UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q




x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended March 31, 2010Oro
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from _________
  to _________





Commission
File Number: 000-20936





GULF
RESOURCES, INC.


(Exact
name of registrant as specified in its charter)





Delaware
            
            13-3637458(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)99
      Wenchang Road, Chenming Industrial Park, Shouguang City, Shandong,
      China
            
            262714(Address
      of principal executive offices)
            
            (Zip
      Code)





Registrant’s
telephone number, including area code: +86 (536) 567 0008





Indicate
by check mark whether the registrant (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 xNo o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.





Large
      accelerated filer o
            Accelerated
      filer oNon-accelerated
      filer (Do not check if a smaller reporting company) o
            Smaller
      reporting company x





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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files.) Yes x No  ̈





As of May
11, 2010, the registrant had outstanding 34,569,447 shares of common
stock.




Table of Contents




Table ofContents





Part
      I – Financial InformationItem 1. Financial
      Statements
            3Item 2. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
            26Item 3. Quantitative and Qualitative Disclosures about Market
      Risk
            33Item 4. Controls and Procedures
            33Part
      II – Other InformationItem 1. Legal Proceedings.
            34Item 1 A. Risk Factors.
            34Item 2. Unregistered Shares of Equity Securities and Use of
      Proceeds.
            34Item 3. Defaults Upon Senior Securities.
            34Item 4. Submission of Matters to a Vote of Security
      Holders.
            34Item 5. Other Information.
            34Item 6. Exhibits.
            34





1
 Table of Contents





FORWARD-LOOKING
STATEMENTS





This
quarterly report on Form 10-Q and other reports filed by the Company from time
to time with the Securities and Exchange Commission (collectively the “Filings”)
contain or may contain forward-looking statements and information that are based
upon beliefs of, and information currently available to, the Company’s
management as well as estimates and assumptions made by Company’s management.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which are only predictions and speak only as of the date hereof.
When used in the filings, the words “anticipate”, “believe”, “estimate”,
“expect”, “future”, “intend”, “plan”, or the negative of these terms and similar
expressions as they relate to the Company or the Company’s management identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to future events and are subject to risks, uncertainties,
assumptions, and other factors, including the risks contained in the “Risk
Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2009 filed with the Securities and Exchange Commission,
relating to the Company’s industry, the Company’s operations and results of
operations, and any businesses that the Company may acquire. Should one or more
of these risks or uncertainties materialize, or should the underlying
assumptions prove incorrect, actual results may differ significantly from those
anticipated, believed, estimated, expected, intended, or planned.





Although
the Company believes that the expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance, or achievements. Except as required by applicable law,
including the securities laws of the United States, the Company does not intend
to update any of the forward-looking statements to conform these statements to
actual results.





Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”). These accounting principles
require us to make certain estimates, judgments and assumptions. We believe that
the estimates, judgments and assumptions upon which we rely are reasonable based
upon information available to us at the time that these estimates, judgments and
assumptions are made. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities as of the date of the financial
statements as well as the reported amounts of revenues and expenses during the
periods presented. Our financial statements would be affected to the extent
there are material differences between these estimates and actual results. In
many cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP and does not require management’s judgment in its application.
There are also areas in which management’s judgment in selecting any available
alternative would not produce a materially different result.  The
following discussion should be read in conjunction with our consolidated
financial statements and notes thereto appearing elsewhere in this
report.





2
 Table of Contents





PART I—FINANCIAL INFORMATION


Item 1. Financial
Statements.




GULF
      RESOURCES, INC.AND
      SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETS(Expressed
      in U.S. dollars)
              (UNAUDITED)




March
      312010
            
            
            
            
            December 31
                  2009Cash
      and cash equivalents
            
            $
            55,571,241
            
            
            
            $
            45,536,735Accounts
      receivable
            
            
            14,194,076
            
            
            
            
            14,960,002Inventories
            
            
            597,009
            
            
            
            
            650,332Prepayment
      and deposit
            
            
            229,267
            
            
            
            
            233,330Prepaid
      land lease
            
            
            51,356
            
            
            
            
            46,133Deferred
      tax asset
            
            
            87,282
            
            
            
            
            85,672Other
      receivable
            
            
            2,289
            
            
            
            
            2,195,208Total
      Current Assets
            
            
            70,732,520
            
            
            
            
            63,707,412Property,
      plant and equipment, net
            
            
            83,985,334
            
            
            
            
            81,993,894Prepaid
      land lease, net of current portion
            
            
            718,487
            
            
            
            
            721,862Total
      Assets
            
            $
            155,436,341
            
            
            
            $
            146,423,168Liabilities
      and Stockholders’ EquityCurrent
      LiabilitiesAccounts
      payable and accrued expenses
            
            $
            6,057,340
            
            
            
            $
            5,823,745Retention
      payable
            
            
            660,150
            
            
            
            
            660,150Due
      to a related party
            
            
            1,190
            
            
            
            
            1,190Taxes
      payable
            
            
            5,155,325
            
            
            
            
            5,555,113Total
      Current Liabilities
            
            
            11,874,005
            
            
            
            
            12,040,198Total
      Liabilities
            
            
            11,874,005
            
            
            
            
            12,040,198Stockholders’
      EquityPREFERRED
      STOCK ; $0.001 par value; 1,000,000 sharesauthorized
      none outstanding
            
            $
            -
            
            
            
            $
            -COMMON
      STOCK; $0.0005 par value; 100,000,000 sharesauthorized;
      34,569,447 and 34,541,066 shares issued and outstanding as of March 31,
      2010 and December 31, 2009, respectively
            
            
            17,285
            
            
            
            
            17,271Additional
      paid in capital
            
            
            65,924,978
            
            
            
            
            64,718,026Retained
      earnings unappropriated
            
            
            67,800,425
            
            
            
            
            59,808,289Retained
      earnings appropriated
            
            
            5,679,769
            
            
            
            5,679,769Cumulative
      translation adjustment
            
            
            4,139,879
            
            
            
            
            4,159,615Total
      Stockholders’ Equity
            
            
            143,562,336
            
            
            
            
            134,382,970Total
      Liabilities and Stockholders’ Equity
            
            $
            155,436,341
            
            
            
            $
            146,423,168





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





3
 Table of Contents




GULF
      RESOURCES, INC.AND
      SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONS(Expressed
      in U.S. dollars)(UNAUDITED)  Three
      Months Ended March 312010
              
              
              2009NET
      REVENUENet
      sales
              
              $
              29,693,418
              
              
              $
              23,633,538OPERATING
      EXPENSESCost
      of net revenue
              
              
              (16,235,499
              )
              
              
              (13,540,940
              )General
      and administrative expenses
              
              
              (2,277,492
              )
              
              
              (1,099,380
              )Research
      and development cost
              
              
              (125,202
              )
              
              
              (124,969
              )(18,638,193
              )
              
              
              (14,765,289
              )INCOME
      FROM OPERATIONS
              
              
              11,055,225
              
              
              
              8,868,249OTHER
      INCOME (EXPENSES)Interest
      expense
              
              
              (174
              )
              
              
              (27,009
              )Interest
      income
              
              
              53,761
              
              
              
              22,029Sundry
      income
              
              
              21,998
              
              
              
              -INCOME
      BEFORE INCOME TAXES
              
              
              11,130,810
              
              
              
              8,863,269INCOME
      TAXES - current
              
              
              (3,138,674
              )
              
              
              (2,330,155
              )NET
      INCOME
              
              $
              7,992,136
              
              
              $
              6,533,114EARNINGS
      PER SHAREBASIC
              
              $
              0.23
              
              
              $
              0.23DILUTED
              
              $
              0.23
              
              
              $
              0.23WEIGHTED
      AVERAGE NUMBER OF SHARESBASIC
              
              
              34,561,233
              
              
              
              28,763,044DILUTED
              
              
              34,762,991
              
              
              
              28,763,044





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





4
 Table of Contents




GULF
      RESOURCES, INC.AND
      SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME(Expressed
      in U.S. dollars)(UNAUDITED)  Three
      Months Ended March 312010
              
              
              2009NET
      INCOME
              
              $
              7,992,136
              
              
              $
              6,533,114OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation adjustment
              
              
              19,734
              
              
              
              (49,438
              )COMPREHENSIVE
      INCOME
              
              $
              8,011,870
              
              
              $
              6,483,676





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




5
 Table of Contents




GULF
      RESOURCES, INC.AND
      SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITYTHREE
      MONTHS ENDED MARCH 31, 2010(Expressed
      in U.S. dollars)(UNAUDITED)





StatutoryAdditional
            
            
            common
            
            
            
            
            
            CumulativeNumber
            
            
            Common
            
            
            paid-in
            
            
            reserve
            
            
            Retained
            
            
            translationof
      shares
            
            
            stock
            
            
            capital
            
            
            fund
            
            
            earnings
            
            
            adjustment
            
            
            Total$
            
            
            $
            
            
            $
            
            
            $
            
            
            $
            
            
            $BALANCE AT DECEMBER
      31, 2009
            
            
            34,541,066
            
            
            
            17,271
            
            
            
            64,718,026
            
            
            
            5,679,769
            
            
            
            59,808,289
            
            
            
            4,159,615
            
            
            
            134,382,970Translation
      adjustment
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            (19,736
            )
            
            
            (19,736
            )Common
      stock issued for exercising stock option
            
            
            12,500
            
            
            
            6
            
            
            
            17,994
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            18,000Common
      stock issuance for exercising warrants
            
            
            15,881
            
            
            
            8
            
            
            
            (8
            )
            
            -
            
            
            -
            
            
            -
            
            
            
            -Issuance
      of warrants to non-employees
            
            
            -
            
            
            
            -
            
            
            
            193,428
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            193,428Issuance
      of stock options to employees
            
            
            -
            
            
            
            -
            
            
            
            995,538
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            995,538Net
      income for three months ended March 31, 2010
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            7,992,136
            
            
            -
            
            
            
            7,992,136BALANCEATMARCH31,
      2010
            
            
            34,569,447
            
            
            
            17,285
            
            
            
            65,924,978
            
            
            
            5,679,769
            
            
            
            67,800,425
            
            
            
            4,139,879
            
            
            
            143,562,336




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




6
 Table of Contents




GULF
      RESOURCES, INC.AND
      SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Expressed
      in U.S. dollars)(UNAUDITED)  Three
      Months Ended March 312010
              
              
              
              2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
              
              $
              7,992,136
              
              
              
              $
              6,533,114Adjustments
      to reconcile net incomeAmortization
      of warrants
              
              
              -
              
              
              
              
              238,027Amortization
      of prepaid expenses
              
              
              22,057
              
              
              
              
              3,957Depreciation
      and amortization
              
              
              2,377,621
              
              
              
              
              1,469,822Stock-based
      compensation expense
              
              
              1,188,966
              
              
              
              
              -Deferred
      tax asset
              
              
              (1,609
              )
              
              
              
              -Bad
      debt provision
              
              
              -
              
              
              
              
              64,117Changes
      in assets and liabilitiesAccounts
      receivable
              
              
              772,311
              
              
              
              
              (1,059,675
              )Inventories
              
              
              53,304
              
              
              
              
              (82,293
              )Prepayment
      and deposit
              
              
              4,129
              
              
              
              
              105,421Accounts
      payable and accrued expenses
              
              
              251,535
              
              
              
              
              2,238,313Taxes
      payable
              
              
              (312,408
              )
              
              
              
              (382,458
              )Net
      cash provided by operating activities
              
              
              12,348,042
              
              
              
              
              9,128,345CASH
      FLOWS USED IN INVESTING ACTIVITIESAdditions
      of prepaid land lease
              
              
              (23,912
              )
              
              
              
              -Purchase
      of property, plant and equipment
              
              
              (4,399,500
              )
              
              
              (10,019,262)Net
      cash used in investing activities
              
              
              (4,423,412
              )
              
              
              
              (10,019,262
              )CASH
      FLOWS PROVIDED BY FINANCING ACTIVITIESProceeds
      from exercising stock options
              
              
              18,000
              
              
              
              
              -Proceeds
      from private placement
              
              
              2,192,919
              
              
              
              -Net
      cash provided by financing activities
              
              
              2,210,919
              
              
              
              
              -EFFECTS
      OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS
              
              
              (101,043
              )
              
              
              
              (36,709
              )NET
      INCREASE/(DECREASE) IN CASH & CASH EQUIVALENT
              
              
              10,034,506
              
              
              
              
              (927,626
              )CASH
      & CASH EQUIVALENT - BEGINNING OF PERIOD
              
              
              45,536,735
              
              
              
              
              30,878,044CASH
      & CASH EQUIVALENT - END OF PERIOD
              
              $
              55,571,241
              
              
              
              $
              29,950,418





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





7
 Table of Contents





GULF
      RESOURCES, INC.AND
      SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS (CONTINUED)(Expressed
      in U.S. dollars)(UNAUDITED)Three
      Months Ended March 312010
            
            
            2009SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid during the period for:Income
      taxes
            
            $
            3,015,261
            
            
            $
            2,273,716Interest
      paid
            
            $
            174
            
            
            $
            27,009SUPPLEMENTAL
      DISCLOSURE OF NON-CASH FINANCING ACTIVITIESIssuance
      of common stock for settlement of stockholder’s notes
    payable
            
            $
            -
            
            
            $
            21,287,493Issuance
      of stock options to employees
            
            $
            995,538
            
            
            $
            143,820Issuance
      of warrants to non-employees
            
            $
            193,428
            
            
            $
            -Issuance
      of common stock for acquiring property, plant and
equipment
            
            $
            -
            
            
            $
            615,000Issuance
      of common stock for exercising warrants
            
            $
            8
            
            
            $
            -





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




8
 Table of Contents




GULF
RESOURCES, INC.


AND
SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31,
2010


(Expressed
in U.S. dollars)


(UNAUDITED)




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





Basis of
Presentation


The
accompanying condensed financial statements have been prepared by Gulf
Resources, Inc. a Delaware corporation and its subsidiaries (collectively, the
“Company”), without audit, in accordance with the instruction to form 10-Q and,
therefore, do not necessarily include all information and footnotes necessary
for a fair statement of its financial position, results of operations and cash
flows in accordance with accounting principles generally accepted in the United
States.  The balance sheet at December 31, 2009 is derived from the audited
balance sheet at that date which is not presented herein.









All
relevant share data have been adjusted retrospectively to reflect a 1 for 4
reverse stock split effective on October 12, 2009.




9
 Table of Contents




GULF
RESOURCES, INC.


AND
SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31,
2010


(Expressed
in U.S. dollars)


(UNAUDITED)





NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
Continued





Nature of the
Business


The
Company manufactures and trades bromine and crude salt through its wholly-owned
subsidiary, Shouguang
City Haoyuan Chemical Company Limited (“SCHC”) and manufactures chemical
products for use in the oil industry and paper manufacturing industry through
its
wholly-owned subsidiary, Shouguang Yuxin Chemical Industry Co., Limited
(“SYCI”).





Basis of
Consolidation


The
consolidated financial statements include the accounts of Gulf Resources, Inc.
and its wholly-owned subsidiaries, Upper Class Group Limited, a company
incorporated in the British Virgin Islands, which owns 100% of Hong Kong Jiaxing
Industrial Limited, a company incorporated in Hong Kong (“HKJI”), which owns
100% of SCHC and SYCI, which is 100% owned by SCHC.  All material
intercompany transactions have been eliminated on consolidation.




Use of
Estimates


The
Company’s consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and this requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Accordingly, actual results may differ significantly from these
estimates under different assumptions or conditions





Cash and Cash
Equivalents


Cash and
cash equivalents consist of all cash balances and highly liquid investments with
maturities of three months or less. Because of short maturity of these
investments, the carrying amounts approximate their fair values.





Accounts Receivable and
Allowance for Doubtful Accounts


Accounts
receivable is stated at cost, net of allowance for doubtful accounts. The
Company establishes an allowance for doubtful accounts based on management’s
assessment of the collectivity of trade and other receivables. A considerable
amount of judgment is required in assessing the amount of allowance and the
Company considers the historic level of credit losses and applies certain
percentage to accounts receivable balance. The Company makes judgments about the
credit worthiness of each customer based on ongoing credit evaluations, and
monitors current economic trends that might impact the level of credit losses in
the future. If the financial condition of the customer begins to deteriorate,
resulting in their inability to make payments, a larger allowance may be
required.




As of
March 31, 2010 and 2009, allowance for doubtful accounts was nil and $64,112,
respectively. Nil and $64,112 allowances for doubtful accounts were charged to
the income statement for the three months ended March 31, 2010 and 2009,
respectively.





10
 Table of Contents




GULF
RESOURCES, INC.


AND
SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31,
2010


(Expressed
in U.S. dollars)


(UNAUDITED)





NOTE
      1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
      Continued





Concentrations of Credit
Risk


Concentrations
of credit risk with respect to accounts receivable exist as the Company sells a
substantial portion of its products to a limited number of customers. However,
such concentrations of credit risks are limited due to the Company performs
ongoing credit evaluations of its customers’ financial condition and due to the
generally short payment terms.





Inventories


Inventories
are stated at the lower of cost, determined on a first-in, first-out cost basis,
or market. Costs of work-in-progress and finished goods comprise direct
materials, direct labor and an attributable portion of manufacturing overhead.
Net realizable value is based on estimated selling price less costs to complete
and selling expenses.





Property, Plant and
Equipment


Property,
plant and equipment are stated at cost less accumulated depreciation and any
impairment losses. Expenditures for new facilities or equipment and expenditures
that extend the useful lives of existing facilities or equipment are capitalized
and depreciated using the straight-line method at rates sufficient to depreciate
such costs over the estimated productive lives.





Mineral
rights are recorded at cost less accumulated depreciation and any impairment
losses. Mineral rights are amortized ratably over the term of the lease, or the
equivalent term under the units of production method, whichever is
shorter.





Construction
in progress primarily represents the renovation costs of plant, machinery and
equipment. Costs incurred are capitalized and transferred to property and
equipment upon completion, at which time depreciation commences. Cost of repairs
and maintenance is expensed as incurred.





The
Company’s depreciation and amortization policies on fixed assets other than
mineral rights and construction in progress are as follows:




Useful
      life
              (in years)Buildings
            20Machinery
            8Equipment
            8





Asset Retirement
Obligation


The
Company follows FASB ASC 410, which established a uniform methodology for
accounting for estimated reclamation and abandonment costs. FASB ASC 410
requires the fair value of a liability for an asset retirement obligation to be
recognized in the period in which the legal obligation associated with the
retirement of the long-lived asset is incurred. When the liability is initially
recorded, the offset is capitalized by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. To settle the liability, the obligation is paid, and
to the extent there is a difference between the liability and the amount of cash
paid, a gain or loss upon settlement is recorded.





11
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GULF
RESOURCES, INC.


AND
SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31,
2010


(Expressed
in U.S. dollars)


(UNAUDITED)





NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
Continued





Currently,
there are no reclamation or abandonment obligations associated with the land
being utilized for exploitation





Recoverability of Long Lived
Assets


Long-lived
and certain identifiable intangibles are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset may
not be recoverable. The Company is not aware of any events or circumstances
which indicate the existence of an impairment which would be
material.





Retirement
Benefits


Pursuant
to the relevant laws and regulations in the PRC, the Company participates in a
defined contribution retirement plan for its employees arranged by a
governmental organization. The Company makes contributions to the retirement
scheme at the applicable rate based on the employees’ salaries.  The
required contributions under the retirement plans are charged to the
consolidated income statement on an accrual basis when they are due.  The
Company’s contributions totaled $138,920 and $98,293 for the three months ended
March 31, 2010 and 2009, respectively.





Mineral
Rights


The
Company considers that certain mineral rights are in-subtance tangible assets
and are included in property, plant and equipment.





Reporting Currency and
Translation


The
financial statements of the Company’s foreign subsidiaries are measured using
the local currency as the functional currency; however, the reporting currency
is the United States dollar (“USD”).  Assets and liabilities of the
Company have been translated into USD 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).





Foreign
Operations


The
Company’s operations and assets are substantially located in
China.  The Company may be adversely affected by possible political or
economic events in this country.  The effect of these factors cannot
be accurately predicted.





Revenue
Recognition


The
Company recognizes revenue, net of any taxes, 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.





Income
Taxes


The
Company uses the asset and liability method of accounting for income
taxes.  Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statements carrying amounts of
existing assets and liabilities and their respective tax bases and tax loss
carry forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.




12
 Table of Contents




GULF
RESOURCES, INC.


AND
SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31,
2010


(Expressed
in U.S. dollars)


(UNAUDITED)





NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
Continued





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 March 31, 2010 and 2009 shipping and handling costs
were $120,871 and $109,578, respectively.





Stock-based
compensation


Common
stock, stock options and stock warrants issued to employees or directors are
recorded at their fair values estimated at grant date using the Black-Scholes
model and the portion that is ultimately expected to vest is recognized as
compensation cost over the requisite service period.





Common
stock, stock options and stock warrants issued to other than employees or
directors are recorded on the basis of their fair value using the Black-Scholes
model on the basis of the market price of the underlying common stock on the
“valuation date,” which for options and warrants related to contracts that have
substantial disincentives to non-performance is the date of the contract, and
for all other contracts the measurement date is the date that the service is
complete. Expense related to the options and warrants is recognized on a
straight-line basis over the shorter of the period over which services are to be
received or the vesting period. Where expense must be recognized prior to a
valuation date, the expense is computed under the Black-Scholes model on the
basis of the market price of the underlying common stock at the end of the
period, and any subsequent changes in the market price of the underlying common
stock up through the valuation date is reflected in the expense recorded in the
subsequent period in which that change occurs.





Basic and Diluted Net Income
per Share of Common Stock


Basic
earnings per common share are based on the weighted average number of shares
outstanding during the periods presented.  Diluted earnings per share
are computed using weighted average number of common shares plus dilutive common
share equivalents outstanding during the period.





The
following table sets forth the computation of basic and diluted earnings per
share:




For
      the three months ended March 312010
            
            
            2009NumeratorNet
      income
            
            $
            7,992,136
            
            
            $
            6,533,114DenominatorBasic:
      Weighted-average common shares outstanding during the year
            
            
            34,561,233
            
            
            
            28,763,044Add:
      Dilutive effect of stock options
            
            
            201,758
            
            
            
            -Diluted
            
            
            34,762,991
            
            
            
            28,763,044Net
      income per shareBasic
            
            $
            0.23
            
            
            $
            0.23Diluted
            
            
            0.23
            
            
            
            0.23




13
 Table of Contents




GULF
RESOURCES, INC.


AND
SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31,
2010


(Expressed
in U.S. dollars)


(UNAUDITED)





NOTE
      1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES–
      Continued





Recently Adopted Accounting
Pronouncements





In
February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements. The amendments in
the ASU remove the requirement for a Securities and Exchange Commission filer to
disclose a date through which subsequent events have been evaluated in both
issued and revised financial statements. This amendment was effective upon
issuance.





Recent Accounting
Pronouncements Not Yet Adopted





In April
2010, the FASB issued ASU No. 2010-13, Compensation—Stock Compensation (Topic
718): Effect of Denominating the Exercise Price of a Share-Based Payment Award
in the Currency of the Market in Which the Underlying Equity Security Trades.
This Update provides amendments to Topic 718 to clarify that an employee
share-based payment award with an exercise price denominated in the currency of
a market in which a substantial portion of the entity’s equity securities trades
should not be considered to contain a condition that is not a market,
performance, or service condition. Therefore, an entity would not classify such
an award as a liability if it otherwise qualifies as equity. The update is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2010. Management does not anticipate
significant effect of the amendment to the Group as the Group has accounted for
share-based payment award as equity.
















14
 Table of Contents




GULF
RESOURCES, INC.


AND
SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31,
2010


(Expressed
in U.S. dollars)


(UNAUDITED)


NOTE 2 –
ASSETS ACQUISITIONS




On
January 7, 2009, the Company  acquired substantially all of the assets
owned by Fenqiu Yuan, Han Wang and Yufen Zhang in theShouguang
City Renjiazhuangzi Village North Area (the “Fenqiu Yuan, Han Wang & Yufen
Zhang property” or Factory No. 7”). The Fenqiu Yuan, Han Wang and Yufen Zhang
property includes a 50-year mineral rights  (as of date acquisition)
and land lease covering 1,611 acres of real property, with the related
production facility, the pipelines, other production equipment, and the
buildings located on the property. The total purchase price for the acquired
assets was $10,615,000, consisting of $10,000,000 in cash and 375,000 shares of
the Company’s Common Stock valued at $615,000 (fair value).





On September 7, 2009, the
Company acquired substantially all of the assets owned by FengxiaYuan, Han Wang
and Qing Yang in the Shouguang City Yingli Township Beishan Village (the “
Fengxia Yuan, Han Wang& Qing Yang property” or Factory No. 8”). The
FengxiaYuan, Han Wang and Qing Yang property includes a 50-year mineral
rights  (as of date acquisition) and land lease covering 2,723 acres
of real property, with the related production facility, the pipelines, other
production equipment, and the buildings located on the property .The total
purchase price for the acquired assets was $16,930,548, consisting of
$11,516,960 in cash and 1,057,342 shares of the Company’s Common Stock valued at
$5,413,588 (fair value).





Each of
the asset acquisitions described above was not in operation when the Company
acquired the assets.  The owners of each of the assets did not hold
the proper license for the exploration and production of bromine, and production
at each of the assets acquired had previously been halted by the
government.  With respect to Factory No. 7, the assets had not been
operational for twelve months, and with respect to Factory No. 8, the assets had
not been operational for thirteen months. The Company recorded the above
transactions as purchase of assets.




15
 Table of Contents




GULF
RESOURCES, INC.


AND
SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31,
2010


(Expressed
in U.S. dollars)


(UNAUDITED)





NOTE 3 –
INVENTORIES





Inventory
consists of:





March
      31
              2010
            
            
            December
      31
              2009Raw
      material
            
            $
            257,759
            
            
            $
            298,359Finished
      goods
            
            
            343,882
            
            
            
            356,605Allowance
      for obsolete and slow moving inventory
            
            
            (4,632)
            
            
            
            (4,632)$
            597,009
            
            
            $
            650,332




NOTE 4 –
PREPAID LAND LEASE





The
Company prepaid for land leases for a period of fifty years to use the land on
which the office premises, production facilities and warehouse of the Company
are situated. The prepaid land lease is amortized on a straight line basis.
During the three months ended March 31, 2010, amortization of prepaid land lease
totaled $22,057, of which $21,910 and $147 were recorded as cost of net revenue
and administrative expenses respectively.  During the three months
ended March 31, 2009, amortization of prepaid land lease totaled $3,957, of
which $3,810 and $147 were recorded as cost of net revenue and administrative
expenses respectively.





NOTE 5 –
PROPERTY, PLANT AND EQUIPMENT, NET





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





March
      31
              2010
            
            
            December
      31
              2009At
      cost:Mineral
      rights
            
            $
            5,840,594
            
            
            $
            5,840,594Buildings
            
            
            21,651,379
            
            
            
            21,651,379Plant
      and machinery
            
            
            63,270,428
            
            
            
            63,270,428Furniture,
      fixtures and office equipment
            
            
            3,602,676
            
            
            
            3,602,676Construction
      in progress
            
            
            5,868,000
            
            
            
            1,467,000Total
            
            
            100,233,077
            
            
            
            95,832,077Less:
      accumulated depreciation and amortization
            
            
            16,247,743
            
            
            
            13,838,183Net
      book value
            
            $
            83,985,334
            
            
            $
            81,993,894




16
 Table of Contents




GULF
RESOURCES, INC.


AND
SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31,
2010


(Expressed
in U.S. dollars)


(UNAUDITED)





NOTE 5 –
PROPERTY, PLANT AND EQUIPMENT, NET– Continued





During
the three months ended March 31, 2010, depreciation and amortization expense
totaled $2,377,621, of which $2,315,988, and $61,633 were recorded as cost of
sales and administrative expenses respectively. During the three months ended
March 31, 2009, depreciation and amortization expense totaled $1,469,822, of
which $1,430,668 and $39,154 were recorded as cost of sales and administrative
expenses respectively.




There
were no impairment provisions made at March 31, 2010 and 2009.





In August
2009, the Company completed a sewage treatment project at a total cost of
$6,601,500.  A retention amount of $660,150, representing 10% of the total
cost will be paid upon one year after the completion date.




NOTE 6 –
ACCOUNTS PAYABLE AND ACCRUED EXPENSES





Accounts
payable and accrued expenses consist of the following:





March
      31
            
            
            December
      312010
            
            
            2009Accounts
      payable
            
            $
            5,616,630
            
            
            $
            5,348,638Salary
      payable
            
            
            134,485
            
            
            
            177,194Social
      security insurance contribution payable
            
            
            29,432
            
            
            
            19,132Other
      payable
            
            
            276,793
            
            
            
            278,781Total
            
            $
            6,057,340
            
            
            $
            5,823,745




NOTE 7–
DUE TO A RELATED PARTY





The
      amount consists of the following:  March
      31
              
              
              December
      312010
              
              
              2009Due
      to a key management
              
              $
              1,190
              
              
              $
              1,190





The
amount of $1,190 represents business expenses not yet reimbursed to a key
management of the Company which is unsecured and interest free.




17
 Table of Contents




GULF
RESOURCES, INC.


AND
SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31,
2010


(Expressed
in U.S. dollars)


(UNAUDITED)





NOTE 8–
TAXES PAYABLE





Taxes
      payable consists of the following:  March
      31
              
              
              December
      312010
              
              
              2009Income
      tax payable
              
              $
              3,205,327
              
              
              $
              3,079,233Mineral
      resource compensation fee payable
              
              
              351,989
              
              
              
              333,928Value
      added tax payable and others
              
              
              1,598,009
              
              
              
              2,141,952Total
              
              $
              5,155,325
              
              
              $
              5,555,113






18
 Table of Contents




GULF
RESOURCES, INC.


AND
SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31,
2010


(Expressed
in U.S. dollars)


(UNAUDITED)





NOTE 9 –
COMMON STOCK





Effective
October 12, 2009 the Company effected a one for four reverse stock
split.  All shares and per share amount for all periods presented have
been adjusted to reflect the reverse stock split.





In March
2009, the Company issued 5,250,000 shares of its common stock as payment for
$21,287,493 of Notes and Loan Payable-Related Party.





In March
2009, the Company issued 375,000 shares of its common stock, valued at $615,000,
to acquire assets owned by Mr. Fenqiu Yuan, Han Wang and Yufen
Zhang.





In
September 2009, the Company issued 1,057,342 shares of its common stock, valued
at $5,413,588, to acquire assets owned by Mr. Fenqiu Yuan, Han Wang and Yufen
Zhang.





In
December 2009, the Company issued 2,941,182 shares of its common stock at a
price of $8.50 per share in a private placement.  A portion of the proceeds
were received by the Company in January 2010.





In August
2008, the Company granted to one investor relations firm a warrant to purchase a
total of 25,000 shares of the Company’s common stock at an exercise price of
$4.80 per share and the options vested immediately.





In
January 2010, the investor relations firm made a cashless exercise for the
warrant. Company issued 15,881 shares based on the fair market price of
$13.16.





In the
fourth quarter of 2008, the Company granted to one Board member options to
purchase a total of 12,500 shares of the Company’s common stock at an exercise
price of $1.44 per share and the options vested immediately.





In
February 2010, the Company issued 12,500 shares of its common stock upon the
exercise of such stock options by the Board member.




NOTE 10 –
STOCK-BASED COMPENSATION





Pursuant
to the 2007 Equity Incentive Plan, the aggregate number of stock options
available for grant and issuance is 5,000,000 shares.





In March
2009, the Company granted to 9 management staff  (including 4
directors of the Company) options to purchase a total of 150,000 shares (25,000
for each of the executive directors, and 12,500 each for one non executive
independent director and 5 other management staff) of the Company’s common
stock at an exercise price of $4.80 per share and the options vested
immediately. The fair values of the options were valued at $143,820 fair value,
using the Black-Scholes option pricing model with assumed 174% volatility, a
three-year expiration term, a risk free rate of 1.43% and no dividend yield. For
the year ended December 31, 2009, $143,820 was recognized as general and
administrative expenses.







19
 Table of Contents




GULF
RESOURCES, INC.


AND
SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31,
2010


(Expressed
in U.S. dollars)


(UNAUDITED)





NOTE 10 –
STOCK-BASED COMPENSATION – Continued




In
February 2010, the Company granted to 8 management staff to purchase 132,500
shares of the Company’s common stock at an exercise price of $8.25 per
share and the options vested immediately. The fair values of the options were
valued at $995,539 fair value, using the Black-Scholes option pricing model with
assumed 154% volatility, a three-year expiration term, a risk free rate of 1.60%
and no dividend yield. For the three months ended March 31, 2010, $995,539 was
recognized as general and administrative expenses.





In
February 2010, the Company granted to the investing relationship firm warrants
to purchase 25,000 shares of the Company’s common stock at an exercise
price of $12 per share and the warrants vested immediately. The fair values of
the warrants were valued at $193,428 fair value, using the Black-Scholes option
pricing model with assumed 155% volatility, a four-year expiration term, a risk
free rate of 1.60% and no dividend yield. For the three months ended March 31,
2010, $193,428 was recognized as general and administrative
expenses.




20
 Table of Contents




GULF RESOURCES, INC.


AND
SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31,
2010


(Expressed
in U.S. dollars)


(UNAUDITED)


NOTE 10 –
STOCK-BASED COMPENSATION – Continued





The
following table summarizes all Company stock option transactions between January
1, 2010 and March 31, 2010.





Number
      of Option
              &Warrants
              Outstanding
            
            
            Number
      of Option
              &Warrants
              Vested
            
            
            Range
      of
              Exercise
      Price per Common ShareBalance,
      December 31, 2009
            
            
            501,471
            
            
            
            501,471
            
            
            $
            0.84
      - $10.20Gra
      Granted or vested during the three months ended March 31,
    2010
            
            
            157,500
            
            
            
            157,500
            
            
            $
            8.25-12.0Exp
      Exercised during the three months ended March 31, 2010
            
            
            (37,500)
            
            
            
            (37,500)
            
            
            $
            1.44-$4.8Balance,
      March 31, 2010
            
            
            621,471
            
            
            
            621,471
            
            
            $
            0.84
      - $12.0





Stock
      and Warrants Options OutstandingOutstanding
      and
            
            Weighted
      Average
            
            Weighted
      AverageRange
      of
            
            Currently
      Exercisable
            
            Remaining
            
            Exercise
      Price of OptionsExercise
      Prices
            
            at
      December 31, 2009
            
            Contractual
      Life (Years)
            
            Currently
      Exercisable$0.84-$12.0
            
            621,471
            
            4.23
            
            $   7.72





The
weighted average grant-date fair values as at March 31, 2010 and December 31,
2009 were $6.99 and $6.84, respectively.





At March
31, 2010, the aggregate intrinsic value of the stock options and warrants was
nil.




NOTE 11 –
INCOME TAXES





The
Company utilizes the asset and liability method of accounting for income taxes
in accordance with FASB ASC 740-10.





United
States


Gulf
Resources, Inc. is subject to the United States of America Tax law at tax rate
of 34%. No provision for the US federal income taxes has been made as the
Company had no US taxable income for the period ended March 31, 2010 and 2009,
and management believes that its earnings are permanently invested in the PRC.
As of March 31, 2010 and 2009, the accumulated undistributed PRC earnings is
$84,523,128 and $48,221,413, respectively.





BVI


Upper
Class Group Limited was incorporated in the BVI and, under the current laws of
the BVI, it is not subject to tax on income or capital gain in the BVI. Upper
Class Group Limited did not generate assessable profit during the three months
ended March 31, 2010 and 2009.




21
 Table of Contents




GULF
RESOURCES, INC.


AND
SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31,
2010


(Expressed
in U.S. dollars)


(UNAUDITED)




NOTE 11 –
INCOME TAXES – Continued





Hong
Kong


Hong Kong
Jiaxing Industrial Limited  was incorporated in Hong Kong and is
subject to Hong Kong profits tax at 16.5%. The Company is subject to Hong Kong
taxation on its activities conducted in Hong Kong and income arising in or
derived from Hong Kong.  No provision for profits tax has been made as
the Company has no assessable income for the three months ended March 31, 2010
and 2009.





PRC


Enterprise
income tax (“EIT”) for SCHC and SYCI in the PRC is charged at 25% of the
assessable profits.





The
operating subsidiaries SCHC and SYCI are wholly foreign-owned enterprises
(“FIE”) incorporated in the PRC and are subject to PRC Foreign Enterprise Income
Tax Law.





On
February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration
of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular 1”).
According to Article 4 of Circular 1, distributions of accumulated profits
earned by a FIE prior to January 1, 2008 to foreign investor(s) in 2008 will be
exempt from withholding tax (“WHT”) while distribution of the profit earned by
an FIE after January 1, 2008 to its foreign investor(s) shall be subject to
WHT.










As of
March 31, 2010, the Company had U.S. federal net operating loss
(“NOL”) of approximately $22million available to offset against future federal
income tax liabilities. The U.S. NOL will expire beginning 2015.




March
      31
            
            
            December
      312010
            
            
            2009Deferred
      tax liabilities
            
            $
            -
            
            
            $
            -Deferred
      tax assets:Allowance
      for obsolete and slow-moving inventories
            
            $
            1,158
            
            
            $
            1,158Property,
      plant and equipment
            
            
            83,047
            
            
            
            81,437Net
      operating loss
            
            
            7,573,138
            
            
            
            6,692,426Other
      assets
            
            
            3,077
            
            
            
            3,077Total
      deferred tax assets
            
            
            7,660,420
            
            
            
            6,778,098Valuation
      allowance
            
            
            (7,573,138
            )
            
            
            (6,692,426
            )Net
            
            $
            87,282
            
            
            $
            85,672Current
      deferred tax asset
            
            $
            87,282
            
            
            $
            85,672Long-term
      deferred tax asset
            
            $
            -
            
            
            $
            -





There was
no unrecognized tax benefits and accrual for uncertain tax positions as of March
31, 2010 and 2009.





Tax
returns filed regarding tax years from 2005 through 2009 are subject to review
by the respective tax authorities.




22
 Table of Contents





GULF RESOURCES,
INC.


AND
SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31,
2010


(Expressed
in U.S. dollars)


(UNAUDITED)





NOTE 12 – BUSINESS
SEGMENTS





The
Company has two reportable segments:  bromine and crude salt and
chemical products.




Bromine
      and
            
            
            Chemical
            
            
            Segment
            
            
            
            
            
            ConsolidatedCrude
      Salt
            
            
            Products
            
            
            Total
            
            
            Corporate
            
            
            TotalMarch 31,
      2010Net
      sales
            
            $
            19,896,458
            
            
            $
            9,796,960
            
            
            $
            29,693,418
            
            
            $
            -
            
            
            $
            29,693,418Income
      (loss) from operations
            
            
            9,125,828
            
            
            
            3,363,515
            
            
            
            12,489,343
            
            
            
            (1,434,118)
            
            
            
            11,055,225Total
      assets
            
            
            124,554,575
            
            
            
            30,748,844
            
            
            
            155,303,419
            
            
            
            132,922
            
            
            
            155,436,341Depreciation
      and amortization
            
            
            1,956,006
            
            
            
            421,615
            
            
            
            2,377,621
            
            
            
            -
            
            
            
            2,377,621Capital
      expenditure
            
            
            -
            
            
            
            4,399,500
            
            
            
            4,399,500
            
            
            
            -
            
            
            
            4,399,500March 31,
      2009Net
      sales
            
            $
            15,530,274
            
            
            $
            8,103,264
            
            
            $
            23,633,538
            
            
            $
            -
            
            
            $
            23,633,538Income
      (loss) from operations
            
            
            6,541,601
            
            
            
            2,754,322
            
            
            
            9,295,923
            
            
            
            (427,674
            )
            
            
            8,868,249Total
      assets
            
            
            73,952,623
            
            
            
            24,100,050
            
            
            
            98,052,673
            
            
            
            432,788
            
            
            
            98,485,461Depreciation
      and amortization
            
            
            1,247,976
            
            
            
            221,846
            
            
            
            1,469,822
            
            
            
            -
            
            
            
            1,469,822Capital
      expenditure
            
            
            10,615,000
            
            
            
            -
            
            
            
            10,615,000
            
            
            
            -
            
            
            
            10,615,000




23
 Table of Contents




GULF
RESOURCES, INC.


AND
SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31,
2010


(Expressed
in U.S. dollars)


(UNAUDITED)




Three
      Months Ended
              March
      31Reconciliations
            
            2010
            
            
            2009Total
      segment operating income
            
            $
            12,489,343
            
            
            $
            9,295,923Corporate
      overhead expenses
            
            
            (1,434,118
            )
            
            
            (427,674
            )Other
      income
            
            
            75,585
            
            
            
            (4,980
            )Income
      tax expense
            
            
            (3,138,674
            )
            
            
            (2,330,155
            )Total
      consolidated net income
            
            $
            7,992,136
            
            
            $
            6,533,114





The following table shows the major
customer(s) (10% or more) for the three months ended March 31,
2010.





Number
            
            Customer
            
            Bromine
      and Crude Salt
              (000’s)
            
            Chemical
      Products
              (000’s)
            
            Total
              Revenue
              (000’s)
            
            Percentage
      of
              Total
      Revenue (%)1
            
            Shouguang
      City Rongyuan Chemical Company Limited
            
            $3,114
            
            $-
            
            $3,114
            
            10.5%TOTAL
            
            
            
            $3,114
            
            $-
            
            $3,114
            
            10.5%





The
following table shows the major customer(s) (10% or more) for the three months
ended March 31, 2009.





Number
            
            Customer
            
            Bromine
      and Crude Salt
              (000’s)
            
            Chemical
      Products
              (000’s)
            
            Total

              Revenue
              (000’s)
            
            Percentage
      of
              Total
      Revenue (%)1
            
            Shandong
      Morui Chemical Company Limited
            
            $2,641
            
            $-
            
            $2,641
            
            11.1%TOTAL
            
            
            
            $2,641
            
            $-
            
            $2,641
            
            11.1%





NOTE 13 –
MAJOR SUPPLIERS





During
the period ended March 31, 2010, the Company purchased 80.6% of its raw
materials from its top five suppliers.  At March 31, 2010, amounts due
to those suppliers included in accounts payable were $4,938,786. During the
period ended March 31, 2009, the Company purchased  46.4% of its raw
material from top five suppliers.  At March 31, 2009, amounts due to
those suppliers included in accounts payable were $2,588,201. This concentration
makes the Company vulnerable to a near-term severe impact, should the
relationships be terminated.




24
 Table of Contents




GULF
RESOURCES, INC.


AND
SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31,
2010


(Expressed
in U.S. dollars)


(UNAUDITED)




NOTE 14 –
CUSTOMER CONCENTRATION





The
Company sells a substantial portion of its products to a limited number of
customers. During the period ended March 31, 2010, the Company sold 45.5% of its
products to its top five customers. At March 31, 2010, amount due from these
customers were $6,454,215. During the period ended March 31, 2009, the Company
sold 42.1% of its products to its top five customers.  At March 31,
2009, amount due from these customers was $5,261,483. This concentration
makes the Company vulnerable to a near-term severe impact, should the
relationships be terminated.





NOTE 15 –
ESTABLISHMENT OF CO-OP RESEARCH AND DEVELOPMENT CENTER





On
September 6, 2007, the Company’s wholly-owned subsidiary, SYCI, and East China
University of Science and Technology formally opened 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. According to the
Co-Op Research Agreement, any research achievement or patents will become assets
of the Company. The Company will provide $500,000 annually during the next five
years to East China University of Science and Technology for research. The
research and development expense recognized during the period ended March 31,
2010 and 2009 were $125,202 and $124,969 respectively.




NOTE 16 – CAPITAL COMMITMENT AND
OPERATING LEASE COMMITMENTS





The
Company has committed approximately $2,934,000 for construction of new
production line as of March 31, 2010.





The Company has leased two pieces of
land under non-cancelable operating leases, which are fixed in rentals and
expire through February and August 2059, respectively. The Company accounts for
the leases as operating leases. Future minimum lease payments consist of the
following at March 31, 2010:





Less
      than 1 year
            $
            $42,1271- 3years
            
            $150,3553-5years
            
            $157,804More
      than 5 years
            
            $6,472,038Total
            $
            $6,822,324





Rental
expense amounted to $22,057 and $9,631 were charged to the income statements for
the periods ended March 31, 2010 and 2009 respectively.







25
 Table of Contents




Item 2. Management’sDiscussion and Analysis of Financial Condition
and Results of Operations





This
quarterly report on Form 10-Q and other reports filed by the Company from time
to time with the Securities and Exchange Commission (collectively the “Filings”)
contain or may contain forward-looking statements and information that are based
upon beliefs of, and information currently available to, the Company’s
management as well as estimates and assumptions made by Company’s management.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which are only predictions and speak only as of the date hereof.
When used in the filings, the words “anticipate”, “believe”, “estimate”,
“expect”, “future”, “intend”, “plan”, or the negative of these terms and similar
expressions as they relate to the Company or the Company’s management identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to future events and are subject to risks, uncertainties,
assumptions, and other factors, including the risks contained in the “Risk
Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2009 filed with the Securities and Exchange Commission,
relating to the Company’s industry, the Company’s operations and results of
operations, and any businesses that the Company may acquire. Should one or more
of these risks or uncertainties materialize, or should the underlying
assumptions prove incorrect, actual results may differ significantly from those
anticipated, believed, estimated, expected, intended, or planned.





Although
the Company believes that the expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance, or achievements. Except as required by applicable law,
including the securities laws of the United States, the Company does not intend
to update any of the forward-looking statements to conform these statements to
actual results.





Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”). These accounting principles
require us to make certain estimates, judgments and assumptions. We believe that
the estimates, judgments and assumptions upon which we rely are reasonable based
upon information available to us at the time that these estimates, judgments and
assumptions are made. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities as of the date of the financial
statements as well as the reported amounts of revenues and expenses during the
periods presented. Our financial statements would be affected to the extent
there are material differences between these estimates and actual results. In
many cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP and does not require management’s judgment in its application.
There are also areas in which management’s judgment in selecting any available
alternative would not produce a materially different result.  The
following discussion should be read in conjunction with our consolidated
financial statements and notes thereto appearing elsewhere in this
report.





Overview





Gulf
Resources conducts operations through its two wholly-owned China subsidiaries,
SCHC and SYCI. Our business is also reported in these two segments, Bromine and
Crude salts, and Chemical Products.





Through
SCHC, we produce and sell bromine and crude salt. We are one of the largest
producers of bromine in China, as measured by production output. Elemental
bromine is used to manufacture a wide variety of brominated compounds used in
industry and agriculture. Bromine is commonly used in brominated flame
retardants, fumigants, water purification compounds, dyes, medicines, and
disinfectants.





Through
SYCI, we manufacture and sell chemical products that are used in oil and gas
field exploration, oil and gas distribution, oil field drilling, wastewater
processing, papermaking chemical agents and inorganic chemicals.





On
December 12, 2006, Gulf Resources acquired, through a share exchange, Upper
Class Group Limited, a British Virgin Islands holding corporation which then
owned all of the outstanding shares of SCHC. Under accounting principles
generally accepted in the United States, this share exchange is considered to be
a capital transaction, rather than a business combination, with the share
exchange equivalent to the issuance of stock by Upper Class for the net assets
of Gulf Resources, accompanied by a recapitalization, and is accounted for as a
change in capital structure. Accordingly, the accounting for the share exchange
was identical to that resulting from a reverse acquisition, except no goodwill
was recorded. Under reverse takeover accounting, the post reverse acquisition
comparative historical financial statements of the legal acquirer, Gulf
Resources, are those of the legal acquiree, Upper Class Group Limited and its
subsidiary, SCHC, which together are considered to be the accounting acquirer.
Share and per share amounts reflected in this report have been retroactively
adjusted to reflect the merger.





26
 Table of Contents




On
February 5, 2007, Gulf Resources, through its subsidiary SCHC, acquired SYCI.
Since prior to the acquisition the ownership of Gulf Resources and SYCI was
substantially the same, the transaction was accounted for as a transaction
between entities under common control, whereby the assets and liabilities of
SYCI were recognized at their carrying amounts.





As a
result of our acquisitions of SCHC and SYCI, the historical financial statements
and the information presented below reflects the accounts of SCHC and SYCI. The
following discussion should be read in conjunction with our consolidated
financial statements and notes thereto appearing elsewhere in this
report.





RESULTS
OF OPERATIONS





The
following table presents certain information derived from the consolidated
statements of operations, cash flows and shareholders equity for the three
months ended March 31, 2010 and 2009.




Three
      months ended
            
            Three
      months ended
            
            Percentage
      ChangeMarch 31,
      2010
            March 31,
      2009Net
      revenue
            $
            29,693,418
            
            $
            23,633,538
            
            
            25.6%Cost
      of net revenue
            $
            16,235,499
            
            $
            13,540,940
            
            
            19.9%Gross
      profit
            $
            13,457,919
            
            $
            10,092,598
            
            
            33.3%Research
      and development costs
            $
            125,202
            
            $
            124,969
            
            
            0.19%General
      and administrative expenses
            $
            2,277,492
            
            $
            1,099,380
            
            
            107.2%Income
      from operations
            $
            11,055,225
            
            $
            8,868,249
            
            
            24.7%Other
      income (expenses), net
            $
            75,585
            
            $
            (4,980)
            
            
            1,618%Income
      before taxes
            $
            11,130,810
            
            $
            8,863,269
            
            
            25.6%Income
      taxes
            $
            (3,138,674)
            
            $
            (2,330,155)
            
            
            34.7%Net
      income
            $
            7,992,136
            
            $
            6,533,114
            
            
            22.3%





Net revenueNet revenues were $29,693,418 for the three months ended March 31, 2010,
an increase of $6,059,880 (or approximately 25.6%) as compared to the comparable
period in 2009. This increase was primarily attributable to strong growth in our
bromine and crude salt segment, in which revenue increased from $15,530,275 for
the three months ended March 31, 2009 to $19,896,458 in 2010, an increase of
approximately 28.1%. The increase in revenue from operations of bromine and
crude salt was mainly due to the increase in the selling price of bromine
arising from an increase in demand. Our average selling price for bromine for
the three months ended March 31, 2010 increased by 39.1%  compared to
the same period in 2009.  The rate of increase in our bromine and
crude salt segment was less than the rate of increase in the average selling
price for bromine due to first quarter seasonality.  Our production
levels are typically lower in the first quarter due to cold weather and the
Chinese New Year holidays. Revenues in the chemical products segment increased
from $8,103,264 for the three months ended March 31, 2009 to $9,796,960 in 2010,
an increase of approximately 20.9%. The increase was mainly due to the strong
demand for environmentally friendly oil and gas exploration chemicals and
agricultural intermediaries.





27
 Table of Contents




Net
      Revenue by SegmentThree
      Months Ended
            
            
            Three
      Months EndedMarch
      31, 2010
              (Unaudited)
            
            
            March
      31, 2009
              (Unaudited)Segments
            
            
            
            
            Percent
      of total
            
            
            
            
            
            Percent
      of totalBromine
      and Crude salt
            
            $
            19,896,458
            
            
            
            67.0
            %
            
            $
            15,530,274
            
            
            
            65.7
            %Chemical
      Products
            
            $
            9,796,960
            
            
            
            33.0
            %
            
            $
            8,103,264
            
            
            
            34.3
            %Total
      Revenues
            
            $
            29,693,418
            
            
            
            100
            %
            
            $
            23,633,538
            
            
            
            100
            %





Three
      Months Ended March 312010
      vs. 2009Segments
            Percent
      Increase (decrease) of Net SalesBromine
      and Crude salt
            1.3%Chemical
      Products
            (1.3)%





Bromine
      and Crude salt segment product sold in metric tons
            
            Three
      Months Ended
              March 31,
      2010
            
            
            Three
      Months Ended
              March 31,
      2009
            
            
            Percentage
      ChangeBromine
            
            
            7,124
            
            
            
            7,448
            
            
            
            (4.4%)Crude
      Salt
            
            
            78,000
            
            
            
            70,000
            
            
            
            11.4%





Due to
the diverse product mix and varying values, management does not believe that the
tonnage sold by the Chemical Product division is a meaningful
metric.





Cost of Net
revenueCost of net revenue reflects the raw materials consumed and the
direct salaries and benefits of staff engaged in the production process,
electricity and other manufacturing costs. Our Cost of net revenue was
$16,235,499 for the three months ended March 31, 2010, an increase of $2,694,559
(or approximately 19.9%) from the cost of net revenue for the three months ended
March 31, 2009. This increase resulted primarily from the production increase in
both Bromine and Crude salt and Chemical Products. Production increase was due
to the increase in sales.  The increase in the rate for cost of net
revenue was lower than that of net revenue mainly because the rate of inflation
for materials was lower than the increase in selling price of our products, as
well as leverage due to economies of scale.





Gross ProfitGross profit was $13,457,919, or 45.3% of net sales for the three months
ended March 31, 2010 compared to $10,092,598, or 42.7% of net revenue for the
comparable period in 2009. The increase in gross profit is mainly due to the
increase in bromine price, the average selling prices for bromine for the three
months ended March 31, 2010 and 2009 were $2,470 and $1,775 per ton arising
from increase in demand, respectively, an increase of 39%.





Research and
Development CostsThe Research and development costs result from the
agreement that SYCI and East China University of Science and Technology entered
in September 2007 to establish a Co-Op Research and Development Center to
develop new bromine-based chemical compounds and products to be utilized in the
pharmaceutical industry. The Research and development costs incurred for three
months ended March 31, 2010 and 2009 were $125,202 and $124,969
respectively.  All research findings and patents developed by this
Center will belong to Gulf Resources.





28
 Table of Contents




General and
Administrative ExpensesGeneral and administrative expenses were
$2,277,492 for the three months ended March 31, 2010, an increase of $1,178,112
(or approximately 107.2%) from the general and administrative expenses of
$1,099,380 for the three months ended March 31, 2009.  This
significant increase in general and administrative expenses was primarily due to
expenses related to corporate costs resulting from the option granted to
employees and a consulting company with a compensation expense charge of
$1,188,966.  The increase in stock options was for the purpose of enhancing
employee incentive.





Income
from Operations





Income
      from Operations by SegmentThree
      Months Ended
            
            
            Three
      Months EndedMarch 31,
      2010
              (Unaudited)
            
            
            March 31,
      2009
              (Unaudited)Segments
            
            
            
            
            Percent
      of total
            
            
            
            
            
            Percent
      of totalBromine
      and Crude salt
            
            $
            9,125,828
            
            
            
            73.1
            %
            
            $
            6,541,601
            
            
            
            70.4
            %Chemical
      products
            
            
            3,363,515
            
            
            
            26.9
            %
            
            
            2,754,322
            
            
            
            29.6
            %Income
      from operations before corporate costs
            
            
            12,489,343
            
            
            
            100
            %
            
            
            9,295,923
            
            
            
            100
            %Corporate
      costs
            
            
            1,434,118
            
            
            
            
            
            
            
            427,674Income
      from operations
            
            $
            11,055,225
            
            
            
            
            
            
            $
            8,868,249





Income
from Operations before corporate costs was $12,489,343 for the three months
ended March 31, 2010 (or 42.1% of net revenue), an increase of $3,193,420 (or
approximately 34.4%) over Income from Operations before corporate cost for
the three months ended March 31, 2009. For the three months ended March 31,
2010, income from operations for the bromine and crude salt segment was
$9,125,828, an increase of 39.5% from $6,541,601 over the three months ended
March 31, 2009. The increase in revenue and the income from operations of our
bromine and crude salt was mainly due to the increase in the selling price of
bromine. For the three months ended March 31, 2010, income from operations for
the chemical products division was $3,363,516, an increase of 22.1% from income
from operations in this division of $2,754,322 for the three months ended March
31, 2009. The increase in revenue and the income from operations of our Chemical
Products was driven by environmentally friendly oil and gas exploration
chemicals and agricultural intermediaries.





Other Income
(Expense)Net Other Income was $75,585 for the three months ended March
31, 2010, an increase of $80,565 from the Other Expense of $4,980 for the three
months ended March 31, 2009. This increase in other income was primarily due to
the higher sundry income and interest income as well as the decrease in interest
expense.





Net IncomeNet Income was $7,992,136 for the three months ended March 31, 2010, an
increase of $1,459,022 (or approximately 22.3%) as compared to the three months
ended March 31, 2009. This increase was primarily attributable to the increase
in revenues.





29
 Table of Contents





LIQUIDITY
AND CAPITAL RESOURCES





As of
March 31, 2010, Cash and Cash Equivalents were $55,571,241 as compared to
$45,536,735 as of December 31, 2009. The components of this increase of
$10,034,506 are reflected below.





Cash
Flow





Three
      Months Ended March 312010
            
            
            2009Net
      cash provided by operating activities
            
            $
            12,348,042
            
            
            $
            9,128,345Net
      cash used in investing activities
            
            $
            (4,423,412)
            
            
            $
            (10,019,262)Net
      cash provided by financing activities
            
            $
            2,210,919
            
            
            $
            -Net
      cash inflow (outflow)
            
            $
            10,135,549
            
            
            $
            (890,917)





For three
months ended March 31, 2010 the Company met its working capital and capital
investment requirements mainly by using operating cash flows.





The
Company will continue to explore opportunities relating to bromine asset
purchases.





As of
March 31, 2010, the capital commitment for wastewater treatment chemical
additives was approximately $2.93 million.





Net
Cash Provided by Operating Activities





During
the three months ended March 31, 2010, we had positive cash flow from operating
activities of $12,348,042 primarily attributable to net income of $7,992,136.
During the three months ended March 31, 2009, we had positive cash flow from
operating activities of $9,128,345 primarily attributable to net income of
$6,533,114. Net Cash Provided by Operating Activities during the three months
ended March 31, 2010 improved by $3,219,697 from that of three months ended
March 31, 2009. The primary source of this was due to the increase net
income.





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





The
Company used $4,399,500 cash for the construction of waste water chemical
additives during three months ended March 31, 2010. This project was financed by
opening cash balance.





We
believe that our available funds and cash flows generated from operations will
be sufficient to meet our anticipated ongoing operating needs for the next
twelve (12) months. For the immediate future we intend to focus our efforts on
the activities of SCHC and SYCI as these segments continue to expand within the
Chinese market. Our long-term strategic goal is to extend our market to overseas
countries.





30
 Table of Contents





We may
not be able to identify, successfully integrate or profitably manage any
businesses or business segment we may acquire, or any expansion of our business.
An expansion may involve a number of risks, including possible adverse effects
on our operating results, diversion of management attention, inability to retain
key personnel, risks associated with unanticipated events and the financial
statement effect of potential impairment of acquired intangible assets, any of
which could have a materially adverse effect on our condition and results of
operations. We may affect an acquisition with a target business which may be
financially unstable, under-managed, or in its early stages of development or
growth. In addition, if competition for acquisition candidates or operations
were to increase, the cost of acquiring businesses could increase materially.
Our inability to implement and manage our expansion strategy successfully may
have a material adverse effect on our business and future
prospects.





We are
not currently party to any contracts or other arrangements with respect to
future acquisitions.





Critical
Accounting Policies and Estimates





Use of
Estimates


The
Company’s consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and this requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Accordingly, actual results may differ significantly from these
estimates under different assumptions or conditions.





Accounts Receivable and
Allowance for Doubtful Accounts


Accounts
receivable is stated at cost, net of allowance for doubtful accounts. The
Company establishes an allowance for doubtful accounts based on management’s
assessment of the collectivity of trade and other receivables. A considerable
amount of judgment is required in assessing the amount of allowance and the
Company considers the historic level of credit losses and applies certain
percentage to accounts receivable balance. The Company makes judgments about the
credit worthiness of each customer based on ongoing credit evaluations, and
monitors current economic trends that might impact the level of credit losses in
the future. If the financial condition of the customer begins to deteriorate,
resulting in their inability to make payments, a larger allowance may be
required.




As of
March 31, 2010 and December 31, 2009, allowance for doubtful accounts was nil.
For the three month ended March 31, 2010 and 2009, allowance for doubtful
accounts amounted to nil and $64,112, respectively.





Property, Plant and
Equipment


Property,
Plant and Equipment are stated at cost. Expenditures for new facilities or
equipment and expenditures that extend the useful lives of existing facilities
or equipment are capitalized and depreciated using the straight-line method at
rates sufficient to depreciate such costs over the estimated productive
lives.





Minerial
rights are recorded at cost less accumulated depreciation and any impairment
losses





The
Company’s depreciation and amortization policies on fixed assets other than
mineral rights and construction in progress are as follows:





Useful
      life
              (in years)Buildings
            20Machinery
            8Equipment
            8




31
 Table of Contents




Revenue
Recognition


The
Company recognizes revenue, net of any taxes, 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.





Income
Taxes


The
Company uses the asset and liability method of accounting for income
taxes.  Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statements carrying amounts of
existing assets and liabilities and their respective tax bases and tax loss
carry forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.





Stock-based
compensation


Common
stock, stock options and stock warrants issued to employees or directors are
recorded at their fair values estimated at grant date using the Black-Scholes
model and the portion that is ultimately expected to vest is recognized as
compensation cost over the requisite service period.




32
 Table of Contents




Common stock, stock options and stock warrants issued to other than
employees or directors are recorded on the basis of their fair value using the
Black-Scholes model on the basis of the market price of the underlying common
stock on the “valuation date,” which for options and warrants related to
contracts that have substantial disincentives to non-performance is the date of
the contract, and for all other contracts the measurement date is the date that
the service is complete. Expense related to the options and warrants is
recognized on a straight-line basis over the shorter of the period over which
services are to be received or the vesting period. Where expense must be
recognized prior to a valuation date, the expense is computed under the
Black-Scholes model on the basis of the market price of the underlying common
stock at the end of the period, and any subsequent changes in the market price
of the underlying common stock up through the valuation date is reflected in the
expense recorded in the subsequent period in which that change
occurs..




Item
3. Quantitative and Qualitative Disclosures About Market Risk.





Not
required.





Item
4T. Controls and Procedures.





Based on
an evaluation of our disclosure controls and procedures as of March 31, 2010
covered by this report (and the financial statements contained in the report),
our president and chief financial officer have determined that our current
disclosure controls and procedures are effective.





The
Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (the
“2008 Annual Report”), management concluded that the Company’s internal control
over financial reporting were effective as of December 31, 2008.





Even
though management concluded that the internal controls over financial reporting
were effective, management determined, based on weakness discussed in the
auditor’s report on the internal control over financial reporting included in
the 2008 Annual Report, that there were still weaknesses in its internal
controls.  However, the Company disagreed with the auditor and did not
believe that those weaknesses were material weakness. The two weaknesses
identified by our auditor in the 2008 Annual Report were:





1.
            Insufficient
      complement of accounting personnel with the appropriate level of
      accounting knowledge, experience and training in the application of
      accounting principles generally accepted in the United States commensurate
      with financial statement reporting requirements;
  and





2.
            Inability
      to timely and properly recognize issuance of share-based
      compensation.





To
address these weaknesses included in the auditor’s report in the 2008 Annual
Report, the Company, among other things, has continuously evaluated, enhanced
and upgraded the Company’s financial controls and procedures at its operating
subsidiaries. The Company also hired Vice President, David Wang, in July
2009, who has significant experience with the US GAAP. In addition, the
Company’s accounting staff has continued to improve the level of its US GAAP
accounting knowledge. Such improvements are intended to ensure that information
required to be disclosed in our periodic filings under the Exchange Act is
accumulated and communicated to our management, to allow timely decisions
regarding required disclosure and that all transactions are recorded,
accumulated and processed to permit the preparation of financial statements in
accordance with generally accepted accounting principles on a timely basis to
allow compliance with our reporting obligations under the Exchange Act. 
In
addition, the Company has timely recognized issuances of share-based
compensation since the issuance of  the auditor’s report in our 2008
Annual Report.  Therefore, management believes that these
weaknesses have been remediated.





There
have not been any changes in our internal control over financial reporting (as
such term is defined in Rules 13a-15(f) under the Exchange Act) during our most
recently completed fiscal quarter which is the subject of this
report  that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.





33
 Table of Contents




PART II—OTHER
INFORMATION.




Item
1. Legal Proceedings.





None.





Item
1A. Risk Factors.





Investing
in our common stock involves a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described in our Annual Report on
Form 10-K for the fiscal year ended December 31,2009 (the “2009 Form 10-K”),
under the caption "Risk Factors," our Management's Discussion and Analysis of
Financial Condition and Results of Operations set forth in Item 2 of Part I of
this Quarterly Report on Form 10-Q, our consolidated financial statements and
related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q
and our consolidated financial statements and related notes, as well as our
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and the other information in our 2009 Form 10-K. Readers should
carefully review those risks, as well as additional risks described in other
documents we file from time to time with the Securities and Exchange
Commission.




Item
2. Unregistered Shares of Equity Securities and Use of Proceeds





None.





Item
3. Defaults Upon Senior Securities.





None.





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





None.





Item
5. Other Information.





None.





Item
6. Exhibits.







Exhibit
      No.
            Description31.1
            Rule
      13a-14(a)/15d-14(a) Certification of Chief
      Executive Officer.


31.2
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer.


32.1
            Section
      1350 Certification of Chief Executive Officer and Chief Financial
      Officer





34
 Table of Contents





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





GULF
      RESOURCES, INC.Dated:
      May 11, 2010
            By:
            /s/
      Xiao bin LiuXiao
      bin LiuChief
      Executive Officer(principal
      executive officer)By:
            /s/
      Min LiMin
      LiChief
      Financial Officer(principal
      financial and accounting officer)







35