GULF RESOURCES, INC. - Quarter Report: 2009 June (Form 10-Q)

Unassociated Document

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 1934

	For the quarterly period ended June 30, 2009

	Or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from _________ to _________

Commission File Number: 000-20936

GULF RESOURCES, INC.

(Exact name of 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 x No 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 x
Non-accelerated filer (Do not check if a smaller reporting company) o	Smaller reporting company o

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

Yes o No 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 Information
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3. Quantitative and Qualitative Disclosures about Market Risk	32
Item 4. Controls and Procedures	32
Part II – Other Information
Item 1. Legal Proceedings.	33
Item 1A. Risk Factors.	33
Item 2. Unregistered shares of Equity Securities and Use of Proceeds.	33
Item 3. Defaults Upon Senior Securities.	33
Item 4. Submission of Matters to a Vote of Security Holders.	33
Item 5. Other Information.	33
Item 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.

PART I—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)
ASSETS

CURRENT ASSETS
Cash	$	37,957,195	$	30,878,044
Accounts receivable, net of allowance		12,072,883		11,674,645
Inventories		329,800		418,259
Prepayment and deposit		639,994		229,408
Prepaid land lease		15,828		15,849
Deferred tax asset		3,449		3,453
Other receivable		2,285		2,641
		51,021,434		43,222,299

PROPERTY, PLANT AND EQUIPMENT, Net		61,881,863		45,399,456

PREPAID LAND LEASE, Net of current portion		728,791		737,711

TOTAL ASSETS	$	113,632,088	$	89,359,466

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable and accrued expenses	$	5,163,201	$	4,746,993
Loan Payable		4,028,750		4,034,250
Note and loan payable – related parties		1,650,000		4,650,000
Due to related party		7,667,138		852,068
Taxes payable		4,960,474		4,269,442
TOTAL CURRENT LIABILITIES		23,469,563		18,552,753

NON CURRENT LIABILITIES
Note payable, net of current portion		-		18,337,493

TOTAL LIABILITIES		23,469,563		36,890,246

STOCKHOLDERS' EQUITY

PREFERED STOCK ; $0.001 par value; 1,000,000 shares authorized none outstanding		-		-
COMMON STOCK; $0.0005 par value; 400,000,000 shares authorized; 122,168,842 and 99,668,842 shares issues and Outstanding in 2009 and 2008		61,084		49,834

ADDITIONAL PAID-IN CAPITAL		35,268,268		13,035,293

RETAINED EARNINGS – UNAPPROPRIATED		47,322,183		31,817,465

RETAINED EARNINGS – APPROPRIATED		3,223,418		3,223,418

CUMULATIVE TRANSLATION ADJUSTMENT		4,287,572		4,343,210

TOTAL STOCKHOLDERS' EQUITY		90,162,525		52,469,220

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	113,632,088	$	89,359,466

See accompanying notes to condensed consolidated financial statements.

GULF RESOURCES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008

NET REVENUE
Net sales	$	29,590,897	$	23,766,179	$	53,224,436	$	45,799,736

OPERATING EXPENSES
Cost of net revenue		16,445,804		14,062,903		29,986,744		26,662,623
Research and development cost		125,095		135,275		250,065		267,109
General and administrative expenses		996,441		1,009,088		2,095,821		1,863,630
		17,567,340		15,207,266		32,332,630		28,793,362

INCOME FROM OPERATIONS		12,023,557		8,558,913		20,891,806		17,006,374

OTHER INCOME (EXPENSES)
Interest expense		(33)		-		(27,043)		(60,111)
Interest income		23,762		18,581		45,792		44,257
Sundry income (expense)		-		14,195		-		(4,543)

INCOME BEFORE INCOME TAXES		12,047,286		8,591,689		20,910,555		16,985,977

INCOME TAXES - current		3,075,682		2,305,780		5,405,837		4,552,477

NET INCOME	$	8,971,604	$	6,285,909	$	15,504,718	$	12,433,500

EARNINGS PER SHARE:
BASIC	$	0.07	$	0.06	$	0.13	$	0.12
DILUTED	$	0.07	$	0.06	$	0.13	$	0.12

WEIGHTED AVERAGE NUMBER OF SHARES:

BASIC		122,168,842		99,668,842		119,442,323		99,668,842
DILUTED		122,168,842		99,668,842		119,442,323		99,676,655

See accompanying notes to condensed consolidated financial statements.

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		2008
NET INCOME	$	8,971,604	$	6,285,909	$	15,504,718	$	12,433,500
OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustment		(6,200)		852,164		(55,638)		2,112,392

COMPREHENSIVE INCOME	$	8,965,404	$	7,138,073	$	15,449,080	$	14,545,892

See accompanying notes to condensed consolidated financial statements.

GULF RESOURCES, INC

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2009

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

BALANCE AT DECEMBER 31, 2008		99,668,842	$	49,834	$	13,035,293	$	3,223,418	$	31,817,465	$	4,343,210	$	52,469,220
Cumulative translation adjustment		-		-		-		-		-		(55,638)		(55,638)
Common stock issuance for settlement of shareholder’s note payable		21,000,000		10,500		21,276,993		-		-		-		21,287,493
Common stock issuance for acquiring assets		1,500,000		750		614,250		-		-		-		615,000
Issuance of warrants for consulting expenses		-		-		32,232		-		-		-		32,232
Issuance of stock options		-		-		309,500		-		-		-		309,500
Net income for six months ended June 30, 2009		-		-		-		-		15,504,718		-		15,504,718

BALANCE AT June 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.

GULF RESOURCES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended June 30,
	2009			2008

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	15,504,718		$	12,433,500
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of warrants issued for expenses		309,500			369,381
Amortization of prepaid expenses by shares issued for consulting fee		32,232			145,484
Depreciation of fixed assets		3,026,880			2,136,053
Amortization of prepaid expenses		7,983		-
Bad debt provision		61,455		-
(Increase) decrease in assets
Accounts receivable		(475,162	)		(8,151,159	)
Inventories		88,034			(1,424,086	)
Prepayment and deposit		(410,997	)		(365,382	)
Increase (decrease) in liabilities
Accounts payable and accrued expenses		419,562			1,968,076
Taxes payable		691,379			2,218,473

Net cash provided by operating activities		19,255,584			9,330,340

CASH FLOWS USED IN INVESTING ACTIVITIES
Restricted 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 ACTIVITIES
Proceeds from loan payable	-				5,590,800
Advances from related party	6,829,785				2,998,281
Repayment on bank loan	-				(3,843,675	)

Net cash provided by financing activities		6,829,785			6,745,406

EFFECTS OF EXCHANGE RATE CHANGE ON CASH		(43,992	)		459,343

NET INCREASE IN CASH		7,079,151			(4,388,962	)

CASH - BEGINNING OF PERIOD		30,878,044			10,773,875

CASH - END OF PERIOD	$	37,957,195		$	6,384,913

See accompanying notes to condensed consolidated financial statements.

GULF RESOURCES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

	Six Months Ended June 30,
	2009		2008

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes	$	4,615,907	$	3,101,479

Interest paid	$	27,009	$	101,144

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES

Forgiveness of accrued interest to Additional Paid In Capital	$	-	$	131,533
Issuance 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.

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.

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 rate
The balance of accounts receivable	<120 days	0.5%
The balance of accounts receivable	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.

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 shorter
Buildings	20
Machinery	8
Motor vehicles	5
Equipment	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.

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.

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.

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.

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.

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 the Shouguang 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		$	202,435
Finished Goods		131,226			229,638
Allowance for obsolete and slow moving inventory		(13,795	)		(13,814	)
	$	329,800		$	418,259

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		5,840,594
Buildings		9,649,618		6,410,813
Plant and machinery		50,086,343		37,619,002
Motor vehicles		57,868		57,947
Furniture, fixtures and office equipment		2,857,856		2,353,789
Construction in progress		3,296,250		-
Total		71,780,566		52,282,144
Less: accumulated depreciation and amortization		9,898,703		6,882,688
Net 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.

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)	$	-		$	18,337,493

Note 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)		-			3,000,000

Loan from a stockholder First Capital Limited is unsecured, non-interest bearing with no fixed term of repayment.		1,650,000		1,650,000
Total loans		1,650,000			22,987,493
Less: current portion		(1,650,000	)		(4,650,000	)
Long-term loans, less current portion	$	-		$	18,337,493

Future maturities of notes payable-related parties are as follows:

2009	$	-		$	-
2010		-			-
2011		-		18,337,493
Total	$	-		$	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

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	$	-	$	852,068
Due 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	$	2,329,227
Mineral resource compensation fee payable		369,506		291,861
Value added tax payable and others		1,477,925		1,648,354
Total	$	4,960,474	$	4,269,442

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.

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 Share
Balance, December 31, 2008		1,300,000		449,999		$0.21 - $2.45
Granted or vested during six months ended June 30, 2009		750,000		833,333		$1.20 -$ 1.20
Expired during six months ended June 30, 2009		-		-		-
Forfeited during six months ended June 30, 2009		(1,000,000)		(333,332)		2.45
Balance, June 30, 2009		1,050,000		950,000		$0.21 - $2.05

Stock and Warrants Options Outstanding

	Number Outstanding	Weighted Average	Weighted Average
Range of	Currently Exercisable	Remaining	Exercise Price of Options
Exercise Prices	at June 30, 2009	Contractual Life (Years)	Currently Exercisable

$0.21-$2.05	950,000	7.32	$ 1.19

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.

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009

(UNAUDITED)

Three Months Ended
June 30, 2009 (unaudited)	Bromine and Crude Salt		Chemical Products		Segment Total		Corporate			Consolidated Total

Net sales	$	20,529,449	$	9,061,448	$	29,590,897	$	-		$	29,590,897
Income (loss) from operations		9,199,179		3,072,202		12,271,381		(247,824	)		12,023,557
Total assets		87,743,342		25,773,119		113,516,461		115,627			113,632,088

Depreciation and amortization		1,333,847		221,830		1,555,677		-			1,555,677
Capital expenditures		5,638,785		3,299,175		8,937,960		-			8,937,960

Three Months Ended
June 30, 2008 (unaudited)	Bromine and Crude Salt		Chemical Products		Segment Total		Corporate			Consolidated Total

Net sales	$	18,008,559	$	5,757,620	$	23,766,179	$	-		$	23,766,179
Income (loss) from operations		7,156,765		2,034,415		9,191,180		(632,267	)		8,558,913
Total assets		60,450,820		12,993,781		73,444,601		191,571			73,636,172

Depreciation and amortization		1,037,986		112,576		1,150,562		-			1,150,562
Capital expenditures		127,792		6,835,909		6,963,701		-			6,963,701

Six Months Ended
June 30, 2009 (unaudited)	Bromine and Crude Salt		Chemical Products		Segment Total		Corporate			Consolidated Total

Net sales	$	36,059,724	$	17,164,712	$	53,224,436	$	-		$	53,224,436
Income (loss) from operations		15,740,780		5,826,524		21,567,304		(675,498	)		20,891,806
Total assets		87,743,342		25,773,119		113,516,461		115,627			113,632,088

Depreciation and amortization		2,582,859		441,021		3,026,880		-			3,026,880
Capital expenditures		15,663,051		3,299,175		18,962,226		-			18,962,226

Six Months Ended
June 30, 2008 (unaudited)	Bromine and Crude Salt		Chemical Products		Segment Total		Corporate			Consolidated Total

Net sales	$	34,520,664	$	11,279,072	$	45,799,736	$	-		$	45,799,736
Income (loss) from operations		14,341,085		3,873,541		18,214,626		(1,208,252	)		17,006,374
Total assets		60,450,820		12,993,781		73,444,601		191,571			73,636,172

Depreciation and amortization		1,975,189		160,864		2,136,053		-			2,136,053
Capital expenditures		10,009,309		6,835,909		16,845,218		-			16,845,218

	Three Months Ended						Six Months Ended
	June 30,						June 30,
Reconciliations	2009			2008			2009			2008

Total segment operating income	$	12,271,381		$	9,191,180		$	21,567,304		$	18,214,626
Corporate 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

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	$	-	$	131,533
Note and loan payable – First Capital Limited (Note 7)	$	1,650,000		1,650,000
Shenzhen Huayin Guaranty and Investment Company Limited (Note 7)	$	-	$	21,337,493
Due to related party:
Jiaxing Lighting (Note 8)	$	-	$	852,068
Haoyuan Group (Note 8)	$	7,667,138	$	-

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

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.

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 Change
	June 30, 2009		June 30, 2008		Percentage Change
Net 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 Change
	June 30, 2009		June 30, 2008		Percentage Change
Net 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%

Net revenue Net 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 Segment
	Three Months Ended				Three Months Ended
	June 30, 2009				June 30, 2008
Segments			Percent of total				Percent of total
Bromine 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 30
	2009 vs. 2008
Segments	Percent Increase of Net Sales
Bromine and Crude salt	14%
Chemical Products	57%

	Net Revenue by Segment
	Six months ended				Six months ended
	June 30, 2009				June 30, 2008
Segments			Percent of total				Percent of total
Bromine 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 30
	2009 vs. 2008
Segments	Percent Increase of Net Sales
Bromine 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 Change
Bromine		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 Change
Bromine		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.

Cost of net revenue and gross profit Cost 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 30
	2009		% of Net revenue			2008		% of Net revenue
Cost 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 30
	2009		% of Net revenue			2008		% of Net revenue
Cost 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 costs The 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 expenses General 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 Segment
	Three months ended					Three months ended
	June 30, 2009					June 30, 2008
Segment				Percent of total					Percent of total
Bromine 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 Segment
	Six months ended					Six months ended
	June 30, 2009					June 30, 2008
Segment				Percent of total					Percent of total
Bromine 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.

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 Income Net 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 30
	2009		2008
Net cash provided by operating activities	$	19,255,584	$	9,330,340
Net cash used in investing activities	$	(18,962,226)	$	(20,924,051)
Net cash provided by financing activities	$	6,829,785	$	6,745,406
Net 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.

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

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

Mineral rights are stated at cost, less accumulated amortization. Mineral rights are amortized ratably over the 50 year term of the lease, or the equivalent term under the units of production method, whichever is shorter.

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

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

Asset Retirement Obligation

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

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

Shipping and Handling Fees and Costs

Basic and Diluted Net Income per Share of Common Stock

Item 3. 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.

Item 4. 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.

PART II—OTHER INFORMATION.

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

Investing in our common stock involves a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described in our Annual Report on Form 10-K for the fiscal year ended December 31,2008 (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.

Item 2. 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.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit No.	Description

31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

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 Liu
		Xiao bin Liu
		Chief Executive Officer
		(principal executive officer)

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