
                  assets
              
              
              24,782,174
              
              
              
              8,086,869
              
              
              
              32,869,043
              
              
              
              434,619
              
              
              
              33,303,662Depreciation
                  and amortization
              
              
              613,015
              
              
              
              140,742
              
              
              
              753,757
              
              
              
              —
              
              
              
              753,757Nine
                  Months EndedSeptember 30,
                  2006Net
                  revenue
              
              $
              12,760,106
              
              
              $
              11,613,806
              
              
              $
              24,373,912
              
              
              $
              —
              
              
              $
              24,373,912Income
                  from operations
              
              
              5,046,017
              
              
              
              3,136,286
              
              
              
              8,182,303
              
              
              
              —
              
              
              
              8,182,303Total
                  assets
              
              
              6,733,552
              
              
              
              5,008,073
              
              
              
              11,741,625
              
              
              
              —
              
              
              
              11,741,625Depreciation
                  and amortization
              
              
              158,373
              
              
              
              47,151
              
              
              
              205,523
              
              
              
              —
              
              
              
              205,523
 
  -
            12 -
  GULF
        RESOURCES, INC.
 AND
        SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 NOTE
        9 –
BUSINESS SEGMENTS (Continued)
 
 Three
                  Months Ended
              
              
              Nine
                  Months EndedSeptember 30,
              
              
              September 30,Reconciliations
              
              2007
              
              
              2006
              
              
              2007
              
              
              2006Total
                  segment operating income
              
              $
              6,573,378
              
              
              $
              2,906,425
              
              
              $
              15,527,268
              
              
              $
              8,182,303Corporate
                  overhead expenses
              
              
              (387,388
              )
              
              
              —
              
              
              
              (712,861
              )
              
              
              —Other
                  income (expense)
              
              
              (38,542
              )
              
              
              673
              
              
              
              (47,414
              )
              
              
              1,214Income
                  tax expense
              
              
              (2,201,107
              )
              
              
              (974,550
              )
              
              
              (5,162,958
              )
              
              
              (2,738,330
              )Total
                  consolidated net income
              
              $
              3,946,341
              
              
              $
              1,932,548
              
              
              $
              9,604,035
              
              
              $
              5,445,187
 
 NOTE
        10 –
ASSETS ACQUISITIONS
 
 On
        April
        7, 2007, the Company acquired certain assets from Mr. Wenbo Yu located in
        the
        Shougang City Qinshuibo Area (the “Qinshuibo Assets”) in exchange for 779,286
        shares of the Company’s common stock valued at $1,987,179 and $3,076,923 in
        cash.
 
 The
        Qinshuibo Assets include a 50 year mineral rights and land lease covering
        1,846
        acres, or 7.5 square kilometers of real property, with proven and probable
        reserves of 223,000 tons of bromine being serviced by 575 wells, as well
        as the
        related production facility, the wells, the pipelines, other production
        equipment, and the buildings located on the property.
 
 On
        June
        8, 2007, the Company acquired certain assets from Mr. Donghua Yang located
        in
        the Dong Ying City Liu Hu Area (the “Liu Hu Assets”) in exchange for 409,795
        shares of the Company’s common stock valued at $941,300 and $4,837,233 in cash
        and an interest-free promissory note in the aggregate principal amount of
        $889,005, with a maturity date of July 8, 2007. The promissory note was fully
        paid in June 2007.
 
 The
        Liu
        Hu Assets include a 50-year mineral rights and land lease covering 2,317.85
        acres of real property, with annual production of 3,700 tons of bromine being
        serviced by 405 wells. The assets acquired include the 405 wells and the
        related
        production facility, the wells, the pipelines, other production equipment,
        and
        the buildings located on the property.
 
 NOTE
        11 –
MAJOR SUPPLIER
 
 During
        the nine months ended September 30, 2007, the Company purchased 48% of its
        raw
        material from two suppliers.  At September 30, 2007, amounts due to
        those suppliers included in accounts payable were approximately
        $1,513,000.  This concentration makes the Company vulnerable to a
        near-term severe impact, should the relationships be terminated.
 
 NOTE
        12 –
CUSTOMER CONCENTRATION
 
 The
        Company sells a substantial portion of its product to a limited number of
        customers.  During the nine months ended September 30, 2007, sales to
        the Company’s three largest customers, based on net revenue made to such
        customers, aggregated $13,897,666, or approximately 36% of total net
        revenue.  At September 30, 2007, amounts due from these customers were
        approximately $2,663,000.  This concentration makes the Company
        vulnerable to a near-term severe impact, should the relationships be
        terminated.
  -
            13 -
  GULF
        RESOURCES, INC.
 AND
        SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 NOTE
        13 –
FIXED PRICE STANDBY EQUITY DISTRIBUTION AGREEMENT
 
 On
        May 7,
        2007, the Company entered into a Fixed Price Standby Equity Distribution
        Agreement with eight investors (the “Investors”).  Pursuant to the
        Fixed Price Standby Equity Distribution Agreement, the Company may, at its
        discretion, periodically sell to the Investors up to 30 million shares of
        the
        Company’s common stock for a total purchase price of up to $60 million (a per
        share purchase price of $2.00 per share). The Investors’ obligation to purchase
        shares of common stock under the Fixed Price Standby Equity Distribution
        Agreement is subject to certain conditions, including the Company obtaining
        an
        effective registration statement for the resale of the common stock sold
        under
        the Fixed Price Standby Equity Distribution Agreement. The maximum amount
        of
        advance under the Fixed Price Standby Equity Distribution Agreement cannot
        exceed $10 million.  In no event can the number of shares issued to
        any Investor pursuant to an advance cause any Investor to own more than 9.9%
        of
        the shares of common stock outstanding.
 
 The
        commitment period under the Fixed Price Standby Equity Distribution Agreement
        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.
 
 NOTE
        14 –
ESTABLISHMENT OF CO-OP RESEARCH AND DEVELOPMENT CENTER
 
 On
        June
        11, 2007, the Company’s wholly-owned subsidiary, Shouguang Yuxin Chemical
        Industry Company Limited ("SYCI"), and East China University of Science and
        Technology entered into a 5 year agreement to set up a Co-Op Research and
        Development Center. The research center is equipped with state of the art
        chemical engineering instruments for the purpose of pursuing targeted research
        and development of refined bromide compounds and end products. Professor
        Ji of
        East China University is the Center’s Manager. He will provide his expertise in
        chemical applications and medicine engineering. SYCI will make payment of
        $500,000 due each year until the agreement expires on June 14, 2012. The
        first
        annual payment was made in August 2007. The payment is reported as a prepayment
        expense and is amortized monthly as research and development costs.
 
 NOTE
        15 –
SUBSEQUENT EVENTS
 
 Forward
        Stock Split
 
 On
        October 19, 2007, the board of directors recommended and the holders of a
        majority of the outstanding Common Stock voted in favor of resolutions in
        connection with the following actions:
 
 Amending
        the Company's Certificate of Incorporation, as amended, (i) to effect a forward
        stock split of the issued and outstanding shares of the Company's Common
        Stock
        on the basis of two (2) post-split shares of Common Stock for every one (1)
        pre-split share of Common Stock (the "Forward Stock Split") and (ii) to increase
        the total number of authorized shares of Common Stock from 70,000,000 to
        400,000,000 (the "Authorized Shares Increase").
 
 The
        decision to effect the forward stock split and increase the authorized shares
        of
        common stock was approved by the Board of Directors and shareholders owning
        a
        majority of the outstanding shares of the Company's Common Stock in order
        to
        provide greater availability of common stock in the public marketplace, to
        help
        improve future liquidity and further diversify the Company's shareholder
        base.
  -
            14 -
  GULF
        RESOURCES, INC.
 AND
        SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 NOTE
        15 –
SUBSEQUENT EVENTS (CONTINUED)
 
 The
        accompanying unaudited consolidated financial statements do not reflect the
        forward stock split since the resolutions will not be deemed effective until
        20
        days after the Schedule 14C (Information Statement Pursuant to Section 14(c)
        of
        the Securities Exchange Act of 1934) is mailed. The Schedule 14C was mailed
        on
        November 8, 2007.
 
 Acquisition
        of Assets in Shouguang City Renjia Area
 
 On
        October 25, 2007, Shuoguang City Haoyuan Chemical Company Limited (“SCHC”), the
        Company’s wholly-owned subsidiary, acquired certain assets owned by Mr. Jiancia
        Wang located in the Shouguang City Renjia Area for approximately $6.4 million
        in
        total cash consideration.
  The
        assets include a 50-year mineral rights and land lease covering 2,165 acres
        through December, 2054, which has been paid in the full. The property has
        approximately 225,000 metric tons of proven bromine reserves. Additional
        assets
        to be conveyed with the purchase include the related production facility,
        wells,
        pipelines and other production equipment, in addition to the current buildings
        and other assets on the property.
 
 Acquisition
        of Assets in  Shouguang City Houxing Area
 
 On
        October 26, 2007, SCHC acquired certain assets owned by Mr. Xingji Liu located
        in the Shouguang City Houxing Area for approximately $6.7 million in total
        cash
        consideration.
 
 The
        assets include a 50-year mineral rights and land lease covering 2,310 acres
        through October, 2054, which has been paid in the full. The property has
        approximately 240,000 metric tons of proven bromine reserves. Additional
        assets
        to be conveyed with the purchase include the related production facility,
        wells,
        pipelines and other production equipment, in addition to the current buildings
        and other assets on the property.
 
 Election
        of Directors and Grant of Options
 
 On
        October 30, 2007, the Company announced that the Board of Directors increased
        the size of the Company's Board of Directors from two to four and elected
        Richard Khaleel and Min Li as directors of the Company to fill such vacancies
        created by such increase to the number of members constituting the Board
        of
        Directors. In addition, the Board of Directors appointed Mr. Khaleel to the
        Company's Audit Committee.
 
 Mr.
        Khaleel will receive three annual grants of options to purchase 25,000 shares
        of
        the Company's common stock, at an exercise price of the closing sale price
        of
        such stock on each respective grant date, contingent upon his continued service
        to the Company.
 
 On
        November 6, 2007, the Company signed an agreement with Mr. Biagio Vignolo
        to
        retain him as a member of the Board of Directors, and also appointed him
        to the
        Audit Committee.
 
 Mr.
        Vignolo will receive three annual grants of options to purchase 25,000 shares
        of
        the Company's common stock, at an exercise price of the closing sale price
        of
        such stock on each respective grant date, contingent upon his continued service
        to the Company.
 
 **Item
        2.  Management’s Discussion and Analysis or Plan of
        Operation**
  **Forward
        Looking Statements**
 
 The
        Company desires to take advantage of the “safe harbor” provisions of the Private
        Securities Litigation Reform Act of 1995.  This report contains a
        number of forward-looking statements that reflect management’s current
        views
  -
            15 -
  and
        expectations with respect to our business, strategies, future results and
        events
        and financial performance.  All statements made in this Report other
        than statements of historical fact, including statements that address operating
        performance, events or developments that management expects or anticipates
        will
        or may occur in the future, including statements related to distributor
        channels, volume growth, revenues, profitability, adequacy of funds from
        operations, statements expressing general optimism about future operating
        results and non-historical information, are forward looking
        statements.  In particular, the words “believe,” “expect,” “intend,” “
anticipate,” “estimate,” “may,” “will,” variations of such words, and similar
        expressions identify forward-looking statements, but are not the exclusive
        means
        of identifying such statements and their absence does not mean that the
        statement is not forward-looking.  These forward-looking statements
        are subject to certain risks and uncertainties, including those discussed
        below.  Our actual results, performance or achievements could differ
        materially from historical results as well as those expressed in, anticipated
        or
        implied by these forward-looking statements.  We do not undertake any
        obligation to revise these forward-looking statements to reflect any future
        events or circumstances.
 
 Readers
        should not place undue reliance on these forward-looking statements, which
        are
        based on management’s current expectations and projections about future events,
        are not guarantees of future performance, are subject to risks, uncertainties
        and assumptions (including those described below) and apply only as of the
        date
        of this report.  Our actual results, performance or achievements could
        differ materially from the results expressed in, or implied by, these
        forward-looking statements.  Factors that could cause or contribute to
        such differences include, but are not limited to, those discussed below in
“Risk
        Factors” as well as those discussed elsewhere in this report, and the risks
        discussed in our press releases and other communications to shareholders
        issued
        by us from time to time which attempt to advise interested parties of the
        risks
        and factors that may affect our business.  We undertake no obligation
        to publicly update or revise any forward-looking statements, whether as a
        result
        of new information, future events or otherwise.
 
 **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS**
 
 The
        following discussion of the financial condition and plan of operations of
        Gulf
        Resources, Inc. (the “company” or “we”) constitutes management’s review of the
        factors that affected our financial and operating performance for the nine
        months ended September 30, 2007 and 2006. This discussion should be read
        in
        conjunction with the financial statements and notes thereto contained elsewhere
        in this report and in our Form 10-KSB, for the year ended December 31,
        2006.
 
 **Overview**
  Overall,
        during the first three quarters of the fiscal year ending December 31, 2007,
        we
        have continued to see consistent sales performance of bromine and crude salt,
        as
        well as development of our chemical business. We generated significantly
        higher
        gross profit margins for the three and nine months ended September 30, 2007,
        as
        compared to the same periods in the fiscal year ended December 31, 2006.
        Our
        gross profit margins for the three and nine months ended September 30, 2007
        were
        42% and 41%, respectively, as compared to 33% and 35%, respectively, for
        the
        three and nine months ended September 30, 2006. Our net profit margins for
        the
        three and nine months ended September 30, 2007 were 24% and 25%, respectively,
        as compared to 21% and 22%, respectively, for the three and nine months ended
        September 30, 2006.
 
 In
        the
        near-term, we do not anticipate that we will experience pricing pressure
        or
        increased overhead costs, including the costs of salaries and benefits as
        well
        as the costs of our anticipated capital improvements as we increase our
        production capabilities. In response to this challenge, while we believe
        that we
        will remain among the low cost manufacturers in the industry, we are seeking
        to
        reduce the purchase costs of raw materials and other unit costs of production
        while pursuing opportunities to raise selling prices where it would benefit
        our
        financial results. In addition, we are seeking to identify alternative raw
        material suppliers to the extent there are viable alternatives and to expand
        our
        use of alternative raw materials. We have also restructured our operations
        in an
        effort to streamline corporate resources and improve internal efficiency,
        with a
        particular focus on manufacturing and sales.
 
 From
        a
        long-term perspective, we believe that our investment in higher-margin and
        value-added products and increasing our production capacity will ultimately
        improve our profitability and competitiveness as increased volume absorbs
        the
        higher fixed overhead costs of the investment in applicable equipment and
        infrastructure.
  -
            16 -
  **Our
        Business**
 
 We
        are
        one of the largest manufacturers of Bromine in China, as measured by production
        output. Elemental bromine is used to manufacture a wide variety of bromine
        compounds used in industry and agriculture. Bromine is also used to form
        intermediates in organic synthesis, in which it is somewhat preferable over
        iodine due to its lower cost.
 
 Our
        Bromine, which is produced and distributed by Shougang City Haoyuan Chemical
        Company Limited (“SCHC”) is commonly used in brominated flame retardants,
        fumigants, water purification compounds, dyes, medicines and
        disinfectants.
 
 The
        below
        list contains ten (10) of the chemical products that are produced by Shougang
        Yuxin Chemical Industry Company Limited (“SYCI”).
 
 **Product
                  name**
              **Application
                  sector**Hydroxyl
                  guar gum
              Oil
                  Exploration & ProductionDemulsified
                  agent
              Oil
                  Exploration & ProductionCorrosion
                  inhibitor for acidizing
              Oil
                  Exploration & ProductionBactericide
              Oil
                  Exploration / AgriculturalChelant
              Paper
                  MakingIron
                  ion stabilizer
              Oil
                  Exploration & ProductionClay
                  stabilizing agent
              Oil
                  Exploration & ProductionFlocculants
                  agent
              Paper
                  MakingRemaining
                  agent
              Paper
                  MakingExpanding
                  agent with enhanced gentleness
              Paper
                  Making
 
 We
        conduct all of our operations in China, in close proximity to China’s
        petrochemical and oil refinery manufacturing base and its rapidly growing
        market.
 
 **GENERAL**
 
 As
        previously reported, on December 12, 2006, as a result of a transaction
        accounted for as a “reverse acquisition,” we acquired SCHC, a company organized
        under the laws of China engaged in manufacturing and trading bromine and
        crude
        salt.  Subsequently, on February 5, 2007, pursuant to a share exchange
        agreement, we acquired SYCI, a company organized under the laws of China
        and
        engaged in the production and sale of chemical products used in oil and gas
        filed exploration, oil and gas distribution, oil field drilling, wastewater
        processing, papermaking chemical agents and inorganic
        chemicals.  Since the ownership of the Company and SYCI were
        substantially the same, the merger was accounted for as a transaction between
        entities under common control, whereby the Company recognized the assets
        and
        liabilities of SYCI transferred at their carrying amounts.  Share and
        per share amounts stated have been retroactively adjusted to reflect the
        above
        transactions.
 
 On
        April
        7, 2007, the Company acquired certain assets owned by Mr. Wenbo Yu located
        in
        the Shougang City Qinshuibo Area (the “Qinshuibo Assets”) in exchange for
        779,286 shares of the Company’s common stock and $3,076,923. The Qinshuibo
        Assets include a 50 year mineral rights and land lease covering 1,846 acres,
        or
        7.5 square kilometers of real property, with proven and probable reserves
        of
        approximately 223,000 metric tons and annual production capacity of
        approximately 4,500 metric tons of bromine being serviced by 575 wells. The
        Qinshuibo Assets acquired also include the 575 wells and the related production
        facility, the pipelines, other production equipment, and the buildings located
        on the property.
 
 On
        June
        8, 2007, the Company acquired certain assets owned by Mr. Donghua Yang locate
        in
        the Dong Ying City Liu Hu Area (the “Liu Hu Assets”) in exchange for 409,795
        shares of the Company’s common stock, $4,837,233 in cash and an interest-free
        promissory note in the aggregate principal amount of $889,005, with a maturity
        date of July 8, 2007. The promissory note was fully paid in June 2007. The
        Liu
        Hu Assets include a 50-year mineral rights and land lease covering 2,317.85
        acres, or 9.38 square kilometers of real property, with proven and probable
        reserves of approximately 235,000 metric tons and annual production capacity
        of
        approximately 3,700 metric tons of bromine being serviced by 405 wells. The
        Liu
        Hu Assets acquired also include the 405 wells and the related production
        facility, the pipelines, other production equipment, and the buildings located
        on the property.
  -
            17 -
  On
        October 25, 2007, the Company acquired certain assets owned by Mr. Jiancai
        Wang
        in the Shouguang City Renjia Area (the “Renjia Assets”) in exchange for
        $6,399,147.  The Renjia Assets include a 50-year mineral rights and
        land lease covering 2,165 acres, or 8.76 square kilometers, of real property,
        with proven and probable reserves of approximately 225,000 metric tons and
        annual production capacity of approximately 3,700 tons of bromine being serviced
        by 398 wells.  The Renjia Assets acquired also include the 398 wells
        and the related production facility, the wells, the pipelines, other production
        equipment, and the buildings located on the property.
 
 On
        October 26, 2007, SCHC, the Company acquired certain assets owned by Xingji
        Liu
        in the Shouguang City Houxing Area (the “Houxing Assets”) in exchange for
        $6,665,778.  The Houxing Assets include a 50-year mineral rights and
        land lease covering 2,310 acres, or 9.35 square kilometers, of real property,
        with proven and probable reserves of approximately 240,000 metric tons and
        annual production capacity of approximately 3,900 tons of bromine being serviced
        by 432 wells.  The Houxing Assets also acquired include the 432 wells
        and the related production facility, the wells, the pipelines, other production
        equipment, and the buildings located on the property.
 
 Collectively,
        as a result of the acquisitions of the Qinshuibo Assets, the Liu Hu Assets,
        the
        Renjia Assets and the Houxing Assets combined with the Company’s 50-year mineral
        rights and land lease covering 10,132 acres or 42 square kilometers of real
        property, with proven and probable reserves of approximately 776,000 metric
        tons
        and annual production capacity of approximately 10,900 metric tons of bromine,
        the Company has proven and probable reserves of approximately 1,699,000 metric
        tons and annual production capacity of approximately 26,700 metric tons of
        bromine.
 
 The
        acquisition of the Renjia Assets and the Houxing Assets occurred subsequent
        to
        the end of the third quarter and, consequently, their results are not reflected
        in the Company’s financial statements.
 
 Our
        historical financial statements, the numbers in the table below and the
        Management’s Discussion and Analysis which follow reflect the accounts of SCHC
        and SYCI.  See Note 1 to our Consolidated Financial
        Statements.
 
 **RESULTS
        OF OPERATIONS**
 
 The
        following tables present certain consolidated statement of operations
        information derived from the consolidated statements of operations for the
        three
        months and nine months ended September 30, 2007 and 2006.
 
 Three
                  months ended September 30,2007
              Three
                  months ended September 30,2006
              Percentage
                  ChangeNet
                  Sales
              $16,418,611
              $9,054,281
              +81%Cost
                  of net sales
              $9,558,866
              $6,066,498
              +58%Gross
                  profit
              $6,859,745
              $2,987,783
              +130%Research
                  and development costs
              $143,269
              ----------
              ---------General
                  and Administrative expenses
              $530,486
              $81,358
              +552%Income
                  from operations
              $6,185,990
              $2,906,425
              +113%Other
                  Income (expenses)
              ($38,542)
              $673
              (5827%)Income
                  before taxes
              $6,147,448
              $2,907,098
              +111%Income
                  Taxes
              $2,201,107
              $974,550
              +126%Net
                  Income
              $3,946,341
              $1,932,548
              +104%
 
  -
            18 -
  
 Nine
                  months ended September 30,2007
              Nine
                  months ended September 30,2006
              Percentage
                  ChangeNet
                  Sales
              $38,871,889
              $24,373,912
              +59%Cost
                  of net sales
              $22,854,530
              $15,898,168
              +44%Gross
                  profit
              $16,017,359
              $8,475,744
              +89%Research
                  and development costs
              $143,269
              ----------
              -------General
                  and Administrative expenses
              $1,059,683
              $293,441
              +261%Income
                  from operations
              $14,814,407
              $8,182,303
              +81%Other
                  Income (expenses)
              ($47,414)
              $1,214
              (4006%)Income
                  before taxes
              $14,766,993
              $8,183,517
              +80%Income
                  Taxes
              $5,162,958
              $2,738,330
              +89%Net
                  Income
              $9,604,035
              $5,445,187
              +76%
 
 ***Net
        Sales***
 
 ***Net
        Sales*******Net sales were $16,418,611 in the
        quarter ended September 30, 2007 (the “Third Quarter 2007”), an increase of
        $7,364,330 (or approximately 81%) from net sales of $9,054,281 in the quarter
        ended September 30, 2006 (the “Third Quarter 2006”).  The increase in
        net sales was primarily attributable to continued strong growth in our sales
        of
        bromine and crude salt, which increased from $4,686,488 in the Third Quarter
        of
        2006 to $10,875,675 in the Third Quarter 2007, an increase of approximately
        132%, and in our sales of chemical products, which increased from $4,367,793
        in
        the Third Quarter 2006 to $5,542,936 in the Third Quarter 2007, an increase
        of
        approximately 27%.  Such increase was primarily as a result of the
        completion of 280 new bromine wells in December 2006, the addition of new
        customers, the purchase of the Qinshuibo Assets and the Liu Hu Assets described
        above which started to generate revenues in April 2007 and in July 2007,
        respectively, the completion of equipment upgrade and the development of
        new
        chemical products.  The demand for bromine within China exceeds the
        available domestic supply. We expect our sales of bromine to increase in
        the
        future quarters, based on the continued demand we have from our customers
        and
        others wanting to purchase Bromine from us, as well as a result from our
        recent
        acquisitions of the Renjia Assets and the Houxing Assets.
 
 Net
                  Sales by SegmentThree
                  Months Ended
              
              
              Three
                  Months EndedSeptember 30,
                  2007
              
              
              September 30,
                  2006Segments
              
              
              
              
              Percent
                  of total
              
              
              
              
              
              Percent
                  of totalBromine
                  and Crude salt
              
              $
              10,875,675
              
              
              
              66
              %
              
              $
              4,686,488
              
              
              
              52
              %Chemical
                  Products
              
              $
              5,542,936
              
              
              
              34
              %
              
              $
              4,367,793
              
              
              
              48
              %Total
                  sales
              
              $
              16,418,611
              
              
              
              100
              %
              
              $
              9,054,281
              
              
              
              100
              %
  -
            19 -
  
 Three
                  Months Ended September 302007
                  vs. 2006Segments
              Percent
                  of Net Sales IncreaseBromine
                  and Crude salt
              132%Chemical
                  Products
              27%
  SCHC
                  
                  Product
                    sold in metric tons
                Three
                    months ended September 30, 2007
                Three
                    months ended September 30, 2006
                Percentage
                    ChangeBromine
                5,662
                2,675
                +112%Crude
                    Salt
                16,000
                No
                    Production
 Net
        sales
        were $38,871,889 for nine months ended September 30, 2007, an increase of
        $14,979,977 (or approximately 59%) from net sales of $24,373,912 for nine
        months
        end September 30, 2006. The increase in net sales for nine months ended
        September 30, 2007 was primarily due to a result of the completion of 280
        new
        bromine wells in December 2006, the acquisition of the Qinshuibo Assets and
        the
        Liu Hu Assets and new development of chemical products, which led to an increase
        in our sales of bromine and crude salt from $12,760,106 in the nine-month
        period
        ended September 30, 2006 to $23,880,542 in the nine-month period ended September
        30, 2007, an increase of approximately 87%, and in our sales of chemical
        products from $11,613,806 in the nine-month period ended September 30, 2006
        to
        $14,991,347 in the nine-month period ended September 30, 2007, an increase
        of
        approximately 29%.
 
 Net
                  Sales by SegmentNine
                  Months Ended
              
              
              Nine
                  Months EndedSeptember 30,
                  2007
              
              
              September 30,
                  2006Segments
              
              
              
              
              Percent
                  of total
              
              
              
              
              
              Percent
                  of totalBromine
                  and Crude salt
              
              $
              23,880,542
              
              
              
              61
              %
              
              $
              12,760,106
              
              
              
              52
              %Chemical
                  Products
              
              $
              14,991,347
              
              
              
              39
              %
              
              $
              11,613,806
              
              
              
              48
              %Total
                  sales
              
              $
              38,871,889
              
              
              
              100
              %
              
              $
              24,373,912
              
              
              
              100
              %
 
 
 Nine
                  Months Ended September 302007
                  vs. 2006Segments
              Percent
                  of Net Sales IncreaseBromine
                  and Crude salt
              87%Chemical
                  Products
              29%
 
 SCHC
                    
                    Product
                      sold in metric tons
                  Nine
                        months ended September 30, 2007
                  Nine
                        months ended September 30, 2006
                  Percentage
                      ChangeBromine
                  12,486
                  7,198
                  +73%Crude
                      Salt
                  44,000
                  No
                      Production  The
            portion of our total net sale represented by bromine and crude salt in
            the three
            and nine month periods ended September 30, 2007, increased as compared
            to the
            comparable periods in 2006.  This increase reflects the fact that
            though sales in both segments grew, the growth of sales of bromine and
            crude
            salt was greater than that of our chemical products
            operations.
  -
            20 -
  
 ***Cost
        of net sales***The reported cost****of net sales
        reflects raw materials consumed, direct salaries and benefits, electricity
        and
        other manufacturing costs. Our cost of net sales was $9,558,866 in the Third
        Quarter 2007, an increase of $3,492,368 from the cost of net sales of $6,066,498
        in the Third Quarter 2006.  The increase in the cost of net sales
        (approximately 58%) resulted primarily from the increase in our net sales
        (approximately 81%).  The favorable variance was due to greater
        production capacity of bromine and tighter control of direct costs and indirect
        costs such as salaries, transportation and consumables as a result of economies
        of scale achieved, and improvement of inventory management on the inventory
        level of chemical products. However, the depreciation and amortization increased
        522% due to the addition of property plant and equipment in the Third Quarter
        2007 compared to the Third Quarter 2006.
 
 Our
        cost
        of net sales was $22,854,530 for nine months ended September 30, 2007, an
        increase of $6,956,362 (or approximately 44%) from the cost of net sales
        of
        $15,898,168 for nine months ended September 30, 2006.  The increase in
        the cost of net sales (approximately 44%) resulted primarily from the increase
        in our net sales (approximately 59%). The favorable attributes to the
        comparatively lower increase in costs of net sales compared to the increase
        of
        net sales were due to the shifting of transportation costs to the customer
        and
        the fact that the cost of direct salaries and benefits remained approximately
        unchanged despite the increase in net sales because of reductions and
        reassignments of workforce the percentage increase in the cost of net sales
        was
        significantly below the rate of increase in net sales. However, the
        depreciation and amortization increased 267% due to the addition of property
        plant and equipment from nine months ended September 30, 2006 to nine months
        ended September 30, 2007.
 
 ***Gross
        Profit***Gross profit was 42% of net sales in the Third Quarter
        2007, compared to 33%of net sales in the Third Quarter 2006, an improvement
        of
        9%. Gross profit was 41% of net sales for nine months ended September 30,
        2007,
        compared to 35% of net sales for the same period of 2006, an improvement
        of 6%.
        These improvements were due to the factors discussed above.
 
 ***Research
        and development costs***Research and development costs were $143,269
        in the Third Quarter 2007.  The research and development costs were
        recorded in the Third Quarter 2007 as a result of SYCI entering into an
        agreement, on June 11, 2007, with East China University of Science and
        Technology to jointly establish a Co-Op Research and Development
        Center.
 
 ***General
        and Administrative Expenses***General and administrative expenses
        were $530,486 in the Third Quarter 2007, an increase of $449,128 (or
        approximately 552%) from the general and administrative expenses of $81,358
        during the Third Quarter 2006.  This significant increase in general
        and administrative expenses was primarily due to expenses related to SEC
        reporting, legal, accounting, auditing, stock transfer agent, and investor
        relations, which amounted to $387,388.
 
 General
        and administrative expenses were $1,059,683 for nine months ended September
        30,
        2007, an increase of $766,242 (or approximately 261%) from the general and
        administrative expenses of $293,441 compared with same period of 2006. This
        significant increase in general and administrative expenses was primarily
        due to
        expenses related to SEC reporting, legal, accounting, auditing, stock transfer
        agent, and investor relations, which amounted to $712,861.
  -
            21 -
  ***Income
        from Operations***
 Income
                  from operations by SegmentThree
                  Months Ended
              
              
              Three
                  Months EndedSeptember 30,
                  2007
              
              
              September
                   30, 2006Segments
              
              
              
              
              Percent
                  of total
              
              
              
              
              
              Percent
                  of totalBromine
                  and Crude salt
              
              $
              4,629,467
              
              
              
              70
              %
              
              $
              1,906,794
              
              
              
              66
              %Chemical
                  Products
              
              $
              1,943,911
              
              
              
              30
              %
              
              $
              999,631
              
              
              
              34
              %Income
                  from operations before corporate costs
              
              $
              6,573,378
              
              
              
              100
              %
              
              $
              2,906,425
              
              
              
              100
              %Corporate
                  Costs
              
              $
              (387,388
              )
              
              
              
              
              
              
              -----Income
                  from operations
              
              $
              6,185,990
              
              
              
              
              
              
              $
              2,906,425
 
 Income
        from operations was $6,185,990 in the Third Quarter 2007, an increase of
        $3,279,565 (or approximately 113%) from income from operations of $2,906,425
        in
        the Third Quarter 2006.  The increase in income from operations
        resulted primarily from the increase in net sales and relatively lower increase
        in cost of net sales as discussed above.  The increase in income from
        operations resulted from increases in sales and production in both the bromine
        and chemical divisions of the Company.  In the Third Quarter 2007,
        income from operations in the bromine division was $4,629,467, an increase
        of
        143% from income from operations of in this division of $1,906,794 in the
        Third
        Quarter 2006.  In the Third Quarter 2007, income from operations in
        the chemical products division was $1,943,911, an increase of 94% from income
        from operations in this division of $999,631 in the Third Quarter
        2006.
 
 Income
                  from operations by SegmentNine
                  Months Ended
              
              
              Nine
                  Months EndedSeptember 30,
                  2007
              
              
              September 30,
                  2006Segments
              
              
              
              
              Percent
                  of total
              
              
              
              
              
              Percent
                  of totalBromine
                  and Crude salt
              
              $
              10,128,452
              
              
              
              65
              %
              
              $
              5,046,017
              
              
              
              62
              %Chemical
                  Products
              
              $
              5,398,816
              
              
              
              35
              %
              
              $
              3,136,286
              
              
              
              38
              %Income
                  from operations before corporate costs
              
              $
              15,527,268
              
              
              
              100
              %
              
              $
              8,182,303
              
              
              
              100
              %Corporate
                  costs
              
              $
              (712,861
              )
              
              
              
              
              
              
              -----Incomes
                  from operations
              
              $
              14,814,407
              
              
              
              
              
              
              $
              8,182,303
 
 For
        the
        nine-month period ended September 30, 2007, income from operations in the
        bromine division was $10,128,452, an increase of 101% from income from
        operations of in the bromine division of $5,046,017 for the nine-month period
        ended September 30, 2006.  For the nine-month period ended September
        30, 2007, income from operations in the chemical products division was
        $5,398,816, an increase of 72% from income from operations in the chemical
        products division of $3,136,286 for the nine-month period ended September
        30,
        2006.   The increase in income from operations resulted primarily
        from the increase in revenues and relatively lower increase in cost of net
        sales
        as discussed above.
 
 ***Other
        Income (Expenses)*** Other income was ($38,542) in the Third Quarter
        2007, a decrease of $39,215 (or approximately 5,827%) from the other income
        of
        $673 during the Third Quarter 2006. Other income was ($47,414) for the
        nine-month period ended September 30 2007, a decrease of $48,628 (or
        approximately 4,006%) from the other income of $1,214 for the nine-month
        period
        ended September 30, 2006. These significant decreases in both periods in
        other
        income were primarily due to an increase in interest expense as compared
        to
        comparable periods in 2006, where there was no interest expense
        incurred.
  -
            22 -
  ***Net
        Income***Net income was $3,946,341 in the Third Quarter 2007, an
        increase of $2,013,793 (or approximately 104%) from net income of $1,932,548
        in
        the Third Quarter 2006.  Net income was $9,604,035 for nine-month
        period ended September 30, 2007, an increase of $4,158,848 (or approximately
        76%) from net income of $5,445,187 for the nine-month period ended September
        30,
        2006.  This increase of net income in both periods resulted primarily
        from the increase in revenues and relatively lower increase in cost of net
        sales
        as discussed above and reflects positive trends in both of the Company’s
        divisions.
 
 **LIQUIDITY
        AND CAPITAL RESOURCES**
  **Cash
        Flow**
 
 Nine
                  Months Ended September 302007
              
              
              2006Net
                  cash provided by (used in) operating activities
              
              $
              11,815,355
              
              
              $
              6,040,096Net
                  cash used in investing activities
              
              $
              (8,803,161
              )
              
              $
              (21,981
              )Net
                  cash provided by (used in) financing activities
              
              $
              2,424,990
              
              
              $
              (6,097,774
              )Net
                  cash inflow
              
              $
              5,675,121
              
              
              $
              35,520
 
 The
        company meets its working capital and capital
        investment requirements mainly by using operating cash flows and short-term
        loans.
 
 As
        previously disclosed, the Company will continue to explore synergistic
        opportunities relating to asset purchases or mergers with other
        Companies.
 
 ***Net
        Cash Used in Operating Activities***
 
 As
        of
        September 30, 2007, the Company had cash on hand of
        $11,367,729.  During nine month period ended September 30, 2007, we
        had positive cash flow from operating activities of $11,815,355, primarily
        attributable to net income of $9,604,035, an increase in accounts receivable
        of
        $2,480,862, which was partially offset by an increase in accounts payables
        of
        $2,041,189, and non-cash items (amortization of prepaid consulting expenses,
        depreciation and amortization, prepayment and deposit, income tax receivable,
        inventories and taxes payable) aggregating a total of $2,650,993.
 
 ***Net
        Cash Provided (Used) by Investing Activities and Financing
        Activities***
 
 We
        used
        approximately $8,803,161 to acquire additional property, plant and equipment
        during the nine month periods ended September 30, 2007.  These
        acquisitions were financed out of cash flows from operations and a portion
        of
        the proceeds of a short-term loan from a third party of $5,878,800 and advances
        from related parties, on a net basis, of $1,235,790.  The proceeds of
        our financing activities were also used to pay dividends aggregating $4,739,600
        in connection with the acquisition of SYCI.
 
 We
        anticipate that our available funds and cash flows generated from operations
        will be sufficient to meet our anticipated needs for working capital
        expenditures and business expansion for the next twelve (12) months. We may
        need
        to raise additional funds in the future, however, in order to fund acquisitions,
        develop new projects, or if our business otherwise grows more rapidly than
        we
        currently predict. If we do need to raise such additional funds, we expect
        to
        raise those funds through the issuance of additional shares of our equity
        securities in one or more public or private offerings, or through credit
        facilities obtained with lending institutions.  There can be no
        guarantee that we will be able to obtain such funding, whether through the
        issuance of debt or equity, on terms satisfactory to management and our board
        of
        directors.
 
 On
        May 7,
        2007, we entered into a Fixed Price Standby Equity Distribution Agreement
        with
        eight investors listed therein (each, an “Investor”, collectively, the
“Investors”). Pursuant to the Fixed Price Standby Equity Distribution Agreement,
        the Company may, at its discretion, periodically sell to the Investors up
        to 30
        million shares of the Company’s common stock, par value $.001 per share, for a
        total purchase price of up to $60 million (a per share purchase price of
        $2.00
        per share). The Investors’ obligation to purchase shares of common stock under
        the Fixed Price Standby Equity Distribution Agreement is subject to certain
        conditions, including the Company obtaining an
  -
            23 -
  effective
        registration statement for the resale of the common stock sold under the
        Fixed
        Price Standby Equity Distribution Agreement. The maximum amount of advance
        under
        the Fixed Price Standby Equity Distribution Agreement cannot exceed $10
        million.  In no event can the number of shares issued to any Investor
        pursuant to an advance cause any Investor to own more than 9.9% of the shares
        of
        common stock outstanding.
 
 The
        commitment period under the Fixed Price Standby Equity Distribution Agreement
        commences on the earlier to occur of (i) the date that the Registration
        Statement is declared effective by the Securities and Exchange Commission
        (the
“Effective Date”), or (ii) such earlier date as we and the Investors may
        mutually agree in writing.  The commitment period under the Fixed
        Price Standby Equity Distribution Agreement expires on the earliest to occur
        of
        (i) the date on which the Investors have purchased an aggregate amount of
        5
        million shares of our common stock under the Fixed Price Standby Equity
        Distribution Agreement, (ii) the date occurring eighteen months after the
        Effective Date, or (iii) the date the Agreement is earlier terminated (in
        the
        event that (x) there occurs any stop order or suspension of the effectiveness
        of
        the Registration Statement for an aggregate of sixty trading days, other
        than
        due to the acts of the Investors, during the commitment period, and (y) we
        fail
        materially to comply with any of the covenants contained in the Standby Equity
        Distribution Agreement and such failure is not cured within thirty days after
        receipt of written notice from the Investors, provided, however, that this
        termination provision does not apply to any period commencing upon the filing
        of
        a post-effective amendment to the Registration Statement and ending upon
        the
        date on which such post effective amendment is declared effective by the
        SEC).  There can be no assurance that the Company will be able to
        satisfy the conditions precedent to its right to cause the Investors to purchase
        its securities under the Standby Equity Distribution Agreement or that if
        it the
        Investors are unable or unwilling to honor their obligations, that the Company
        would be able to obtain debt or equity from other parties or that if obtained,
        that such debt or equity would be on terms acceptable to the
        Company.
 
 There
        can
        be no assurance that the Company will be able to satisfy the conditions
        precedent to its right to cause the Investors to purchase its securities
        under
        the Standby Equity Distribution Agreement or that if the Investors were unable
        or unwilling to do so, that the Company would be able to obtain debt or equity
        from other parties or that if obtained, that such debt or equity would be
        on
        terms acceptable to the Company.
 
 On
        October 19, 2007, the Company's Board of Directors and holders of a majority
        of
        the Company's then outstanding shares of Common Stock consented in writing,
        without a meeting, to amend our Certificate to Incorporation to effect a
        two-for-one-hundred (2-for-1) forward stock split (the "Forward Stock Split")
        of
        the outstanding shares of the Company's Common Stock and to increase the
        total
        number of authorized shares of Common Stock from 70,000,000 to 400,000,000
        (the
        "Authorized Shares Increase").
 
 **OFF-BALANCE
        SHEET ARRANGEMENTS**
 
 We
        have
        never entered into any off-balance sheet financing arrangements and have
        never
        established any special purpose entities. We have not guaranteed any debt
        or
        commitments of other entities or entered into any options on non-financial
        assets.
 
 **Risk
        Factors**
 
 The
        reader should carefully consider each of the risks described
        below.  If any of the following risks develop into actual events, our
        business, financial condition or results of operations could be materially
        adversely affected and the trading price of our common stock could decline
        significantly.
 
 **Risk
        Factors of the Company**
 
 **There
        is a limited public market for our common stock.**
 
 There
        is
        currently a limited public market for the common stock. Holders of our common
        stock may, therefore, have difficulty selling their common stock, should
        they
        decide to do so. In addition, there can be no assurances that such markets
        will
        continue or that any shares of common stock, which may be purchased, may
        be sold
        without incurring a loss. Any such market price of the common stock may not
        necessarily bear any relationship to our book value, assets, past operating
        results, financial condition or any other established criteria of value,
        and may
        not be indicative of the market price for the common stock in the future.
        Further, the market price for the common stock may be volatile depending
        on a
        number of factors, including business performance, industry dynamics, and
        news
        announcements or changes in general economic conditions.
  -
            24 -
   **Our
        common stock may be deemed penny stock with a limited trading
        market.**
 
 Our
        common stock is currently listed for trading in the Over-The-Counter Market
        on
        the NASD Electronic Bulletin Board or in the “pink sheets” maintained by the
        National Quotation Bureau, Inc., which are generally considered to be less
        efficient markets than markets such as NASDAQ or other national exchanges,
        and
        which may cause difficulty in conducting trades and difficulty in obtaining
        future financing. Further, our securities are subject to the “penny stock rules”
adopted pursuant to Section 15 (g) of the Securities Exchange Act of 1934,
        as
        amended (the “Exchange Act”). The penny stock rules apply to non-NASDAQ
        companies whose common stock trades at less than $5.00 per share or which
        have
        tangible net worth of less than $5,000,000 ($2,000,000 if the company has
        been
        operating for three or more years). Such rules require, among other things,
        that
        brokers who trade “penny stock” to persons other than “established customers”
complete certain documentation, make suitability inquiries of investors and
        provide investors with certain information concerning trading in the security,
        including a risk disclosure document and quote information under certain
        circumstances. Many brokers have decided not to trade “penny stock” because of
        the requirements of the penny stock rules and, as a result, the number of
        broker-dealers willing to act as market makers in such securities is limited.
        In
        the event that we remain subject to the “penny stock rules” for any significant
        period, there may develop an adverse impact on the market, if any, for our
        securities. Because our securities are subject to the “penny stock rules”
investors will find it more difficult to dispose of our securities. Further,
        for
        companies whose securities are traded in the Over-The-Counter Market, it
        is more
        difficult: (i) to obtain accurate quotations; (ii) to obtain coverage for
        significant news events because major wire services, such as the Dow Jones
        News
        Service, generally do not publish press releases about such companies, and
        (iii)
        to obtain needed capital.
 
 **Management’s
        decision to change the business focus of the Company from the photocopy and
        fax
        service industry to the chemical industry could ultimately prove to be
        unsuccessful, harming our business operations and
        prospects.**
 
 Management
        changed the Company's
        business focus from the photocopy service industry to the bromine and chemical
        products industry.  Accordingly, a substantial portion of our
        management’s time will be directed toward the pursuit of identifying and
        acquiring business opportunities in the chemical industry.  There can
        be no assurance that new management will be able to properly manage the
        direction of the Company or that any ultimate change in the Company's business
        focus will be successful. If new management fails to properly manage and
        direct
        the Company, the Company may be forced to scale back or abandon its existing
        operations, which will cause the value of our shares to decline.
 
 **We
        have not and do not anticipate paying any dividends on our common stock;
        because
        of this our securities could face devaluation in the
        market.**
 
 We
        have
        paid no dividends on our common stock to date and it is not anticipated that
        any
        dividends will be paid to holders of our common stock in the foreseeable
        future.  While our dividend policy will be based on the operating
        results and capital needs of the business, it is anticipated that any earnings
        will be retained to finance our future expansion and for the implementation
        of
        our new business plan. As an investor, you should take note of the fact that
        a
        lack of a dividend can further affect the market value of our stock, and
        could
        significantly affect the value of any investment in our Company.
 
 **We
        will continue to incur significant increased costs as a result of operating
        as a
        public company, and our management will be required to devote substantial
        time
        to new compliance requirements.**
 
 As
        a
        public company we incur significant legal, accounting and other expenses
        under
        the Sarbanes-Oxley Act of 2002, together with rules implemented by the
        Securities and Exchange Commission and applicable market
        regulators.  These rules impose various requirements on public
        companies, including requiring certain corporate governance
        practices.  Our management and other personnel will need to devote a
        substantial amount of time to these new compliance requirements. Moreover,
        these
        rules and regulations will increase our legal and financial compliance costs
        and
        will make some activities more time-consuming and costly.
 
 In
        addition, the Sarbanes-Oxley Act requires, among other things, that we maintain
        effective internal controls for financial reporting and disclosure controls
        and
        procedures. In particular, commencing in 2007, we must perform system and
        process evaluations and testing of our internal controls over financial
        reporting to allow management and our independent registered public accounting
        firm to report on the effectiveness of our internal
  -
            25 -
  controls
        over financial reporting, as required by Section 404 of the Sarbanes-Oxley
        Act. Our testing, or the subsequent testing by our independent registered
        public
        accounting firm, may reveal deficiencies in our internal controls over financial
        reporting that are deemed to be material weaknesses. Compliance with
        Section 404 may require that we incur substantial accounting expenses and
        expend significant management efforts. If we are not able to comply with
        the
        requirements of Section 404 in a timely manner, or if our accountants later
        identify deficiencies in our internal controls over financial reporting that
        are
        deemed to be material weaknesses, the market price of our stock could decline
        and we could be subject to sanctions or investigations by the SEC or other
        applicable regulatory authorities.
 
 **Our
        Board of Directors has the authority, without stockholder approval, to issue
        preferred stock with terms that may not be beneficial to common stock holders
        and with the ability to adversely affect stockholder voting power and perpetuate
        the board’s control over the Company.**
 
 Our
        certificate of incorporation authorizes the issuance of up to 1,000,000 shares
        of preferred stock, par value $0.001 per share.
 
 The
        specific terms of the preferred stock have not been determined, including:
        designations; preferences; conversions rights; cumulative, relative;
        participating; and optional or other rights, including: voting rights;
        qualifications; limitations; or restrictions of the preferred
        stock.
 
 The
        Board
        of Directors is entitled to authorize the issuance of up to 1,000,000 shares
        of
        preferred stock in one or more series with such limitations and restrictions
        as
        may be determined in its sole discretion, with no further authorization by
        security holders required for the issuance thereof.
  The
        issuance of preferred stock could adversely affect the voting power and other
        rights of the holders of common stock. Preferred stock may be issued quickly
        with terms calculated to discourage, make more difficult, delay or prevent
        a
        change in control of our Company or make removal of management more difficult.
        As a result, the Board of Directors' ability to issue preferred stock may
        discourage the potential hostile acquirer, possibly resulting in beneficial
        negotiations. Negotiating with an unfriendly acquirer may result in, among
        other
        things, terms more favorable to us and our stockholders. Conversely, the
        issuance of preferred stock may adversely affect any market price of, and
        the
        voting and other rights of the holders of the common stock. We presently
        have no
        plans to issue any preferred stock.
 
 **The
        inability to successfully manage the growth of our business may have a material
        adverse effect on our business, results or operations and financial
        condition.**
 
 We
        expect to experience growth in the
        number of employees and the scope of our operations as a result of internal
        growth and acquisitions.  Such activities could result in increased
        responsibilities for management.
 
 Our
        future success will be highly
        dependent upon our ability to manage successfully the expansion of
        operations.  Our ability to manage and support our growth effectively
        will be substantially dependent on our ability to implement adequate
        improvements to financial, inventory, management controls, reporting, union
        relationships, order entry systems and other procedures, and hire sufficient
        numbers of financial, accounting, administrative, and management
        personnel.  There can be no assurance that we will be able to
        identify, attract and retain experienced accounting and financial
        personnel.
 
 Our
        future success depends on our
        ability to address potential market opportunities and to manage expenses
        to
        match our ability to finance operations.  The need to control our
        expenses will place a significant strain on our management and operational
        resources.  If we are unable to control our expenses effectively, our
        business, results of operations and financial condition may be adversely
        affected.
 
 **The
        unsuccessful integration of a business or business segment we acquire could
        have
        a material adverse effect on our results.**
 
 As
        part of our business strategy, we
        expect to acquire assets and businesses relating to or complementary to our
        operations.  These acquisitions will involve risks commonly
        encountered in acquisitions.  These risks include, among other things,
        exposure to unknown liabilities of the acquired companies, additional
        acquisition costs and unanticipated expenses.  Our quarterly and
        annual operating results will fluctuate due to the costs and expenses
        of
  -
            26 -
  acquiring
        and integrating new businesses.  We may also experience difficulties
        in assimilating the operations and personnel of acquired
        businesses.  Our ongoing business may be disrupted and our
        management’s time and attention diverted from existing
        operations.  Our acquisition strategy will likely require additional
        debt or equity financing, resulting in additional leverage or dilution of
        ownership.  We cannot assure you that any future acquisition will be
        consummated, or that if consummated, that we will be able to integrate such
        acquisition successfully.
 
 **We
        depend on revenues from a few significant relationships, and any loss,
        cancellation, reduction, or interruption in these relationships could harm
        our
        business.**
 
 In
        general, the Company has derived a
        material portion of its revenue from a limited number of customers and
        suppliers.  We expect that in future periods we may enter into
        contracts with customers and suppliers which represent a significant
        concentration of our revenues.  If such contracts were terminated, our
        revenues and net income could significantly decline.  Our success will
        depend on our continued ability to develop and manage relationships with
        significant customers and suppliers.  Any adverse change in our
        relationship with such customer could have a material adverse effect on our
        business.  Although we are attempting to expand our customer base, we
        expect that our customer concentration will not change significantly in the
        near
        future.  We cannot be sure that we will be able to retain our largest
        customers and suppliers or that we will be able to attract additional customers
        and suppliers, or that our customers and suppliers will continue to buy our
        products in the same amounts as in prior years.  The loss of one or
        more of our largest customers or suppliers, any reduction or interruption
        in
        sales to these customers or suppliers, our inability to successfully develop
        relationships with additional customers or suppliers or future price concessions
        that we may have to make, could significantly harm our business.
 
 **Attracting
        and retaining key personnel is an essential element of our future
        success.**
 
 Our
        future success depends to a
        significant extent upon the continued service of our executive officers and
        other key management and technical personnel and on our ability to continue
        to
        attract, retain and motivate executive and other key employees, including
        those
        in managerial, technical, marketing and information technology support
        positions.  Attracting and retaining skilled workers and qualified
        sales representatives is also critical to us.  Experienced management
        and technical, marketing and support personnel in the defense and aerospace
        industries are in demand and competition for their talents is
        intense.  The loss of the services of one or more of our key employees
        or our failure to attract, retain and motivate qualified personnel could
        have a
        material adverse effect on our business, financial condition and results
        of
        operations.
 
 **Risks
        related to doing business in China**
 
 **Our
        business operations take place primarily in China. Because Chinese laws,
        regulations and policies are continually changing, our Chinese operations
        will
        face several risks summarized below.**
 
 **Limitations
        on Chinese economic market reforms may discourage foreign investment in Chinese
        businesses.**
 
 The
        value
        of investments in Chinese businesses could be adversely affected by political,
        economic and social uncertainties in China. The economic reforms in China
        in
        recent years are regarded by China's central government as a way to introduce
        economic market forces into China. Given the overriding desire of the central
        government leadership to maintain stability in China amid rapid social and
        economic changes in the country, the economic market reforms of recent years
        could be slowed, or even reversed.
 
 **Any
        change in policy by the Chinese government could adversely affect investments
        in
        Chinese businesses.**
 
 Changes
        in policy could result in imposition of restrictions on currency conversion,
        imports or the source of suppliers, as well as new laws affecting joint ventures
        and foreign-owned enterprises doing business in China. Although China has
        been
        pursuing economic reforms for the past two decades, events such as a change
        in
        leadership or social disruptions that may occur upon the proposed privatization
        of certain state-owned industries, could significantly affect the government's
        ability to continue with its reform.
 
  -
            27 -
  **We
        face economic risks in doing business in China.**
 
 As
        a
        developing nation, China's economy is more volatile than that of developed
        Western industrial economies. It differs significantly from that of the U.S.
        or
        a Western European country in such respects as structure, level
        of
        development, capital reinvestment, resource allocation and self-sufficiency.
        Only in recent years has the Chinese economy moved from what had been a command
        economy through the 1970s to one that during the 1990s encouraged substantial
        private economic activity. In 1993, the Constitution of China was amended
        to
        reinforce such economic reforms. The trends of the 1990s indicate that future
        policies of the Chinese government will emphasize greater utilization of
        market
        forces. For example, in 1999 the Government announced plans to amend the
        Chinese
        Constitution to recognize private property, although private business will
        officially remain subordinated to the state-owned companies, which are the
        mainstay of the Chinese economy. However, there can be no assurance that,
        under
        some circumstances, the government's pursuit of economic reforms will not
        be
        restrained or curtailed. Actions by the central government of China could
        have a
        significant adverse effect on economic conditions in the country as a whole
        and
        on the economic prospects for our Chinese operations.
 
 **The
        Chinese legal and judicial system may negatively impact foreign
        investors.**
 
 In
        1982,
        the National Peoples Congress amended the Constitution of China to authorize
        foreign investment and guarantee the "lawful rights and interests" of foreign
        investors in China. However, China's system of laws is not yet comprehensive.
        The legal and judicial systems in China are still rudimentary, and enforcement
        of existing laws is inconsistent. Many judges in China lack the depth of
        legal
        training and experience that would be expected of a judge in a more developed
        country. Because the Chinese judiciary is relatively inexperienced in enforcing
        the laws that do exist, anticipation of judicial decision-making is more
        uncertain than would be expected in a more developed country. It may be
        impossible to obtain swift and equitable enforcement of laws that do exist,
        or
        to obtain enforcement of the judgment of one court by a court of another
        jurisdiction. China's legal system is based on written statutes; a decision
        by
        one judge does not set a legal precedent that is required to be followed
        by
        judges in other cases. In addition, the interpretation of Chinese laws may
        be
        varied to reflect domestic political changes.
 
 The
        promulgation of new laws, changes to existing laws and the pre-emption of
        local
        regulations by national laws may adversely affect foreign investors. However,
        the trend of legislation over the last 20 years has significantly enhanced
        the
        protection of foreign investment and allowed for more control by foreign
        parties
        of their investments in Chinese enterprises. There can be no assurance that
        a
        change in leadership, social or political disruption, or unforeseen
        circumstances affecting China's political, economic or social life, will
        not
        affect the Chinese government's ability to continue to support and pursue
        these
        reforms. Such a shift could have a material adverse effect on our business
        and
        prospects.
 
 The
        practical effect of the Peoples Republic of China legal system on our business
        operations in China can be viewed from two separate but intertwined
        considerations. First, as a matter of substantive law, the Foreign Invested
        Enterprise laws provide significant protection from government interference.
        In
        addition, these laws guarantee the full enjoyment of the benefits of corporate
        Articles and contracts to Foreign Invested Enterprise participants. These
        laws,
        however, do impose standards concerning corporate formation and governance,
        which are not qualitatively different from the general corporation laws of
        the
        several states. Similarly, the Peoples Republic of China accounting laws
        mandate
        accounting practices, which are not consistent with U.S. Generally Accepted
        Accounting Principles. China's accounting laws require that an annual "statutory
        audit" be performed in accordance with Peoples Republic of China accounting
        standards and that the books of account of Foreign Invested Enterprises are
        maintained in accordance with Chinese accounting laws. Article 14 of the
        Peoples
        Republic of China Wholly Foreign-Owned Enterprise Law requires a Wholly
        Foreign-Owned Enterprise to submit certain periodic fiscal reports and
        statements to designate financial and tax authorities, at the risk of business
        license revocation. Second, while the enforcement of substantive rights may
        appear less clear than United States procedures, the Foreign Invested
        Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered
        companies, which enjoy the same status as other Chinese registered companies
        in
        business-to-business dispute resolution. Generally, the Articles of Association
        provide that all business disputes pertaining to Foreign Invested Enterprises
        are to be resolved by the Arbitration Institute of the Stockholm Chamber
        of
        Commerce in Stockholm, Sweden, applying Chinese substantive law. Any award
        rendered by this arbitration tribunal is, by the express terms of the respective
        Articles of Association, enforceable in accordance with the "United Nations
        Convention on the Recognition and Enforcement of Foreign Arbitral Awards
        (1958)." Therefore, as a practical matter, although no assurances can be
        given,
        the Chinese legal infrastructure, while different in operation from its United
        States counterpart, should not present any significant impediment to the
        operation of Foreign Invested Enterprises.
  -
            28 -
  **Economic
        Reform Issues**
 
 Although
        the Chinese government owns the majority of productive assets in China, during
        the past several years the government has implemented economic reform measures
        that emphasize decentralization and encourage private economic activity.
        Because
        these economic reform measures may be inconsistent or ineffectual, there
        are no
        assurances that:
 
 -
              We
                  will be able to capitalize on economic reforms;-
              The
                  Chinese government will continue its pursuit of economic reform
                  policies;-
              The
                  economic policies, even if pursued, will be successful;-
              Economic
                  policies will not be significantly altered from time to time;
                  and-
              Business
                  operations in China will not become subject to the risk of
                  nationalization.
 
 Since
        1979, the Chinese government has reformed its economic systems. Because many
        reforms are unprecedented or experimental, they are expected to be refined
        and
        improved. Other political, economic and social factors, such as political
        changes, changes in the rates of economic growth, unemployment or inflation,
        or
        in the disparities in per capita wealth between regions within China, could
        lead
        to further readjustment of the reform measures. This refining and readjustment
        process may negatively affect our operations.
 
 Over
        the
        last few years, China's economy has registered a high growth rate. Recently,
        there have been indications that rates of inflation have increased. In response,
        the Chinese government recently has taken measures to curb this excessively
        expansive economy. These measures have included devaluations of the Chinese
        currency, the Renminbi (RMB), restrictions on the availability of domestic
        credit, reducing the purchasing capability of certain of its customers, and
        limited re-centralization of the approval process for purchases of some foreign
        products. These austerity measures alone may not succeed in slowing down
        the
        economy's excessive expansion or control inflation, and may result in severe
        dislocations in the Chinese economy. The Chinese government may adopt additional
        measures to further combat inflation, including the establishment of freezes
        or
        restraints on certain projects or markets.
 
 To
        date,
        reforms to China's economic system have not adversely impacted our operations
        and are not expected to adversely impact operations in the foreseeable future;
        however, there can be no assurance that the reforms to China's economic system
        will continue or that we will not be adversely affected by changes in China's
        political, economic, and social conditions and by changes in policies of
        the
        Chinese government, such as changes in laws and regulations, measures which
        may
        be introduced to control inflation, changes in the rate or method of taxation,
        imposition of additional restrictions on currency conversion and remittance
        abroad, and reduction in tariff protection and other import
        restrictions.
 
 **Item
        3.  Controls and Procedures**
  As
        of the
        end of the period covered by this report, our management, including our
        principal executive officer and our principal financial officer, conducted
        an
        evaluation of the effectiveness of our disclosure controls and procedures
        (as
        defined in Rule 13a-15 under the Securities Exchange Act of
        1934).  Based upon that evaluation, our principal executive officer
        and our chief financial officer have concluded that our disclosure controls
        and
        procedures are effective in timely alerting them of material information
        relating to us that is required to be disclosed by us in the reports we file
        or
        submit under the Exchange Act.  There have been no changes in our
        internal control over financial reporting that occurred during the period
        covered by this report that have materially affected, or are reasonably likely
        to materially affect, our internal control over financial
        reporting.
 
 **PART
        II**
  **OTHER
        INFORMATION**
  **Item
        4.  Submission of Matters to a Vote of Security
        Holders.**
  On
        October 19 2007, shareholders holding 26,236,918 shares (approximately 53%)
        of
        the shares of our Common Stock outstanding at such time consented in writing,
        without a meeting, to amend our Certificate of Incorporation to implement
        the
        Forward Stock Split and Authorized Shares Increase. On or about November
        8,
        2007, we mailed to
  -
            29 -
  our
        shareholders an information statement on Schedule 14C with respect to such
        matters and, we expect that the Forward Stock Split and the Authorized Shares
        Increase will become effective on November 28, 2007.
 
 **Item
                  6. Exhibits**
                
                The
                  following exhibits are filed as part of this report:Exhibit
                No.
              Description
                of Exhibit31.1                   --
              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).
  -
            30 -
  **SIGNATURES**
  In
        accordance with the requirements of the Securities Exchange Act of 1934,
        the
        Registrant has caused this report to be signed on its behalf by the undersigned,
        thereunto duly authorized.
   Dated:
                November 13, 2007GULF
                RESOURCES, INC.By:
              /s/ Ming
                YangChief
                  Executive
                  Officer/s/ Min
                  LiChief
                Financial Officer(Principal
                Financial and Accounting Officer)
 
  
  -
            31 -
  **EXHIBIT
                  INDEX**Exhibit
                  No.
              Description
                  of Exhibit31.1                   --
              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).