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 June 30, 2009Oro
            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.)Chenming
      Industrial Park, Shouguang City, Shandong, China
            
            262714(Address
      of principal executive offices)
            
            (Zip
      Code)




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





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes xNo o





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




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




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


Yes oNo x




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files.)


Yes o No  ̈




As of
August 7, 2009, the registrant had outstanding 122,168,842 shares of common
stock.









Table
of Contents




Part
      I – Financial InformationItem
      1. Financial Statements
            3Item
      2. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
            25Item
      3. Quantitative and Qualitative Disclosures about Market
      Risk
            32Item
      4. Controls and Procedures
            32Part
      II – Other InformationItem
      1. Legal Proceedings.
            33Item
      1A. Risk Factors.
            33Item
      2. Unregistered shares of Equity
      Securities and Use of Proceeds.
            33Item
      3. Defaults Upon Senior Securities.
            33Item
      4. Submission of Matters to a Vote of Security
      Holders.
            33Item
      5. Other Information.
            33Item
      6. Exhibits.
            34









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, 2008 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.









PARTI—FINANCIAL INFORMATION
 Item
1. Financial Statements.


GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 JUNE 30,
2009 AND DECEMBER 31, 2008
  June 30,
              
              
              December 31,2009
              
              
              2008(unaudited)
              
              
              (audited)ASSETSCURRENT
      ASSETSCash
              
              $
              37,957,195
              
              
              $
              30,878,044Accounts
      receivable, net of allowance
              
              
              12,072,883
              
              
              
              11,674,645Inventories
              
              
              329,800
              
              
              
              418,259Prepayment
      and deposit
              
              
              639,994
              
              
              
              229,408Prepaid
      land lease
              
              
              15,828
              
              
              
              15,849Deferred
      tax asset
              
              
              3,449
              
              
              
              3,453Other
      receivable
              
              
              2,285
              
              
              
              2,64151,021,434
              
              
              
              43,222,299PROPERTY,
      PLANT AND EQUIPMENT, Net
              
              
              61,881,863
              
              
              
              45,399,456PREPAID
      LAND LEASE, Net of current portion
              
              
              728,791
              
              
              
              737,711TOTAL
      ASSETS
              
              $
              113,632,088
              
              
              $
              89,359,466LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable and accrued expenses
              
              $
              5,163,201
              
              
              $
              4,746,993Loan
      Payable
              
              
              4,028,750
              
              
              
              4,034,250Note
      and loan payable – related parties
              
              
              1,650,000
              
              
              
              4,650,000Due
      to related party
              
              
              7,667,138
              
              
              
              852,068Taxes
      payable
              
              
              4,960,474
              
              
              
              4,269,442TOTAL
      CURRENT LIABILITIES
              
              
              23,469,563
              
              
              
              18,552,753NON
      CURRENT LIABILITIESNote
      payable, net of current portion
              
              
              -
              
              
              
              18,337,493TOTAL
      LIABILITIES
              
              
              23,469,563
              
              
              
              36,890,246STOCKHOLDERS'
      EQUITYPREFERED
      STOCK ; $0.001 par value; 1,000,000 shares authorized none
      outstanding
              
              
              -
              
              
              
              -COMMON
      STOCK; $0.0005 par value; 400,000,000 sharesauthorized;
      122,168,842 and 99,668,842 shares issues and Outstanding in 2009 and
      2008
              
              
              61,084
              
              
              
              49,834ADDITIONAL
      PAID-IN CAPITAL
              
              
              35,268,268
              
              
              
              13,035,293RETAINED
      EARNINGS – UNAPPROPRIATED
              
              
              47,322,183
              
              
              
              31,817,465RETAINED
      EARNINGS – APPROPRIATED
              
              
              3,223,418
              
              
              
              3,223,418CUMULATIVE
      TRANSLATION ADJUSTMENT
              
              
              4,287,572
              
              
              
              4,343,210TOTAL
      STOCKHOLDERS' EQUITY
              
              
              90,162,525
              
              
              
              52,469,220TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              113,632,088
              
              
              $
              89,359,466
 
 See
accompanying notes to condensed consolidated financial statements.
  3
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
  Three
      Months Ended
                June
      30,
              
              
              Six
      Months Ended
                June
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008NET
      REVENUENet
      sales
              
              $
              29,590,897
              
              
              $
              23,766,179
              
              
              $
              53,224,436
              
              
              $
              45,799,736OPERATING
      EXPENSESCost
      of net revenue
              
              
              16,445,804
              
              
              
              14,062,903
              
              
              
              29,986,744
              
              
              
              26,662,623Research
      and development cost
              
              
              125,095
              
              
              
              135,275
              
              
              
              250,065
              
              
              
              267,109General
      and administrative expenses
              
              
              996,441
              
              
              
              1,009,088
              
              
              
              2,095,821
              
              
              
              1,863,63017,567,340
              
              
              
              15,207,266
              
              
              
              32,332,630
              
              
              
              28,793,362INCOME
      FROM OPERATIONS
              
              
              12,023,557
              
              
              
              8,558,913
              
              
              
              20,891,806
              
              
              
              17,006,374OTHER
      INCOME (EXPENSES)Interest
      expense
              
              
              (33)
              
              
              
              -
              
              
              
              (27,043)
              
              
              
              (60,111)Interest
      income
              
              
              23,762
              
              
              
              18,581
              
              
              
              45,792
              
              
              
              44,257Sundry
      income (expense)
              
              
              -
              
              
              
              14,195
              
              
              
              -
              
              
              
              (4,543)INCOME
      BEFORE INCOME TAXES
              
              
              12,047,286
              
              
              
              8,591,689
              
              
              
              20,910,555
              
              
              
              16,985,977INCOME
      TAXES - current
              
              
              3,075,682
              
              
              
              2,305,780
              
              
              
              5,405,837
              
              
              
              4,552,477NET
      INCOME
              
              $
              8,971,604
              
              
              $
              6,285,909
              
              
              $
              15,504,718
              
              
              $
              12,433,500EARNINGS
      PER SHARE:BASIC
              
              $
              0.07
              
              
              $
              0.06
              
              
              $
              0.13
              
              
              $
              0.12DILUTED
              
              $
              0.07
              
              
              $
              0.06
              
              
              $
              0.13
              
              
              $
              0.12WEIGHTED
      AVERAGE NUMBER OF SHARES:BASIC
              
              
              122,168,842
              
              
              
              99,668,842
              
              
              
              119,442,323
              
              
              
              99,668,842DILUTED
              
              
              122,168,842
              
              
              
              99,668,842
              
              
              
              119,442,323
              
              
              
              99,676,655
  See
accompanying notes to condensed consolidated financial statements.
  4
 
 GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (UNAUDITED)
  Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,2009
              
              
              2008
              
              
              2009
              
              
              2008NET
      INCOME
              
              $
              8,971,604
              
              
              $
              6,285,909
              
              
              $
              15,504,718
              
              
              $
              12,433,500OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation adjustment
              
              
              (6,200)
              
              
              
              852,164
              
              
              
              (55,638)
              
              
              
              2,112,392COMPREHENSIVE
      INCOME
              
              $
              8,965,404
              
              
              $
              7,138,073
              
              
              $
              15,449,080
              
              
              $
              14,545,892
 
 See
accompanying notes to condensed consolidated financial statements.
  5
  GULF
RESOURCES, INC
 AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
 SIX
MONTHS ENDED JUNE 30, 2009
  StatutoryAdditional
              
              
              Common
              
              
              
              
              
              CumulativeNumber
              
              
              Common
              
              
              Paid-in
              
              
              Reserve
              
              
              Retained
              
              
              Translationof
      Shares
              
              
              Stock
              
              
              Capital
              
              
              Fund
              
              
              Earnings
              
              
              Adjustment
              
              
              TotalBALANCE
      ATDECEMBER
      31, 2008
              
              
              99,668,842
              
              
              $
              49,834
              
              
              $
              13,035,293
              
              
              $
              3,223,418
              
              
              $
              31,817,465
              
              
              $
              4,343,210
              
              
              $
              52,469,220Cumulative
      translation adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (55,638)
              
              
              
              (55,638)Common
      stock issuance for settlement of shareholder’s note
payable
              
              
              21,000,000
              
              
              
              10,500
              
              
              
              21,276,993
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              21,287,493Common
      stock issuance for acquiring assets
              
              
              1,500,000
              
              
              
              750
              
              
              
              614,250
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              615,000Issuance
      of warrants for consulting expenses
              
              
              -
              
              
              
              -
              
              
              
              32,232
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              32,232Issuance
      of stock options
              
              
              -
              
              
              
              -
              
              
              
              309,500
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              309,500Net
      income for six months ended June 30, 2009
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              15,504,718
              
              
              
              -
              
              
              
              15,504,718BALANCE
      ATJune
      30, 2009 (unaudited)
              
              
              122,168,842
              
              
              $
              61,084
              
              
              $
              35,268,268
              
              
              $
              3,223,418
              
              
              $
              47,322,183
              
              
              $
              4,287,572
              
              
              $
              90,162,525
 
 See
accompanying notes to condensed consolidated financial statements.
  6
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
  Six
      Months Ended June 30,2009
              
              
              2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
              
              $
              15,504,718
              
              
              $
              12,433,500Adjustments
      to reconcile net income to net cash provided by operating
      activitiesAmortization
      of warrants issued for expenses
              
              
              309,500
              
              
              
              369,381Amortization
      of prepaid expenses by sharesissued for consulting fee
              
              
              32,232
              
              
              
              145,484Depreciation
      of fixed assets
              
              
              3,026,880
              
              
              
              2,136,053Amortization
      of prepaid expenses
              
              
              7,983
              
              
              -Bad
      debt provision
              
              
              61,455
              
              
              -(Increase)
      decrease in assetsAccounts
      receivable
              
              
              (475,162
              )
              
              
              (8,151,159
              )Inventories
              
              
              88,034
              
              
              
              (1,424,086
              )Prepayment
      and deposit
              
              
              (410,997
              )
              
              
              (365,382
              )Increase
      (decrease) in liabilitiesAccounts
      payable and accrued expenses
              
              
              419,562
              
              
              
              1,968,076Taxes
      payable
              
              
              691,379
              
              
              
              2,218,473Net
      cash provided by operating activities
              
              
              19,255,584
              
              
              
              9,330,340CASH
      FLOWS USED IN INVESTING ACTIVITIESRestricted
      cash
              
              -
              
              
              
              (4,078,833
              )Construction
      in progress
              
              
              (3,299,175
              )
              
              
              -Property,
      plant and equipment
              
              
              (15,663,051
              )
              
              
              (16,845,218
              )Net
      cash used in investing activities
              
              
              (18,962,226
              )
              
              
              (20,924,051
              )CASH
      FLOWS PROVIDED BY FINANCING ACTIVITIESProceeds
      from loan payable
              
              -
              
              
              
              5,590,800Advances
      from related party
              
              6,829,785
              
              
              
              2,998,281Repayment
      on bank loan
              
              -
              
              
              
              (3,843,675
              )Net
      cash provided by financing activities
              
              
              6,829,785
              
              
              
              6,745,406EFFECTS
      OF EXCHANGE RATE CHANGE ON CASH
              
              
              (43,992
              )
              
              
              459,343NET
      INCREASE IN CASH
              
              
              7,079,151
              
              
              
              (4,388,962
              )CASH
      - BEGINNING OF PERIOD
              
              
              30,878,044
              
              
              
              10,773,875CASH
      - END OF PERIOD
              
              $
              37,957,195
              
              
              $
              6,384,913
  See
accompanying notes to condensed consolidated financial statements.
  7
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 (UNAUDITED)
 
 Six
      Months Ended June 30,2009
              
              
              2008SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid during the period for:Income
      taxes
              
              $
              4,615,907
              
              
              $
              3,101,479Interest
      paid
              
              $
              27,009
              
              
              $
              101,144
 
 SUPPLEMENTAL
      DISCLOSURE OF NON-CASH FINANCING ACTIVITIESForgiveness
      of accrued interest to Additional Paid In Capital
              
              $
              -
              
              
              $
              131,533Issuance
      of common stock for settlement of shareholder’s note
    payable
              
              $
              21,287,493
              
              
              $
              -Issuance
      of common stock for purchase of assets
              
              $
              615,000
              
              
              $
              -
  See
accompanying notes to condensed consolidated financial statements.
  8
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2009
 (UNAUDITED)
  NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 The
accompanying unaudited condensed 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 are 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, 2008 (“2008 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 2008 Form 10-K should be read in conjunction with the accompanying
interim financial statements.  The interim operating results for the
six months ended June 30, 2009 may not be indicative of operating results
expected for the full year.
 
 Nature of the
Business
 The
Company manufactures and trades bromine and crude salt through its Shouguang
City Haoyuan Chemical Company Limited (“SCHC”) subsidiary, and manufactures
chemical products for use in the oil industry and paper manufacturing industry
through its Shouguang Yuxin Chemical Industry Co., Limited (“SYCI”)
subsidiary.
 
 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
Hong Kong Jiaxing Industrial Limited (“HKJI”) (collectively the
“Company”).  All material intercompany transactions have been
eliminated in consolidation.
 
 Use of
Estimates
 The
Company’s consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and this requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities 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.
 
 Allowance of doubtful
accounts
 Accounts
receivable is stated at cost, net of allowance for doubtful accounts. The
company establishes an allowance for doubtful accounts based on management’s
assessment of the collectivity of trade and other receivables. A considerate
amount of judgment is required in assessing the amount of allowance and the
company considers the historic level of credit losses and applies certain
percentage to accounts receivable balance. The company makes judgments about the
credit worthiness of each customer based on ongoing credit evaluations, and
monitors current economic trends that might impact the level of credit losses in
the future. If the financial condition of the customer begins deteriorate,
resulting in their inability to make payments, a larger allowance may be
required.
  9
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2009
 (UNAUDITED)
 
 NOTE
      1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (Continued)
 
 Allowance of doubtful
accounts (continued)
 
 Based on
the above assessment, during the reporting period ended June 30, 2009, the
management established the general provision allowance according to the aging of
trade and other receivable as follows:
  Provision Base
              
              aging
              
              Provision
      rateThe balance of
      accounts receivable
              
              <120 days
              
              0.5%121 days- 1 year
              
              5%1- 2 year
              
              30%2-3 year
              
              50%>3 year
              
              100%
  Bad debts
are written off when identified. The company extends unsecured credit to
customers ranging from 45 days to 90 days in the normal course of business. The
company does not accrue interest on trade and other receivable.
 
 As of
June 30, 2009, allowance for doubtful accounts amounted to $61,453. As of
December 31, 2008, allowance for doubtful accounts was $0.
 
 Concentration of Credit
Risk
 Concentrations
of credit risk with respect to accounts receivable are limited since the Company
performs ongoing credit evaluations of its customers’ financial condition and
due to the generally short payment terms.
 
 Inventories
 Inventories
are stated at the lower of cost, determined on a first-in first-out cost basis,
or 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 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 recorded at cost. 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.
  10
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2009
 (UNAUDITED)
  NOTE
      1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (Continued)
 
 Property, Plant and
Equipment (continued)
 
 The
Company’s depreciation and amortization policies on fixed assets are as
follows:
 
 Useful
      life
                (in
      years)Mineral
      rights
              Period
      of lease or 50 years or the equivalent term under the units of production
      method, whichever is shorterBuildings
              20Machinery
              8Motor
      vehicles
              5Equipment
              8
  Asset Retirement
Obligation
 The
Company follows SFAS No. 143, “Accounting for Asset Retirement Obligations”
(“SFAS No. 143”), which established a uniform methodology for accounting for
estimated reclamation and abandonment costs. SFAS No. 143 requires the fair
value of a liability for an asset retirement obligation to be recognized in the
period in which the legal obligation associated with the retirement of the
long-lived asset is incurred. When the liability is initially recorded, the
offset is capitalized by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of
the related asset. To settle the liability, the obligation is paid, and to
the extent there is a difference between the liability and the amount of cash
paid, a gain or loss upon settlement is recorded. Currently, there are no
reclamation or abandonment obligations associated with the land being utilized
for exploitation
 
 Recoverability of Long Lived
Assets
 The
Company follows SFAS No. 144, ”Accounting for the Impairment of Disposal of
Long-Lived Assets.” The Statement requires that long-lived and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. The Company is not aware of any events or circumstances which
indicate the existence of an impairment which would be material.
 
 Mineral
Rights
 The
Company follows SFAS No. 141(R) which provides 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.
 
 Fair Value of Financial
Instruments
 Statement
of Financial Accounting Standards No. 107, “Disclosures about Fair Values of
Financial Instruments”, requires disclosing fair value to the extent practicable
for financial instruments that are recognized or unrecognized in the balance
sheet. The fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or settled, nor
does the fair value amount consider the tax consequences of realization or
settlement.
  11
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2009
 (UNAUDITED)
  NOTE
      1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (Continued)
 
 Fair Value of Financial
Instruments  (continued)
 
 For
certain financial instruments, including cash, accounts and other receivables,
accounts payable, short-term loans, accruals and other payables, it was assumed
that the carrying amounts approximate fair value because of the near term
maturities of such obligations. The carrying amounts of loans payable
approximate fair value since the interest rate associated with the debt
approximates the current market interest rate.
 
 Reporting Currency and
Translation
 The
financial statements of the Company’s foreign subsidiaries are measured using
the local currency as the functional currency; however, the reporting currency
is the United States dollar (“USD”).  Assets and liabilities of the
Company have been translated into 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).
 
 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.
 
 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.
 
 Income
Taxes
 The
Company uses the asset and liability method of accounting for income taxes
pursuant to SFAS No. 109 “Accounting for Income Taxes”.  Under the
asset and liability method of SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to temporary
differences between the financial statements carrying amounts of existing assets
and liabilities and their respective tax bases and tax loss carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
 
 Shipping and Handling Fees
and Costs
 The
Company follows Emerging Issues Task Force No. 00-10, “Accounting for Shipping
and Handling Fees and Costs”.  The Company does not charge its
customers for shipping and handling.  The Company classifies shipping
and handling costs as part of the cost of net sales.   For the
three months ended June 30, 2009 and 2008, shipping and handling costs were
$132,152 and $124,171 respectively, and for the six months ended June 30, 2009
and 2008, shipping and handling costs were $241,730 and $221,246
respectively.
  12
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2009
 (UNAUDITED)
  NOTE
      1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (Continued)
 
 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.
 
 Recently Adopted Accounting
Pronouncements
 
 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. The adoption of (FSP) FAS
142-3 is currently not applicable to the Company.
 
 In May
2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),
which clarifies the accounting for convertible debt instruments that may be
settled in cash upon conversion, including partial cash settlement. FSP APB 14-1
specifies that an issuer of such instruments should separately account for the
liability and equity components of the instruments in a manner that reflects the
issuer’s non-convertible debt borrowing rate when interest costs are recognized
in subsequent periods. FSP APB 14-1 is effective for the Company’s fiscal year
beginning January 1, 2009, and retrospective application is required for all
periods presented. FSP APB 14-1 is currently not applicable to the
Company.
 
 In June
2008, the FASB issued EITF Issue No. 07-5, Determining Whether an Instrument (or
Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF Issue No. 07-5”),
which is effective for financial statements for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The Issue
addresses the determination of whether an instrument (or an embedded feature) is
indexed to an entity’s own stock, which is the first part of the scope exception
in Paragraph 11(a) of SFAS No. 133 for the purpose of determining whether the
instrument is classified as an equity instrument or accounted for as a
derivative instrument which would be recognized either as an asset or liability
and measured at fair value. The guidance shall be applied to outstanding
instruments as of the beginning of the fiscal year in which this Issue is
initially applied. Any debt discount that was recognized when the conversion
option was initially bifurcated from the convertible debt instrument shall
continue to be amortized. The cumulative effect of the change in accounting
principles shall be recognized as an adjustment to the opening balance of
retained earnings. The adoption of EITF Issue No. 07-05 did not have a material
impact on the Company’s financial statements.
  13
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2009
 (UNAUDITED)
 
 NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
 
 Recently Adopted Accounting
Pronouncements (continued)
 
 In June
2008, the FASB issued FASB Staff Position (FSP) Emerging Issues Task Force
(EITF) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities. FSP EITF 03-6-1 addresses whether
instruments granted in share-based payment transactions are participating
securities prior to vesting
and, therefore, need to be included in the earnings allocation in computing
earnings per share under the two-class method as described in SFAS No. 128,
Earnings Per Share. Under the guidance of FSP EITF 03-6-1, unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and must be
included in the computation of earnings per share pursuant to the two-class
method. All prior period earnings per share information must be adjusted
retrospectively. Company does not currently have any share-based awards that
would qualify as participating securities.
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 establishes a framework for measuring fair value and expands disclosures
about fair value measurements. The changes to current practice resulting from
the application of this statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued FSP No. SFAS No. 157-2,
Effective Date of FASB
Statement No. 157, which provides a one-year deferral of the effective
date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed in the financial statements at
fair value at least annually. The Company adopted this statement for financial
assets and financial liabilities and nonfinancial assets and nonfinancial
liabilities disclosed or recognized at fair value on a recurring basis (at least
annually) as of January 1, 2008. The Company adopted the statement for
nonfinancial assets and nonfinancial liabilities on January 1, 2009. The
adoption of this statement in each period did not have a material impact on its
financial statements.
 
 In April
2009, the FASB issued FASB Staff Position No. 107-1 (“FSP FAS 107-1”) and APB
28-1 (“APB 28-1”), which amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments and APB Opinion No. 28, Interim Financial Reporting,
to require disclosures about the fair value of financial instruments for interim
reporting periods. FSP FAS 107-1 and APB 28-1 will be effective for interim
reporting periods ending after June 15, 2009. The adoption of this staff
position did not have a material impact on the Company’s financial
statements.
 
 In April
2009, the FASB issued FASB Staff Position No. 157-4 (“FSP FAS 157-4”), which
provides additional guidance in accordance with FASB No. 157, Fair Value Measurements, when
the volume and level of activity for the asset or liability has significantly
decreased. FSP FAS 157-4 shall be effective for interim and annual reporting
periods ending after June 15, 2009. The adoption of this staff position did not
have a material impact on the Company’s financial statements.
 
 In April
2009, the FASB issued FASB Staff Position No. 115-2 (“FSP FAS 115-2”) and FASB
Staff Position No. 124-2 (“FSP FAS 124-2”), which amends the
other-than-temporary impairment guidance for debt and equity securities. FSP FAS
115-2 and FSP FAS 124-2 shall be effective for interim and annual reporting
periods ending after June 15, 2009. The adoption of this staff position did not
have a material effect on the Company’s financial statements.
  14
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2009
 (UNAUDITED)
 
 NOTE
      1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (Continued)
  However,
since the Company is a public entity, management is required to evaluate
subsequent events through the date that financial statements are issued and
disclose the date through which subsequent events have been evaluated, as well
as the date the financial statements were issued. SFAS No. 165 was adopted for
its interim period ending June 30, 2009. Subsequent events have been evaluated
through August 7, 2009, the date the financial statements were issued as further
discussed in EITF Topic No. D-86.
 
 Recently Issued Accounting
Pronouncements Not Yet Adopted
 
 In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No.
46(R).
 
 This
Statement is a revision to FIN 46(R) and changes how a company determines when
an entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of whether a
company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic
performance.
 
 This
Statement requires an additional reconsideration event when determining whether
an entity is a variable interest entity when any changes in facts and
circumstances occur such that the holders of the equity investment at risk, as a
group, lose the power from voting rights or similar rights of those investments
to direct the activities of the entity that most significantly impact the
entity’s economic performance. It also requires ongoing assessments of whether
an enterprise is the primary beneficiary of a variable interest entity. These
requirements will provide more relevant and timely information to users of
financial statements.
 
 This
Statement shall be effective as of the beginning of each reporting entity’s
first annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period, and for interim and annual
reporting periods thereafter. This statement is not currently applicable to the
Company.
 
 In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification,which establishes the Codification as the source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. SFAS 168 is effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The adoption of SFAS 168 is not
expected to have an effect on the Company’s financial reporting.
  15
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2009
 (UNAUDITED)
 
 NOTE 2 –
ASSETS ACQUISITIONS
 
 On
January 8, 2008, the Company  acquired substantially all of the
assets owned by Xiaodong Yang in the Shouguang City Hanting  Area (the
“Yangxiaodong property” or Factory No. 6”).  The Yangxiaodong property
includes a 50-year mineral rights and land lease covering 1,069 hectares of real
property, with non-reserve mineralized materials of  approximately 205,000
tons of bromine and 294 wells, as well as the related production facility, the
pipelines, other production equipment, and the buildings located on the
property. The total purchase price for the acquired assets was
$9,722,222.
 
 On
January 7, 2009, the Company  acquired substantially all of the assets
owned by Fenqiu Yuan, Han Wang and Yufen Zhang in theShouguang
City Renjiazhuangzi Village North Area (the “Yangxiaodong property” or Factory
No. 7”). The Fenqiu Yuan, Han Wang and Yufen Zhang property includes a 50-year
mineral rights and land lease covering 1,611 hectares of real property, with
non-reserve mineralized materials of approximately 150,000 tons of bromine,
as well as the related production facility, the pipelines, other production
equipment, and the buildings located on the property The total purchase price
for the acquired assets was $10,615,000.
  The asset
acquisition described above was not in operation when the Company acquired the
asset.  The owners of each of the assets did not hold the proper
license for the exploration and production of bromine, and production at each of
the assets acquired had been previously halted by the
government.
 
 By June
2009, the Company completed the construction of well and channel, which are used
for the production of bromine and crude salt and resulted in addition of
$5,638,785 in Property, plant and equipment.
 
 NOTE 3 –
INVENTORY
 
 Inventory
consists of:
 June
      30,2009
              
              
              December
      31,2008(unaudited)
              
              
              (audited)Raw
      Material
              
              $
              212,369
              
              
              $
              202,435Finished
      Goods
              
              
              131,226
              
              
              
              229,638Allowance
      for obsolete and slow moving inventory
              
              
              (13,795
              )
              
              
              (13,814
              )$
              329,800
              
              
              $
              418,259
  16
  NOTE 4 –
PREPAID LAND LEASE
  The
Company prepaid for land leases for a period of fifty years to use the land on
which the office premises, production facilities and warehouse of the Company
are situated. The prepaid land lease are amortized on a straight line basis.
During the three months ended June 30, 2009, amortization of prepaid land lease
totaled $3,961, of which $3,814 and $147 were recorded as cost of sales and
administrative expenses respectively. During the six months ended
June 30, 2009, amortization of prepaid land lease totaled $7,918, of which
$7,625 and $293 were recorded as cost of sales and administrative expenses
respectively.
 
 NOTE 5 –
PROPERTY, PLANT AND EQUIPMENT, NET
 
 Property,
plant and equipment, net consist of the following :
 June
      30,
                2009
                (unaudited)
              
              
              December
      31,
                2008
                (audited)At
      cost:Mineral
      rights
              
              $
              5,832,631
              
              
              
              5,840,594Buildings
              
              
              9,649,618
              
              
              
              6,410,813Plant
      and machinery
              
              
              50,086,343
              
              
              
              37,619,002Motor
      vehicles
              
              
              57,868
              
              
              
              57,947Furniture,
      fixtures and office equipment
              
              
              2,857,856
              
              
              
              2,353,789Construction
      in progress
              
              
              3,296,250
              
              
              
              -Total
              
              
              71,780,566
              
              
              
              52,282,144Less:
      accumulated depreciation and amortization
              
              
              9,898,703
              
              
              
              6,882,688Net
      book value
              
              $
              61,881,863
              
              
              
              45,399,456
 
 
 During
the three months ended June 30, 2009, depreciation and amortization expense
totaled $1,555,677, of which $1,516,080 and $39,597 were recorded as cost of
sales and administrative expenses respectively. During the three months ended
June 30, 2008, depreciation and amortization expense totaled $949,654, of which
$923,109 and $26,545 were recorded as cost of sales and administrative expenses
respectively.
 
 NOTE 6 –
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.
  17
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2009
 (UNAUDITED)
 
 NOTE 7 –
NOTES AND LOAN PAYABLE – RELATED PARTIES
 
 June
      30,
              
              
              December
      31,2009
              
              
              2008(unaudited)
              
              
              (audited)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. This loan is denominated in RMB (a)
              
              $
              -
              
              
              $
              18,337,493Note
      payable to a stockholder, Shenzhen Huayin Guaranty and Investment Company
      Limited is unsecured, non-interest bearing and is due May 2009. The loan
      is denominated in US dollars. (a)
              
              
              -
              
              
              
              3,000,000Loan
      from a stockholder First Capital Limited is unsecured, non-interest
      bearing with no fixed term of repayment.
              
              
              1,650,000
              
              
              1,650,000Total
      loans
              
              
              1,650,000
              
              
              
              22,987,493Less:
      current portion
              
              
              (1,650,000
              )
              
              
              (4,650,000
              )Long-term
      loans, less current portion
              
              $
              -
              
              
              $
              18,337,493Future
      maturities of notes payable-related parties are as
follows:2009
              
              
              $
              -
              
              
              $
              -2010
              
              
              
              -
              
              
              
              -2011
              
              
              
              -
              
              
              18,337,493Total
              
              
              $
              -
              
              
              $
              18,337,493
 
 (a)
                Based
      on an amendment agreement dated January 24, 2009, the Company issued 21.0
      million shares of its common stock in lieu of repayment of the Loans to
      Shenzhen Huayin Guaranty and Investment Company Limited to the following
      companies, which assumed the Loans from Shenzhen Hua Yin, and in the
      following amounts: Top King, 6 million shares of common stock; Billion
      Gold, 8 million shares of common stock; Topgood, 7 million shares of
      common stock. Upon the issuance of the Shares, the Loans were deemed paid
      in full and were cancelled.
 
 Since the
conversion of debt into shares of common stock took place with an existing
shareholder, the conversion was account for as a capital
transaction.indent
  18
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2009
 (UNAUDITED)
 
 NOTE 8 –
DUE TO A RELATED PARTY
 
 Due
      to related parties consists of the following:June
      30,
              
              
              December
      31,2009
              
              
              2008(unaudited)
              
              
              (audited)Due
      to related company - Jiaxing Lighting
              
              $
              -
              
              
              $
              852,068Due
      to related company – Haoyuan Group
              
              $
              7,667,138
              
              
              $
              -
 
 The
$852,068 due to related company represents funds received from Jiaxing Lighting
for investment purpose in SCHC.  Mr. Ming Yang, Chairman of the
Company, is the director and shareholder of Jiaxing Lighting, $852,068 was
repaid to Jiaxing Lighting in May 2009.
 
 The
$7,667,138 due to related company represents funds received from Haoyuan Group
for investment purpose in SCHC, Mr. Ming Yang, Chairman of the Company, is the
director and shareholder of Haoyuan Group.
 Balances
due to related company are unsecured, non-interest bearing and have no fixed
repayment terms.
 
 NOTE 9 –
TAXES PAYABLE
 
 Taxes
      payable consists of the following:June
      30,
                2009
              
              
              December
      31,2008(unaudited)
              
              
              (audited)Income
      tax payable
              
              $
              3,113,043
              
              
              $
              2,329,227Mineral
      resource compensation fee payable
              
              
              369,506
              
              
              
              291,861Value
      added tax payable and others
              
              
              1,477,925
              
              
              
              1,648,354Total
              
              $
              4,960,474
              
              
              $
              4,269,442
  19
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2009
 (UNAUDITED)
 
 NOTE 10 –
RETAINED EARNINGS – APPROPRIATED
 
 In
accordance with the relevant PRC regulations and the Company’s Articles of
Association, the Company is required to allocate its profit after tax to the
following reserves:
 
 Statutory Common Reserve
Funds
 SCHC and
SYCI are required each year to transfer 10% of the profit after tax as reported
under the PRC statutory financial statements to the Statutory Common Reserve
Funds until the balance reaches 50% of the registered share
capital.  This reserve can be used to make up any loss incurred or to
increase share capital.  Except for the reduction of losses incurred,
any other application should not result in this reserve balance falling below
25% of the registered
 capital.
Due to the increase in capital contribution in SCHC in 2009, the statutory
common Reserve Fund as of June 30, 2009 is 25% of its registered
capital.
 
 Statutory Public Welfare
Funds
 Prior to
January 1, 2007, SCHC and SYCI were required each year to transfer 5% of the
profit after tax as reported under the PRC statutory financial statements to the
Statutory public welfare funds.  This reserve was restricted to
capital expenditure for employees’ collective welfare facilities that are owned
by the Company.  The Statutory public welfare funds are not available
for distribution to the stockholders (except on liquidation).  Once
capital expenditure for staff welfare facilities has been made, an equivalent
amount must be transferred from the Statutory public welfare funds to the
discretionary common reserve funds.  Due to a change in the PRC
Company Law, appropriation of profit to the Statutory Public Welfare Fund is no
longer required.  Therefore, the balance in the Statutory Public
Welfare Fund was transferred to the Statutory Common Reserve Fund on January 1,
2007.
 
 NOTE 11 –
COMMON STOCK
 
 In March
2009, the Company issued 21,000,000 shares of its common stock as payment for
$21,287,493 of Notes and Loan Payable-Related Party (Note 7).
 
 In March
2009, the Company issued 1,500,000 shares of its common stock, valued at
$615,000 (fair value), to acquire assets owned by Mr. Fenqiu Yuan, Han Wang and
Yufen Zhang (Note 2).
 
 NOTE 12 –
STOCK-BASED COMPENSATION
 
 The Company
issued 100,000 warrants on August 1, 2008 at a price of $1.20 per share as part
of a consulting agreement with its investor relations firm. These options fully
vest on August 1, 2009. The warrants were valued at $65,000, fair value, using
the Black-Scholes option-pricing  model with assumed 1,430%
volatility, a four year expiration term, a risk free rate of 3% and a dividend
yield of 0%. The value of the warrants will be expensed over one year, which
is the term of the consulting agreement. For the three and six months ended
June 30, 2009, $16,205 and $ 32,232 was recognized as consulting
expense.
  20
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2009
 (UNAUDITED)
 
 In March
2009, the Company granted to 9 management staffs (including 4 board of
directors) options to purchase a total of 600,000 shares (100,000 for each of 3
board of directors, and 50,000 for each of 1 non executive independent director
and 5 other management staff) of the Company’s common stock at an exercise
price of $1.20 per share and the options vested immediately. The options were
valued at $222,000,fair value, using the Black-Scholes option pricing model with
assumed 1,098% volatility, a ten year expiration term, a risk free rate of 3%
and a dividend yield of 0%. For the three and six months ended June 30, 2009, $
- and $222,000 was recognized as general and administrative
expenses.
 
 In May
2009 the Company granted to 1 director options to purchase 50,000 shares of
the Company’s common stock at an exercise price of $1.20 per share and the
options vested immediately. The options were valued at $29,500,fair value, using
the Black-Scholes option pricing model with assumed 1,096% volatility, a ten
year expiration term, a risk free rate of 3% and a dividend yield of 0%. For the
three months ended June 30, 2009, $29,500 was recognized as general and
administrative expenses.
 
 In June
2009 the Company granted to 1 director options to purchase 100,000
shares of the Company’s common stock at an exercise price of $1.20 per
share and the options vested immediately. The options were valued at $58,000,
fair value, using the Black-Scholes option pricing model with assumed 1,096%
volatility, a three year expiration term, a risk free rate of 3% and a dividend
yield of 0%. For the three months ended June 30, 2009, $58,000 was recognized as
general and administrative expenses.
 
 The
following table summarizes all Company stock option and warrant transactions
between December 31,2008 and June 30, 2009.
 
 Option
                &Warrants
                Outstanding
              
              
              Option
                &Warrants
                Vested
              
              
              Range
      of
                Exercise
      Price per Common ShareBalance,
      December 31, 2008
              
              
              1,300,000
              
              
              
              449,999
              
              
              
              $0.21
      - $2.45Granted or vested during six months ended June 30, 2009
              
              
              750,000
              
              
              
              833,333
              
              
              
              $1.20
      -$ 1.20Expired
      during six months ended June 30, 2009
              
              
              -
              
              
              
              -
              
              
              
              -Forfeited
      during six months ended June 30, 2009
              
              
              (1,000,000)
              
              
              
              (333,332)
              
              
              
              2.45Balance,
      June 30, 2009
              
              
              1,050,000
              
              
              
              950,000
              
              
              
              $0.21
      - $2.05
 
 Stock
      and Warrants Options OutstandingNumber
      Outstanding
              
              Weighted
      Average
              
              Weighted
      AverageRange
      of
              
              Currently
      Exercisable
              
              Remaining
              
              Exercise
      Price of OptionsExercise
      Prices
              
              at
      June 30, 2009
              
              Contractual
      Life (Years)
              
              Currently
      Exercisable$0.21-$2.05
              
              950,000
              
              7.32
              
              $   1.19
  21
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2009
 (UNAUDITED)
  NOTE 13 –
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 six months ended June 30, 2009 were 25.5% and
25.9%.  Effective tax rates for both the three months and six months
ended June 30, 2008 were 26.8%.  These rates in those periods differed
from the statutory PRC rates of 25%, 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 for the period ended June 30, 2009 and 2008. Deferred taxes asset
amounted to $3,449 and $3,453 as of June 30, 2009 and December 31,
2008.
 
 There was
no change in unrecognized tax benefits and accrual for uncertain tax positions
the period ended June 30, 2009.
 
 Tax years
from 2005 through 2008 remain subject to examination by major tax
jurisdiction.
 
 United
States
  Gulf
Resources Inc. is subject to the United States of America Tax law at tax rate of
34%. No provision for the US federal income taxes has been made as the Company
had no US taxable income for the six months ended June 30, 2009 and 2008 and
management believes that its earnings are permanently invested in the
PRC.
 
 BVI
 Upper
Class Group Limited was incorporated in the BVI and, under the current laws of
the BVI, it is not subject to income taxes.
 
 Hong
Kong
 Hong Kong
Jiaxing Industrial Limited  was incorporated in Hong Kong and is
subject to Hong Kong profits tax. The Company is subject to Hong Kong taxation
on its activities conducted in Hong Kong and income arising in or derived from
Hong Kong.  No provision for profits tax has been made as the Company
has no assessable income for the year.  The applicable statutory tax
rate for the six months ended June 30, 2009 and 2008 is 16.5%.
  PRC
  Enterprise
income tax (“EIT”) for SCHC and SYCI in the PRC is charged at 25% of the
assessable profits,  of which 15% is for national tax and 10% is for
local tax.
 
 NOTE 14 –
BUSINESS SEGMENTS
 
 The
Company follows SFAS No. 131, “Disclosures about Segments of and Enterprise and
Related Information” ,
which requires the Company to provide certain information about their operating
segments. This classification is based on the nature of the products consistent
with the method by which the Company’s chief operating decision-maker assesses
the operating performance and allocates resources . The Company has two
reportable segments:  bromine and crude salt, and chemical
products.
  22
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2009
 (UNAUDITED)
 
 Three
      Months EndedJune
      30, 2009
                (unaudited)
              
              Bromine
      and
                Crude
      Salt
              
              
              Chemical
                Products
              
              
              Segment
                Total
              
              
              Corporate
              
              
              Consolidated
                TotalNet
      sales
              
              $
              20,529,449
              
              
              $
              9,061,448
              
              
              $
              29,590,897
              
              
              $
              -
              
              
              $
              29,590,897Income
      (loss) from operations
              
              
              9,199,179
              
              
              
              3,072,202
              
              
              
              12,271,381
              
              
              
              (247,824
              )
              
              
              12,023,557Total
      assets
              
              
              87,743,342
              
              
              
              25,773,119
              
              
              
              113,516,461
              
              
              
              115,627
              
              
              
              113,632,088Depreciation
      and amortization
              
              
              1,333,847
              
              
              
              221,830
              
              
              
              1,555,677
              
              
              
              -
              
              
              
              1,555,677Capital
      expenditures
              
              
              5,638,785
              
              
              
              3,299,175
              
              
              
              8,937,960
              
              
              
              -
              
              
              
              8,937,960
 
 
 Three
      Months EndedJune
      30, 2008
                (unaudited)
              
              Bromine
      and
                Crude
      Salt
              
              
              Chemical
                Products
              
              
              Segment
                Total
              
              
              Corporate
              
              
              Consolidated
                TotalNet
      sales
              
              $
              18,008,559
              
              
              $
              5,757,620
              
              
              $
              23,766,179
              
              
              $
              -
              
              
              $
              23,766,179Income
      (loss) from operations
              
              
              7,156,765
              
              
              
              2,034,415
              
              
              
              9,191,180
              
              
              
              (632,267
              )
              
              
              8,558,913Total
      assets
              
              
              60,450,820
              
              
              
              12,993,781
              
              
              
              73,444,601
              
              
              
              191,571
              
              
              
              73,636,172Depreciation
      and amortization
              
              
              1,037,986
              
              
              
              112,576
              
              
              
              1,150,562
              
              
              
              -
              
              
              
              1,150,562Capital
      expenditures
              
              
              127,792
              
              
              
              6,835,909
              
              
              
              6,963,701
              
              
              
              -
              
              
              
              6,963,701
 
 
 Six
      Months EndedJune
      30, 2009
                (unaudited)
              
              Bromine
      and
                Crude
      Salt
              
              
              Chemical
                Products
              
              
              Segment
                Total
              
              
              Corporate
              
              
              Consolidated
                TotalNet
      sales
              
              $
              36,059,724
              
              
              $
              17,164,712
              
              
              $
              53,224,436
              
              
              $
              -
              
              
              $
              53,224,436Income
      (loss) from operations
              
              
              15,740,780
              
              
              
              5,826,524
              
              
              
              21,567,304
              
              
              
              (675,498
              )
              
              
              20,891,806Total
      assets
              
              
              87,743,342
              
              
              
              25,773,119
              
              
              
              113,516,461
              
              
              
              115,627
              
              
              
              113,632,088Depreciation
      and amortization
              
              
              2,582,859
              
              
              
              441,021
              
              
              
              3,026,880
              
              
              
              -
              
              
              
              3,026,880Capital
      expenditures
              
              
              15,663,051
              
              
              
              3,299,175
              
              
              
              18,962,226
              
              
              
              -
              
              
              
              18,962,226
 
 
 Six
      Months EndedJune
      30, 2008
                (unaudited)
              
              Bromine
      and
                Crude
      Salt
              
              
              Chemical
                Products
              
              
              Segment
                Total
              
              
              Corporate
              
              
              Consolidated
                TotalNet
      sales
              
              $
              34,520,664
              
              
              $
              11,279,072
              
              
              $
              45,799,736
              
              
              $
              -
              
              
              $
              45,799,736Income
      (loss) from operations
              
              
              14,341,085
              
              
              
              3,873,541
              
              
              
              18,214,626
              
              
              
              (1,208,252
              )
              
              
              17,006,374Total
      assets
              
              
              60,450,820
              
              
              
              12,993,781
              
              
              
              73,444,601
              
              
              
              191,571
              
              
              
              73,636,172Depreciation
      and amortization
              
              
              1,975,189
              
              
              
              160,864
              
              
              
              2,136,053
              
              
              
              -
              
              
              
              2,136,053Capital
      expenditures
              
              
              10,009,309
              
              
              
              6,835,909
              
              
              
              16,845,218
              
              
              
              -
              
              
              
              16,845,218
 
 
 Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,Reconciliations
              
              2009
              
              
              2008
              
              
              2009
              
              
              2008Total
      segment operating income
              
              $
              12,271,381
              
              
              $
              9,191,180
              
              
              $
              21,567,304
              
              
              $
              18,214,626Corporate
      overhead expenses
              
              
              (247,824
              )
              
              
              (632,267
              )
              
              
              (675,498
              )
              
              
              (1,208,252
              )Other
      income (expense)
              
              
              23,729
              
              
              
              (32,776
              )
              
              
              18,749
              
              
              
              (20,397
              )Income
      tax expense
              
              
              (3,075,682
              )
              
              
              (2,305,780
              )
              
              
              (5,405,837
              )
              
              
              (4,552,477
              )Total
      consolidated net income
              
              $
              8,971,604
              
              
              $
              6,285,909
              
              
              $
              15,504,718
              
              
              $
              12,433,500
  23
  GULF
RESOURCES, INC.
 AND
SUBSIDIARIES
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30,
2009
 (UNAUDITED)
  NOTE 15 –
MAJOR SUPPLIERS
 
 During
the three months and six months ended June 30, 2009, the Company purchased 28%
and 27% of its raw material from two suppliers.  At June 30, 2009,
amounts due to those suppliers included in accounts payable were $762,044.
During the three months and six months ended June 30, 2008, the Company
purchased 62% of its raw material from two suppliers.  At June 30,
2008, amounts due to those suppliers included in accounts payable were
$2,257,452.
 
 This
concentration makes the Company vulnerable to a near-term severe impact, should
the relationships be terminated.
 
 NOTE 16 –
CUSTOMER CONCENTRATION
 
 The
Company sells a substantial portion of its product to a limited number of
customers.  During the three months ended June 30, 2009, sales to the
Company’s two largest customers, based on net revenue made to such customers,
aggregated $6,992,568, or approximately 24% of total net
revenue.  During the six months ended June 30, 2009, the Company's
largest customer aggregated $5,941,834, or approximately 11% of total net
revenue. At June 30, 2009, amounts due from these customers were
$2,388,754. This concentration makes the Company vulnerable to a near-term
severe impact, should the relationships be terminated.
 
 During
the three months ended June 30, 2008, sales to the Company’s two largest
customers, based on net revenue made to such customers, aggregated $5,625,665,
or approximately 24% of total net revenue.  During the six months
ended June 30, 2008, the Company's four largest customers aggregated
$16,702,133, or approximately 40% of total net revenue. At June 30, 2008,
amounts due from these customers were $7,962,106. This concentration makes the
Company vulnerable to a near-term severe impact, should the relationships be
terminated.
  NOTE 17 –
ESTABLISHMENT OF CO-OP RESEARCH AND DEVELOPMENT CENTER
 
 On
September 6, 2007, the Company’s wholly-owned subsidiary, SYCI, and East China
University of Science and Technology formally opened a Co-Op Research and
Development Center. The research center is equipped with state of the art
chemical engineering instruments for the purpose of pursuing targeted research
and development of refined bromide compounds and end products. According to the
Co-op Research Agreement, any research achievement or patents will become assets
of the Company. The Company will provide $500,000 annually during the next five
years to East China University of Science and Technology for research. The
research and development expense recognized during the three months and six
months ended June 30, 2009 was $125,095 and $250,065. The research and
development expense recognized during the three months and six months ended June
30, 2008 was $135,275 and $267,109.
 
 NOTE 18 –
RELATED PARTY TRANSACTIONS
 
 June
      30, 2009
              
              
              December
      31, 2008(unaudited)
              
              
              (audited)Shenzhen
      Huayin Guaranty and Investment Company Limited Waiver of accrued interest
      during first quarter 2008
              
              $
              -
              
              
              $
              131,533Note
      and loan payable – First Capital Limited (Note 7)
              
              $
              1,650,000
              
              
              
              1,650,000Shenzhen
      Huayin Guaranty and Investment Company Limited (Note 7)
              
              $
              -
              
              
              $
              21,337,493Due
      to related party:Jiaxing
      Lighting (Note 8)
              
              $
              -
              
              
              $
              852,068Haoyuan
      Group (Note 8)
              
              $
              7,667,138
              
              
              $
              -
  24
  Item2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
 
 This
quarterly report on Form 10-Q and other reports filed by the Company from time
to time with the Securities and Exchange Commission (collectively the “Filings”)
contain or may contain forward-looking statements and information that are based
upon beliefs of, and information currently available to, the Company’s
management as well as estimates and assumptions made by Company’s management.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which are only predictions and speak only as of the date hereof.
When used in the filings, the words “anticipate”, “believe”, “estimate”,
“expect”, “future”, “intend”, “plan”, or the negative of these terms and similar
expressions as they relate to the Company or the Company’s management identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to future events and are subject to risks, uncertainties,
assumptions, and other factors, including the risks contained in the “Risk
Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2008 filed with the Securities and Exchange Commission,
relating to the Company’s industry, the Company’s operations and results of
operations, and any businesses that the Company may acquire. Should one or more
of these risks or uncertainties materialize, or should the underlying
assumptions prove incorrect, actual results may differ significantly from those
anticipated, believed, estimated, expected, intended, or planned.
  Although
the Company believes that the expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance, or achievements. Except as required by applicable law,
including the securities laws of the United States, the Company does not intend
to update any of the forward-looking statements to conform these statements to
actual results.
  Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”). These accounting principles
require us to make certain estimates, judgments and assumptions. We believe that
the estimates, judgments and assumptions upon which we rely are reasonable based
upon information available to us at the time that these estimates, judgments and
assumptions are made. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities as of the date of the financial
statements as well as the reported amounts of revenues and expenses during the
periods presented. Our financial statements would be affected to the extent
there are material differences between these estimates and actual results. In
many cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP and does not require management’s judgment in its application.
There are also areas in which management’s judgment in selecting any available
alternative would not produce a materially different result.  The
following discussion should be read in conjunction with our consolidated
financial statements and notes thereto appearing elsewhere in this
report.
 
 Overview
  Gulf
Resources conducts operations through its two wholly-owned China subsidiaries,
SCHC and SYCI. Our business is also reported in these two segments, Bromine and
Crude salts, and Chemical Products.
  Through
SCHC, we produce and sell bromine and crude salt. We are one of the largest
producers of bromine in China, as measured by production output. Elemental
bromine is used to manufacture a wide variety of brominated compounds used in
industry and agriculture. Bromine is commonly used in brominated flame
retardants, fumigants, water purification compounds, dyes, medicines, and
disinfectants.
  Through
SYCI, we manufacture and sell chemical products that are used in oil and gas
field exploration, oil and gas distribution, oil field drilling, wastewater
processing, papermaking chemical agents and inorganic chemicals.
  On
December 12, 2006, Gulf Resources acquired, through a share exchange, Upper
Class Group Limited, a British Virgin Islands holding corporation which then
owned all of the outstanding shares of SCHC. Under accounting principles
generally accepted in the United States, this share exchange is considered to be
a capital transaction, rather than a business combination, with the share
exchange equivalent to the issuance of stock by Upper Class for the net assets
of Gulf Resources, accompanied by a recapitalization, and is accounted for as a
change in capital structure. Accordingly, the accounting for the share exchange
was identical to that resulting from a reverse acquisition, except no goodwill
was recorded. Under reverse takeover accounting, the post reverse acquisition
comparative historical financial statements of the legal acquirer, Gulf
Resources, are those of the legal acquiree, Upper Class Group Limited and its
subsidiary, SCHC, which together are considered to be the accounting acquirer.
Share and per share amounts reflected in this report have been retroactively
adjusted to reflect the merger.
  On
February 5, 2007, Gulf Resources, through its subsidiary SCHC, acquired SYCI.
Since prior to the acquisition the ownership of Gulf Resources and SYCI was
substantially the same, the transaction was accounted for as a transaction
between entities under common control, whereby the assets and liabilities of
SYCI were recognized at their carrying amounts. Share and per share amounts
stated in this report have also been retroactively adjusted to reflect this
transaction.
  As a
result of our acquisitions of SCHC and SYCI, the historical financial statements
and the information presented below reflects the accounts of SCHC and SYCI. The
following discussion should be read in conjunction with our consolidated
financial statements and notes thereto appearing elsewhere in this
report.
  Possible
PRC Government-mandated restrictions affecting the production activities of our
customers or celebrations prior to and during the Olympics scheduled to be held
in Beijing in August 2008 may have an adverse effect on our business and results
of operations.
  25
  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 six months ended June 30, 2009 and 2008.
  Three
      months ended
              
              Three
      months ended
              
              Percentage
      ChangeJune 30,
      2009
              June 30,
      2008Net
      Revenue
              $
              29,590,897
              
              $
              23,766,179
              
              
              25%Cost
      of Net Revenue
              $
              16,445,804
              
              $
              14,062,903
              
              
              17%Gross
      Profit
              $
              13,145,093
              
              $
              9,703,276
              
              
              35%Research
      and Development costs
              $
              125,095
              
              $
              135,275
              
              
              -8%General
      and Administrative  expenses
              $
              996,441
              
              $
              1,009,088
              
              
              -1%Income
      from operations
              $
              12,023,557
              
              $
              8,558,913
              
              
              40%Other
      Income net
              $
              23,729
              
              $
              32,776
              
              
              -28%Income
      before taxes
              $
              12,047,286
              
              $
              8,591,689
              
              
              40%Income
      Taxes
              $
              3,075,682
              
              $
              2,305,780
              
              
              33%Net
      Income
              $
              8,971,604
              
              $
              6,285,909
              
              
              43%
  Six
      months ended
              
              Six
      months ended
              
              Percentage
      ChangeJune 30,
      2009
              June 30,
      2008Net
      Revenue
              $
              53,224,436
              
              $
              45,799,736
              
              
              16%Cost
      of Net Revenue
              $
              29,986,744
              
              $
              26,662,623
              
              
              12%Gross
      Profit
              $
              23,237,692
              
              $
              19,137,113
              
              
              21%Research
      and Development costs
              $
              250,065
              
              $
              267,109
              
              
              -6%General
      and Administrative  expenses
              $
              2,095,821
              
              $
              1,863,630
              
              
              12%Income
      from operations
              $
              20,891,806
              
              $
              17,006,374
              
              
              23%Other
      Income (expenses), net
              $
              18,749
              
              $
              (20,397)
              
              
              192%Income
      before taxes
              $
              20,910,555
              
              $
              16,985,977
              
              
              23%Income
      Taxes
              $
              (5,405,837)
              
              $
              (4,552,477)
              
              
              19%Net
      Income
              $
              15,504,718
              
              $
              12,433,500
              
              
              25%
  26
  Net revenueNet revenues were $29,590,897 for three months ended June 30, 2009, an
increase of $5,824,718 (or approximately 25%) as compared to the comparable
period in 2008. This increase was attributable to strong growth in our chemical
products segment, in which revenue increased from $5,757,620 for the three
months ended June 30, 2008 to $9,061,448 in the same period in 2009, an increase
of approximately 57%. The increase in our chemical products segment was
primarily a result of increased sales of our new friendly additive products,
solid lubricant and polyether lubricant, which are used in oil and gas
exploration and were first introduced in the fourth quarter of
2008.  Revenues in our bromine and crude salt segment increased from
$18,008,559 for the three months ended June 30, 2008 to $20,529,449 in the same
period in 2009, an increase of $2,520,890 (or approximately 14%). Within the
segment, revenue from bromine’s increased slightly from $17,890,429 to
$18,183,869, an increase of $293,440 (or approximately 2%). We believe that this
was due to a decrease in customer purchase orders for bromine caused by the
slowdown in the global economy. In an effort to offset the relatively flat sales
of bromine, management increased its crude salt production and its price per
ton.  Net revenue from crude salt production increased from $118,130
for the three months ended June 30, 2008 to $2,345,580 in the same period in
2009.
 
 Net
revenues for the six months ended June 30, 2009, were $53,224,436, representing
an increase of $7,424,700 or 16% over the comparable 2008 period.  Our
bromine and crude salts segment’s revenue grew by $1,539,060 to
$36,059,724, primarily as a result of in increase in sales of crude salt,
which contributed approximately $4,656,010 of additional revenue. Net revenues
from our chemical products segment were $17,164,712, an increase of $5,885,640
or 52% over the comparable 2008 period. This increase was primarily a result of
sales of our new friendly additive products, solid lubricant and polyether
lubricant which were first introduced in fourth quarter of 2008.
 
 Net
      Revenue by SegmentThree
      Months Ended
              
              
              Three
      Months EndedJune
      30, 2009
              
              
              June
      30, 2008Segments
              
              
              
              
              Percent
      of total
              
              
              
              
              
              Percent
      of totalBromine
      and Crude salt
              
              $
              20,529,449
              
              
              
              69.4%
              
              
              $
              18,008,559
              
              
              
              75.8%Chemical
      Products
              
              $
              9,061,448
              
              
              
              30.6%
              
              
              $
              5,757,620
              
              
              
              24.2%Total
      Revenues
              
              $
              29,590,897
              
              
              
              100%
              
              
              $
              23,766,179
              
              
              
              100%
  Three
      Months Ended June 302009
      vs. 2008Segments
              Percent
      Increase of Net SalesBromine
      and Crude salt
              14%Chemical
      Products
              57%
 
 
 Net
      Revenue by SegmentSix
      months ended
              
              
              Six
      months endedJune 30,
      2009
              
              
              June 30,
      2008Segments
              
              
              
              
              Percent
      of total
              
              
              
              
              
              Percent
      of totalBromine
      and Crude salt
              
              $
              36,059,724
              
              
              
              67.8%
              
              
              $
              34,520,664
              
              
              
              75.4%Chemical
      Products
              
              
              17,164,712
              
              
              
              32.2%
              
              
              
              11,279,072
              
              
              
              24.6%Total
      Revenues
              
              $
              53,224,436
              
              
              
              100.0%
              
              
              $
              45,799,736
              
              
              
              100.0%
 
 Six
      Months Ended June 302009
      vs. 2008Segments
              Percent
      Increase of Net SalesBromine
      and Crude salt
              4%Chemical
      Products
              52%
 
 
 Bromine
      and Crude salt segment product sold in metric tons
              
              Three
      Months Ended
                June 30,
      2009
              
              
              Three
      Months Ended
                June 30,
      2008
              
              
              Percentage
      ChangeBromine
              
              
              10,895
              
              
              
              8,451
              
              
              
              29
              %Crude
      Salt
              
              
              95,540
              
              
              
              9,000
              
              
              
              962
              %
 
 
 Bromine
      and Crude salt segment product sold in metric tons
              
              Six
      Months Ended
                June 30,
      2009
              
              
              Six
      Months Ended
                June 30,
      2008
              
              
              Percentage
      ChangeBromine
              
              
              18,343
              
              
              
              16,512
              
              
              
              11
              %Crude
      Salt
              
              
              165,540
              
              
              
              17,000
              
              
              
              874
              %
 
 Due to
the diverse product mix and varying values, management does not believe that the
tonnage sold by the Chemical Product division is a meaningful
metric.
  27
  Cost of net
revenue and gross profitCost of net revenue reflects the raw materials
consumed the direct salaries and benefits of staff engaged in the production
process, electricity and other manufacturing costs. Our cost of net revenue and
the resulting gross profit for the three and six months ended June 30, 2009 and
2008 were:
 Three
      months ended June 302009
              
              
              %
      of Net revenue
              
              
              2008
              
              
              %
      of Net revenueCost
      of net revenue
              
              $
              16,445,804
              
              
              
              55.6
              %
              
              $
              14,062,903
              
              
              
              59.2
              %Gross
      profit
              
              $
              13,145,093
              
              
              
              44.4
              %
              
              $
              9,703,276
              
              
              
              40.8
              %
  Six
      months ended June 302009
              
              
              %
      of Net revenue
              
              
              2008
              
              
              %
      of Net revenueCost
      of net revenue
              
              $
              29,986,744
              
              
              
              56.3
              %
              
              $
              26,662,623
              
              
              
              58.2
              %Gross
      profit
              
              $
              23,237,692
              
              
              
              43.7
              %
              
              $
              19,137,113
              
              
              
              41.8
              %
 
 The
increases in the cost of net revenue were largely the result of the
substantially higher sales volumes recorded in both the three and six month
periods ended June 30, 2009 as compared to the corresponding prior year
periods.  The reduction in the cost of net revenue as a percentage of
net revenue for the first half of 2009 compared to 2008 was due to a higher
percentage of revenue from crude salt, which has a lower product cost as a
percentage of its net revenue, as well as production efficiencies in consumables
and electricity, in part as a result of economies of scale achieved due to the
acquisitions, and greater utilization of our chemical production capacity. The
increases in gross profit for both periods were largely the result of higher
sales volumes as well as the other factors noted above.
 
 Research and
development costsThe research and development costs result from the
agreement that SYCI and East China University of Science and Technology entered
into in September 2007 to establish a Co-Op Research and Development Center to
develop new bromine-based chemical compounds and products to be utilized in the
pharmaceutical industry. The research and development costs incurred for the
three months ended June 30, 2009 and 2008 was $125,095 and $135,275
respectively. The research and development costs incurred for the six months
ended June 30, 2009 and 2008 was $250,065 and $267,109
respectively.  All research findings and patents developed by this
Center will belong to Gulf Resources.
  General and
administrative expensesGeneral and administrative expenses for the three
and six months ended June 30, 2009 were $996,441 and $2,095,820, representing a
decreases of $12,647 and an increase of $854,622 respectively.  The
increase in general and administrative expenses was primarily due to $309,500
stock-based compensation incurred and the increase in depreciation and mineral
resource compensation fee during the quarter and for the six months ended June
30, 2009.
  Income
from Operations
  Income
      from Operations by SegmentThree
      months ended
              
              
              Three
      months endedJune
      30, 2009
              
              
              June
      30, 2008Segment
              
              
              
              
              
              Percent
      of total
              
              
              
              
              
              
              Percent
      of totalBromine
      and Crude salt
              
              $
              9,199,179
              
              
              
              75.0%
              
              
              $
              7,156,765
              
              
              
              77.8%Chemical
      Products
              
              
              3,072,203
              
              
              
              25.0%
              
              
              
              2,034,415
              
              
              
              22.2%Income
      from operations before corporate costs
              
              
              12,271,382
              
              
              
              100.0%
              
              
              
              9,191,180
              
              
              
              100.0%Corporate
      costs
              
              
              (247,824
              )
              
              
              
              
              
              
              (632,267
              )Income
      from operations
              
              $
              12,023,558
              
              
              
              
              
              
              $
              8,558,913
 
 Income
      from Operations by SegmentSix
      months ended
              
              
              Six
      months endedJune
      30, 2009
              
              
              June
      30, 2008Segment
              
              
              
              
              
              Percent
      of total
              
              
              
              
              
              
              Percent
      of totalBromine
      and Crude salt
              
              $
              15,740,780
              
              
              
              73.0%
              
              
              $
              14,341,085
              
              
              
              78.7%Chemical
      Products
              
              
              5,826,524
              
              
              
              27.0%
              
              
              
              3,873,541
              
              
              
              21.3%Income
      from operations before corporate costs
              
              
              21,567,304
              
              
              
              100.0%
              
              
              
              18,214,626
              
              
              
              100.0%Corporate
      costs
              
              
              (675,498
              )
              
              
              
              
              
              
              (1,208,252
              )Income
      from operations
              
              $
              20,891,806
              
              
              
              
              
              
              $
              17,006,374
 
 Income
from operations before corporate costs was $1,271,382 for three months ended
June 30, 2009 (41.5% of net revenue), an increase of $3,080,202 (or
approximately 33.5%) over income from operations for three months ended June 30,
2008.  Income from operations before corporate costs was $21,567,304
for the six months ended June 30, 2009 (40.5% of net revenue), an increase of
$3,352,678 (or approximately 18.4%). These increases resulted primarily from the
increases in revenues and the resulting higher income from operations from the
bromine and crude salts segment of the Company. For three months ended June 30,
2009, income from operations for the bromine and crude salt segment was
$9,199,180, an increase of 29% from $7,156,765 for three months ended June 30,
2008. For six month period ended June 30, 2009, income from operations for the
bromine and crude salt segment was $15,740,780, an increase of 10% from the six
months ended June 30, 2008. These increases in the revenue and Income from
operations of bromine and crude salt segment were primarily as a result of the
purchase of five new bromine producing assets and a higher gross margin due to
production cost efficiencies. The larger increases in revenue and income from
operations of our chemical products were largely due to the completion of
equipment upgrades and the development of new chemical products.
  28
  Other Income
(Expense), Net Other income, net was $23,729 for three months ended June
30, 2009, a decrease of $9,074 from the same period in 2008.  Other
income, net was $18,749 for the six months ended June 30, 2009, compared to a
net expense of $20,397 for the same period in 2008.  [add explanation of the
components]
 
 Net IncomeNet income was $8,971,604 for three months ended June 30, 2009, an
increase of $2,685,695 (42.7%) compared to the same period in 2008. Net Income
was $15,504,719 for the six months ended June 30, 2009, an increase of
$3,072,219 (24.7%) compared to the same period in 2008. These increases were
primarily attributable to the higher operating profit resulting from the
increases in revenues, and a decrease in the effective tax rate to 25.5% in 2009
from approximately 26.8% in 2008
  LIQUIDITY
AND CAPITAL RESOURCES
  As of
June 30, 2009, cash were $37,957,195 as compared to $30,878,044 as of December
31, 2008. The components of this increase of $7,079,151 are reflected
below.
  Cash
Flow
  Six
      Months Ended June 302009
              
              
              2008Net
      cash provided by operating activities
              
              $
              19,255,584
              
              
              $
              9,330,340Net
      cash used in investing activities
              
              $
              (18,962,226)
              
              
              $
              (20,924,051)Net
      cash provided by financing activities
              
              $
              6,829,785
              
              
              $
              6,745,406Net
      cash inflow (outflow)
              
              $
              7,079,151
              
              
              $
              (4,388,962)
  For the
six months ended June 30, 2009 the Company met its working capital and capital
investment requirements mainly by using operating cash flows.
 
 The
Company will continue to explore opportunities relating to bromine asset
purchases.
 
 Net
Cash Provided by Operating Activities
  During
six months ended June 30, 2009, we had positive cash flow from operating
activities of $19,255,584, primarily attributable to net income of $15,504,718,
as well as depreciation of fixed assets of $3,026,880. Net cash provided by
operating activities during the six months ended June 30, 2009 increased by
$9,925,244 compared to the six months ended June 30, 2008, primarily due to a
$3,072,219 increase in net income, and the decreases in accounts
receivable.
 
 Net
Cash Provided (Used) by Investing Activities and Financing
Activities
  The
Company used $10,000,000 cash and issued 1,500,000 shares to acquire additional
mineral rights, property, plant and equipment during three months ended March
31, 2009.
 
 The
Company used $5,638,785 cash to complete the construction of well and channel,
which are used for the production of bromine and crude salt during three months
ended June 30, 2009.
  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 we will likely need to raise additional capital in order
to fund the ongoing program of acquiring unlicensed bromine properties. We
expect to raise those funds through the issuance of additional shares of our
equity securities in one or more public or private offerings, or through credit
facilities obtained with lending institutions or a combination of both. There
can be no guarantee that we will be able to obtain such funding, whether through
the issuance of debt or equity, on terms satisfactory to management and our
board of directors.
 
 For the
immediate future we intend to focus our efforts on the activities of SCHC and
SYCI as these segments continue to expand within the Chinese market. Our
long-term strategic goal is to extend our market to overseas
countries.
  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.
  29
  Critical
Accounting Policies and Estimates
 
 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
Hong Kong Jiaxing.  All material intercompany transactions have been
eliminated in consolidation.
 
 The
consolidated financial statements have been restated for all periods prior to
the SCHC and SYCI 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.  For the three month ended June 30, 2009, allowance for
doubtful accounts amounted to $61,453. As of December 31, 2008, allowance for
doubtful accounts was 0
  During
the quarter ended March 31, 2009, management revised the Company’s credit
policy.  Based on
 management’s
review, the Company began extending more favorable credit terms to certain of
its existing customers, based on credit-worthiness and payment history, as well
as to new customers. Management evaluates each customer individually to
determine the number of days the credit would be extended. No customer is
extended more than 120 days of credit. The Company previously extended 60 days
of credit.
 
 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 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
      yearsMineral
      rights
              Lower
      of the period of lease or 50 yearsBuildings
              20Machinery
              8Motor
      vehicles
              5Equipment
              8
 
 Asset Retirement
Obligation
 The
Company follows SFAS No. 143, “Accounting for Asset Retirement Obligations”
(“SFAS No. 143”), which established a uniform methodology for accounting for
estimated reclamation and abandonment costs. SFAS No. 143 requires the fair
value of a liability for an asset retirement obligation to be recognized in the
period in which the legal obligation associated with the retirement of the
long-lived asset is incurred. When the liability is initially recorded, the
offset is capitalized by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. To settle the liability, the obligation is paid, and to the
extent there is a difference between the liability and the amount of cash paid,
a gain or loss upon settlement is recorded. Currently, there are no reclamation
or abandonment obligations associated with the land being utilized for
exploitation.
 
 30
  Recoverability of Long Lived
Assets
 The
Company follows SFAS No. 144, “Accounting for the Impairment of Disposal of
Long-Lived Assets.” The Statement requires that long-lived and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. The Company is not aware of any events or circumstances which
indicate the existence of an impairment which would be material to the Company’s
annual financial statements.
 
 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.
 
 Financial
Instruments
 Statement
of Financial Accounting Standards No. 107, “Disclosures about Fair Value of
Financial Instruments” (“SFAS No. 107”), requires disclosure of the fair value
of financial instruments held by the Company.  SFAS No. 107 defines
the fair value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing
parties.  The carrying amount for notes payable approximates fair
value because the underlying instruments approximate market rates.
 
 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).
 
 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.
 
 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.
 
 Income
Taxes
 The
Company uses the asset and liability method of accounting for income taxes
pursuant to SFAS No. 109 “Accounting for Income Taxes”.  Under the
asset and liability method of SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to temporary
differences between the financial statements carrying amounts of existing assets
and liabilities and their respective tax bases and tax loss carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
 
 Shipping and Handling Fees
and Costs
 The
Company follows Emerging Issues Task Force No. 00-10, “Accounting for Shipping
and Handling Fees and Costs”.  The Company does not charge its
customers for shipping and handling.  The Company classifies shipping
and handling costs as part of the cost of net sales.  For the three
months ended June 30, 2009 and 2008, shipping and handling costs were $132,152
and $124,171 respectively, and for the six months ended June 30, 2009 and 2008,
shipping and handling costs were $241,730 and $221,246 respectively
  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.
  31
  Item3. Quantitative and Qualitative Disclosures About Market
Risk.
 
 Interest
Rate Risk
  We are
exposed to interest rate risk due primarily to our short-term bank loans.
Although the interest rates are fixed for the terms of the loans, the terms are
typically twelve months and interest rates are subject to change upon renewal.
Since July 20, 2007, the People’s Bank of China has increased the interest rate
of Renminbi bank loans with a term of six months or less by 0.2% and loans with
a term of six to 12 months by 0.3%. The new interest rates are approximately
6.0% and 6.8% for Renminbi bank loans with a term six months or less and loans
with a term of six to 12 months, respectively. The change in interest rates has
no impact on our bank loans secured before July 28, 2007. We monitor interest
rates in conjunction with our cash requirements to determine the appropriate
level of debt balances relative to other sources of funds. We have not entered
into any hedging transactions in an effort to reduce our exposure to interest
rate risk.
  Credit
Risk
  The
Company is exposed to credit risk from its cash in bank and fixed deposits and
bills and accounts receivable. The credit risk on cash in bank and fixed
deposits is limited because the counterparties are recognized financial
institutions. Bills and accounts receivable are subjected to credit evaluations.
An allowance has been made for estimated irrecoverable amounts which have been
determined by reference to past default experience and the current economic
environment.
  Foreign
Exchange Risk
  The value
of the Renminbi against the U.S. dollar and other currencies is affected by,
among other things, changes in China’s political and economic conditions. Since
July 2005, the Renminbi has no longer been pegged to the U.S. Dollar at a
constant exchange rate. Although the People’s Bank of China regularly intervenes
in the foreign exchange market to prevent significant short-term fluctuations in
the exchange rate, the Renminbi may appreciate or depreciate within a flexible
peg range against the U.S. dollar in the medium to long term. Moreover, it is
possible that in the future, PRC authorities may lift restrictions on
fluctuations in the Renminbi exchange rate and lessen intervention in the
foreign exchange market.
  Because
substantially all of our earnings and cash assets are denominated in Renminbi,
but our reporting currency is the U.S. dollar, fluctuations in the exchange rate
between the U.S. dollar and the Renminbi will affect our balance sheet and our
earnings per share in U.S. dollars. In addition, appreciation or depreciation in
the value of the Renminbi relative to the U.S. dollar would affect our financial
results reported in U.S. dollar terms without giving effect to any underlying
change in our business or results of operations. Fluctuations in the exchange
rate will also affect the relative value of any dividend we issue in the future
that will be exchanged into U.S. dollars and earnings from, and the value of,
any U.S. dollar-denominated investments we make in the future.
  Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange
risk. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert Renminbi into foreign
currencies.
  Most of
the transactions of the Company are settled in Renminbi and U.S. dollars. In the
opinion of the directors, the Company is not exposed to significant foreign
currency risk.
  Inflation
  Inflationary
factors, such as increases in the cost of our products and overhead costs, could
impair our operating results. Although we do not believe that inflation has had
a material impact on our financial position or results of operations to date, a
high rate of inflation in the future may have an adverse effect on our ability
to maintain current levels of gross margin and selling, general and
administrative expenses as a percentage of sales revenue if the selling prices
of our products do not increase with these increased costs.
 
 Company’s
Operations are Substantially in Foreign Countries
  Substantially
all of our operations are conducted in China and are subject to various
political, economic, and other risks and uncertainties inherent in conducting
business in China. Among other risks, the Company and its subsidiaries’
operations are subject to the risks of restrictions on transfer of funds; export
duties, quotas, and embargoes; domestic and international customs and tariffs;
changing taxation policies; foreign exchange restrictions; and political
conditions and governmental regulations. Additional information regarding such
risks can be found under the heading “Risk Factors” in our Amended Report Form
10-K for the fiscal year ended December 31, 2008.
 
 Item4. 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 (and the financial statements contained
in the report), our president and chief financial officer have determined that
our current disclosure controls and procedures are effective.
  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.
  32
  PART II—OTHER
INFORMATION.
 Item1. Legal Proceedings.
 
 None.
 
 Item1A. Risk Factors.
 
 Investing
in our common stock involves a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described in our Annual Report on
Form 10-K for the fiscal year ended December 31,2008 (the “2008 Form 10-K”),
under the caption "Risk Factors," our Management's Discussion and Analysis of
Financial Condition and Results of Operations set forth in Item 2 of Part I of
this Quarterly Report on Form 10-Q, our consolidated financial statements and
related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q
and our consolidated financial statements and related notes, as well as our
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and the other information in our 2008 Form 10-K. Readers should
carefully review those risks, as well as additional risks described in other
documents we file from time to time with the Securities and Exchange
Commission.
  Item2. Unregistered shares of Equity Securities and Use of
Proceeds
 
 In March
2009, the Company granted options to purchase up to 600,000 shares of its common
stock at an exercise price of $1.20 per share to nine management staffs for
their services with the Company. The options vest immediately and may be
exercised through March 2019.
 
 In May
2009 the Company granted to one director options to purchase 50,000
shares of the Company’s common stock at an exercise price of $1.20 per
share.  The options vested immediately and may be exercised through May
2019.
 
 In June
2009 the Company granted to one director options to purchase 100,000
shares of the Company’s common stock at an exercise price of $1.20 per
shares.  The options vested immediately and may be exercised through June
2012.
  The
options were issued without registration in reliance on the exemption provided
by Section 4(2) of the Securities Act of 1933.
  Item3. Defaults Upon Senior Securities.
 
 None.
 
 Item4. Submission of Matters to a Vote of Security
Holders.
 
 None.
 
 Item5. Other Information.
 
 None.
  33
  Item6. Exhibits.
 
 Exhibit
      No.
              Description31.1
              Rule
      13a-14(a)/15d-14(a) Certification of Chief
      Executive Officer.31.2
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer.32.1
              Section
      1350 Certification of Chief Executive Officer and Chief Financial
      Officer
  34
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
   GULF
      RESOURCES, INC.Dated:
      August 10, 2009
              By:
              /s/
      Xiao bin LiuXiao
      bin LiuChief
      Executive Officer(principal
      executive officer)By:
              /s/
      Min LiMin
      LiChief
      Financial Officer(principal
      financial and accounting
officer)