Unassociated Document

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. As of June 29, 2007, the aggregate market value of the common stock of the registrant held by non-affiliates (excluding shares held by directors, officers and others holding more than 5% of the outstanding shares of the class) was $40,102,843 based upon a closing sale price of $2.80 as reported by Bloomberg Finance.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15 of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes o No o

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of March 7, 2008, the registrant had outstanding 86,410,880 shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any report filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933.

Table of Contents

Item 1.	Business	1
Item 1A.	Risk Factors	10
Item 2.	Properties	18
Item 3.	Legal Proceedings	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
Item 6.	Selected Financial and Other Data	20
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 8.	Financial Statements and Supplementary Data	28
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	50
Item 9A.	Controls and Procedures	50
Item 9B.	Other Information	51
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	51
Item 11.	Executive Compensation	53
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	54
Item 13.	Certain Relationships and Related Transactions, and Director Independence	55
Item 14.	Principal Accounting Fees and Services	56
PART IV
Item 15.	Exhibits and Financial Statement Schedules	56

Signatures		59

Special Note Regarding Forward Looking Information

This report contains forward-looking statements that reflect management's current views and expectations with respect to our business, strategies, future results and events, and financial performance. All statements made in this report other than statements of historical fact, including statements that address operating performance, events or developments that management expects or anticipates will or may occur in the future, including statements related to future reserves, cash flows, revenues, profitability, adequacy of funds from operations, statements expressing general optimism about future operating results and non-historical information, are forward-looking statements. In particular, the words "believe," "expect," "intend," "anticipate," "estimate," "plan," "may," "will," variations of such words and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements and their absence does not mean that the statement is not forward-looking. Readers should not place undue reliance on forward-looking statements which are based on management's current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences include those discussed in this report, particularly under the caption "Risk Factors." Except as required under the federal securities laws, we do not undertake any obligation to update the forward-looking statements in this report.

PART I

Item 1. Business.

Introduction

We manufacture and trade bromine and crude salt, and manufacture and sell chemical products used in oil and gas field exploration, oil and gas distribution, oil field drilling, wastewater processing, papermaking chemical agents and inorganic chemicals. To date, our products have been sold only within the People’s Republic of China. As used in this report, the terms "we," "our," "Company" and "Gulf Resources" refers to Gulf Resources, Inc. and its wholly-owned subsidiaries, and the terms “ton” and “tons” refers to metric tons, in each case, unless otherwise stated or the context requires otherwise. All information in this report gives retroactive effect to a 1-for-100 reverse stock split of our common stock effected on October 23, 2006 and a 2-for-1 forward stock split of our common stock effected on November 28, 2007.

The Company’s functional currency is the Renminbi, which had an average exchange rate of $0.12557 and $0.13167 during fiscal year 2006 and 2007 respectively.

Our Corporate History

From November 1993 through August 2006, we were engaged in the business of owning, leasing and operating coin and debit card pay-per copy photocopy machines, fax machines, microfilm reader-printers and accessory equipment. Due to the increased use of internet services, demand for our services declined sharply, and in August 2006, our Board of Directors decided to discontinue our operations.

Upper Class Group Limited, incorporated in the British Virgin Islands in July 2006, acquired all the outstanding stock of Shouguang City Haoyuan Chemical Company Limited ("SCHC"), a company incorporated in Shouguang City, Shangdong Province, the People's Republic of China, in May 2005. At the time of the acquisition, members of the family of Mr. Ming Yang, our president and chief executive officer, owned approximately 63.20% of the outstanding shares of Upper Class Group Limited. Since the ownership of Upper Class Group Limited and SCHC was then substantially the same, the acquisition was accounted for as a transaction between entities under common control, whereby Upper Class Group Limited recognized the assets and liabilities transferred at their carrying amounts.

On December 12, 2006, we, then known as Diversifax, Inc., a public "shell" company, acquired Upper Class Group Limited and SCHC. Under the terms of the agreement, the stockholders of Upper Class Group Limited received 26,500,000 shares of voting common stock of Gulf Resources, Inc. in exchange for all outstanding shares of Upper Class Group Limited. Members of the Yang family received approximately 62% of our common stock as a result of the acquisition. Under accounting principles generally accepted in the United States, the share exchange is considered to be a capital transaction rather than a business combination. That is, the share exchange is equivalent to the issuance of stock by Upper Class Group Limited for the net assets of Gulf Resources, Inc., accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the share exchange is identical to that resulting from a reverse acquisition, except no goodwill is recorded. Under reverse takeover accounting, the post reverse acquisition comparative historical financial statements of the legal acquirer, Gulf Resources, Inc., are those of the legal acquiree, Upper Class Group Limited. Share and per share amounts stated have been retroactively adjusted to reflect the share exchange.

To satisfy certain ministerial requirements necessary to confirm certain government approvals required in connection with the acquisition of SCHC by Upper Class Group Limited, the shares of SCHC were transferred to a newly formed Hong Kong corporation named Hong Kong Jiaxing, all of the outstanding shares of which are now owned by Upper Class Group Limited.

On February 5, 2007, we acquired Shouguang Yuxin Chemical Industry Co., Limited ("SYCI"), a company incorporated in the People's Republic of China, in October 2000. Under the terms of the acquisition agreement, the stockholders of SYCI received a total of 16,188,118 shares of common stock of Gulf Resources, Inc. in exchange for all outstanding shares of SYCI's common stock. Simultaneously with the completion of the acquisition, a dividend of $2,550,000 was paid to the former stockholders of SYCI. At the time of the acquisition, approximately 49.1% of the outstanding shares of SYCI were owned by Ms. Yu, Mr. Yang’s wife, and the remaining 50.9% of the outstanding shares of SYCI were owned by Shandong City Haoyuan Group Limited, all of whose outstanding shares were owned by Mr. Yang and his wife. Since the ownership of Gulf Resources, Inc. and SYCI are substantially the same, the acquisition was accounted for as a transaction between entities under common control, whereby Gulf Resources, Inc. recognized the assets and liabilities of SYCI at their carrying amounts. Share and per share amounts have been retroactively adjusted to reflect the acquisition.

As a result of the transactions described above, our corporate structure is linear. That is Gulf Resources owns 100% of the outstanding shares of Upper Class Group Limited, which owns 100% of the outstanding shares of Hong Kong Jiaxing, which owns 100% of the outstanding shares of SCHC, which owns 100% of the outstanding shares of SYCI. Further, as a result of our acquisitions of SCHC and SYCI, our historical financial statements, as contained in our Condensed Consolidated Financial Statements and Management's Discussion and Analysis, appearing elsewhere in the report, reflect the accounts of SCHC and SYCI.

Our executive offices are located in China at Chenming Industrial Park, Shouguang City, Shandong, People's Republic of China. Our telephone number is (646) 200-6316. Our website address is www.gulfresourcesco.com. The information on our website is not part of this report

In January 2007, stockholders holding approximately 62% of the then outstanding shares of our common stock consented in writing to change our corporate name from Diversifax, Inc. to Gulf Resources, Inc. Accordingly, on February 20, 2007, we filed a Certificate of Amendment to our Certificate of Incorporation changing our corporate name to Gulf Resources, Inc.

On November 28, 2007, we amended our certificate of incorporation to increase our authorized shares of common stock from 70,000,000 to 400,000,000 and to effect a 2-for-1 forward stock split of our outstanding shares of common stock.

Recent Developments

On April 7, 2007, the Company acquired substantially all of the assets of Wenbo Yu in the Shouguang City Qinshuibo. These assets include a 50-year mineral rights and production land lease covering 1,846 acres, or 7.5 square kilometers, of real property, with proven and probable reserves of approximately 223,000 tons of bromine being serviced by 575 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 $5,100,000, consisting of an aggregate of 1,598,572 shares of our common stock and cash in the amount $3,051,282.

On June 8, 2007, the Company acquired substantially all of the assets of Dong Hua Yang in the Dong Ying City Liu Hu Area. These assets include a 50-year mineral rights and land lease covering 2,318 acres, or 9.4 square kilometers of real property, with proven and probable reserves of approximately 235,000 tons of bromine being serviced by 405 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 $6,667.538, consisting of an aggregate of 819,590 shares of our common stock and cash in the amount $4,837,233 and interest-free promissory note in the aggregate principal amount of $889,005.

On October 25, 2007, the Company acquired substantially all of the assets owned by Jiancai Wang in the Shouguang City Renjia Area. These assets include a 50-year mineral rights and land lease covering 2,165 acres or 8.8 square kilometers of real property, with proven and probable reserves of approximately 225,000 tons of bromine being serviced by 398 wells, annual production of 3,700 tons as well as the related production facility, the wells, the pipelines, other production equipment, and the buildings located on the property. The total purchase price for the acquired assets was $6,399,147, of which $2,519,664 was paid at the closing and the remaining $3,879,483 was paid within five days after the closing.

On October 26, 2007, the Company acquired substantially all of the assets owned by Xingji Liu in the Shouguang City Houxing Area. These assets include a 50-year mineral rights and land lease covering 2,310 acres or 9.4 square kilometers of real property, with proven and probable reserves of approximately 240,000 tons of bromine, being serviced by 432 wells, annual production of 3,900 tons 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 $6,665,778.

On January 8th, 2008, the Company acquired substantially all of the assets owned by Xiaodong Yang in the Shouguang City Hanting Area. These assets include a 50-year mineral rights and land lease covering 2,641 acres or 11 square kilometers of real property, with proven and probable reserves of approximately 205,000 being serviced by 294 wells, annual production of 4,700 tons 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.

Our Business Segments

Our business operations are conducted in two segments, bromine and crude salt, and chemical products. We manufacture and trade bromine and crude salt, and manufacture and sell chemical products used in oil and gas field exploration, oil and gas distribution, oil field drilling, wastewater processing, papermaking chemical agents and inorganic chemicals. We conduct all of our operations in China, in close proximity to China’s petrochemical and oil refinery manufacturing base and its rapidly growing market.

Bromine and Crude Salt

We manufacture and distribute bromine through our wholly-owned subsidiary, Shougang City Haoyuan Chemical Company Limited, or SCHC. Bromine (Br2) is a halogen element and it is a red volatile liquid at standard room temperature which has reactivity between chlorine and iodine. Elemental bromine is used to manufacture a wide variety of bromine compounds used in industry and agriculture. Bromine is also used to form intermediates in organic synthesis, in which it is somewhat preferable over iodine due to its lower cost. Our bromine is commonly used in brominated flame retardants, fumigants, water purification compounds, dyes, medicines and disinfectants. According to figures published by the China Crude Salt Association, we are one of the largest manufacturers of bromine in China, as measured by production output

The extraction of bromine in the Shangdong province is limited by the Provincial Government to six licensees. We hold one of such licenses. The other five license holders produce bromine mainly for their own consumption. Although there are only six licensed bromine producers in Shangdong, the government has not shut down hundreds of small unlicensed producers. Part of our business strategy is to acquire these producers and to use our bromine to expand our downstream chemical operations.

Location of Production Sites

Our production sites are located in the Shangdong Province in northeastern China. The productive formation (otherwise referred to as the “working region”), extends from latitude N 36°56’ to N 37°20’ and from longitude E 118°38’ to E 119°14’, in the north region of Shouguang city, from the Xiaoqing River of Shouguang city to the west of the Dan river, bordering on Hanting District in the east, from the main channel of “Leading the Yellow River to Supply Qingdao City Project” in the south to the coastline in the north. The territory is classified as coastal alluvial – marine plain with an average height two to seven meters above the sea level. The terrain is relatively flat.

Bromine reserve study conducted by Institute of Mineral Resources Chinese Academy of Geological Science

In November 2007 the Institute of Mineral Resources Chinese Academy of Geological Science completed a study of the bromine reserves included in the assets of SCHC at the time it was acquired (the “SCHC Assets”), the Qinshuibo Assets and the Liu Hu Assets. This study determined the occurrences and burying conditions, distribution range and characteristics of natural brine occurring in these assets; analyzed the creation, supply and exploration conditions of these properties. The study concluded that economic reserves of bromine are 776,000 tons in the SCHC Assets, 230,000 tons in the Qinshuibo Assets, and 280,000 tons in the Liu Hu Assets, that the natural brine resources of these three assets collectively is about 3.9 billion cubic meters. In addition it estimated that the economic reserves in these three assets collectively are approximately 300 million tons of rock salt (liquid NaCl), 4.3 million tons of potassium chloride, 55 million tons of magnesium chloride, 29 million tons of magnesium sulfate, and 9.8 million tons of calcium sulfate.

Geological background of this region

The Shangdong Province working region is located to the east of Lubei Plain and on the south bank of Bohai Laizhou Bay. The geotectonic location bestrides on the North China Platte (I) and north three-level structure units, from west to east including individually the North China Depression, Luxi Plate, and Jiaobei Plate. Meanwhile, 4 V-level structure units including the Dongying Sag of Dongying Depression(IV) of North China Depression, the Buried Lifting Area of Guangrao, Niutou sag and Buried Lifting Area of Shuanghe and are all on two V-level structure units including Xiaying Buried Lifting Area of Weifang Depression (IV) of Luxi Plate and Chuangyi Sag, as well as on a V-level structure units of Jiaobei Buried Lifting Area of Jiaobei Plate. Ths is so confusing, maybe we should drop it?

Processing of Bromine

Natural brine is a complicated salt-water system, containing many ionic compositions in which different ions have close interdependent relationships and which can be reunited to be many dissolved soluble salts such as sodium chloride, potassium chloride, calcium sulfate, potassium sulfate and other similar soluble salts.

The goal of natural brine processing is to separate and precipitate the soluble salts or ions away from the water. Due to the differences in the physical and chemical characteristics of brine samples, the processing methods are varied, and can result in inconsistency of processing and varied technical performance for the different useful components from the natural brine.

Bromine

Bromine is the first component extracted during the processing of natural brine. In natural brine, the bromine exists in the form of bromine sodium and bromine magnesium and other soluble salts.

Bromine is produced by extracting the bromine ion from natural brine. In neutral or acidic water, the bromine ion is easily oxidized by adding the oxidative of chlorine and generating the single bromine away from the brine. Thereafter, the extracted single bromine is blown out by forced air, then absorbed by sulfur dioxide or soda. This production method is called “air blowing out process”, is technologically very simple,with a relatively high bromine extraction rate, often reaching to 70-80%. The whole process can be completed in a closed system, avoiding harm to the environment. Nevertheless, the various materials consumed during oxidation, absorption and distillation are relatively higher than those used in other production methods, therefore the process costs are relatively higher.

Soluble salts

The extraction of natural brine’s soluble salts is accomplished through the method known as distillation crystallization, in which the extracted natural brine is placed into containing pools and then exposed to natural sunshine, which makes the soluble salts reach the saturation point and precipitate after crystallization. This is a relatively simple method to operate with low processing costs.

Chemical Products

We produce chemical products through our wholly-owned subsidiary, Shougang Yuxin Chemical Industry Company Limited , (SYCI). The products we produce and the markets in which they are sold include, among others:

Product name	Application sector
Hydroxyl guar gum	Oil Exploration & Production
Demulsified agent	Oil Exploration & Production
Corrosion inhibitor for acidizing	Oil Exploration & Production
Bactericide	Oil Exploration / Agricultural
Chelant	Paper Making
Iron ion stabilizer	Oil Exploration & Production
Clay stabilizing agent	Oil Exploration & Production
Flocculants agent	Paper Making
Remaining agent	Paper Making
Expanding agent with enhanced gentleness	Paper Making

SYCI concentrates its efforts on the production and sale of chemical products that are in used in oil and gas field explorations, oil and gas distribution, oil field drilling, wastewater processing, papermaking chemical agents, and inorganic chemicals. SYCI also engages in research and development of commonly used chemical products as well as medicine intermediates. Currently, SYCI's annual production of oil and gas field exploration products and related chemicals is over 10,000 tons, and its production of papermaking-related chemical products is over 7,000 tons. These products are mainly distributed to large domestic papermaking manufacturers and major oilfields such as Shengli Oilfield, Daqing Oilfield, Zhongyuan Oilfield, Huabei Oilfield, and Talimu Oilfields.

SYCI’s headquarters are located in Shouguang City at 2nd Living District, Qinghe Oil Factory, Shouguang City, Shandong Province, China. The company has been certified as ISO9001-2000 compliant and received the Quality Products and Services Guarantee Certificate from China Association for Quality. SYCI has been accredited by Shandong as a Provincial Credit Enterprises and is a Class One supplier for both China Petroleum & Chemical Corporation (SINOPC) and PetroChina Company Limited. SYCI has been engaged in product innovation and R&D projects with Shandong University, Shandong Institute of Light Industry, Southeast University and other higher education institutions. SYCI has hired three college professors and three professionals who hold PhD degrees to lead its Research and Development department.

Segment disclosure

We follow SFAS No. 131, Disclosures about Segments of and Enterprise and Related Information, which requires us to provide certain information about our operating segments. We have two reportable segments: bromine and crude salt and chemical products.

The amounts set forth below are based upon on an average Renminbi to US$ exchange rates of $0.12557 and $0.13167 during fiscal year 2006 and 2007 respectively.

	Net Sales by Segment
	Twelve Months Ended			Twelve Months Ended
	December 31, 2007			December 31, 2006
Segment			Percent of total			Percent of total
Bromine and Crude salt	$	34,015,484	63%	$	17,825,097	56%
Chemical Products	$	20,233,166	37%	$	13,911,119	44%
Total sales	$	54,248,650	100%	$	31,736,216	100%

Percentage Increase in Net Sales from fiscal year 2006 to 2007
Segments
Bromine and Crude salt	90.8%
Chemical Products	45.4%

SCHC Product sold in metric tons	Year ended 12/31/07	Year ended 12/31/06	Percentage Change
Bromine	17,648	10,035	+75.9%

Crude Salt	51,000	No Production

	Income from Operations by Segment
	Twelve Months Ended			Twelve Months Ended
	December 31, 2007			December 31, 2006
Segment			Percent of total			Percent of total
Bromine and Crude salt	$	14,181,054	66%	$	1,728,746	32%
Chemical Products	$	7,164,833	34%	$	3,714,475	68%
Income from operations before corporate costs	$	21,345,887	100%	$	5,443,221	100%
Corporate costs	$	(1,320,959)		$	-------
Income from operations	$	20,024,928		$	5,443,221

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

F-9

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 1 –

NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 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 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 of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, notes payable and taxes payable approximate fair value due to their short-term nature.

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.

F-10

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 1 –

NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 years ended December 31, 2007 and 2006, shipping and handling costs were $384,868 and $492,749.

Basic and Diluted Net Income per Share of Common Stock

In accordance with SFAS 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. As of December 31, 2007 and 2006, the Company had no dilutive common share equivalents.

Recently Issued Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 was effective for fiscal years beginning after December 15, 2006, and the provisions of FIN 48 are to be applied to all tax positions under Statement No. 109 upon initial adoption. The cumulative effect of applying the provisions of this interpretation is to be reported as an adjustment to the opening balance of retained earnings for that fiscal year. The Company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not require an adjustment to the opening balance of retained earnings as of January 1, 2007.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS No. 157 relate to the definition of fair value, the methods used to measure fair value and the expanded disclosures about fair value measurement. SFAS No. 157 is effective for fiscal years after November 15, 2007 and interim periods within those fiscal years. The Company does not believe that the adoption of the provisions of SFAS No. 157 will materially impact its financial position or results of operations.

F-11

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 1 –

NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and will become effective for the Company beginning with the first quarter of 2008. The Company has not yet determined the impact of the adoption of SFAS No. 159 on its financial statements and footnote disclosures.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“FAS No. 141R”). FAS No. 141R replaces Statement of Financial Accounting Standards No. 141, “Business Combinations” (“FAS No. 141”), although it retains the fundamental requirement in FAS No. 141 that the acquisition method of accounting be used for all business combinations. FAS No. 141R establishes principles and requirements for how the acquirer in a business combination (a) recognizes and measures the assets acquired, liabilities assumed and any noncontrolling (“minority”) interest in the acquiree, (b) recognizes and measures the goodwill acquired in a business combination or a gain from a bargain purchase and (c) determines what information to disclose regarding the business combination. FAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after December 15, 2008. The Company is currently assessing the potential effect of FAS No. 141R on its financial statements.

NOTE 2 – ASSETS ACQUISITIONS

On April 7, 2007, the Company’s wholly owned subsidiary, SCHC, acquired assets from Mr. Wenbo Yu in exchange for 1,558,572 newly issued shares of the Company’s common stock valued at $1,987,179 and $3,076,923 in cash. The assets include a 50 year mineral rights and land lease covering 1,846 acres of real property through December 2052, with proven and probable reserves of approximately 230,000 metric tons of bromine and annual production of 3,700 metric tons being serviced by 575 wells, as well as the related production facility, the pipelines, other production equipment, and the buildings located on the property.

On June 8, 2007, SCHC acquired assets from Mr. Donghua Yang in exchange for 819,590 newly issued shares of the Company’s common stock valued at $941,300 and $4,837,233 in cash and an interest-free promissory note in the aggregate principal amount of $889,005, with a maturity date of July 8, 2007. The Company issued the promissory note, and the promissory note was fully paid in June 2007. The assets include a 50-year mineral rights and land lease covering 2,318 acres of real property through April 2052, with proven and probable reserve of approximately 280,000 metric tons of bromine and annual production of 4,000 metric tons of bromine being serviced by 405 wells, and the related production facility, the pipelines, other production equipment, and the buildings located on the property.

On October 25, 2007, SCHC acquired substantially all of the assets of Shouguang City Renjia Area, a bromine producer located in close proximity to SCHC for $6,399,147 in total cash consideration. The assets include a 50-year mineral rights and land lease covering 2,165 acres through April, 2052, which has been paid in the full. The property has approximately 225,000 metric tons of proven and probable bromine reserves and has annual production of 3,700 metric tons of bromine. Additional assets to be conveyed with the purchase include the related production facility, wells, pipelines and other production equipment, in addition to the current buildings and other assets on the property.

F-12

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 2 – ASSETS ACQUISITIONS (Continued)

On October 26, 2007, SCHC acquired substantially all of the assets of Shouguang City Houxing Area, a bromine producer located in close proximity to SCHC for $6,665,778 in total cash consideration. The assets include a 50-year mineral rights and land lease covering 2,310 acres through April 2052, which has been paid in the full. The property has approximately 240,000 metric tons of proven and probable bromine reserves and annual production of 3,900 metric tons of bromine. Additional assets to be conveyed with the purchase include the related production facility, wells, pipelines and other production equipment, in addition to the current buildings and other assets on the property.

In accordance with Emerging Issues Task Force No.98-3 “Determining Whether a Non Monetary Transactions Involves Receipt of Productive Assets of a Business”, the Company recorded the above transactions as purchase of assets.

NOTE 3 – PROPERTY, PLANT AND EQUIPMENT, NET

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

	As of December 31,
	2007		2006
At cost:
Mineral rights	$	4,221,059	$	501,326
Buildings		2,379,252		1,489,936
Plant and machinery		24,280,820		2,917,350-
Motor vehicles		54,154		50,639
Furniture, fixtures and office equipment		1,120,058		75,131

Total		32,055,343		5,034,382

Less: accumulated depreciation and amortization		1,950,158		571,975
Net book value	$	30,105,185	$	4,462,407

There were no impairment provisions made at December 31, 2007 and 2006.

During the year ended December 31, 2007, depreciation and amortization expense totaled $1, 285,465, of which $ 1,251,604 and $ 33,861 were recorded as cost of sales and administrative expenses, respectively.

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.

During the years ended December 31, 2007 and 2006, amortization amounted to $12,986 and $1,936 respectively.

NOTE 5 – INCOME TAX RECEIVABLE

The Income tax receivable of $1,111,154 in Shouguang City Haoyuan Chemical Company Limited in 2006 was not fully refunded. As a result, $707,000 was recognized as the Income taxes expense in 2007.

F-13

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 6 – NOTES PAYABLE

	As of December 31,
	2007			2006

Bank borrowing from Citibank (China) Company Limited Shanghai Branch is $3,770,250, due March 30, 2008 prevailing interest rate regulated by The People’s Bank of China minus 5% from October 31, 2007 to March 30, 2008, guaranteed by a shareholder, Shenzhen Huayin Guaranty and Investment Company Limited .	$	3,770,250		$	-

Note payable to a shareholder, Shenzhen Huayin Guaranty and Investment Company Limited is for $11,653,500. Of this, $6,169,500 of the borrowing is with interest at 3.33% p.a. from March 20, 2007 to March 19, 2008 and is due on March 19, 2008. The remaining borrowing of $5,484,000 is interest free and matures on April 1, 2009.		11,653,500			-

Total loans		15,423,750			-
Less: current portion		(9,939,750	)		-
Long-term loans, less current portion	$	5,484,000		$	-


Future maturities of long-term loans are as follows as of December 31, 2007:

2008		9,939,750			-
2009		5,484,000			-

Total	$	15,423,750		$	-

NOTE 7 – TAXES PAYABLE

Taxes payable consists of the following:
	As of December 31,
	2007		2006

Income tax payable	$	798,090	$	221,346
Value added tax payable and others		679,206		260,059
Total	$	1,477,296	$	481,405

NOTE 8 – DUE TO A RELATED PARTY

Amounts represent payables due to a company whose stockholder and director is also a stockholder and director of the company.

F-14

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 9 – 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. The Statutory Common Reserve Funds of both SCHC and SYCI as of December 31, 2007 have reached 50% of their registered capital share.

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 10 – COMMON STOCK

Effective November 28, 2007, the Company affected a two for one stock split. All shares and per share amount for all periods presented have been adjusted to reflect the stock split.

In March 2007, the Company issued 9,979,800 shares of its common stock as payment for $5,344,395 of accrued consulting expenses.

In March 2007, the Company issued 900,000 shares of its common stock, valued at $892,500 (fair value), for two consulting contracts, one that expired on December 31, 2007 and one that expires in March 2008. These issuances were recorded in prepaid expenses on the balance sheet and expensed over the terms of the contracts.

In April 2007, the Company issued 1,558,572 shares of its common stock, valued at $1,987,179 (fair value), to acquire assets owned by Mr. Wenbo Yu, (Note 2).

In June 2007, the Company issued 819,590 shares of its common stock, valued at $941,300 (fair value), to acquire assets owned by Mr. Donghua Yang, (Note 2).

F-15

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 11 – STOCK-BASED COMPENSATION

On January 1, 2006, the Company adopted SFAS No. 123R (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), using the modified prospective method as permitted under SFAS No. 123R. Under this transition method, compensation cost recognized in 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested as of, December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. In accordance with the modified prospective method of adoption, the Company’s results of operations and financial position for prior periods have not been restated. There was no unrecognized compensation cost as of December 31, 2006.

During the year ended December 31, 2007, the Company’s net income was reduced by approximately $97,054,due to stock-based compensation expense as a result of the adoption of SFAS No. 123R and the issuance of stock options, as shown below. There was no stock granted during the year ended December 31, 2006.

The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an option award, with the following assumptions: no dividend yield, expected volatility of 68%, and a risk-free interest rate of 4.2%. In determining volatility of the Company’s options, the Company used the average volatility of the Company’s stock.

In the fourth quarter of 2007, the Company granted to two Board members options to purchase a total of 100,000 shares of the Company’s common stock at an exercise price averaging $2.025 per share and the options vested immediately.

The vesting of the options is the contingent on the continued participation as a Board of Director. The option expires in three years. Based on the Black-Scholes option pricing model, the options were valued at $97,054. In accordance with SFAS No. 123R, the Company has recorded stock-based compensation expense during the year ended December 31, 2007 of $97,054 in connection with the issuance of these options.

The following table summarizes all Company stock option transactions between January 1, 2007 and December 31, 2007

	Option Shares		Vested Shares		Exercise Price per Common Share Range
Balance, December 31, 2006		-		-		-
Granted or vested during the nine months ended December 31, 2007		100,000		100,000	$	2.00 - $2.05
Expired during the year ended December 31, 2007		-		-		-
Balance, December 31, 2007		100,000		100,000	$	2.00 - $2.05

F-16

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 13 – DIVIDEND DISTRIBUTION

On January 31, 2007, SYCI distributed a dividend to two stockholders in the amount of $2,189,600. On February 5, 2007, in conjunction with the merger of SYCI, Gulf Resources, Inc. paid a $2,550,000 dividend to the original stockholders of SYCI.

NOTE 14 – INCOME TAXES

The Company utilizes the asset and liability method of accounting for income taxes in accordance with SFAS No. 109.

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 years ended December 31, 2007 and 2006 and 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 years ended December 31, 2007 and 2006 is 17.5%.

PRC

Enterprise income tax (“EIT”) for SCHC and SYCI in the PRC is charged at 33% of the assessable profits, of which 30% is for national tax and 3% is for local tax.

The components of the provision for income taxes from continuing operations are:

	Year ended December 31,
	2007		2006

Current taxes - PRC	$	7,043,641	$	1,879,582
Non-deductible items disallowed for prior year		706,869		-
Others		48,172		4,662

	$	7,798,682	$	1,884,244

F-17

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 14 – INCOME TAXES - (Continued)

The effective income tax expenses differs from the PRC statutory income tax rate of 33% from continuing operations in the PRC as follows :-

	Year ended December 31,
	2007			2006

Statutory income tax rate		33	%		33	%
Non-deductible items disallowed for prior year		4	%		-
Non-deductible items		2	%		-

Effective tax rate		39	%		33	%

No provision for deferred taxes has been made as there were no material temporary differences as of December 31, 2007 and 2006.

NOTE 15 – 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.

	Bromine
	and Crude		Chemical		Segment					Consolidated
	Salt		Products		Total		Corporate			Total

December 31, 2007

Net revenue	$	34,015,484	$	19,764,829	$	53,780,313	$	-		$	53,780,313
Maintenance service income		-		468,337		468,337					468,337
Income (loss) from operations		14,181,054		7,164,833		21,345,887		(1,320,959	)		20,024,928
Total assets		36,614,939		9,516,930		46,131,869		197,963			46,329,832
Depreciation and amortization		1,111,580		186,871		1,298,451		-			1,298,451

December 31, 2006

Net revenue	$	17,825,097	$	13,911,119	$	31,736,216	$	-		$	31,736,216
Income from operations		1,728,746		3,714,475		5,443,221		-			5,443,221
Total assets		9,835,484		5,069,584		14,905,068		50,000			14,955,068
Depreciation and amortization		213,092		70,362		283,454		-			283,454

F-18

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 15 – BUSINESS SEGMENTS - (Continued)


	Years ended December 31,
Reconciliations	2007			2006

Total segment operating income	$	21,345,887		$	5,443,221
Corporate overhead expenses		(1,320,959	)		-
Other income (expense), net		6,717			252,483
Income tax expense		(7,798,682	)		(1,884,244	)

Total consolidated net income	$	12,232,963		$	3,811,460

NOTE 16 – MAJOR SUPPLIERS

During the year ended December 31, 2007, the Company purchased 48% of its raw material from two suppliers. At December 31, 2007, amounts due to those suppliers included in accounts payable were $1,395,301. This concentration makes the Company vulnerable to a near-term adverse impact, should the relationships be terminated.

NOTE 17 – CUSTOMER CONCENTRATION

The Company sells a substantial portion of its product to a limited number of customers. During the year ended December 31, 2007, sales to the Company’s three largest customers aggregated $19,009,146, or approximately 35% of total net revenue. At December 31, 2007, amounts due from these customers were $2,552,068. This concentration makes the Company vulnerable to a near-term adverse impact, should the relationships be terminated.

NOTE 18 –FIXED PRICE STANDBY EQUITY DISTRIBUTION AGREEMENT

On May 7, 2007, the Company entered into a Fixed Price Standby Equity Distribution Agreement with eight investors (the “Investors”). Pursuant to the Fixed Price Standby Equity Distribution Agreement, the Company was able, at its discretion, periodically sell to the Investors up to 60 million shares of the Company’s common stock for a total purchase price of up to $60 million, at a per share purchase price of $1.00 per share. The Investors’ obligation to purchase shares of common stock under the Fixed Price Standby Equity Distribution Agreement was subject to certain conditions, including the Company obtaining an effective registration statement for the resale of the common stock sold under the Fixed Price Standby Equity Distribution Agreement. An individual advance under the Fixed Price Standby Equity Distribution Agreement could not exceed $10 million. In no event could the number of shares issued to any Investor pursuant to an advance cause any Investor to own more than 9.9% of the shares of common stock outstanding.

The commitment period under the Fixed Price Standby Equity Distribution Agreement was to commence on the earlier to occur of (i) the date that the Registration Statement is declared effective by the Securities and Exchange Commission (the “Effective Date”), or (ii) such earlier date as the Company and the Investors may mutually agree in writing.

The commitment period under the Fixed Price Standby Equity Distribution Agreement was to expire on the earliest to occur of (i) the date on which the Investors have purchased an aggregate amount of $60 million shares of our common stock under the Fixed Price Standby Equity Distribution Agreement, (ii) the date occurring eighteen months after the Effective Date, or (iii) the date the Agreement is earlier terminated as defined in the agreement. No sale or distribution of stock under this Agreement has been made. See Note 22 – Subsequent Events.

F-19

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 19 – 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.

NOTE 20 – FORWARD STOCK SPLIT

On October 19, 2007, the Board of Directors recommended and the holders of a majority of the outstanding Common Stock voted in favor of resolutions in connection with the following actions:

Amending the Company's Certificate of Incorporation, as amended, (i) to affect a forward stock split of the issued and outstanding shares of the Company's Common Stock on the basis of two (2) post-split shares of Common Stock for every one (1) pre-split share of Common Stock (the "Forward Stock Split") and (ii) to increase the total number of authorized shares of Common Stock from 70,000,000 to 400,000,000 (the "Authorized Shares Increase").

The decisions to affect the Forward Stock Split and the Authorized Shares Increase of common stock were approved by the Board of Directors and shareholders owning a majority of the outstanding shares of the Company's Common Stock in order to provide greater availability of common stock in the public marketplace, to help improve future liquidity and further diversify the Company's shareholder base.

NOTE 21 – RELATED PARTY TRANSACTIONS

	For years ended December 31,
	2007		2006
Note payable to a shareholder, Shenzhen Huayin Guaranty and Investment Company Limited is for $11,653,500. (Note 6)	$	11,653,500		-
Interest paid to Shenzhen Huayin Guaranty and Investment Company Limited (Note 6)	$	123,910	$	-
Guarantee given by a shareholder: Bank borrowing from Citibank (China) Company Limited Shanghai Branch is $3,770,250, due March 30, 2008 prevailing interest rate regulated by The People’s Bank of China minus 5% from October 31, 2007 to March 30, 2008, guaranteed by a shareholder, Shenzhen Huayin Guaranty and Investment Company Limited .	$	3,770,250	$	-

F-20

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 22 – SUBSEQUENT EVENTS

On January 8, 2008, SCHC entered into an Asset Purchase Agreement with Mr. Xiaodong Yang for the purchase of mineral rights and land lease covering 2641 acres located in Wei Fang City Hanting Area from Mr. Yang, along with wells, pipelines and other production equipment. The consideration for the assets amounted to $9,722,222. The property has approximately 210,000 metric tons of proven and probable bromine reserves and was producing approximately 4,700 metric tons per year.

On March 6, 2008, the Company terminated the Fixed Price Standby Equity Distribution Agreement.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

On February 20, 2007, we appointed the firm of Morison Cogen LLP ("New Auditor") as our independent auditor and dismissed the firm of Pender Newkirk & Company LLP ("Former Auditor"), which had served as our independent auditor until that date. The New Auditor had been the auditor of Upper Class Grouper and SCHC prior to its engagement by us. The Former Auditor was our auditor prior to the acquisition of our company by Upper Class Group and SCHC.

Our Board of Directors approved the decision to dismiss the Former Auditor and engage the New Auditor.

The reports of the Former Auditor on our financial statements for the fiscal years ended November 30, 2005 and November 30, 2006 did not contain an adverse opinion, a disclaimer of opinion or any qualifications or modifications related to uncertainty, limitation of audit scope or application of accounting principles, except that report of the Former Auditor on our financial statements for the fiscal year ended November 30, 2005 expressed "substantial doubt about our ability to continue as a going concern" and state that "The financial statements do not include any adjustments that might result from the outcome of this uncertainty". During the fiscal years ending November 30, 2005 and November 30, 2006 and the period from November 30, 2006 to February 20, 2007, the Company did not have any disagreements (within the meaning of Instruction 4 of Item 304 of Regulation S-K) with the Former Auditor as to any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure and there have been no reportable events (as defined in Item 304 of Regulation S-K).

We furnished the Former Auditor with a copy of the disclosures in our Form 8-K filed on February 20, 2007 reporting the change in accountants and the Former Auditor filed a letter dated February 16, 2007 addressed to the Securities and Exchange Commission stating that it agreed with the statements in our Form 8-K. A copy of that letter was filed as Exhibit 16.2 to our Form 8-K.

Item 9A. Controls and Procedures.

Our management is responsible for establishing and maintaining adequate internal controls over financial reporting. Such controls are intended to provide reasonable assurance regarding the reliability of our financial reports for external reporting purposes and for purposes of monitoring operations.

On December 12, 2006, we, then a public shell company, acquired Upper Class Group Limited and SCHC, then a privately held business in the PRC. At such time the management of SCHC assumed management control of our company. Further, as we had no operations prior to such acquisition, upon the acquisition of SCHC, its system of financial controls and procedures were adopted as those of our Company. Following the acquisition of SCHC, our management commenced a review of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934) as of the end of 2006. Based upon that evaluation, we began the process of upgrading our financial controls and procedures. During 2007 we made a number of acquisitions. None of the businesses or operations acquired had financial controls and procedures appropriate for a public company and we began the procedure of incorporating the assets or operations acquired into our financial systems.

Our management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2007. Based upon such assessment, management concluded that our operational procedures were adequate in the areas of inventory control, purchasing process and cash and bank account management processes. Nevertheless, during the course of such review our management found a number of areas where the procedures required by Section 404 had not been fully implemented due, in certain instances, to the operating procedures of SCHC and SCYI. Management believes that these discrepancies do not represent material deficiencies in our financial reporting systems. Nevertheless, management has recommended changes to be adopted in respect of each deficiency uncovered and intends to implement such changes. Management will continue to assess the adequacy of our financial reporting systems in light of the anticipated continued growth in our operations. We anticipate that if we grow significantly, we will have to continuously upgrade our systems to ensure the reliability of our financial statements.

Item 9B. Other Information.

Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant.

Our directors, executive officers and key employees are:

Name	Age	Title
Ming Yang	41	Chairman, Chief Executive Officer and Director
Min Li	30	Chief Financial Officer and Director
Naihui Miao	39	Secretary and Director
Richard Khaleel	57	Director
Biagio Vignolo	60	Director

Ming Yang has served as Chairman of Shouguang City Yuxin Chemical Company Limited since July 2000. Since May 2005, Mr. Yang has served as Chairman of Shouguang City Haoyuan Chemical Company Limited, Shouguang City He Mao Yuan Bromize Company Limited, and Shouguang City Qing River Real Estate Construction Company. He was nominated as director of Qinghe Oil Field Office in 1993, where he managed operations. In 1997 he was appointed chairman and general manager of Shouguang Qinghe Shiye LLC and during the next three years its profits doubled. He took the position of general manager of Shouguang City Yu Xin Chemical Industry Co., Ltd. in 2000. During his stay, he focused on quality management and technology progress, which led to a 100 percent success rate of all products. He also helped the company successfully pass the ISO certification and become a private high-tech enterprise. In 2005 he was appointed to the position of chairman, where he has helped the company to become a leading producer of bromine and crude salt in China. In 2006 he became the chairman of Gulf Resources, Inc. Mr. Yang has been the representative of Shandong Shouguang congress since 1995 and in 1998 he was awarded as Honorary Entrepreneur in Weifang City

Min Li was appointed a director on October 30, 2007. He has served as our Chief Financial Officer since December 2006 and as Chief Financial Officer for Shouguang City Haoyuan Chemical Company Limited. From 2004 to 2006, Mr. Li served as Manager of Financial and Asset Management Department for Shouguang City Yuxin Chemical Company Limited. From 2000 to 2004, Mr. Li served as Manager of the Accounting Department for the Yang Kou Branch of the China Construction Bank. From 1998 to 1999, he worked at China Construction Bank Shandong branch and in 2000 he worked at the Yangkou Office as the accounting manager. He has helped implement effective cost controls while efficiently increasing the use of capital.

Naihui Miao has served as Vice President of Shouguang City Haoyuan Chemical Company Limited since January 2006. Since January 2006, Mr. Miao has served as Director, Secretary and Vice President of Gulf Resources, Inc. and he is in charge of sales, human resource and business management.

From 2005 to 2006, Mr. Miao served as Vice President of Shouguang City Yuxin Chemical Company Limited as the deputy general manager. From 1991 to 2005, Mr. Miao served as a Manager and then Vice President of Shouguang City Commercial Trading Center Company Limited. He was the director of Shouguang Business Trade Center since 1986

Richard Khaleel, was appointed a director on October 24, 2007. From 2004 to 2007, Mr. Khaleel served as Executive Vice President and Chief Marketing Officer for the Bank of New York, a $30 billion leading global financial services company, where he helped create and implement programs that grew the institutional asset management business of that bank. From 1996 to 2003, Mr. Khaleel was Chief Creative Marketing Officer at Alliance Bernstein LP, where he led development and execution of marketing programs for its institutional and retail business. From 1994 to 1996, Mr. Khaleel was vice president of marketing for CNBC, where he was responsible for consumer marketing, strategic planning, positioning and promotions. Prior to 1996, Mr. Khaleel worked in senior marketing positions at various global advertising agencies. He received a degree in Political Science from Princeton University and an MBA in Finance from New York University.

Biagio Vignolo was appointed a director on November 6, 2007. Mr. Vignolo is a partner with Tatum, LLC, the largest executive services firm in the US, and has been with that company since 2005. He was the CFO for Sara Lee's $5 billion Hanes Brands, Inc. division where he where he built a separate financial team for the new public company as it separated from Sara Lee and also implemented Sarbanes-Oxley controls. From 2003 through 2005, Mr. Vignolo was Executive Vice President and Chief Financial Officer at Exide Technologies. From 1989 to 2001, Mr. Vignolo was Executive Vice President and CFO of Sun Chemical Corp. and was involved in over forty mergers and acquisitions. Mr. Vignolo received a B.S. degree in Accounting from Rider University.

Corporate Governance: Board Committees and Independent Directors

Our Board of Directors did not hold any meetings during 2007, though it did act by Unanimous Written Consent on seven occasions.

Our Board of Directors established an Audit Committee in October 2007. The members of the Audit Committee are Richard Khaleel and Biagio Vignolo The Audit Committee is responsible for reviewing the results and scope of the audit, and other services provided by our independent auditors, and reviewing and evaluating our system of internal controls. Mr. Vignolo is the Audit Committee Financial Expert. Our audit committee did not hold any meetings during 2007. Our Board of Directors has determined that Messrs. Khaleel and Vignolo are “independent directors” within the meaning of Rule 10A-3 under the Exchange Act, as determined based upon the criteria for “independence” set forth in the rules of The NASDAQ Stock Market, Inc.

We have not established a Compensation Committee or a Nominating Committee. Since our common stock is quoted on the OTC Bulletin Board, our Board has no plans or need to establish a compensation committee to determine guidelines for determining the compensation of its executive officers or directors, who currently serve without compensation. For similar reasons, it has not adopted a written policy for considering recommendations from stockholders for candidates to serve as directors or with respect to communications from stockholders.

Compensation of Directors

We have agreed to pay each of Richard Khaleel and Biagio Vignolo $32,500 per annum for serving as a director, plus additional fees for serving on committees of the Board. In addition, we have granted to each of Richard Khaleel and Biagio Vignolo options to purchase 50,000 shares of our common stock, at an exercise price of $2 and $2.05, the closing sale price of such stock on the dates of grants, and will grant each of them options to purchase an additional 50,000 shares in each of the next two years at an exercise price equal to the closing sale price of such stock on the date of grant. The granting of future options is contingent upon the individual’s continued service with our company.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and beneficial owners of more than 10% of our common stock to file with the SEC reports of their holdings of, and transactions in, our common stock. Based solely upon our review of copies of such reports and written representations from reporting persons that were provided to us, we believe that our officers, directors and 10% stockholders complied with these reporting requirements with respect to 2007.

Code of Ethics

We have not adopted a code of ethics to apply to our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions because, until recently, we have not been an operating company. We expect to prepare a Code of Ethics in the near future

Item 11. Executive Compensation.

The following table sets forth information with respect to the amounts awarded to, earned by, or paid to, our principal executive officer for services provided in all capacities to us and our subsidiaries for the fiscal year ended December 31, 2007, and the amounts awarded to, earned by, or paid to that individual for the fiscal year ended December 31, 2006. No other executive officer or former executive officer received more than $100,000 in compensation for the fiscal year ended December 31, 2007.

Summary Compensation Table

Name and principal position	Year	Salary ($)		Bonus ($)		Stock awards ($)		Option awards ($)			Non-equity incentive plan compensation ($)		Change in pension value and nonqualified deferred compensation earnings ($)		All other compensation ($)		Total ($)
(a)	(b)	(c)		(d)		(e)		(f)			(g)		(h)		(i)		(j)
Ming Yang Chairman, Chief Executive Officer and Director	2007	$	3,342		N/A		N/A		N/A			N/A		N/A		N/A	$	3,342 318,826
	2006	$	0		N/A		N/A		N/A			N/A		N/A		N/A	$	0
Min Li Chief Financial Officer and Director	2007	$	2,674		N/A		N/A		N/A			N/A		N/A		N/A	$	2,674
	2006	$	4487		N/A		N/A		N/A			N/A		N/A		N/A
Naihui Miao Secretary and Director	2007	$	3,342		N/A		N/A		N/A			N/A		N/A		N/A	$	3,342
	2006	$	4487		N/A		N/A		N/A			N/A		N/A		N/A	$	4,487
Richard Khaleel Director	2007		6115.58		N/A		N/A		50,000	($2)		N/A		N/A		N/A	$
	2006	$	0	$	0	$	0	$	0		$	0	$	0	$	0	$	0
Biagio Vignolo Director	2007		4695.27						50,000	($2.05)
	2006	$	0	$	0	$	0	$	0		$	0	$	0	$	0	$	0

(1) Mr. Yang became our chief executive officer on December 11, 2006.

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth information as of December 31, 2007, concerning outstanding equity awards granted to the individuals listed in the Summary Compensation Table. We did not grant options, or make stock awards, to any of our executive officers in 2007.

Outstanding Equity Awards at Fiscal Year-End

Option awards

Stock awards

Name

Number of securities underlying unexercised options

(#) exercisable

Number of securities underlying unexercised options

(#) unexercisable

Equity incentive plan awards: number of securities underlying unexercised unearned options

(#)

Option exercise price

($)

Option expiration date

Number of shares or units of stock that have not vested

(#)

Market value of shares or units of stock that have not vested

(#)

Equity incentive plan awards: number of unearned shares, units or other rights that have not vested

(#)

Equity incentive plan awards: market or payout value of unearned shares, units or other rights that have not vested

($)

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

Richard Khaleel Director

50,000

Biagio Vignolo Director

50,000

2.05

We have not granted any equity-based compensation, awards or stock options to our chief executive officer or any other executive officer.

We have not entered into an employment or consulting agreement with any of our executive officers or directors. Except as disclosed below under the caption “Compensation of Directors,” we have not paid or accrued any fees to any of our directors for serving as a member of our Board of Directors. We do not have any retirement, pension, profit sharing or stock option plans or insurance or medical reimbursement plans covering our officers and directors.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Furnish the information required by Item 201(d) of Regulation S-K (§ 229.201(d) of this chapter) and Item 403 of Regulation S-K (§ 229.403 of this chapter).

The following table sets forth certain information as of March 7, 2008 concerning the beneficial ownership of our common stock by (i) each person who, to our knowledge, beneficially owns more than 5% of our common stock; (ii) each of our directors and executive officers; and (iii) all of our directors and executive officers as a group. As of March 7, 2008, we had outstanding 98,849,252 shares of common stock. Under SEC rules, a person is deemed to be the beneficial owner of securities that he may acquire within 60 days upon the exercise of warrants or options, or conversion or exchange of other of our securities. The percent of common stock owned by each beneficial owner is determined assuming the acquisition by him (but not any other beneficial owner) of all shares he may acquire within 60 days upon exercise, conversion of exchange of all derivative securities. Except as otherwise indicated, the address for each beneficial owner is Chenming Industrial Park, Shouguang City, Shandong, China 262714.

Name and Address	Shares			Percent
Beneficial owners of more than 5%:
First Capital Limited		5,830,000			5.90	%
China US Bridge Capital Limited		5,300,000			5.37	%
Shenzhen Dingyi Investment Company Limited		5,035,000			5.10	%

Directors and Executive Officers:
Ming Yang		49,124,236	(1)		49.70	%
Min Li		0			--
Naihui Miao		0			--
Richard Khaleel		50,000	(2)		*
Biagio Vignolo		50,000	(3)		*
Huang Shixiang
All directors and executive officers as a group		49,174,236	(1) (5) (6)		49.72	%

_____

(1) Includes 25,926,106 shares owned by Ms. Wenxiang Yu, the wife of Mr. Yang, 6,699,200 shares owned by Mr. Zhi Yang, Mr. Yang’s son, and 16,498,930 shares owned by Shandong Haoyuan Industry Group Ltd. ("SHIG"), of which Mr. Yang is the controlling shareholder, chief executive officer and a director. Mr. Yang disclaims beneficial ownership of the shares owned by his wife and SHIG.

(2) Includes 50,000 shares issuable upon exercise of options held by Mr. Khaleel described above.

(3) Includes 50,000 shares issuable upon exercise of options held by Mr. Vignolo described above.

Item 13. Certain Relationships and Related Transactions.

Since December 2006, Mr. Ming Yang, a stockholder and Chairman of Shandong Haoyuan Industry Group Ltd. and chief executive officer of SYCI, has served as our chairman of the board and chief executive officer and has been a member of our board of directors, and Mr. Min Li, the chief financial officer of both Shandong Haoyuan Industry Group Ltd. and SYCI, also has served as our chief financial officer. As a result of the share exchange on December 11, 2006 in which we acquired Upper Class Group Limited and SCHC, each of Mr. Yang and Ms. Wenxiang Yu acquired 5,024,400 shares, or approximately 18.6% of our then outstanding shares, of common stock, and Mr. Yang became an officer and director of our company.

As a result of the merger on February 5, 2007, in which we acquired SYCI, Ms. Wenxiang Yu acquired an additional 7,938,653 shares of our common stock, giving her a total of 12,962,653 shares, or approximately 30% of our then outstanding shares, of common stock.

During the fiscal year ended December 31, 2005 our subsidiary SCHC advanced to Shanguang Hong Ye Economic Trading Co. Ltd. ("Hong Ye"), a company organized under the laws of China, of which Mr. Ming Yang, our Chairman and Chief Executive Officer, is the controlling stockholder and an executive officer and director, approximately $1,913,000, of which approximately $1,409,000 was repaid by Hong Ye, leaving a balance of $503,787 as of December 31, 2005. During the fiscal year ended December 31, 2006, SCHC advanced approximately $1,568,000 to Hong Ye, of which approximately $1,532,000 was repaid, leaving a balance of $540,081 as of December 31, 2006. On February 27, 2007, Hong Ye repaid the remaining balance on this loan in full. I think you needonly two years and can delete this paragraph

Item 14. Principal Accounting Fees and Services.

Our Board of Directors pre-approved the engagement of Morison Cogen LLP for all audit and permissible non-audit services. The Audit Committee annually reviews the audit and permissible non-audit services performed by our principal accounting firm and reviews and approves the fees charged by our principal accounting firm. The Audit Committee has considered the role of Morison Cogen LLP in providing tax and audit services and other permissible non-audit services to us and has concluded that the provision of such services, if any, was compatible with the maintenance of such firm's independence in the conduct of its auditing functions

During fiscal year 2006 and fiscal year 2007, the aggregate fees which we paid to or were billed by Morison Cogen LLP or Pender Newkirk & Company LLP for professional services, which only included audit fees, were as follows:

	Fiscal Year Ended December 31,
	2006		2007
Audit Fees (1)	$	112,000	$	90,000
Audit-Related Fees (2)	$	-0-	$	45,000
Tax Fees (3)	$	-0-	$	-0-
All Other Fees	$	-0-	$	-0-

(1) Fees for services to perform an audit or review in accordance with generally accepted auditing standards and services that generally only our independent registered public accounting firm can reasonably provide, such as the audit of our consolidated financial statements, the review of the financial statements included in our quarterly reports on Form 10-QSB, and for services that are normally provided by independent registered public accounting firms in connection with statutory and regulatory engagements.

(2) Fees, if any, for assurance and related services that are traditionally performed by our independent registered public accounting firm, such as audit attest services not required by statute or regulation, and consultation concerning financial accounting and reporting standards.

(3) Fees for tax compliance. Tax compliance generally involves preparation of original and amended tax returns, claims for refunds and tax payment planning services.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) List the following documents filed as a part of the report:

(1) All financial statements;

(2) Those financial statement schedules required to be filed by Item 8 of this form, and by paragraph (b) below.

(3) Those exhibits required by Item 601 of Regulation S-K (§ 229.601 of this chapter) and by paragraph (b) below. Identify in the list each management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 15(b) of this report.

(b) Registrants shall file, as exhibits to this form, the exhibits required by Item 601 of Regulation S-K (§ 229.601 of this chapter).

(c) Registrants shall file, as financial statement schedules to this form, the financial statements required by Regulation S-X (17 CFR 210) which are excluded from the annual report to shareholders by Rule 14a-3(b) including (1) separate financial statements of subsidiaries not consolidated and fifty percent or less owned persons; (2) separate financial statements of affiliates whose securities are pledged as collateral; and (3) schedules.

Exhibit Index

Exhibit No.

Description

2.1		Agreement and Plan of Merger dated December 10, 2006, among the Registrant, DFAX Acquisition vehicle, Inc., Upper Class Group Limited and the shareholders of UCG, incorporated herein by reference to Exhibit 10 to the Registrant's Current Report on Form 8-K filed on December 12, 2007.

2.2		Share Exchange Agreement among the Registrant, Upper Class Limited, Shougnag Yuxin Chemical Industry Company Limited and shareholders of Shougnag Yuxin Chemical Industry Company Limited, incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on February 9, 2007.

3.1		Restated Certificate of Incorporation, incorporated herein by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (No. 33-46580) declared effective on November 18, 1992.

3.2		Amendment to Restated Certificate of Incorporation., increasing the authorized capital stock, incorporated herein by reference to Exhibit A to the Registrant's definitive Schedule 14A filed on October_, 1995.

3.3		Amendment to Restated Certificate of Incorporation., increasing the authorized capital stock, incorporated herein by reference to Exhibit B to the Registrant's definitive Schedule 14A filed on August 12, 1997.

3.4		Amendment to Restated Certificate of Incorporation., increasing the authorized capital stock, incorporated herein by reference to Exhibit A to the Registrant's definitive Schedule 14A filed on October 16, 1998.

3.5		Amendment to Restated Certificate of Incorporation, filed with the Secretary of the State of Delaware on October 16, 2006, effecting a reverse stock split.

3.6		Amendment to Restated Certificate of Incorporation, changing the name of the Registrant to Gulf Resources, Inc., incorporated herein by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed on February 20, 2007.

3.7		Amendment to Restated Certificate of Incorporation, increasing the authorized capital stock of the Registrant and effecting a 2-for-1 forward stock split, incorporated herein by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed on December 4, 2007.

3.8		By-laws, incorporated herein by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (No. 33-46580) declared effective on November 18, 1992.

4.1		Certificate of Designation, Powers, Preferences and Rights of Series D Convertible Preferred Stock incorporated herein by reference to Exhibit 3 (c) to the Registrant's Registration Statement on Form SB-2 (No. 33-30021) filed on June 25, 1997.

4.2		Non-interest bearing promissory note dated April 7, 2007 in the aggregate principal amount of $3,051,282 issued to Wenbo Yu incorporated herein by reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K filed on April 10, 2007.

10.01		Stock Purchase Agreement, dated as of August 25, 2006, by and between Juxiang Yu and Irwin Horowitz, incorporated herein by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed on August 31, 2006.

10.02		Fixed Price Standby Equity Distribution Agreement dated May 7, 2006, incorporated herein by reference to Exhibit 99.1 of the Registrant's Current Report on Form 8-K filed on May 10, 2007.

10.3		Asset Purchase Agreement between Shougang City Haoyuan Chemical Company Limited and Dong Hua Yang dated June 8, 2007, incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on June 11, 2007.

10.4		Escrow Agreement, dated as of August 25, 2007, by and among the Registrant, the selling shareholders named in the registration statement and Eaton & Van Winkle LLP, as escrow agent.*

10.5		Asset Purchase Agreement between the Registrant and Shougang City Haoyuan Chemical Company Limited and Wenbo Yu dated April 4, 2007, incorporated herein by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed on April 10, 2007.

10.6		Asset Purchase Agreement between Shougang City Haoyuan Chemical Company Limited and Jianci Wang dated as of October 25, 2007, incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on October 31, 2007.

10.7		Asset Purchase Agreement between Shougang City Haoyuan Chemical Company Limited and Xingji Liu dated October 26 2007, incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on October 31, 2007.

21.1		List of Subsidiaries

Delaware	13-3637458
State or other jurisdiction of incorporation or organization	(I.R.S. Employer Identification No.)

Number	Customer	Revenue (000’s)		Percentage of Segment’s Revenue (%)
1	Shouguang Weidong Chemical Co., Ltd.	$	7,139	21%
2	Shandong Ruitai Chemicals Co., LTD.	$	6,761	20%
3	Weifang Luguang Chemical Co., Ltd.	$	5,110	15%
TOTAL		$	19,010	56%

Number	Customer	Revenue (000’s)		Percentage of Segment’s Revenue (%)
1	Talimu Oil Company -1st, 2nd, and 3rd exploiture dept. Ltd. (1)	$	10,244	51%
2	Sinopec Shengli -field Ltd's Qinghe factory	$	3,241	16%
3	Wuhan City Chenming Hanyang Papermaking Ltd	$	2,316	11%
TOTAL		$	15,801	78%

	·	deferral of recognition of our revenue in accordance with applicable accounting principles due to the time required to complete projects; and
	·	costs related to possible acquisitions of technology or businesses.

	High		Low
2007

First Quarter	$	2.00	$	0.725
Second Quarter	$	2.975	$	0.925
Third Quarter	$	1.475	$	0.90
Fourth Quarter	$	3.00	$	1.45

2006

First Quarter	$	0.50	$	0.25
Second Quarter	$	0.75	$	0.50
Third Quarter	$	2.75	$	0.65
Fourth Quarter	$	0.75	$	0.55

Title of each class	Name of each exchange on which registered
None


(1)	Represents sales to three autonomous entities within a single corporate group.

	Location	Acreage	Approximate proven/probable reserve (tons)	Actual Annual Production Capacity (tons)
SCHC Assets	Shouguang City Yangjiahuan Area Shandong Province P.R.C.	10,131	776,000	11,500
Qinshuibo Assets	Shouguang City Qinshuibo Area Shandong Province P.R.C.	1,846	230,000	4,500
Liu Hu Assets	Dong Ying City Liu Hu Area Shandong Province P.R.C.	2,318	280,000	3,700
Renja Assets	Shouguang City Renja Area Shandong Province P.R.C.	2,165	225,000	3,700
Houxing Assets	Shouguang City Houxing Area Shandong Province P.R.C.	2,310	240,000	3,900
Hanting Assets	Shouguang City Hanting Area Shandong Province P.R.C.	2,641	210,000	4,700

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)	(c)
Equity compensation plans approved by security holders	100,000	$2.025	0
Equity compensation plans not approved by security holders	none	n/a	0
Total	100,000	$2.025	0

	For the year ended	For the year ended	Percentage
	December 31, 2007	December 31, 2006	Change

Net Revenue	$54,248,650	$31,736,216	+70.9%

Cost of Net Revenue	$32,108,180	$20,503,829	+56.6%

Gross Profit	$22,140,470	$11,232,387	+97.1%

Research and Development costs	$268,168	----------	-------

General and Administrative expenses	$1,847,374	$5,789,166	(68.1%)

Income from operations	$20,024,928	$5,443,221	+267.9%

Other Income (expenses), net	$6,717	$252,483	(97.3%)

Income before taxes	$20,031,645	$5,695,704	+251.7%

Income Taxes	$7,798,682	$1,884,244	+313.9%

Net Income	$12,232,963	$3,811,460	+221.0%

	Net Revenue by Segment
	Year Ended			Year Ended
	December 31, 2007			December 31, 2006
Segment			Percent of total			Percent of total
Bromine and Crude salt	$	34,015,484	63%	$	17,825,097	56%
Chemical Products	$	20,233,166	37%	$	13,911,119	44%
Total sales	$	54,248,650	100%	$	31,736,216	100%

	Year Ended December 31
	2007 vs. 2006
Segment	Percent Increase of Net Sales
Bromine and Crude salt	90.8%
Chemical Products	45.4%

Shouguang City Haoyuan Chemical Company Limited ("SCHC")	Year Ended December 31
Product sold in metric tons	2007	2006	Percentage Change
Bromine	17,648	10,035	+75. 9%

Crude Salt	51,000	No Production

	Year of Maturity
	2008	2009

Bank Borrowing	$3,770,250	0

Average Interest Rate	6.5%

Note payable including Current portion	$5,484,000	$6,169,500

Average Interest Rate	3.33%	n/a

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

						PAGE

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM						1

CONSOLIDATED BALANCE SHEETS						2

CONSOLIDATED STATEMENTS OF OPERATIONS						3

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME						4

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY						5

CONSOLIDATED STATEMENTS OF CASH FLOWS						6 - 7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS						8 - 21

								Statutory			Statutory
					Additional			Common			Public						Cumulative
	Number		Common		Paid-in			Reserve			Welfare			Retained			Translation
	of Shares		Stock		Capital			Fund			Fund			Earnings			Adjustment		Total

BALANCE AT DECEMBER 31, 2005		85,376,236	$	42,688	$	1,733,304		$	696,719		$	348,359		$	5,918,390		$	140,485	$	8,879,945

Issue of share capital at merger		1,034,644		517		(517	)		-			-			-			-		-

Capital Contribution		-		-		936,030			-			-			-			-		936,030

Net income for year		-		-		-			-			-			3,811,460			-		3,811,460

Dividend distribution		-		-		-			-			-			(5,622,880	)		-		(5,622,880	)

Transfer to reserve funds		-		-		-			381,145			190,573			(571,718	)		-		-

Cumulative translation adjustment		-		-		-			-			-			-			227,906		227,906

BALANCE AT DECEMBER 31, 2006		86,410,880	$	43,205	$	2,668,817		$	1,077,864		$	538,932		$	3,535,252		$	368,391	$	8,232,461

Common stock issues as payment for accrued expenses		9,979,800		4,990		5,339,405			-			-			-			-		5,344,395

Common stock issuance for prepaid expenses		900,000		450		892,050			-			-			-			-		892,500

Common stock issuance for acquiring assets		1,558,572		779		1,986,400			-			-			-			-		1,987,179

Common stock issuance for acquiring assets		819,590		410		940,890			-			-			-			-		941,300

Issuance of stock options		-		-		97,054			-			-			-			-		97,054

Transfer from Statutory Public Welfare Fund		-		-		-			538,932			(538,932	)		-			-		-

Transfer from Statutory Common Reserve Fund		-		-		-			(294,903	)		-			294,903			-		-

Cumulative translation adjustment		-		-		-			-			-			-			1,480,056		1,480,056

Dividend distribution		-		-		-			-			-			(4,739,600	)		-		(4,739,600	)

Net income for year ended December 31, 2007		-		-		-			-			-			12,232,963			-		12,232,963

BALANCE AT DECEMBER 31, 2007		99,668,842	$	49,834	$	11,924,616		$	1,321,893		$	-		$	11,323,518		$	1,848,447	$	26,468,308

	GULF RESOURCES, INC.

Dated: March 11, 2008	By:	/s/ Ming Yang
		Ming Yang
		Chairman and Chief Executive Officer
		(principal executive officer)


	By:	/s/ Min Li
		Min Li
		Chief Financial Officer
		(principal financial and accounting officer)

Signature		Title


/s/ Ming Yang		Chairman, Chief Executive Officer and a Director (principal executive officer)
Ming Yang


/s/ Min Li		Chief Financial Officer (principal financial and accounting officer) and a Director
Min Li


/s/ Naihui Miao		Director
Naihui Miao


/s/ Richard Khaleel		Director
Richard Khaleel


/s/ Biagio Vignolo		Director
Biagio Vignolo