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 September 30, 2008oro
            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.)Cheming
      Industrial Park, Shouguang City, Shandong, China
            
            262714(Address
      of principal executive offices)
            
            (Zip
      Code)




Registrant’s
telephone number, including area code: (646) 200-6316





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 x No 





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





As of
November 10, 2008, the registrant had outstanding  99,668,842 shares
of common stock.









Table
of Contents




Part
      I – Financial InformationItem
      1. Financial
      StatementsCONDENSED CONSOLIDATED BALANCE
      SHEETS
            2CONDENSED CONSOLIDATED STATEMENTS
      OF OPERATIONS
            3CONDENSED CONSOLIDATED STATEMENTS
      OF COMPREHENSIVE INCOME
            4CONDENSED CONSOLIDATED STATEMENT
      OF STOCKHOLDERS' EQUITY
            5CONDENSED CONSOLIDATED STATEMENTS
      OF CASH FLOWS
            6-7NOTES TO CONDENSED CONSOLIDATED
      FINANCIAL STATEMENTS
            8Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
            19Item
      3. Quantitative and Qualitative Disclosures about Market
    Risk
            30Item
      4T. Controls and Procedures
            30Part
      II – Other InformationItem
      1  Legal Proceedings
            30Item
      1A Risk Factors
            30Item
      2 Unregistered Sales of Equity Securities and Use of
    Proceeds
            31Item
      3 Defaults Upon Senior Securities
            31Item
      4 Submission of Matters to a Vote of Security Holders
            31Item
      5 Other Information
            31Item
      6 Exhibits
            31









Item
1. Financial Statements.


GULF
RESOURCES, INC.


AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


SEPTEMBER
30, 2008 AND DECEMBER 31, 2007




September
      30,
            
            
            December
      31,2008
            
            
            2007(unaudited)
            
            
            (audited)ASSETSCURRENT
      ASSETSCash
            
            $
            22,874,360
            
            
            $
            10,773,875Accounts
      receivable
            
            
            8,868,590
            
            
            
            3,945,000Inventories
            
            
            2,124,304
            
            
            
            413,391Prepaid
      expenses
            
            
            -
            
            
            
            145,484Prepayment
      and deposit
            
            
            353,572
            
            
            
            236,269Prepaid
      land lease
            
            
            15,806
            
            
            
            13,521Other
      receivable
            
            
            2,000
            
            
            
            -TOTAL
      CURRENT ASSETS
            
            
            34,238,632
            
            
            
            15,527,540PROPERTY,
      PLANT AND EQUIPMENT, Net
            
            
            46,571,703
            
            
            
            30,105,185PREPAID
      LAND LEASE, Net of current portion
            
            
            739,651
            
            
            
            697,107TOTAL
      ASSETS
            
            $
            81,549,986
            
            
            $
            46,329,832LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable and accrued expenses
            
            $
            5,987,805
            
            
            $
            2,928,248Loan
      payable
            
            
            4,023,250
            
            
            
            -Note
      payable related parties
            
            
            4,650,000
            
            
            
            9,939,750Due
      to related parties
            
            
            234,333
            
            
            
            32,230Taxes
      payable
            
            
            2,653,408
            
            
            
            1,477,296TOTAL
      CURRENT LIABILITIES
            
            
            17,548,796
            
            
            
            14,377,524NON
      CURRENT LIABILITIESLoan payable
      – related party
            
            
            18,287,493
            
            
            
            5,484,000TOTAL
      LIABILITIES
            
            
            35,836,289
            
            
            
            19,861,524STOCKHOLDERS'
      EQUITYPREFERED
      STOCK ; $0.001 par value; 1,000,000 sharesauthorized
      none outstanding
            
            
            -
            
            
            
            -COMMON
      STOCK; $0.0005 par value; 400,000,000 sharesauthorized; 99,668,842 shares issued and outstanding
            
            
            49,834
            
            
            
            49,834ADDITIONAL
      PAID-IN CAPITAL
            
            
            12,658,291
            
            
            
            11,924,616RETAINED
      EARNINGS - UNAPPROPRIATED
            
            
            27,493,919
            
            
            
            11,323,518RETAINED
      EARNINGS - APPROPRIATED
            
            
            1,321,893
            
            
            
            1,321,893CUMULATIVE
      TRANSLATION ADJUSTMENT
            
            
            4,189,760
            
            
            
            1,848,447TOTAL
      STOCKHOLDERS' EQUITY
            
            
            45,713,697
            
            
            
            26,468,308TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            81,549,986
            
            
            $
            46,329,832




See
accompanying notes to condensed consolidated financial statements.




-2-




GULF
RESOURCES, INC.


AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)





Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007NET
      REVENUENet
      sales
            
            $
            17,554,873
            
            
            
            16,276,184
            
            
            $
            63,354,609
            
            
            
            38,599,310Maintenance
      service income
            
            
            -
            
            
            
            142,427
            
            
            
            -
            
            
            
            272,57917,554,873
            
            
            
            16,418,611
            
            
            
            63,354,609
            
            
            
            38,871,889OPERATING
      EXPENSESCost
      of net revenue
            
            
            11,388,348
            
            
            
            9,558,866
            
            
            
            38,050,971
            
            
            
            22,854,530Research
      and development cost
            
            
            122,744
            
            
            
            143,269
            
            
            
            389,853
            
            
            
            143,269General
      and administrative expenses
            
            
            960,747
            
            
            
            530,486
            
            
            
            2,824,377
            
            
            
            1,059,68312,471,839
            
            
            
            10,232,621
            
            
            41,265,201
            
            
            
            24,057,482INCOME
      FROM OPERATIONS
            
            
            5,083,034
            
            
            
            6,185,990
            
            
            
            22,089,
      408
            
            
            
            14,814,407OTHER
      INCOME (EXPENSES)Interest
      expense
            
            
            -
            
            
            
            (49,516
            )
            
            
            (60,111
            )
            
            
            (73,598
            )Interest
      income
            
            
            26,143
            
            
            
            10,974
            
            
            
            70,400
            
            
            
            26,184Sundry income
            
            
            779
            
            
            
            -
            
            
            (3,764
            )
            
            
            -INCOME
      BEFORE INCOME TAXES
            
            
            5,109,956
            
            
            
            6,147,448
            
            
            
            22,095,933
            
            
            
            14,766,993INCOME
      TAXES - current
            
            
            1,373,055
            
            
            
            2,201,107
            
            
            
            5,925,532
            
            
            
            5,162,958NET
      INCOME
            
            $
            3,736,901
            
            
            $
            3,946,341
            
            
            $
            16,170,401
            
            
            $
            9,604,035EARNINGS
      PER SHARE:BASIC
            
            $
            0.04
            
            
            $
            0.04
            
            
            $
            0.16
            
            
            $
            0.1DILUTED
            
            $
            0.04
            
            
            $
            0.04
            
            
            $
            0.16
            
            
            $
            0.1WEIGHTED
      AVERAGE NUMBER OF SHARESBASIC
            
            
            99,668,842
            
            
            
            99,668,842
            
            
            
            99,668,842
            
            
            
            95,684,142DILUTED
            
            
            99,668,842
            
            
            
            99,668,842
            
            
            
            99,668,842
            
            
            
            95,684,142




See
accompanying notes to condensed consolidated financial statements.




-3-




GULF
RESOURCES, INC.


AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(UNAUDITED)




Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007NET
      INCOME
            
            $
            3,736,901
            
            
            $
            3,946,341
            
            
            $
            16,170,401
            
            
            $
            9,604,035OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation adjustment
            
            
            228,921
            
            
            
            310,528
            
            
            
            2,341,313
            
            
            
            798,358COMPREHENSIVE
      INCOME
            
            $
            3,965,822
            
            
            $
            4,256,869
            
            
            $
            18,511,714
            
            
            $
            10,402,393




See
accompanying notes to condensed consolidated financial statements.




-4-




GULF
RESOURCES, INC.


AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


NINE
MONTHS ENDED SEPTEMBER 30, 2008




Additional
            
            
            Statutory

                Common
            
            
            
            
            
            CumulativeNumber
            
            
            Common
            
            
            Paid-in
            
            
            Reserve
            
            
            Retained
            
            
            Translationof
      Shares
            
            
            Stock
            
            
            Capital
            
            
            Fund
            
            
            Earnings
            
            
            Adjustment
            
            
            TotalBALANCE
      AT DECEMBER 31, 2007 (audited)
            
            
            99,668,842
            
            
            $
            49,834
            
            
            $
            11,924,616
            
            
            $
            1,321,893
            
            
            $
            11,323,518
            
            
            $
            1,848,447
            
            
            $
            26,468,308Cumulative
      translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,341,313
            
            
            
            2,341,313Waiver
      of accrued interest
            
            
            -
            
            
            
            -
            
            
            
            131,533
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            131,533Issuance
      of warrants for consulting expenses
            
            
            -
            
            
            
            -
            
            
            
            602,142
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            602,142Net
      income for the nine months ended September 30, 2008
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            16,170,401
            
            
            
            -
            
            
            
            16,170,401BALANCE
      AT SEPTEMBER 30, 2008 (unaudited)
            
            
            99,668,842
            
            
            $
            49,834
            
            
            $
            12,658,291
            
            
            $
            1,321,893
            
            
            $
            27,493,919
            
            
            $
            4,189,760
            
            
            $
            45,713,697





See
accompanying notes to condensed consolidated financial statements.




-5-




GULF
RESOURCES, INC.


AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


NINE
MONTHS ENDED SEPTEMBER 30, 2008 AND 2007


(UNAUDITED)




Nine
      Months Ended September 30,2008
            
            
            2007CASH
      FLOWS PROVIDED BY OPERATING ACTIVITIESNet
      income
            
            $
            16,170,401
            
            
            $
            9,604,035Adjustments
      to reconcile net incometo
      net cash provided by operating activitiesAmortization
      of warrants issued for expenses
            
            
            602,142
            
            
            
            -Amortization
      of prepaid expenses by sharesissued
      for consulting fee
            
            
            145,484
            
            
            
            507,881Depreciation
      and amortization
            
            
            3,426,455
            
            
            
            753,757(Increase)
      decrease in assetsAccounts
      receivable
            
            
            (4,426,119
            )
            
            
            (2,480,862
            )Inventories
            
            
            (1,659,098
            )
            
            
            123,351Prepayment
      and deposit
            
            
            (713,470
            )
            
            
            (347,938
            )Income
      tax receivable
            
            
            -
            
            
            
            841,949Increase
      (decrease) in liabilitiesAccounts
      payable and accrued expenses
            
            
            3,102,777
            
            
            
            2,041,189Taxes
      payable
            
            
            969,282
            
            
            
            771,993Net
      cash provided by operating activities
            
            
            17,617,854
            
            
            
            11,815,355CASH
      FLOWS USED IN INVESTING ACTIVITIESProperty,
      plant and equipment
            
            
            (17,365,195
            )
            
            
            (8,803,161
            )Net
      cash used in investing activities
            
            
            (17,365,195
            )
            
            
            (8,803,161
            )CASH
      FLOWS PROVIDED BY FINANCING ACTIVITIESCapital
      contribution
            
            
            -
            
            
            
            50,000Loan
      due to third party
            
            
            -
            
            
            
            5,878,800Advances
      from related party
            
            
            9,397,662
            
            
            
            1,235,790Proceeds
      from notes payable – related party
            
            
            5,590,800
            
            
            
            -Repayment
      on note payable
            
            
            (3,843,675
            )
            
            
            -Dividends
      paid
            
            
            -
            
            
            
            (4,739,600
            )Net
      cash provided by financing activities
            
            
            11,144,787
            
            
            
            2,424,990EFFECTS
      OF EXCHANGE RATE CHANGE ON CASH
            
            
            703,038
            
            
            
            237,937NET
      INCREASE (DECREASE) IN CASH
            
            
            12,100,485
            
            
            
            5,675,121CASH
      - BEGINNING OF PERIOD
            
            
            10,773,875
            
            
            
            5,692,608CASH
      - END OF PERIOD
            
            $
            22,874,360
            
            
            $
            11,367,729





See
accompanying notes to condensed consolidated financial statements.




-6-




GULF
RESOURCES, INC.


AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)


NINE
MONTHS ENDED SEPTEMBER 30, 2008 AND 2007


(UNAUDITED)





Nine
      Months Ended September 30,2008
            
            
            2007SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWINFORMATIONCash
      paid during the period for:Income
      taxes
            
            $
            5,444,244
            
            
            $
            3,895,301Interest
      paid
            
            $
            126,715
            
            
            $
            -


SUPPLEMENTAL
      DISCLOSURE OF NON-CASH FINANCINGACTIVITIESWaiver
      of accrued interest to Additional Paid In Capital
            
            $
            131,533
            
            
            $
            -Issuance
      of common stock as payment for accrued expenses
            
            $
            -
            
            
            $
            5,344,395Issuance
      of common stock for prepaid expenses
            
            $
            -
            
            
            $
            892,500Issuance
      of common stock for acquiring fixed assets including mineral
      right
            
            $
            -
            
            
            $
            2,928,479




See
accompanying notes to condensed consolidated financial statements.




-7-




GULF
RESOURCES, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008








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





The
accompanying unaudited consolidated financial statements have been prepared by
Gulf Resources, Inc. and its subsidiaries (collectively, the
“Company”).  These statements include all adjustments (consisting only
of their normal recurring adjustments) which management believes necessary for a
fair presentation of the statements and have been prepared on a consistent basis
using the accounting policies described in the Form 10-K for the year ended
December 31, 2007 (“2007 Form 10-K”).  Certain financial information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission, although the Company believes that the
accompanying disclosures are adequate to make the information presented not
misleading.  The Notes to Financial Statements included in the 2007
Form 10-K should be read in conjunction with the accompanying interim financial
statements.  The interim operating results for the three and nine
months ended September 30, 2008 may not be indicative of operating results
expected for the full year.





Basis of
Presentation


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





On
December 12, 2006, Gulf Resources, Inc. (formerly Diversifax, Inc.), a public
“shell” company, acquired Upper Class Group Limited and its wholly-owned
subsidiary, SCHC (together “Upper Class”).  Under the terms of the
agreement, all stockholders of Upper Class Group Limited received a total amount
of 53,000,000 shares of voting common stock of Gulf Resources, Inc. in exchange
for all shares of Upper Class Group Limited common stock held by all
stockholders of Upper Class.  Under accounting principles generally
accepted in the United States, the share exchange is considered to be a capital
transaction in substance, rather than a business combination.  That
is, the share exchange is equivalent to the issuance of stock by Upper Class
Group Limited for the net monetary assets of Gulf Resources, Inc., accompanied
by a recapitalization, and is accounted for as a change in capital structure.
Accordingly, the accounting for the share exchange will be identical to that
resulting from a reverse acquisition, except no goodwill will be
recorded.  Under reverse takeover accounting, the comparative
historical financial statements issued after the acquisition of the legal
acquirer, Gulf Resources, Inc., are those of the legal acquiree, Upper Class
Group Limited, which is considered to be the accounting acquirer.





On
February 5, 2007, Upper Class Group Limited acquired Shouguang Yuxin Chemical
Industry Co., Limited (“SYCI”), a company formed in PRC law on October 30,
2000.  Under the terms of the merger agreement, the stockholders of
SYCI received a total amount of 32,376,236 shares of voting common stock of Gulf
Resources, Inc. in exchange for all of the shares of SYCI’s common
stock.  Also, upon the completion of the merger, Gulf Resources, Inc.
paid a $2,550,000 dividend to the original stockholders of
SYCI.  Since prior to the acquisition the majority of the ownership of
Gulf Resources, Inc. and of SYCI was controlled by the same party, the merger
was accounted for as a transaction between entities under common control,
whereby Gulf Resources, Inc. recognized the assets and liabilities of SYCI
transferred at their carrying amounts.  Share and per share amounts
stated have been retroactively adjusted to reflect the merger.





On
November 11, 2007, Upper Class Group Limited formed Hong Kong Jiaxing Industrial
Limited (“HKJI”),  a wholly-owned subsidiary of Upper Class in Hong
Kong. Upper Class Group Limited then transferred the net assets of SCHC to HKJI
at cost on December 5, 2007.




-8-




GULF
RESOURCES, INC.AND SUBSIDIARIES


NOTES TO
CONS LIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008





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





Basis of
Consolidation


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





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





Nature of the
Business


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





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 and the related disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. 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.





Reporting
Currency


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





Foreign Currency
Translation


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





Restricted
Cash


The
Company’s restricted cash was in the Company’s bank account designated for use
in supporting the Company’s application to increase its registered capital in
SCHC. The Company’s such application was approved during the quarter ended
September 30,2008 and the restricted cash was returned to an unrestricted
status.





Accounts
Receivable


Accounts
receivable is stated at cost, net of allowance for doubtful accounts. As of
September 30, 2008 and December 31, 2007 the Company considered all accounts
receivable collectable and therefore did not record an allowance for doubtful
accounts.





Inventories


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




-9-





GULF
RESOURCES, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008





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





Property, Plant and
Equipment


Property,
plant and equipment is 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.
Mineral rights are stated at cost, less accumulated amortization.




Mineral
rights are amortized ratably over the 50 year term of the lease, or the
equivalent term under the units of production method, whichever is
shorter.




The
Company’s depreciation and amortization policies on fixed assets are as
follows:







Useful life
              (in
      years)Mineral
    rights
            Lower of the period
      of lease or 50 yearsBuildings
            20Machinery
            8Motor
      vehicles
            5Equipment
            8




Mineral
Rights


The
Company follows FASB Staff Position amending SFAS No. 142 and No. 144 which
provide that certain mineral rights are considered tangible assets and that
mineral rights should be accounted for based on their substance. Mineral rights
are included in property, plant and equipment.







Revenue
Recognition


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





Foreign
Operations


All of
the Company’s operations and assets are 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.








Shipping and Handling Fees
and Costs


The
Company follows Emerging Issues Task Force (“EITF”) No. 00-10, Accounting for Shipping and Handling
Fees and Costs.  The Company does not charge its customers for
shipping and handling.  The Company classifies shipping and handling
costs as part of the cost of revenue.  For the three months ended Sep
30, 2008 and 2007, shipping and handling costs were $91,365 and $107,331, and
for the nine months ended September 30, 2008 and 2007, shipping and handling
costs were $312,611 and $293,896.




-10-




GULF
RESOURCES, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008





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





Recently Issued Accounting
Pronouncements





During
September 2006, the Financial Accounting Standards Board (“FASB”)
issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which
is effective for fiscal years beginning after November 15, 2007 with
earlier adoption encouraged. SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. In February 2008, the
FASB issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No.
157 which delayed the effective date of SFAS 157 for all non-financial assets
and liabilities, except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis, until January 1,
2009.   The Company adopted SFAS 157 on January 1, 2008 for all
financial assets and liabilities, but the implementation did not have a
significant impact on the Company's financial position or results of
operations.  The Company has not yet determined the impact the
implementation of SFAS 157 will have on the Company’s non-financial assets and
liabilities which are not recognized or disclosed on a recurring
basis.  However, the Company does not anticipate that the full
adoption of SFAS 157 will significantly impact their consolidated financial
statements.





During
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement No.
115 (“SFAS 159”), which permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective of SFAS 159 is
to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The Company adopted SFAS 159 on January 1, 2008 and has elected not
to measure any additional financial assets, liabilities or other items at fair
value.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (“SFAS 141R”). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired.
SFAS 141R also establishes disclosure requirements to enable the evaluation
of the nature and financial effects of the business combination. This statement
is effective for the Company beginning January 1, 2009 and will change the
accounting for business combinations on a prospective basis.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51 (“SFAS 160”). SFAS 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. This statement is
effective for the Company beginning January 1, 2009. This statement is not
currently applicable since its subsidiaries are wholly-owned.





In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”), which is effective January 1,
2009. SFAS 161 requires enhanced disclosures about derivative instruments and
hedging activities to allow for a better understanding of their effects on an
entity’s financial position, financial performance, and cash flows. Among other
things, SFAS 161 requires disclosures of the fair values of derivative
instruments and associated gains and losses in a tabular formant. SFAS 161
is not currently applicable to the Company since the Company does not have
derivative instruments or hedging activity.




-11-




GULF
RESOURCES, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008





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





In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchyof Generally Accepted Accounting
Principles(“FAS 162"). This Standard identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles. FAS 162
directs thehierarchy to the
entity, rather than the independent auditors, as the entity is responsible for
selecting accounting principles for financial statements that are presented in
conformity with generally accepted accounting principles. The Standard is
effective 60 days following SEC approval of the Public Company Accounting
Oversight Board amendments to remove the hierarchy of generally accepted
accounting principles from the auditing standards. FAS 162 is not expected to
have an impact on the financial statements.





In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the Useful Life of
Intangible Assets, which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible
Assets.This Staff Position is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Early adoption is prohibited. This FSP is not currently
applicable to the Company.





In June
2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities.
This FSP provides that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. The Company does not
currently have any share-based awards that would qualify as participating
securities. Therefore, application of this FSP is not expected to have an effect
on the Company's financial reporting.





In May
2008, the FASB issued FASB Staff Position (FSP) APB 14-1, Accounting for Convertible Debt That
May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)("FSP 14-1"). FSP 14-1 will be effective for financial statements issued
for fiscal years beginning after December 15, 2008. The FSP includes guidance
that convertible debt instruments that may be settled in cash upon conversion
should be separated between the liability and equity components, with each
component being accounted for in a manner that will reflect the entity's
nonconvertible debt borrowing rate when interest costs are recognized in
subsequent periods. FSP 14-1 is not currently applicable to the Company since
the Company does not have convertible debt.





NOTE 2-
PROPERTY, PLANT AND EQUIPMENT




September
      30,
            
            
            December
      31,2008
            
            
            2007(unaudited)
            
            
            (audited)Building
            
            $
            6,393,333
            
            
            $
            2,379,252Furnitures
      & equipment
            
            
            2,347,371
            
            
            
            1,120,059Plant
      and machinery
            
            
            37,516,428
            
            
            
            24,280,822Motor
      vehicle
            
            
            57,789
            
            
            
            54,155Mineral
      rights
            
            
            5,824,668
            
            
            
            4,221,05952,139,588
            
            
            
            32,055,347Accumulated
      depreciation
            
            
            (5,567,885
            )
            
            
            (1,950,162
            )$
            46,571,703
            
            
            $
            30,105,185




-12-




GULF
RESOURCES, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008





On
January 8, 2008, SCHC entered into an Asset Purchase Agreement with Mr. Xiaodong
Yang for the acquisition of wells, pipelines and other production equipment of a
bromine production facility located in Wei Fang City Hanting Area, along with
mineral rights and land lease associated with the acquisition. The consideration
for the assets amounted to $9,722,222. The property has 200,000 to 210,000
metric tons of proven bromine reserves and its production capacity is estimated
to be approximately 4,700 metric tons per year. This acquisition was deemed to
be a purchase of assets and not a purchase of a business.





NOTE 3 –
NOTE PAYABLE-RELATED PARTIES




September
      30
            
            
            December
      312008
            
            
            2007(unaudited)
            
            
            (audited)Bank
      borrowing from Citibank (China) Company Limited Shanghai Branch of
      $3,770,250 was due March 30, 2008 at the prevailing interest rate
      regulated by The People’s Bank of China minus 5% from October 31, 2007 to
      March 30, 2008, guaranteed by a shareholder, Shenzhen Huayin Guaranty and
      Investment Company Limited.
            
            $
            -
            
            
            $
            3,770,250Note
      payable to a stockholder, Shenzhen Huayin Guaranty and Investment Company
      Limited with interest at 3.33% per annum from March 20, 2007 to March 19,
      2008 and was due on March 19, 2008.
            
            
            -
            
            
            
            6,169,500Note
      payable to a stockholder, Shenzhen Huayin Guaranty and Investment Company
      Limited of $3,000,000 is unsecured, non-interest bearing and is due May
      2009. The loan is denominated in US dollars.
            
            
            3,000,000
            
            
            
            -Note
      payable to a stockholder, Shenzhen Huayin Guaranty and Investment Company
      Limited is unsecured, non-interest bearing, pursuant to an agreement
      which, as is Chinese custom, states that the loan need not be paid in the
      immediate future. The Company believes the earliest the loan would be
      required to be repaid is January 2011. This loan is denominated in
      RMB.
            
            
            18,287,493
            
            
            
            5,484,000Loan
      from a stockholder First Capital Limited of 1,650,000 is unsecured,
      non-interest bearing with no fixed term of repayment.
            
            
            1,650,000Total
      loans
            
            
            22,937,493
            
            
            
            15,423,750Less:
      current portion
            
            
            (4,650,000
            )
            
            
            (9,939,750
            )Long-term
      loans, less current portion
            
            $
            18,287,493
            
            
            $
            5,484,000




-13-




GULF
RESOURCES, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008


(UNAUDITED)





NOTE 3 –
NOTE PAYABLE  RELATED PARTIES- Continued





Future
      maturities of notes payable-related parties are as
follows:2009
            $
            -2010
              2011
            
            -
              18,287,493Total
            $
            18,287,493




During
the three months ended March 31, 2008, Shenzhen Huayin Guaranty and Investment
Company Limited waived $131,533 of accrued interest, which was recorded as a
credit to additional paid in capital.





NOTE 4
–LOAN PAYABLE





This amount is
interest free with no fixed terms of repayment, and not secured against the
Company’s assets. This amount is owed to a non-related party.




NOTE 5 –
TAXES PAYABLE





Taxes
      payable consists of the following:September
      30,
              2008
            
            
            December
      31, 2007(unaudited)
            
            
            (audited)Income
      tax payable
            
            $
            1,401,443
            
            
            $
            798,090Mineral
      resource compensation fee payable
            
            
            248,983
            
            
            
            -Value
      added tax payable and others
            
            
            1,002,982
            
            
            
            679,206Total
            
            $
            2,653,408
            
            
            $
            1,477,296








NOTE 6 –
DUE TO RELATED PARTIES





Due
      to related parties consists of the following:September
      30,
            
            
            December
      31,2008
            
            
            2007(unaudited)
            
            
            (audited)Advance
      from major stockholder
            
            $
            32,230
            
            
            $
            32,230Due
      to related company - Jiaxing Lighting
            
            
            202,103
            
            
            
            -$
            234,333
            
            
            $
            32,230




The
$32,230 due to related party represents advance from major
stockholder.  The $202,103 due to related company represents funds
received from Jiaxing Lighting for investment purpose in SCHC.  Mr.
Ming Yang, CEO of the Company, is the director and shareholder of Jiaxing
Lighting. Advance from major stockholder and balances due to related company are
unsecured, non-interest bearing and have no fixed repayment terms.




-14-




GULF
RESOURCES, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008


(UNAUDITED)




NOTE 7 –
RETAINED EARNINGS – APPROPRIATED





In
accordance with the relevant PRC regulations and the Company’s Articles of
Association, the Company is required to classify 10% of the profit after tax as
reported under the PRC statutory financial statements to the Statutory Common
Reserve Fund until the balance reaches 50% of the registered
capital.  This reserve can be used to make up any losses incurred or
to increase share capital.  Except for the reduction of losses
incurred, any other application should not result in this reserve balance
falling below 25% of the registered capital. As of December 31, 2007 the
Statutory Common Reserve Fund had reached 50% of the Company’s registered
capital.




NOTE 8 –
STOCK OPTIONS




Common
stock, stock options and common stock warrants issued to other than employees or
directors are recorded on the basis of their fair value, as required by SFAS No.
123(R), which is measured as of the date required by EITF Issue 96-18,
“Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services.”  In
accordance with EITF 96-18, the stock options or common stock warrants are
valued 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.





The
Company issued 1,000,000 warrants on February 5, 2008 at a price of $2.51 per
share as part of a consulting agreement with its investor relations firm. The
warrants were valued using the Black-Scholes option-pricing model with an
assumed 86% volatility, a three year term for the warrants, a risk free rate of
3% and a dividend yield of 0%. These warrants may be exercised through the third
anniversary of the date of the agreement, and vest in 12 quarterly installments
in equal amounts beginning in the second quarter of 2008. The consulting expense
for these services is recognized on a straight line basis over the one year
period of the related consulting agreement. The related expense for the three
months and nine months ended September 30, 2008 is $232,761 and
$602,142.








The
following table summarizes all Company stock option transactions between January
1, 2008 and September 30, 2008 period.




Option
      & Warrants Outstanding
            
            
            Options
      & Warrants Vested
            
            
            Range
      of Exercise Price per Common ShareBalance,
      December 31, 2007
            
            
            100,000
            
            
            
            100,000
            
            
            $
            2.00
      - $2.05Granted
      or vested during the nine months ended September 30, 2008
            
            
            1,000,000
            
            
            
            166,666
            
            
            
            2.51Expired
      during the nine months ended September 30, 2008
            
            
            -
            
            
            
            -
            
            
            
            -Balance,
      September 30, 2008
            
            
            1,100,000
            
            
            
            266,666
            
            
            $
            2.00
      - $2.51




-15-




GULF
RESOURCES, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008


(UNAUDITED)





NOTE 9 –
STOCK OPTIONS – Continued




Stock
      Options OutstandingNumber
      Outstanding
            
            Weighted
      Average
            
            Weighted
      AverageRange
      of
            
            Currently
      Exercisable
            
            Remaining
            
            Exercise
      Price of OptionsExercise
      Prices
            
            at
      September 30, 2008
            
            Contractual
      Life (Years)
            
            Currently
      Exercisable$2.00-$2.51
            
            266,666
            
            1.55
            
            $   2.25




NOTE 10 –
INCOME TAXES





The
Company utilizes the asset and liability method of accounting for income taxes
in accordance with SFAS No. 109. The Company’s effective tax rates for the three
months and nine months ended September 30, 2008 were 26.8%.  Effective
tax rates for the three months and nine months ended September 30, 2007 were
35.8% and 34.96%.  The rates in those periods differed from the
statutory PRC enterprise income tax rates of 25% and 33%, respectively, due to
the non-deductibility of certain expenses incurred outside of the
PRC.





No
provision for deferred taxes has been made as there were no material temporary
differences at September 30, 2008 and December 31, 2007.





There was
no change in unrecognized tax benefits during the period ended September 30,
2008 and there was no accrual for uncertain tax positions as of September 30,
2008.





Tax years
from 2005 through 2007 remain subject to examination by major tax
jurisdictions.




NOTE 11 –
BUSINESS SEGMENTS





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





Three
      Months EndedSeptember
      30, 2008
              (unaudited)
            
            Bromine
      and
              Crude
      Salt
            
            
            Chemical
              Products
            
            
            Segment
              Total
            
            
            Corporate
            
            
            Consolidated
              TotalNet
      sales
            
            $
            13,106,804
            
            
            
            4,448,069
            
            
            
            17,554,873
            
            
            -
            
            
            
            17,554,873Income
      (loss) from operations
            
            
            4,086,664
            
            
            
            1,369,393
            
            
            
            5,465,194
            
            
            
            (382,160
            )
            
            
            5,083,034Total
      assets
            
            
            63,513,465
            
            
            
            17,961,014
            
            
            
            81,474,479
            
            
            
            75,507
            
            
            
            81,549,986Depreciation
      and amortization
            
            
            1,068,738
            
            
            
            221,664
            
            
            
            1,290,402
            
            
            
            -
            
            
            
            1,290,402Capital
      expenditures
            
            
            519,977
            
            
            
            -
            
            
            
            519,977
            
            
            
            -
            
            
            
            519,977




-16-




GULF
RESOURCES, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008


(UNAUDITED)




NOTE 12 –
BUSINESS SEGMENTS (CONTINUED)


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





Nine
      Months EndedSeptember
      30, 2008
              (unaudited)
            
            Bromine
      and
              Crude
      Salt
            
            
            Chemical
              Products
            
            
            Segment
              Total
            
            
            Corporate
            
            
            Consolidated
              TotalNet
      sales
            
            $
            47,627,468
            
            
            
            15,727,141
            
            
            
            63,354,609
            
            
            
            -
            
            
            
            63,354,609Income
      (loss) from operations
            
            
            18,427,749
            
            
            
            5,252,071
            
            
            
            23,679,820
            
            
            
            (1,590,412
            )
            
            
            22,089,408Total
      assets
            
            
            63,513,465
            
            
            
            17,961,014
            
            
            
            81,474,479
            
            
            
            75,507
            
            
            
            81,549,986Depreciation
      and amortization
            
            
            3,043,928
            
            
            
            382,528
            
            
            
            3,426,455
            
            
            
            -
            
            
            
            3,426,455Capital
      expenditures
            
            
            10,529,284
            
            
            
            6,835,909
            
            
            
            17,365,195
            
            
            
            -
            
            
            
            17,365,195





Nine
      Months EndedSeptember
      30,2007
              (unaudited)
            
            Bromine
      and
              Crude
      Salt
            
            
            Chemical
              Products
            
            
            Segment
              Total
            
            
            Corporate
            
            
            Consolidated
              TotalNet
      sales
            
            $
            23,880,542
            
            
            
            14,991,347
            
            
            
            38,871,889
            
            
            
            -
            
            
            
            38,871,889Income
      (loss) from operations
            
            
            10,128,452
            
            
            
            5,398,816
            
            
            
            15,527,268
            
            
            
            (712,861
            )
            
            
            14,814,407Total
      assets
            
            
            24,782,174
            
            
            
            8,086,869
            
            
            
            32,869,043
            
            
            
            434,619
            
            
            
            33,303,662Depreciation
      and amortization
            
            
            613,015
            
            
            
            140,742
            
            
            
            753,757
            
            
            
            -
            
            
            
            753,757Capital
      expenditures
            
            
            8,803,161
            
            
            
            -
            
            
            
            8,803,161
            
            
            
            -
            
            
            
            8,803,161





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,Reconciliations
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Total
      segment operating income
            
            $
            5,465,194
            
            
            $
            6,573,378
            
            
            $
            23,679,820
            
            
            $
            15,527,268Corporate
      overhead expenses
            
            
            (382,160
            )
            
            
            (387,388
            )
            
            
            (1,590,412
            )
            
            
            (712,861
            )Other
      income (expense)
            
            
            26,922
            
            
            
            (38,542
            )
            
            
            6,525
            
            
            
            (47,414
            )Income
      tax expense
            
            
            (1,373,055
            )
            
            
            (2,201,107
            )
            
            
            (5,925,532
            )
            
            
            (5,162,958
            )Total
      consolidated net income
            
            $
            3,736,901
            
            
            $
            3,946,341
            
            
            $
            16,170,401
            
            
            $
            9,604,035




-17-




GULF
RESOURCES, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008


(UNAUDITED)





NOTE 13 –
MAJOR SUPPLIER





During
the three months and nine months ended September 30, 2008, the Company purchased
62% and 59% of its raw material from three and two suppliers.  At
September 30, 2008, amounts due to those suppliers included in accounts payable
were $2,504,000. This concentration makes the Company vulnerable to a near-term
severe impact, should the relationships be terminated.




During
the three months and nine months ended September 30, 2007, the Company purchased
71% and 48% of its raw material from four and two suppliers.  At
September 30, 2007, amounts due to those suppliers included in accounts payable
were $1,514,000.





NOTE 14 –
CUSTOMER CONCENTRATION





The
Company sells a substantial portion of its product to a limited number of
customers.  During the three months ended September 30, 2008, sales to
the Company’s two largest customers, based on net revenue made to such
customers, aggregated $5,257,000, or approximately 30% of total net revenue.
 During the nine months ended September 30, 2008, the Company's largest
customers aggregated $6,578,000, or approximately 10% of total net
revenue.  At September 30, 2008, amounts due from these customers were
$2,309,518.    This concentration makes the Company
vulnerable to a near-term severe impact, should the relationships be
terminated.





During
the three months and nine months ended September 30, 2007, sales to the two and
three largest customers totaled $4,294,000 and $13,897,666, or approximately 27%
and 37% of total net revenue.  At September 30, 2007, amounts due from
these customers were $2,664,000.





NOTE 15 –
RELATED PARTY TRANSACTIONS





September
      30,
              2008
            
            
            December
      31, 2007(unaudited)
            
            
            (audited)Waiver
      of interest expenses during first quarter 2008 by a related
      party:Shenzhen
      Huayin Guaranty and Investment Company Limited (Note 3)
            
            $
            131,533
            
            
            $
            -Note
      payable - related party:Shenzhen
      Huayin Guaranty and Investment Company Limited (Note 3)
            
            $
            21,287,493
            
            
            $
            11,653,500Due
      to related party:Jiaxing
      Lighting
            
            $
            202,103
            
            
            $
            -Advance
      from major stockholder
            
            
            32,230
            
            
            
            32,230$
            234,333
            
            
            $
            32,230




NOTE 16 –
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 signed an agreement to facilitate the
pursuing targeted research and development of refined bromide compounds and end
products. As part of this agreement the Co-Op Research and Development Center
was opened and is now equipped with state of the art chemical engineering
instruments. 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 three months and nine months ended September 30, 2008 was $122,744 and
$389,853. No research and development expense was recorded during the three
months and nine months ended September 30, 2007.




-18-




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





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, 2007 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.





Company
Overview




The
Company conducts operations through its two wholly-owned China subsidiaries,
Shouguang City Haoyuan Chemical Company Limited (“SCHC”) and Shouguang Yuxin
Chemical Industry Co., Limited (“SYCI”). Our business is also reported in these
two segments; Bromine and Crude salts (SCHC), and Chemical Products
(SYCI).




Through
SCHC, we believe that 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, papermaking, chemical agents and
inorganic chemicals.




-19-




On
December 12, 2006, the Company, which was then an inactive “shell” company,
acquired, through a share exchange, Upper Class Group Limited which then owned
all of the outstanding shares of SCHC. Under GAAP 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
comparative historical financial statements issued after the acquisition of the
legal acquirer, Gulf Resources, Inc., are those of the legal acquiree, Upper
Class Group Limited, which is considered to be the accounting
acquirer.  Share and per share amounts stated have been retroactively
adjusted to reflect the acquisition.




On
February 5, 2007, Gulf Resources, through its subsidiary SCHC, acquired SYCI.
Prior to the acquisition the majority of the ownership of Gulf Resources and of
SYCI was controlled by the same party, therefore, 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. Share and per
share amounts stated in this report have also been retroactively adjusted to
reflect this transaction.





On August
31, 2008, Gulf Resources completed the construction of a new chemical production
line. It passed the examination by Shouguang City Administration of Work Safety
and local fire department. This new production line focuses on producing
environmental friendly additive products, solid lubricant and polyether
lubricant, for use in oil and gas exploration. The line has an expected annual
production capacity of 5,000 tons. Formal production of this chemical production
line started on September 15, 2008.




PRC
Government-mandated restrictions affected the production activities of our
customers, the celebrations prior to and during the Olympics held in China in
August 2008 also had an adverse effect on our business and results of
operations.





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 and nine months ended September 30, 2008 and September 30, 2007,
respectively.





Three
      months ended
              September 30,
      2008
            
            
            Three
      months ended
              September 30,
      2007
            
            
            Percentage
      ChangeNet
      Revenue
            
            $
            17,554,873
            
            
            $
            16,418,611
            
            
            
            6.9
            %Cost
      of Net Revenue
            
            
            11,388,348
            
            
            
            9,558,866
            
            
            
            19.1
            %Gross
      Profit
            
            
            6,166,525
            
            
            
            6,859,745
            
            
            
            -10.1
            %Research
      and Development costs
            
            
            122,744
            
            
            
            143,269
            
            
            
            -14.3
            %General
      and Administrative expenses
            
            
            960,747
            
            
            
            530,486
            
            
            
            81.1
            %Income
      from operations
            
            
            5,083,034
            
            
            
            6,185,990
            
            
            
            -17.8
            %Other
      Income (expenses), net
            
            
            26,922
            
            
            
            (38,542)
            
            
            
            -170
            %Income
      before taxes
            
            
            5,109,956
            
            
            
            6,147,448
            
            
            
            -16.9
            %Income
      Taxes
            
            
            1,373,055
            
            
            
            2,201,107
            
            
            
            -37.6
            %Net
      Income
            
            $
            3,736,901
            
            
            $
            3,946,341
            
            
            
            -5.3
            %




-20-




Nine
      months ended
              September 30,
      2008
            
            
            Nine
      months ended
              September 30,
      2007
            
            
            Percentage
      ChangeNet
      Revenue
            
            $
            63,354,609
            
            
            $
            38,871,889
            
            
            
            63.0
            %Cost
      of Net Revenue
            
            
            38,050,971
            
            
            
            22,854,530
            
            
            
            66.5
            %Gross
      Profit
            
            
            25,303,638
            
            
            
            16,017,359
            
            
            
            58.0
            %Research
      and Development costs
            
            
            389,853
            
            
            
            143,269
            
            
            
            172.1
            %General
      and Administrative expenses
            
            
            2,824,377
            
            
            
            1,059,683
            
            
            
            166.5
            %Income
      from operations
            
            
            22,089,408
            
            
            
            14,814,407
            
            
            
            49.1
            %Other
      Income (expenses), net
            
            
            6,525
            
            
            
            (47,414)
            
            
            
            113.8
            %Income
      before taxes
            
            
            22,095,933
            
            
            
            14,766,993
            
            
            
            49.6
            %Income
      Taxes
            
            
            5,925,532
            
            
            
            5,162,958
            
            
            
            14.8
            %Net
      Income
            
            $
            16,170,401
            
            
            $
            9,604,035
            
            
            
            68.4
            %




-21-




Net revenueNet revenues was $17,554,873 for three months ended September 30,
2008, an increase of $1,136,262 (or approximately 6.9%) compared to the same
period during 2007.  This increase was primarily attributable to the
growth in our bromine and crude salt segment, with revenues increasing from
$10,875,675 for three months ended September 30, 2007 to $13,106,804 in 2008, an
increase of approximately 20.5%. This increase was primarily the result of
increased production due to the acquisitions of four bromine producing
properties during 2007 and one in January 2008, which generated approximately
$3,792,998 of additional revenue for this quarter.  Compared to the
second quarter of 2008, where there was a 92% increase in net revenue compared
to the second quarter of 2007, the growth was considerably slower, in line with
the management’s anticipation of government-imposed restrictions on production
and distribution at many chemical factories in Beijing and Qingdao due to the
Beijing 2008 Olympic Games held in August, which caused a reduction in orders in
the third quarter.





Revenues
in the chemical products segment decreased from $5,542,936 for three months
ended September 30, 2007 to $4,448,069 during the same period in 2008, a
decrease of $1,094,867(approximately 19.8%).  This was also largely
due to the Olympic Games, as Qingdao City in Shandong Province was one of the
host cities for the Olympic Games. To ensure improved air quality and traffic
conditions, the government restricted transportation and chemical production in
the area. This major event impacted our revenue in the Chemical Products segment
significantly.





Net
      Revenue by SegmentThree
      months ended
            
            
            Three
      months endedSeptember 30,
      2008
            
            
            September 30,
      2007Segment
            
            
            
            
            Percent
      of total
            
            
            
            
            
            Percent
      of totalBromine
      and Crude salt
            
            $
            13,106,804
            
            
            
            74.7%
            
            
            $
            10,875,675
            
            
            
            66.2%Chemical
      Products
            
            
            4,448,069
            
            
            
            25.3%
            
            
            
            5,542,936
            
            
            
            33.8%Total
      Revenues
            
            $
            17,554,873
            
            
            
            100.0%
            
            
            $
            16,418,611
            
            
            
            100.0%





Three
      months ended September 302008
      vs. 2007Segment
            Percent increase of Net
    revenueBromine
      and Crude salt
            20.5%Chemical
      Products
            -19.8%




-22-




Net
revenues for the nine months ended September 30, 2008, were $63,354,609,
representing an increase of $24,482,720 or 63% over the comparable 2007
period.  The majority of the revenue came from the bromine and crude
salts segment, and net revenue in this segment increased by $23,746,926 from $
23,880,542 to $47,627,468, resulting from the acquisitions of five bromine
facilities, and the  expansion of an existing facility.





The
revenues from the chemical products segment were $15,727,141, an increase of
$735,794 or 4.9% over the comparable 2007 period for nine months ended September
30, 2008. This increase was largely due to the Chinese Yuan appreciation , and
due to the development of new chemical products.





Of the
total revenue increase of $24,482,720 during the nine months ended September 30,
2008 as compared to the similar 2007 period, approximately $23,292,998 resulted
from the impact of the five bromine properties acquired; the rest was due to the
Chinese Yuan appreciation and well-managed growth of the Company.


Net Revenue by SegmentNine
      months ended
            
            
            Nine
      months endedSeptember 30,
      2008
            
            
            September 30,
      2007Segments
            
            
            
            
            Percent
      of total
            
            
            
            
            
            Percent
      of totalBromine
      and Crude salt
            
            $
            47,627,468
            
            
            
            75.2%
            
            
            $
            23,880,542
            
            
            
            61.4%Chemical
      Products
            
            
            15,727,141
            
            
            
            24.8%
            
            
            
            14,991,347
            
            
            
            38.6%Total
      Revenues
            
            $
            63,354,609
            
            
            
            100.0%
            
            
            $
            38,871,889
            
            
            
            100.0%








Nine
      Months Ended September 302008
      vs. 2007Segment
            Percent increase of Net
    revenueBromine
      and Crude salt
            99.4%Chemical
      Products
            4.9%







Cost of Net
revenue and Gross profit.The cost of net revenue reflects the
raw materials consumed, electricity, depreciation, the direct salaries and
benefits of staff engaged in the production process, and other manufacturing
costs. The cost of net revenue and the resulting gross profit for the three and
nine months ended September 30, 2008 and 2007 were:





Three
      months ended September 302008
            
            
            % of Net revenue
            
            2007
            
            
            % of Net revenueCost
      of net revenue
            
            $
            11,388,348
            
            
            
            64.9
            %
            
            $
            9,558,866
            
            
            
            58.2
            %Gross
      Profit
            
            
            6,166,525
            
            
            
            35.1
            %
            
            
            6,859,745
            
            
            
            41.8
            %Nine
      months ended September 302008
            
            
            % of Net revenue
            
            2007
            
            
            % of Net revenueCost
      of net revenue
            
            $
            38,050,971
            
            
            
            60.0
            %
            
            $
            22,854,530
            
            
            
            58.8
            %Gross
      Profit
            
            
            25,303,638
            
            
            
            39.9
            %
            
            
            16,017,359
            
            
            
            41.2
            %




-23-




Increased
raw material prices in an inflationary environment increased the cost of net
revenue and caused the decrease of our gross profit margin for both of the three
and nine month periods ended September 30, 2008 as compared to the corresponding
prior year periods.  The prices of raw materials for Bromine and Crude
salt segment increased significantly, such as both of sulfur and sulphuric acid
with more than 100% increase, raw coal with about 200% increase. The prices of
raw materials for Chemical Products segment increased around 5-10%. The increase
in the Cost of net revenue as a percentage of net revenue for the three months
ended period was mainly due to the decreased amount of sales of 383 tons of the
bromine and crude salt products as compared to the corresponding period of last
year, but also a higher production cost include all the raw
materials  product consumables and electricity. Accordingly, the cost
of net revenue as a percentage of net revenue increased from 58.2% in 2007 to
64.9% for three months ended September 30 2008. Because the increase ratios in
net revenues from 2007 to 2008  for the three months period ended
September 30 was lower than the increase ratio from cost of net revenue, it
caused the gross profit decreased from $6,859,745 (41.8%) in 2007 to $6,166,525
(35.1%) in 2008.





Since the
cost of net revenue increased little bit to 60% in 2008 as compared with 58.8%
in 2007 for nine months ended September 30, the gross profit percentage of net
revenue decreased 1.3% from 41.2% in 2007 to 39.9% in 2008 for nine months ended
September 30.





Research and
Development CostsThe increase in research and development costs resulted
from an agreement that the Company and East China University of Science and
Technology entered into in September 2007 pursuant to which a Cooperative
Research and Development Center was established to develop new bromine-based
chemical compounds and products to be utilized in the pharmaceutical industry.
There were no comparable costs incurred in the 2007 periods.  All
research findings and patents developed by this center will belong to the
Company.




General and
Administrative ExpensesGeneral and administrative expenses were $960,747
and $2,824,377 for the three and nine months ended September 30,2008, an
increase of $ 430,261 and $1,764,694, compared to the three and nine months
ended September 30, 2007.  These significant increases in general and
administrative expenses were primarily due to increased expenses related to
corporate costs resulting from higher land tax fees and mineral resources
compensation fees of $415,876 and $1,438,165 for three and nine months ended
September 30,2008. The increase in general and administrative expenses as
compared to same period of 2007 was also due to a big increase in salary and
welfare expenses for hiring more staff in line with company expansion of $78,945
or 337.2%  and $154,191 or 227.0% for the three and nine months ended
September 30,2007 respectively.




-24-




Income
from Operations




Income
      from Operations by SegmentThree
      months ended
            
            Three
      months endedSeptember
      30, 2008
            
            September
      30, 2007Segment
            
            
            
            Percent
      of total
            
            
            
            
            Percent
      of totalBromine
      and Crude salt
            
            $
            4,086,664
            
            
            
            74.8%
            
            
            $
            4,629,467
            
            
            
            70.4%Chemical
      Products
            
            
            1,369,393
            
            
            
            25.2%
            
            
            
            1,943,911
            
            
            
            29.6%Income
      from operations before corporate costs
            
            
            5,465,194
            
            
            
            100.0%
            
            
            
            6,573,378
            
            
            
            100.0%Corporate
      costs
            
            
            (382,160)
            
            
            
            
            
            
            
            (387,388)Income
      from operations
            
            $
            5,083,034
            
            
            
            
            
            
            $
            6,185,990





Income
      from Operations by SegmentNine
      months ended
            
            Nine
      months endedSeptember
      30, 2008
            
            September
      30, 2007Segment
            
            
            
            Percent
      of total
            
            
            
            
            Percent
      of totalBromine
      and Crude salt
            
            $
            18,427,749
            
            
            
            77.8%
            
            
            $
            10,128,452
            
            
            
            65.2%Chemical
      Products
            
            
            5,252,071
            
            
            
            22.2%
            
            
            
            5,398,816
            
            
            
            34.8%Income
      from operations before corporate costs
            
            
            23,679,820
            
            
            
            100.0%
            
            
            
            15,527,268
            
            
            
            100.0%Corporate
      costs
            
            
            (1,590,412)
            
            
            
            
            
            
            
            (712,861)Income
      from operations
            
            $
            22,089,408
            
            
            
            
            
            
            $
            14,814,407





Income
from operations before corporate costs was $5,465,194 for the three months ended
September 30, 2008 (31% of net revenue), a decrease of $1,108,184 (or
approximately 16.9 %) of Income from operations for three months ended September
30, 2007.  Income from Operations before corporate costs was
$23,679,820 for the nine months ended September 30, 2008 (37.5% of net revenue),
an increase of $8,152,552 (or approximately 52.5%). The decrease of income from
operations for three months ended  September 30, 2008 was mainly due
to the 2008 Olympic Games government restrictions as we mentioned above, our
third quarter income from bromine and crude salt and chemical products were both
adversely affected as compared to the same period of last year, they decreased
$542,803 and $574,518 respectively. The increased income from operations for
nine months ended September 30, 2008 resulted primarily from the increased
income before corporate costs from the bromine and crude salts segment of the
Company. For the nine months ended September 30, 2008, income from operations
for the bromine and crude salt segment was $ 18,427,749, an increase of
$8,299,297 with 81.94% increase for the nine months ended September 30, 2007.
These increases in the income from operations of bromine and crude salt segment
were primarily a result of the acquisitions of four bromine producing properties
during 2007 and one in January 2008.The smaller decreased income from operations
of our chemical products were largely due to the government environmental
restrictions on the chemical industry during the Olympic Games, an increase of
corporate costs of equipment upgrades and the development of new chemical
products.




-25-




Net IncomeNet Income was $3,736,901 for three months ended September 30, 2008, a
decrease of $209,440 (5.3%), and net Income was $16,170,401 for the nine months
ended September 30, 2008, an increase of $6,566,366 (68.4%), as compared to the
comparative prior year periods. The decrease for three months net income ended
September 30, 2008 was mainly due to the increase from operating expense. The
increases for nine months ended September 30, 2008 was primarily attributed to
the higher operating profit resulting from the increases in net revenues, and a
decrease in the applicable tax rate to 26.8% in 2008 from approximately 34% in
2007 due to the implementation of the new PRC enterprise income tax regulation
which was effective as of January 1, 2008.





LIQUIDITY
AND CAPITAL RESOURCES




As of
September 30, 2008, Cash, and Cash Equivalents were $22,874,359 as compared to
$10,773,875 as of December 31, 2007. The components of this increase of
$12,100,485 are reflected below.




Cash
Flow


Nine
      Months Ended September 302008
            
            
            2007Net
      cash provided by operating activities
            
            $
            17,617,854
            
            
            $
            11,815,355Net
      cash used in investing activities
            
            
            (17,365,195)
            
            
            
            (8,803,161
            )Net
      cash provided by financing activities
            
            
            11,144,787
            
            
            
            2,424,990Net
      cash inflow (outflow)
            
            $
            12,100,485
            
            
            $
            5,675,121







For nine
months ended September 30, 2008 the Company met its working capital and capital
investment requirements mainly by using cash flow from operations and financing
activities totally $28,762,641, including the total advances from related
parties of $9,397,622 and the proceeds from notes payable of
$5,590,800.




Net
Cash Provided by Operating Activities




During
nine months ended September 30, 2008, we had positive cash flow from operating
activities of $17,617,854, primarily attributable to net income of $16,170,401,
taxes payable of $969,282, accounts payable and accrued expenses of $3,102,777,
partially offset by an increase in  accounts receivable of $4,426,119,
inventories of $1,659,098, and prepayment and deposit of $713,470. Net cash
provided by operating activities during nine months ended September 30, 2008
increased by $9,330,340 from that of Nine months ended September 30, 2007. The
primary source of this was a $6,566,366 increase in net income and the increases
in accounts payable and accrued expenses, prepayment and deposit and in taxes
payable, partially offset by the increase in accounts receivable and
inventories.  The increase in accounts receivables was due in part to
extended payment terms provided to new customers. The new payment term Gulf
Resources Inc. offered to our new customers is 60 days in 2008 instead of 45
days in 2007.




-26-




Net
Cash Used by Investing Activities




The
Company used $519,977 to acquire property, plant and equipment pertaining to a
bromine production facility during the three months ended September 30,
2008.  The Company used these funds for improvements for SCHC, to
increase the number of bromine wells and transport pipes.





Net
Cash Provided by Financing Activities





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 months. However, it is possible that the Company might need to raise
additional capital in order to fund any potential acquisitions of bromine assets
and/or increase our chemical production capacity. There can be no guarantee that
we will be able to obtain such funding, whether through the issuance of debt or
equity securities, on terms satisfactory to management and our board of
directors.




Working
capital at September 30, 2008 was approximately $16,689,836 as compared to
$1,150,016 at December 31, 2007, reflecting the higher account receivable
balance.




For the
immediate future we intend to focus our efforts to continue to expand within the
Chinese market. Our long-term strategic goal is to extend our market to overseas
countries.




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.




Significant
Accounting Policies and Estimates




Basis of
Consolidation


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




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




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 and the related disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. 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 the short maturity of these
investments, the carrying amounts approximate their fair value.








Accounts
Receivable


Accounts
receivable is stated at cost, net of allowance for doubtful accounts. As of
September 30, 2008 and December 31, 2007 the Company considered all accounts
receivable collectable and therefore did not record an allowance for doubtful
accounts.




Inventories


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




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.
Mineral rights are stated at cost, less accumulated amortization.




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Mineral
rights are amortized ratably over the 50 year term of the lease, or the
equivalent term under the units of production method, whichever is
shorter.




The
Company’s depreciation and amortization policies on fixed assets are as
follows:


Useful
      life
              (in years)Mineral
      rights
            Lower
      of the period of lease or 50 yearsBuildings
            20Machinery
            8Motor
      vehicles
            5Equipment
            8




Mineral
Rights


The
Company follows FASB Staff Position amending SFAS No. 142 and No. 144 which
provide that certain mineral rights are considered tangible assets and that
mineral rights should be accounted for based on their substance. Mineral rights
are included in property, plant and equipment.




Reporting Currency and
Translation


The
Company’s functional currency is Renminbi (“RMB”); however, the reporting
currency is the United States dollar (“USD”). Assets and liabilities of the
Company have been translated into dollars using the exchange rate at the balance
sheet date. The average exchange rate for the period has been used to translate
revenues and expenses. Translation adjustments are reported separately and
accumulated in a separate component of equity (cumulative translation
adjustment).





Revenue
Recognition


In
accordance with Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin (“SAB”) No. 104, “Revenue Recognition”, the Company recognizes revenue,
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.





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Basic and Diluted Net Income
per Share of Common Stock


In
accordance with Financial Accounting Standards No. 128, “Earnings per Share”,
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.





Impact
of inflation





We are
subject to commodity price risks arising from price fluctuations in the market
prices of the raw materials. We have generally been able to pass on cost
increases through price adjustments. However, the ability to pass on these
increases depends on market conditions influenced by the overall economic
conditions in China. We manage our price risks through productivity improvements
and cost-containment measures. We do not believe that inflation risk is material
to our business or our financial position, results of operations or cash flows
at this time.





Off
Balance Sheet Arrangements





We do not
have any off-balance sheet arrangements as defined by standards issued by the
Financial Accounting Standards Board, and accordingly, no such arrangements are
likely to have a current or future effect on our financial position, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources.





Item
3. Quantitative and Qualitative Disclosures About Market Risk.





Not
applicable to smaller reporting companies.





Item
4T. Controls and Procedures.





Based on
an evaluation of our disclosure controls and procedures as of the end of the
quarterly period covered by this report (the “Evaluation Date”) our president
and chief financial officer have determined that our current disclosure controls
and procedures are effective.




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.





PART II—OTHER
INFORMATION.


Item
1. Legal Proceedings.





None.





Item
1A. Risk Factors.





As a
smaller reporting company, the Company is not required to make disclosures under
this Item 1A.




-30-




Item
2. Unregistered Sales 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.       Description


31.1                     
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.




-31-




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.Date:
      November 13, 2008
            By:
            /s/
      Ming YangMing
      YangPresident
      and Chief Executive Officer(principal
      executive officer)By:
            /s/
      Min LiMin
      LiChief
      Financial Officer(principal
      financial and accounting officer)









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