UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





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




For the
fiscal year ended December 31, 2008





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: 0-9879





Fuda
      Faucet Works, Inc.(Exact
      name of registrant as specified in its charter)Delaware
            
            
            
            13-2648442(State
      or other jurisdiction of
              incorporation
      or organization)
            
            
            
            (I.R.S.
      Employer
              Identification
      Number)Ge
      Jia Ba, Hua Ting, Yiyang
              Jiangxi,
      PRC 334400
              Telephone:
      86 793-5887178(Address
      and telephone number of principal executive offices)Securities
      registered pursuant to Section 12(b) of the Act: NoneSecurities
      registered pursuant to section 12 (g) of the Act:  Common Stock,
      par value $0.001 per share




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. □Yes  QNo


Indicate
by check mark if the registrant is not required to file reports pursuant Section
13 or 15(d) of the Exchange Act from their obligations under those Sections.
□Yes  QNo





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. QYes  □No





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.□





Indicate
by check mark whether the registrant is a large accelerated filer, and
accelerated filer, a non-accelerated filer, or a small 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
                 ̈
                Accelerated
      filer
                 ̈Non-accelerated
      filer
                 ̈
                Smaller
      reporting company
                x(Do
      not check if a smaller reporting company)




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





The
aggregate market value of voting and nonvoting common stock held by
non-affiliates of the registrant, based upon the closing bid quotation for the
registrant’s common stock, as reported on the OTC Bulletin Board quotation
service, as of June 30, 2008 was approximately $886,000.





The
number of shares of registrant’s common stock outstanding as of March 23, 2009
was 10,765,966.












TABLE
OF CONTENTS






FORWARD
      LOOKING STATEMENTS
                1PART
      I
                2ITEM
      1.
                BUSINESS.
                2ITEM
      1A.
                RISK
      FACTORS.
                9ITEM
      2.
                PROPERTY.
                14ITEM
      3.
                LEGAL
      PROCEEDINGS.
                15ITEM
      4.
                SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS.
                15PART
      II
                15ITEM
      5.
                MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITY.
                15ITEM
      7.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.
                16ITEM
      8.
                FINANCIAL
      STATEMENTS.
                22ITEM
      9.
                CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                22ITEM
      9A(T).
                CONTROLS
      AND PROCEDURES.
                22PART
      III
                23ITEM
      10.
                DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
                23ITEM
      11.
                EXECUTIVE
      COMPENSATION.
                26ITEM
      12.
                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.
                26ITEM
      13.
                CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.
                27ITEM
      14.
                PRINCIPAL
      ACCOUNTING FEES AND SERVICES.
                28PART
      IV
                29ITEM
      15.
                EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES.
                29SIGNATURES
                
                31













i









FORWARD
LOOKING STATEMENTS







This
Annual Report on Form 10-K contains forward-looking statements regarding our
business, financial condition, results of operations and prospects. Words such
as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,”
“estimates” and similar expressions or variations of such words are intended to
identify forward-looking statements, but are not deemed to represent an
all-inclusive means of identifying forward-looking statements as denoted in this
Annual Report on Form 10-K. Additionally, statements concerning future matters
are forward-looking statements.





Although
forward-looking statements in this Annual Report on Form 10-K reflect the good
faith judgment of our management, such statements can only be based on facts and
factors currently known by us. Consequently, forward-looking statements are
inherently subject to risks and uncertainties and actual results and outcomes
may differ materially from the results and outcomes discussed in or anticipated
by the forward-looking statements. Factors that could cause or contribute to
such differences in results and outcomes include, without limitation, those
specifically addressed under the headings “Risks Factors” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” You
are urged not to place undue reliance on these forward-looking statements, which
speak only as of the date of this Annual Report on Form 10-K. We file reports
with the SEC. The SEC maintains a website (www.sec.gov) that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC, including us. You can also read and copy any
materials we file with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Washington, DC 20549. You can obtain additional information about
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.





We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
Annual Report on Form 10-K, except as required by law. Readers are urged to
carefully review and consider the various disclosures made throughout the
entirety of this Annual Report, which are designed to advise interested parties
of the risks and factors that may affect our business, financial condition,
results of operations and prospects.









-1-









PART
I




ITEM
      1.
            BUSINESS.




The
Company




References
in this annual report to “we,” “us,” or “Fuda” refer to Fuda Faucet Works, Inc.,
its wholly-owned subsidiaries and Jiangxi Yiyang Fuda Copper Co., Ltd. (“Fuda
Yiyang”), a variable interest entity under the contractual arrangements with us
whose financial statements are consolidated with ours, unless the context
specifically states or implies otherwise.





We
develop, manufacture, distribute and market a wide range of brass faucets and
related spouts and fittings. We produce all of our products in China and export
most of our products in international markets, primarily in the Middle East,
Europe, and Africa. We sell our products to distributors rather than to end
users.





We began
our business by focusing on copper re-processing in 1995. In 2002, we began to
produce and sell brass faucets, spouts and fittings to the Chinese local market,
and in 2004, we began to sell our European style products
internationally.




About Us




We are a
Delaware corporation, incorporated in 1969 under the name Magnum Communications
Corp. We subsequently changed our name to Vacation Ownership Marketing,
Inc. As of May 10, 2004, we changed our corporate name to Capital Solutions I,
Inc. On January 3, 2008, we changed our corporate name to Fuda Faucet Works,
Inc.





Our
executive office is located at Ge Jia Ba, Hua Ting, Yiyang, Jiangxi, PRC
334400.  Our telephone number is 86 793-5887178.  Our
website is www.jxfuda.com.  Information on our website and any other
website is not a part of this annual report.




Stock
Distribution




On
January 3, 2008, we effected a 3.2-for-one stock distribution of our common
stock pursuant to which each share of common stock was converted into 3.2 shares
of common stock.  All references to shares and per share information
in this annual report give effect to the stock distribution.




Currency
References




Our
business is conducted in China, using RMB, the currency of China, and our
financial statements are presented in United States dollars.   In this
annual report, we refer to assets, obligations, commitments and liabilities in
our financial statements in United States dollars.   These dollar
references are based on the exchange rate of RMB to United States dollars,
determined as of a specific date.   Changes in the exchange rate will
affect the amount of our obligations and the value of our assets in terms of
United States dollars which may result in an increase or decrease in the amount
of our obligations (expressed in dollars) and the value of our assets, including
accounts receivable (expressed in dollars).




Reverse
Acquisition




On
December 3, 2007, we (then known as Capital Solutions I, Inc.) consummated a
share exchange agreement with Jibrin Issa Jibrin Al Jibrin, trustee (the
“Trustee”) of the Wu Yiting Stock Trust (the “Trust”), which was the sole
stockholder of Moral Star Development Limited, a British Virgin Islands company
(“Moral Star BVI”).  As a result of the share exchange the trust
became our controlling stockholder, Moral Star BVI became our wholly-owned
subsidiary, and the business of Moral Star BVI and its affiliated companies
became our business.  The sole beneficiary of the Trust is Wu Yiting,
who, as a result of the exchange, became our chief executive
officer.





The share
exchange is treated as a reverse acquisition.  For accounting
purposes, Moral Star BVI is treated as the acquiring company and our financial
statements for periods prior to the transaction reflect the historical
operations of Moral Star BVI and its affiliated companies.






-2-









Contractual
Arrangements




Moral
Star BVI owns 100% of the stock of Jiangxi Moral Star Copper Technology Co.,
Ltd. (“Moral Star China”), which is a wholly foreign-owned enterprise under the
laws of the PRC.  Moral Star China is a party to a series of
contractual arrangements with Fuda Yiyang, a limited liability company
headquartered in, and organized under the laws of, the PRC.





Fuda
Yiyang was incorporated as a limited liability company under the laws of the PRC
on November 20, 1995, and Wu Yiting, our chief executive officer and chairman of
the board of directors, is the sole owner of Fuda Yiyang.  PRC law
currently has limits on foreign ownership of certain companies.  To
comply with these foreign ownership restrictions, we operate our businesses in
China through Fuda Yiyang.  Fuda Yiyang has the licenses and approvals
necessary to operate its business in China.  We have a series of
contractual arrangements with Fuda Yiyang and its sole owner pursuant to which
we own and operate the business of Fuda Yiyang.  Through these
contractual arrangements, we also have the ability to substantially influence
Fuda Yiyang’s daily operations and financial affairs, appoint its senior
executives and approve all matters requiring stockholder approval.  As
a result of these contractual arrangements, which enable us to control Fuda
Yiyang, we are considered the primary beneficiary of Fuda
Yiyang.  Accordingly, we consolidate the results, assets and
liabilities of Fuda Yiyang in our financial statements, and the business
described in this annual report is the business that was conducted by Fuda
Yiyang prior to the share exchange transaction.





Our
relationships with Fuda Yiyang and its sole owner are governed by a series of
contractual arrangements between Moral Star China and Fuda
Yiyang.  Under PRC laws, each of Moral Star China and Fuda Yiyang is
an independent legal person and none of them is exposed to liabilities incurred
by the other parties.  On December 3, 2007, we entered into the
following contractual arrangements with Fuda Yiyang or its owner.





(i)  Management
Agreement.Pursuant to the management agreement, Moral Star China manages
and operates Fuda Yiyang’s business.  In implementing this agreement,
Moral Star China manages the operations of Fuda Yiyang, including, but not
limited to, nominating and replacing members of Fuda Yiyang’s board, determining
compensation and controlling management and day-to-day operation.  All
revenue (total profit (if any) after deduction of necessary expenses) generated
by Fuda Yiyang shall be paid to Moral Star China and Moral Star China is
responsible for paying Fuda Yiyang’s obligations incurred in connection with its
business.  In addition, Moral Star China manages and controls all of
Fuda Yiyang’s funds.





(ii)  Related
Transactions Agreement.Under the related transactions agreement among
Fuda Yiyang, Moral Star China, and Yiyang Kunpeng Worn Metal Recycling Co., Ltd.
(“Kunpeng”), a company also owned by Wu Yiting, Kunpeng agreed to supply Fuda
Yiyang and Moral Star China on an exclusive basis with recycled copper at its
original cost, which will be not greater than the local market
price.  When the price of worn copper fluctuates in the local market
by 20%, Kunpeng must notify Fuda Yiyang and Moral Star China.  This
agreement does not prohibit Fuda Yiyang or Moral Star China from obtaining
recycled copper from other sources.  Kunpeng is presently our largest
supplier of raw materials.  The agreement is a long-term agreement
with no set expiration date.





(iii)  Purchase
Agreement.Pursuant to the purchase agreement, Moral Star China has a
right to purchase the entire business of Fuda Yiyang.  Moral Star
China controls all of the operations of Fuda Yiyang and under the purchase
agreement, agrees to purchase Fuda Yiyang’s equipment and patents and leases
Fuda Yiyang’s manufacturing plants, land and remaining equipment.  The
purchase agreement is designed so that Moral Star China can conduct its business
in China.  In December 2007, Moral Star China purchased equipment from
Fuda Yiyang in the amount of $368,615.





(iv)  Stockholders’
Voting Proxy Agreement.Pursuant to the proxy agreement, Wu Yiting, sole
owner of Fuda Yiyang, agreed to irrevocably grant a person to be designated by
Moral Star China with the right to exercise the stockholder voting rights among
other rights, including the attendance at and the voting of the Fuda Yiyang
shares at stockholder meetings (or by written consent in lieu of such meetings)
in accordance with applicable laws and its articles of association, including
but not limited to the rights to sell or transfer all or any of her equity
interests of Fuda Yiyang, and appoint and vote for the directors and chairman as
the authorized representative of the stockholders of Fuda Yiyang.






-3-







(v)  Shares Pledge
Agreement.Under the pledge agreement, Wu Yiting pledged all of her
equity interests in Fuda Yiyang to Moral Star China to guarantee Fuda Yiyang’s
performance of its obligations under all related agreements by and between Moral
Star China and Fuda Yiyang.  Neither Wu Yiting nor Fuda Yiyang may
transfer any of the pledged shares without the permission of Moral Star
China.





(vi)  Exclusive Option
Agreement.Under the option agreement between the Wu Yiting and Moral
Star China, Wu Yiting irrevocably granted Moral Star China or its designated
person an exclusive option to purchase, to the extent permitted under PRC law,
all or part of the equity interests in Fuda Yiyang, or to purchase the real
estate and land used currently owned by Fuda Yiyang, at a price agreed upon by
all parties.  This agreement may not be terminated without the
unanimous consent of all the parties, except that Moral Star China may, by
giving thirty (30) days prior notice to the parties, may terminate this
agreement.





(vii)  Patent Transfer
Agreement.Under the patent transfer agreement, Fuda Yiyang will transfer
its patent certificate of utility model named Bending Water Pipe, designed by Yu
Zeshi, patent number ZL 99 2 59230.5, certificate number 427197 to Moral Star
China. Moral Star China is to pay an assignment fee for the patent of RMB 10,000
(US$ 1,392). If Fuda Yiyang does not transfer the patent without reason, Fuda
Yiyang is to pay a penalty fee to Moral Star China.  If Fuda Yiyang
delays the transfer for more than two (2) months, Moral Star China has the right
to terminate this agreement and request a return of the assignment
fee.  We are now in the process of application of
transfer.





(viii)  Trademark
Transfer Agreement.Under the trademark transfer agreement, Fuda Yiyang
transferred its trademark, “FURDHER” to Moral Star China for RMB 10,000 (US$
1,392).  The registration is valid until January 1, 2015 in China. The
trademark is registered with Serial No. 11, which includes bathroom equipment,
flushing device and washing equipment.




Corporate Structure
Chart




The
following chart summarizes our organizational and ownership
structure.







Recent
Event




On
February 3, 2009, we entered into an amendment to the agreement relating to our
December 2007 private placement.  Pursuant to the
amendment,





(1)
            Each
      of the investors agreed to exchange all then outstanding warrants issued
      to the investors pursuant to the Purchase Agreement for a total of
      1,350,000 shares of series A preferred
stock.





(2)
            The
      date by which we are to apply to list its common stock on the Nasdaq
      Global Market, Nasdaq Capital Market or the New York or American Stock
      Exchange is deferred from June 3, 2009 to June 3,
  2010.





(3)
            The
      requirement that we deliver up to 3,000,000 shares of series A preferred
      stock to the investors based on our EBIT per share for the years ended
      December 31, 2007 and 2008 is
deleted.






-4-







(4)
            We
      are not required to update the current registration statement, which
      relates to shares of common stock issuable upon exercise of warrants and
      the date on which we are required to have a subsequent registration
      statement declared effective was postponed to June 3,
  2010.




Our
Business




We are a
holding company, and all of our operations are conducted by our Chinese
subsidiary, Moral Star China, and our affiliated company, Fuda
Yiyang.





We
provide services as an original equipment manufacturer or original design
manufacturer for other companies.  We plan to broaden the scope of our
business to offer a broader range of services, including market research and
tracking, product design, and integrated services including assembly, delivery
and related services.





The
manufacture of brass faucets and related products is a labor-intensive
industry.  China has become one of most significant manufacturer of
these products in the past two decades.  Especially during the recent
years, a number of global producers of sanitary ware and bathroom fittings have
established manufacturing facilities in China.  Our growth is
dependent on expanding our manufacturing capacity, upgrading our products,
improving quality, and improving international sales and service.





The
market for faucet and related products is largely dependent upon the market for
real estate.  Although there is not a direct correlation between the
real estate market and the market for bathroom fixtures, any slowdown affecting
new residential construction would have an effect on the market for products,
such as bathroom faucets and related products, that are used in new
construction.  Due to continuing global economic downturn, which has
significantly impaired the real estate market, our export sales declined $2.3
million, or 12%, to $16.2 million for the second half of 2008, compared to the
first half of 2008.  At the same time, our bad debt expense increased
significantly.  From August to December 2008, we incurred a bad debt
expense of approximately $4.2 million.





We
completed the construction of a new factory in April 2008 and we completed
improvements on our original facilities in September 2008. Thus our production
capacity increased to 3.5 million sets. The total investment was approximately
$12 million.




Product Lines and
Manufacturing Process




Our
products include kitchen and bar faucets, bathroom faucets and bathroom
accessories.  The following table set forth information as to the
sales of these products for 2008, 2007 and 2006 (dollars in
thousands):





Years
      ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Category
                  
                  Amount
                  
                  
                  %
                  
                  
                  Amount
                  
                  
                  %
                  
                  
                  Amount
                  
                  
                  %Kitchen
      and bar faucets
                  
                  $
                  11,745
                  
                  
                  
                  33.8
                  %
                  
                  $
                  15,969
                  
                  
                  
                  62.4
                  %
                  
                  $
                  7,118
                  
                  
                  
                  61.8
                  %Bathroom
      faucets
                  
                  
                  16,941
                  
                  
                  
                  48.8
                  %
                  
                  
                  8,914
                  
                  
                  
                  34.8
                  %
                  
                  
                  3,532
                  
                  
                  
                  30.7
                  %Bathroom
      accessories
                  
                  
                  6,053
                  
                  
                  
                  17.4
                  %
                  
                  
                  705
                  
                  
                  
                  2.8
                  %
                  
                  
                  860
                  
                  
                  
                  7.5
                  %Total
                  
                  $
                  34,739
                  
                  
                  
                  100.0
                  %
                  
                  $
                  25,588
                  
                  
                  
                  100.0
                  %
                  
                  $
                  11,510
                  
                  
                  
                  100.0
                  %





The basic
process of our products consists of molding and forming the main body of the
faucet, applying a finish, and then assembling the various components, followed
by inspection and packaging.





Forging
is the process of shaping metals by deforming them in some way.  In
hot forging, heated metal is forced into a shape similar to the faucet
body.  In molding and forming our faucets, we use hot forging to
create the shape of the faucet.  We believe that forging is a more
efficient process than machining since it can produce a near-net shape in about
three seconds with little waste.  As a result, only minor mechanical
machining is required for us to produce the exact dimensions
needed.  After the machining process is completed, the faucet body is
polished in an eight step process.






-5-







The next
step is plating.  Plating involves a leaching process that eliminates
remaining molecules from the brass surface.  The conventional plating
is nickel and chrome since these materials are most resistant to
corrosion.  First, a base coating of electroplated nickel is applied,
followed by a thin coating of electroplated chromium.  The chrome
layer is deposited from a plating bath containing certain additives that improve
corrosion resistance.





Finally,
the faucets and other components are sent for assembly.  This process
takes place on rotary assembly machines, which are precisely
controlled.  The sprout, if separate, is first installed, followed by
the ceramic cartridge.  This cartridge is screwed in place with a
brass screw using a pneumatic gun, and then the handle is attached by
hand.  After assembly, the faucets are packaged in boxes along with
any other components that are needed for final installation.





Our
products are checked against the blueprints to ensure it matches all
dimensions.  A go-no-go gauge is used to make sure the interior and
exterior threads fit together.





Before
plating, parts are visually checked for surface imperfections, which are removed
by sanding.  After final assembly, every faucet is pressure tested
with air and water for leaks and tested for durability.





The lab
will sample some faucets, make use of special devices to test the thickness of
plating, carry out a punished/forcing test to evaluate the working life of
faucet, and ultimately approve for final installation.




Market and
Competition




Overview
of Faucet Production Industry




Kitchen
and bar faucets, bathroom faucets and accessories are elements of the building
and construction industry.  Key factors that affect the market for
these products include:





·
            Rising
      or falling income of the people and
businesses;





·
            Growing
      awareness among the people regarding the decorative aspects of
      faucet;





·
            Increasing
      urbanization, which is resulting in growing demand for high level
      faucets;





·
            Rising
      or falling investment in the real estate
  industry.





With the
increasing world population, the demand for more houses and hence faucet
products has been growing.  Rapid urbanization and growth of number of
residential facilities are also deriving the demand.  Rising personal
incomes and increasing purchasing power parity have contributed to the growth of
this industry.  However, the current worldwide economic downturn,
particularly as it relates to real estate, has had a significant effect in the
market for bathroom fixtures.  Our sales decreased 12%, to $16.2
million, in the second half of 2008, compared to $18.5 million in the first half
of 2008, and we incurred a $4.2 million bad debt charge in the fourth quarter of
2008 as a result of financial difficulties faced by our
customers.  Although we believe that there will continue to be a need
for bathroom fixtures, we cannot predict if, or when, the market downturn will
reverse itself.





According
to data on the website www.hardwaremarketplace.com,
faucet production industry had a market size of over $15 billion in 2006 and the
market had been growing at around 4% by volume.  Third world
countries, especially India and China, had been emerging as major markets for
bathroom hardware and fittings.  However, as a result of the worldwide
economic downturn, this trend turned in the middle of 2008, and the market for
real estate related products, including faucets, has declined.




Sales
and Marketing




We are
based in China, but we conduct business in the Middle East and Russia. Through
distributors and wholesalers in Dubai, United Arab Emirates, our products are
resold into different countries in Middle East, Europe and Africa.  In
2007 and 2006, we also sold products directly to distributors in Spain, Turkey,
Israel and the China domestic market.





As of
December 31, 2008, we had three sales offices outside of China, located in
Dubai, Moscow and Nigeria.






-6-







The
following table describes net sales in the major geographic areas (dollars in
thousands) in 2008, 2007 and 2006:





Years
      ended December 31,2008
                              
                              
                              2007
                              
                              
                              2006Country
                              
                              Amount
                              
                              
                              %
                              
                              
                              Amount
                              
                              
                              %
                              
                              
                              Amount
                              
                              
                              %United
      Arab Emirates
                              
                              $
                              31,882
                              
                              
                              
                              91.8
                              %
                              
                              $
                              22,522
                              
                              
                              
                              88.0
                              %
                              
                              $
                              7,006
                              
                              
                              
                              60.9
                              %Russia
                              
                              
                              2,857
                              
                              
                              
                              8.2
                              %
                              
                              
                              1,610
                              
                              
                              
                              6.3
                              %
                              
                              
                              -
                              
                              
                              
                              -Spain
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              457
                              
                              
                              
                              1.8
                              %
                              
                              
                              907
                              
                              
                              
                              7.9
                              %China
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              406
                              
                              
                              
                              1.6
                              %
                              
                              
                              1,895
                              
                              
                              
                              16.5
                              %Turkey
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              155
                              
                              
                              
                              0.6
                              %
                              
                              
                              980
                              
                              
                              
                              8.5
                              %Israel
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              348
                              
                              
                              
                              3.0
                              %Other
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              438
                              
                              
                              
                              1.7
                              %
                              
                              
                              374
                              
                              
                              
                              3.2
                              %Total
                              
                              $
                              34,739
                              
                              
                              
                              100.0
                              %
                              
                              $
                              25,588
                              
                              
                              
                              100.0
                              %
                              
                              $
                              11,510
                              
                              
                              
                              100.0
                              %




Raw Materials and
Suppliers




The
faucet body is usually made of brass, which is an alloy of copper and
zinc.  The average proportion of copper and zinc is 70:30 and the
specific proportions of each kind of product can be varied to create a range of
brasses with varying properties.  Brass is the most widely used
material for faucets due to its resistance to soft-water corrosion and
hard-water calcification.





In 2008,
our three largest suppliers of copper and zinc were Kunpeng, Shangrao JinBin
Industrial Co., Ltd.(“JinBin”) and Yiyang Shunda Worn Metal Recycling Co., Ltd.
(“Shunda”), which accounted for 49.2%, 26.2 and 9.3%, respectively.





In 2007,
our largest two suppliers of copper and zinc were Kunpeng and Yiyang Tengfei
Electric Ware Co., Ltd. (“Tengfei”), accounted for 70.5% and 26.9%,
respectively.





In 2006,
our largest two suppliers of copper and zinc were Kunpeng and Yiyang Tengfei
Electric Ware Co., Ltd. (“Tengfei”), accounted for 56.4% and 38.5%,
respectively.





No other
supplier accounted for more than 5% of our purchases for each
year.  Kunpeng was our largest supplier for 2008, 2007 and
2006.  We purchased raw materials from Kunpeng for $10,240,000 in
2008, $16,491,000 in 2007 and $6,586,000 in 2006.  Wu Yiting, our
chief executive officer and chairman, owns 80% of the equity and is chairperson
of Kunpeng.





We
manufacture the main part of the faucet, such as faucet body, and utilize the
services and products of other manufacturers for the fittings and/or components
to the faucet.  These products are readily available to us from a
number of suppliers.  The following table sets forth our main fittings
suppliers.





Supplier
              
              FittingsWenzhou
      Haicheng Yongshi Valve Core Company
              
              Valve
      coreZhejiang
      Changhe Jinyi Plumbing Factory
              
              Shower
      seriesZhejiang
      Aifeiling Plumbing Company
              
              PipesYutao
      Lufu Ciwa Valve Factory
              
              Hose,
      valve coreWenzhou
      Huamei Copper Tube Company
              
              HoseZhejiang
      Changjiang Chaohong Plumbing Factory
              
              Shower
      series





All the
raw materials, fittings and components are available from a wide range of
suppliers.  Our principal raw material is copper.  The
production volume of copper in China was approximately 3,789,000 tons in 2008
(Source: “Statistical
Bulletins of the National Economic and Social Developments for 2008”
issued by National Bureau of Statistics of China on February 26, 2009), an
increase of 10.1% as compared to 2007.  Jiangxi province, where Fuda
Yiyang’s factory is located, is one of richest areas in copper resources in
China.  In 2008, its production volume reached about 702,900 tons,
according to the report “Situation of production of
non-ferrous metal Industry in Jiangxi Province-2008” issued by Jiangxi
Administrative Office of Non-Ferrous Metal Industry on January 23,
2009.  There are a number of copper processing factories in the area
around the Fuda Yiyang factory and it is very easy for us to obtain scrap copper
when needed.






-7-









Customers




A
significant percentage of our business is generated from a small number of
customers. The following table sets forth information as to sales to the only
customers who accounted for 5% or more of our sales for 2008, 2007 and 2006
(dollars in thousands).





Years
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Amount
                  
                  
                  %
                  
                  
                  Amount
                  
                  
                  %
                  
                  
                  Amount
                  
                  
                  %Super
      Way General Trading L.L.C.
                  
                  $
                  21,207
                  
                  
                  
                  61.0
                  %
                  
                  $
                  
                  *
                  
                  
                  *
                  
                  
                  $
                  
                  *
                  
                  
                  *Isabella
      Hardware Trading L.L.C.
                  
                  
                  8,710
                  
                  
                  
                  25.1
                  %
                  
                  
                  12,810
                  
                  
                  
                  50.1
                  %
                  
                  
                  2,843
                  
                  
                  
                  24.7
                  %Venus
      Building Materials Trading L.L.C.
                  
                  
                  2,123
                  
                  
                  
                  6.1
                  %
                  
                  
                  *
                  
                  
                  
                  *
                  
                  
                  
                  *
                  
                  
                  
                  *Al
      Jibrin General Trading L.L.C.
                  
                  
                  *
                  
                  
                  
                  *
                  
                  
                  
                  7,021
                  
                  
                  
                  27.4
                  %
                  
                  
                  *
                  
                  
                  
                  *Al
      Jaber Building Material Trading L.L.C.
                  
                  
                  *
                  
                  
                  
                  *
                  
                  
                  
                  2,415
                  
                  
                  
                  9.4
                  %
                  
                  
                  *
                  
                  
                  
                  *Idemix
      Yapi Gerecleri San. Tic.AS
                  
                  
                  *
                  
                  
                  
                  *
                  
                  
                  
                  *
                  
                  
                  
                  *
                  
                  
                  
                  1,136
                  
                  
                  
                  9.9
                  %Yiyang
      Jiayi I&E Company
                  
                  
                  *
                  
                  
                  
                  *
                  
                  
                  
                  *
                  
                  
                  
                  *
                  
                  
                  
                  937
                  
                  
                  
                  8.1
                  %*
      less than 5%.





Al Jibrin
General Trading L.L.C. was a related party to Fuda, which was the second largest
customer in 2007.  It was owned by Mr. Jibrin Issa Jibrin Al Jibrin
(“Mr. Jibrin”), who is trustee of the Wu Yiting Stock Trust, sales director
since January 2008 and one of our directors since April 2008.  We did
not sell any products to Al Jibrin General Trading L.L.C. in 2008 and
2006.




Employees




At
December 31, 2008, we had 405 full time employees, 391at our headquarter and
manufacture base in Yiyang, Jiangxi, China, 14 as sales staff in United Arab
Emirates, Russia and Nigeria.  Our employees in China are represented
by a union. We believe that our employee relations are good.




Intellectual
Property




We rely
on a combination of trademark, copyright and trade secret protection laws in
China and other jurisdictions, as well as confidentiality procedures and
contractual provisions to protect our intellectual property and our
brand.  The following table describes our intellectual
property:





Type
                  
                  Name
                  
                  Issued
      by
                  
                  Duration
                  
                  DescriptionTrademark
                  
                  “FURDHER”
                    Registration
      No. 3512752
                  
                  Trademark
      Bureau of the People’s Republic of China
                  
                  Ten
      years, expiring on January 27, 2015 (and renewable within six months prior
      to the end of each ten-year term for additional ten-year
      periods)
                  
                  Company’s
      trademark registered on product Serial No. 11: Bathroom equipment,
      flushing device and washing equipment.Patent
                  
                  Bending
      Water Pipe
                    Patent
      No. ZL 99 2 59230.5
                    Certificate
      No. 427197
                  
                  Intellectual
      Property Bureau of the People’s Republic of China
                  
                  Ten
      years, expiring on December 2009






-8-









Environmental
Matters




Fuda
Yiyang, which manufactures our products, is subject to Chinese and regional
environmental laws and regulations.  Wastes generated from the metal
plating operations generally include: spent solutions containing metals, rinse
waters (wastewater) and sludges.  When present in sufficient
concentration, nearly all of the wastes produced by metal-finishing operations
are directly toxic to humans and when, if discharged or spilled, will have a
negative impact on the environment.  Our plating facility and related
water treatment system are built under rigorous government
criteria.  Fuda Yiyang has passed environmental impact assessment by
local environment authorities.  Our plating facility and related water
treatment system are built under government criteria, and we received a
manufacturing license from the government department of environmental
protection.  We believe that we and Fuda Yiyang are in compliance in
all material respects with all environmental protection laws and
regulations.




ITEM
      1A.
            RISK
      FACTORS.




Because
our sales are related to the real estate market, our sales have declined because
of the worldwide economic downturn which affected the real estate
industry.




Our sales
are made to distributors who sell in the real estate
industry.  Although our sales increased 35.8% from 2007 to 2008, the
effects of the economic downturn began to affect our business in the second half
of 2008, where our export sales declined 12% to $16.2 million for the second
half of 2008, compared to the first half of 2008.  At the same time,
our bad debt expense increased significantly.  From August to December
2008, we incurred bad debt expense of approximate $4.2 million.  As a
result, we generated a loss $440,000 on sales of $34.7 million, as compared with
a net income of $3.5 million on sales of $25.6 million for 2007.  As
the downturn continues, we anticipate that our sales will continue to decline
and we will continue to operate at a loss.  We do not anticipate that
our business trends will be reversed until there is a significant improvement in
the international real estate market.  We cannot determine if or when
the downturn will reverse.




Significant
fluctuation of copper price will adversely affect our sales, gross margin or
collection of receivables.




Our
principal raw material is copper; its price is subject to significant
fluctuations.  During 2007, the price had been subject to significant
increases, however, commencing in August 2008, the price has been decreasing
swiftly. Although we set up a long-term raw material supply relationship with a
related-party, Kunpeng, the price of raw material purchased from Kunpeng is
based on the local market price, which is not fixed.  As a result, any
increase in our suppliers’ costs, including Kunpeng’s costs, would be passed on
to us.  Neither we nor Kunpeng has any long term supply contracts with
any source of copper.  As a result, the prices at which we purchase
raw materials are based on the market price at the time.





The price
of copper affects our gross margins, since it affects both the cost of our
principal raw material and the price that customers are willing to pay for the
finished product.  In times of increasing prices, we need to try to
fix the price at which we purchase copper in order to avoid increases in costs
which we cannot recoup through increases in sales prices. Similarly, in times of
decreasing prices, we may have purchased copper at a price which is high in
terms of the price at which we can sell our product.





Any
increase in the prices of raw materials, including copper, will affect the price
at which we can sell our product and may further affect sales
volume.  In case of decrease in the prices of raw materials, since we
grant our customers a three-month credit term, some customers may demand
discount of receivables, which could generate a bad debt expense.




Our
expansion into Russia and Africa markets may have an adverse affect on our
profitability.




We are
beginning to expand our operations into Russia and Africa, which we consider
significant potential markets for our products.  Although we
anticipate that these new markets will generate additional revenue and earnings
in the long term, it is possible that our start up expenses, combined with the
economic downturn which is affecting these markets as well as the rest of the
world, may have an initial adverse impact until our operations are fully
developed.  We cannot assure you that we will be successful in
entering these new markets or that we will generate any profits from these
markets.






-9-







We
must effectively manage the growth of our operations, or our company will
suffer.




We are
expanding our business by establishing offices in Dubai, Russia and Africa, and
we plan to increase the range of services that we offer our customers. Further, we may expand
our operations through acquisitions.  Our ability to successfully
develop our business requires an effective planning and management process,
especially in view of the international nature of our business.  The
planned development of our business will place a significant strain on our
management and our resources.  If we grow, we will need to improve our
financial and managerial controls and reporting systems and procedures, and we
will need to expand, train and manage our workforce.  Any failure to
manage any of the foregoing areas efficiently and effectively would cause our
business to suffer.




Failure
to obtain short-term bank loans or extend such loans can hinder our business
operations and profitability.




Our
operations have been financed largely with short-term bank loans in the form of
export invoice financing, which typically have a two or three-month term and
have generally been rolled over at the end of the term.  The bank
loans from one of those banks are secured by a mortgage on one of our parcels of
land and ten workshop buildings.  At December 31, 2008, these bank
loans totaled approximately $12.4 million, accounts payable due to material and
service suppliers was $1.0 million.  Although in the past these notes
have been rolled over at the then current interest rate, we cannot assure you
that the banks will continue to lend us money.  The failure of the
banks to continue to extend credit or to demand payment of a significant amount
of our loans could impair our ability to operate profitably.




We
may need to raise additional capital which may not be available on acceptable
terms or at all




We will
require additional capital to expand our marketing efforts, meet our growing
working capital requirements and make acquisition to extend industrial
chain.  Our net loss for 2008 combined with the downturn in the real
estate market and the lack of credit availability generally will make it
increasingly difficult for us to obtain any capital which we may require, and we
cannot assure you that financing will be available in amounts or on terms
acceptable to us, if at all.  The inability to obtain additional
capital may reduce our ability to develop our business and may require us to
scale down our operations and curtail or significantly reduce our expansion
plans.  If we have to raise funds with high interest rates, our
profitability would unavoidably decline.  Further, any additional
equity financing may involve substantial dilution to our then existing
stockholders.




If
we raise additional capital, the value of your investment may
decrease.




If we
need to raise additional capital to implement or continue operations, we may
issue additional equity or convertible debt securities.  If we issue
equity or convertible debt securities, the net tangible book value per share may
decrease, the percentage ownership of our current stockholders may be diluted
and any equity securities that we issue may have rights, preferences or
privileges senior to our common stockholders and may provide advantages that our
common stockholders do not have.




We
do not carry sufficient property or casualty insurance and as a result any
business disruption, litigation or natural disaster might result in substantial
costs and diversion of resources.




The
insurance industry in China is still at an early stage of
development.  Insurance companies in China offer limited business
insurance products, and do not, to our knowledge, offer business liability
insurance.  With the exception of a property insurance covering ten
workshops, which are held as collateral for bank loans, we do not have any other
business liability insurance coverage for our operations.  Any
business property loss, natural disaster or litigation might result in
substantial costs and diversion of resources.




Failure
to comply with PRC regulations relating to the establishment of offshore special
purpose companies by PRC residents may materially adversely affect
us.




The PRC
State Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant
Issues in the Foreign Exchange Control over Financing and Return Investment
Through Special Purpose Companies by Residents inside China (Circular 75) in
October 2005, and also promulgated its internal implementing guidelines (Notice
106) in June 2007.  These regulations require that a PRC resident
shall apply for the registration of foreign exchange of investment offshore at
the local or State Administration of Foreign Exchange before establishing or
controlling an offshore special purpose company.  If a PRC resident
transfers his properties or equities of a domestic enterprise to the offshore
special purpose company, or seeks equity financing offshore after the
transference of properties or equities to the offshore special purpose company,
he shall file a modification registration.  There is uncertainty over
how Circular 75 will be interpreted and implemented, and how or whether SAFE
will apply it to us.  As a consequence, we cannot predict how it will
affect our business operations or future strategies.






-10-







We
believe we comply with the applicable regulations.  The owner of Fuda
Yiyang, Wu Yiting, was not a stockholder of Moral Star BVI. Moral Star BVI’s
sole stockholder, the Trustee is not a resident of the PRC.





However,
to the best of our knowledge, based on the terms of the Trust and the
irrevocable proxy which the Trust issued to her, Wu Yiting may be deemed to
control Moral Star BVI, which is an offshore special purpose company, under
these policies. Wu Yiting shall apply for a registration of foreign exchange at
Jiangxi Branch of SAFE.  If Wu Yiting fails to fulfill the
registration of foreign exchange, Fuda Yiyang cannot transfer its payment of
profit, dividend, liquidation, equity transference and capital reduction to
Moral Star BVI since any such payment would be considered as exchange
evasion.  As a Sino-foreign equity joint venture, Moral Star China’ s
registration of foreign exchange has been approved by relating authorities; but
Moral Star BVI’s application for registration of foreign exchange is still in
the process of approval.  There is no assurance that we will be
granted for this registration.  If we need to enforce the agreements
with Fuda Yiyang, we must seek to enforce them in China. We cannot assure you
that we will be able to enforce any of them or remedies will be available
outside of China.




We
face intense competition, and many of our competitors have substantially greater
resources than we have.




We
operate in a competitive environment that is characterized by price deflation
and technological change.  We compete with major international and
domestic companies.  Our competitors may have greater market
recognition and substantially greater financial, technical, marketing,
distribution, purchasing, manufacturing, personnel and other resources than we
do.  Furthermore, some of our competitors have manufacturing and sales
forces that are geographically diversified, allowing them to reduce
transportation expenses, tariff costs and currency fluctuations for certain
customers in markets where their facilities are located.  Many
competitors have production lines that allow them to produce more sophisticated
and complex devices than we currently offer and to offer a broader range of
display devices.  Other emerging companies or companies in related
industries may also increase their participation in the display and display
module markets, which would intensify competition in our markets. We might lose
some of our current or future business to these competitors or be forced to
reduce our margins to retain or acquire that business, which could decrease our
revenues or slow our future revenue growth and lead to a decline in
profitability.




Risks Related to Operating
in China




Adverse
changes in political and economic policies of the Chinese government could have
a material adverse effect on the overall economic growth of China, which could
reduce the demand for our products and materially and adversely affect our
business.




Our
business, financial condition, results of operations and prospects are subject
to significant changes in economic, political and legal developments of
China.  The Chinese economy differs from the economies of most
developed countries in many respects, including:





·
            the
      amount of government involvement;


·
            the
      level of development;


·
            the
      growth rate;


·
            the
      control of foreign exchange; and


·
            the
      allocation of resources.




While the
Chinese economy has grown significantly in the past 20 years, the growth has
been uneven, both geographically and among various sectors of the economy, and
the recent worldwide economic downturn has affected China as well as the rest of
the world.  The Chinese government has implemented various measures to
encourage economic growth and guide the allocation of resources. Some of these
measures benefit the overall Chinese economy, but may also have a negative
effect on us.  For example, our financial condition and results of
operations may be adversely affected by government control over capital
investments or changes in tax regulations that are applicable to us and the
extent that any stimulus program implemented by the Chinese government affects
the real estate industry or companies that manufacture products such as
ours.


-11-







The
Chinese economy has been transitioning from a planned economy to a more
market-oriented economy.  Although in recent years the Chinese
government has implemented measures emphasizing the utilization of market forces
for economic reform, the reduction of state ownership of productive assets and
the establishment of sound corporate governance in business enterprises, a
substantial portion of the productive assets in China is still owned by the
Chinese government.  The continued control of these assets and other
aspects of the national economy by the Chinese government could materially and
adversely affect our business.  The Chinese government also exercises
significant control over Chinese economic growth through the allocation of
resources, controlling payment of foreign currency-denominated obligations,
setting monetary policy and providing preferential treatment to particular
industries or companies including the allocation of resources under any stimulus
package which may be adopted.





Any
adverse change in the economic conditions or government policies, policy
interpretations, imposition of confiscatory taxation, restrictions on currency
conversion, imports and sources of supply, devaluations of currency, the
nationalization or other expropriation of private enterprises in China could
have a material adverse effect on the overall economic growth and the level of
investments and expenditures in China, which in turn could lead to a reduction
in demand for our products and consequently have a material adverse effect on
our businesses and our operations and assets in China.




Fluctuation
in currency exchange rate may have a material adverse effect on your
investment.




The
change in 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 2005, the Renminbi is permitted to fluctuate within
a narrow and managed band against a basket of certain foreign
currencies.  Under this new policy, the exchange rate of Renminbi
against U.S. dollar has fallen down about 12% to 6.8346 as of December 31, 2008,
as compared to that at the beginning of 2007.  While the international
reaction to the Renminbi revaluation has generally been positive, there remains
significant international pressure on the Chinese government to adopt an even
more flexible currency policy, which could result in a further and more
significant appreciation of the Renminbi against the U.S. dollar.  As
a portion of our costs and expenses is denominated in Renminbi, the revaluation
in July 2005 and potential future revaluation has and could further increase our
costs.  In addition, as we rely entirely on dividends paid to us by
our operating subsidiaries, any significant revaluation of the Renminbi may have
a material adverse effect on our revenues and financial condition, and the value
of, and any of our dividends payable on our ordinary shares in foreign currency
terms. For example, to the extent that we need to convert U.S. dollars we
receive from this offering into Renminbi for our operations, appreciation of the
Renminbi against the U.S. dollar would have an adverse effect on the Renminbi
amount we receive from the conversion.  Conversely, if we decide to
convert our Renminbi into U.S. dollars for the purpose of making payments for
dividends on our ordinary shares or for other business purposes, appreciation of
the U.S. dollar against the Renminbi would have a negative effect on the U.S.
dollar amount available to us.





Because
most of our sales are in the international market and payment is made in
currency other than Renminbi, any change in the conversion rate between the time
we issue an invoice for goods and services and the time we receive payment could
result in a currency loss if the amount we receive in Renminbi is less than the
amount we reflect as a receivable.




Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.




All of
our revenues and most of our expenses are denominated in Renminbi.  If
our revenues denominated in Renminbi increase or expenses denominated in
Renminbi decrease in the future, we may need to convert a portion of our
revenues into other currencies to meet our foreign currency obligations,
including, among others, payment of dividends declared, if any, in respect of
our ordinary shares.  Under China’s existing foreign exchange
regulations, our Chinese subsidiary, Moral Star China, is able to pay dividends
in foreign currencies, without prior approval from the State Administration of
Foreign Exchange, or SAFE, by complying with certain procedural
requirements.  However, we cannot assure you that that the Chinese
government will not take further measures in the future to restrict access to
foreign currencies for current account transactions.





Foreign
exchange transactions by Moral Star China under the capital account continue to
be subject to significant foreign exchange controls and require the approval of
China’s governmental authorities, including the SAFE.  In particular,
if Moral Star China borrows foreign currency loans from us or other foreign
lenders, these loans must be registered with the SAFE, and if we finance Moral
Star China by means of additional capital contributions, these capital
contributions must be approved by certain government authorities including the
Ministry of Commerce or its local counterparts.  These limitations
could affect the ability of Moral Star China to obtain foreign exchange through
debt or equity financing.




-12-









Capital
outflow policies in the PRC may hamper our ability to remit income to the United
States.




The PRC
has adopted currency and capital transfer regulations.  These
regulations may require that we comply with complex regulations for the movement
of capital and as a result we may not be able to remit all income earned and
proceeds received in connection with our operations or from the sale of our
operating subsidiary to the U.S. or to our stockholders.




Our
operations and assets in the China are subject to significant political and
economic uncertainties.




Government
policies are subject to rapid change and the government of the China may adopt
policies which have the effect of hindering private economic activity and
greater economic decentralization.  There is no assurance that the
government of the China will not significantly alter its policies from time to
time without notice in a manner with reduces or eliminates any benefits from its
present policies of economic reform.  In addition, a substantial
portion of productive assets in China remains government-owned.  For
instance, all lands are state owned and business entities or individuals are
granted by government state-owned land use rights.  The granting
process is typically based on government policies at the time of granting, which
could be lengthy and complex. This process may adversely affect our
business.  The government of China also exercises significant control
over China’s economic growth through the allocation of resources, controlling
payment of foreign currency and providing preferential treatment to particular
industries or companies.  Uncertainties may arise with changing of
governmental policies and measures.  In addition, changes in laws and
regulations, or their interpretation, or the imposition of confiscatory
taxation, restrictions on currency conversion, imports and sources of supply,
devaluations of currency, the nationalization or other expropriation of private
enterprises, as well as adverse changes in the political, economic or social
conditions in China, could have a material adverse effect on our business,
results of operations and financial condition.




Because
Chinese law governs almost all of our material agreements, we may not be able to
enforce our legal rights within China or elsewhere, which could result in a
significant loss of business, business opportunities, or capital.




Chinese
law governs almost all of our material agreements relating to the purchase of
raw materials, the manufacture of our products and the distribution of our
products within China, as well as our agreements with Fuda Yiyang.  We
cannot assure you that we will be able to enforce any of our material agreements
or that remedies will be available outside of China.  The system of
laws and the enforcement of existing laws in China may not be as certain in
implementation and interpretation as in the United States.  The
Chinese judiciary is relatively inexperienced in enforcing corporate and
commercial law, leading to a higher than usual degree of uncertainty as to the
outcome of any litigation.  The inability to enforce or obtain a
remedy under any of our agreements could result in a significant loss of
business, business opportunities or capital.




It
will be extremely difficult to acquire jurisdiction and enforce liabilities
against our officers, directors and assets based in China.




Substantially
all of our assets will be located outside of the United States and our officers
and directors will reside outside of the United States.  As a result,
it may not be possible for United States investors to enforce their legal
rights, to effect service of process upon our directors or officers or to
enforce judgments of United States courts predicated upon civil liabilities and
criminal penalties of our directors and officers under Federal securities
laws.  Moreover, we have been advised that China does not have
treaties providing for the reciprocal recognition and enforcement of judgments
of courts with the United States.  Further, it is unclear if
extradition treaties now in effect between the United States and China would
permit effective enforcement of criminal penalties of the Federal securities
laws.




We
may have difficulty establishing adequate management, legal and financial
controls in China, which could impair our planning processes and make it
difficult to provide accurate reports of our operating results.




China
historically has not followed Western style management and financial reporting
concepts and practices, and its access to modern banking, computer and other
control systems has been limited.  Although we will be required to
implement internal controls, we may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in China in these
areas.  As a result of these factors, we may experience difficulty in
establishing the required controls and instituting business practices that meet
Western standards, making it difficult for management to forecast its needs and
to present the results of our operations accurately at all times.




-13-









Because
our funds are held in banks which do not provide insurance, the failure of any
bank in which we deposit our funds could affect our ability to continue in
business.




Banks and
other financial institutions in the PRC do not provide insurance for funds held
on deposit.  As a result, in the event of a bank failure, we may not
have access to funds on deposit.  Depending upon the amount of money
we maintain in a bank that fails, our inability to have access to our cash could
impair our operations, and, if we are not able to access funds to pay our
suppliers, employees and other creditors, we may be unable to continue in
business.




Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences.




We are
subject to the United States Foreign Corrupt Practices Act, which generally
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some that may compete with us, are not
subject to these prohibitions.  Corruption, extortion, bribery,
pay-offs, theft and other fraudulent practices occur from time-to-time in the
PRC, Russia and the United Arab Emirates.  We can make no assurance,
however, that our employees or other agents will not engage in such conduct for
which we might be held responsible. If our employees or other agents are found
to have engaged in such practices, we could suffer severe penalties and other
consequences that may have a material adverse effect on our business, financial
condition and results of operations.




Imposition
of trade barriers and taxes may reduce our ability to do business
internationally, and the resulting loss of revenue could harm our
profitability.




We may
experience barriers to conducting business and trade in our targeted emerging
markets in the form of delayed customs clearances, customs duties and
tariffs.  In addition, we may be subject to repatriation taxes levied
upon the exchange of income from local currency into foreign currency,
substantial taxes of profits, revenues, assets and payroll, as well as
value-added tax.  The markets in which we plan to operate may impose
onerous and unpredictable duties, tariffs and taxes on our business and
products, and there can be no assurance that this will not reduce the level of
sales that we achieve in such markets, which would reduce our revenues and
profits.




Risks Related to Our
Securities




There
is a limited market for our common stock which may make it more difficult to
dispose of your stock.




Our
common stock is currently quoted on the Over the Counter Bulletin Board under
the symbol “FUFW.”  There is a limited trading market for our common
stock, and on many days there is no activity in our common
stock.  Accordingly, there can be no assurance as to the liquidity of
any markets that may develop for our common stock, the ability of holders of our
common stock to sell our common stock, or the prices at which holders may be
able to sell our common stock.




ITEM
      2.
            PROPERTY.




In China,
there is no private ownership of land.  The government issues a
certificate of land use right, which is transferable and permits the holder to
use the land.  We hold four certificates of property rights which
cover three blocks of industrial-use land in Jiangxi province in China, covering
491,374 square feet, for the term of 50 years, beginning from issuance date of
the certificates, respectively.  Among these three blocks of land, one
block of 51,235 square feet has left unused since December 2004.





With the
completion of a new factory in April 2008 and improvement of our original
facilities in September 2008, our production capacity increased to 3.5 million
sets, as compared to 1.2 million sets at the end of 2007.  We believe
our real property is adequate to meet our needs at present and in two or three
years in the future.





One block
of land with the acreage of 210,435square feet and ten workshop buildings are
held as collateral pursuant to a maximum amount mortgage contract with a
commercial bank which we entered into on September 6, 2007.





We lease
office space in Dubai at an annual rental of $18,000 pursuant to a lease which
expires on March 4, 2010.




-14-









ITEM
      3.
            LEGAL
      PROCEEDINGS.




We are
not a defendant in any material legal proceedings.




ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS.




On
November 21, 2008, the holders of more than a majority of our outstanding common
stock approved the following actions without a meeting of stockholders in
accordance with Section 228 of the Delaware General Corporation
Law:





(1)
            The
      election of seven directors to serve until the next annual meeting of
      stockholders and until their successors are elected and qualified;
      and





(2)
            The
      approval of the selection of Bernstein & Pinchuk LLP as the company’s
      independent registered accounting firm for the fiscal year ending December
      31, 2008.





These
actions became effective following the mailing of an information statement to
our stockholders.




PART
II




ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITY.






Market
Information




Our
common stock is listed on the Over the Counter Bulletin Board under the symbol
“FUFW.”  However, there is currently no regular market or trading in
the Company’s common stock, and we cannot give an assurance that such a market
will develop.





The
following table sets forth the high and low bid quotations per share of our
common stock as reported on the OTC Bulletin Board for the periods
indicated.  The high and low bid quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.





2007
                        
                        High
                        
                        
                        LowFirst
      Quarter
                        
                        $
                        1.50
                        
                        
                        $
                        1.01Second
      Quarter
                        
                        
                        1.03
                        
                        
                        
                        1.03Third
      Quarter
                        
                        
                        1.03
                        
                        
                        
                        1.03Fourth
      Quarter
                        
                        
                        7.00
                        
                        
                        
                        1.01





2008
                      
                      High
                      
                      
                      LowFirst
      Quarter
                      
                      $
                      5.50
                      
                      
                      $
                      1.50Second
      Quarter
                      
                      
                      3.80
                      
                      
                      
                      1.50Third
      Quarter
                      
                      
                      2.10
                      
                      
                      
                      1.18Fourth
      Quarter
                      
                      
                      1.60
                      
                      
                      
                      0.35





As of
March 23, 2009, we had approximately 33 holders of record of our common
stock.




Dividends




We have
not declared any dividends to date.  Pursuant to the securities
purchase agreement dated December 3, 2007, as amended, relating to our December
2007 private placement, we may not pay dividends on or redeem shares of common
stock while the series A preferred stock is outstanding.




-15-









Recent Sales of Unregistered
Securities




There
were no sales of unregistered securities during the year ended December 31, 2008
that were not disclosed in a quarterly report on Form 10-Q or a current report
on Form 8-K.




Purchases of Equity
Securities by the Issuer and Affiliated Purchasers




We have
not repurchased any shares of the Company’s common stock in the three months
ended December 31, 2008.




Equity Compensation
Plan




The
following table summarized the equity compensation plans under which securities
may be issued as of December 31, 2008.





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 approved by security holders
              
              -0-
              
              -0-
              
              -0-Equity
      compensation not approved by security holders
              
              100,000
              
              1.60
              
              -0-





The
equity compensation plan not approved by security holders is a warrant to
purchase 100,000 shares of common stock at $1.60 per share, issued to an
investor relations firm for investor relations services.




ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.




Overview




Prior to
December 3, 2007, we were a public reporting blind pool company with no
assets.  On December 3, 2007, we consummated a share exchange
agreement with Jibrin Issa Jibrin Al Jibrin, trustee of the Wu Yitang Trust,
which was the sole stockholder of Moral Star BVI.  Pursuant to the
share exchange agreement, the Trustee transferred to us all of the capital stock
of Moral Star BVI in exchange for 10,564,647 shares of our common stock, which
were issued to the Trust and the designees of the Trust, some of whom acquired
their shares as nominees of Ms. Wu Yiting, our chief executive
officer.  As a result, Moral Star BVI became our wholly-owned
subsidiary and our sole business became the business of Moral Star BVI and its
affiliated companies.  The transaction is treated as a reverse
acquisition.  As a result, for accounting purposes, Moral Star BVI is
treated as the acquiring company for accounting purposes and our financial
statements for period prior to December 3, 2007 reflect the historical
operations of Fuda Yiyang.





We have a
series of contractual arrangements with Fuda Yiyang, which provide us with both
control over the operations of Fuda Yiyang and the net income from Fuda Yiyang’s
operations.  Thus this discussion relates to the business, financial
condition and results of operations of Fuda Yiyang, which is treated as a
variable interest entity.





We
develop, manufacture, distribute and market high-quality brass faucets and
related spouts and fittings. In 2007, we achieved net income of $3.46
million.  However, we incurred net loss of $440,000 during 2008, which
mainly resulted from substantial bad debt losses of receivables on the
background of global economic crisis in the second half of 2008, of $4.20
million, which represented 58.3% of our gross profit for the whole
year.






-16-







Our
principal raw material is copper, a significant portion of which we purchase
from Kunpeng, a related party.  The price of copper is subject to
significant fluctuations.  In 2007 the price had been subject to
significant increases, however, commencing in August 2008, the price has
decreased swiftly.  The price of copper affects our gross margins,
since it affects both the cost of our principal raw material and the price that
customers are willing to pay for the finished product.  In times of
increasing prices, we need to try to fix the price at which we purchase copper
in order to avoid increases in costs which we cannot recoup through increases in
sales prices.  Similarly, in times of decreasing prices, we may have
purchased copper at a price which is high in terms of the price at which we can
sell our product which would result in a decline in our gross
margin.





We
produce all our products in China and export most of them to international
markets, including Middle East, primarily United Arab Emirates, and
Russia.  In 2008, we had no sales in China, and 91.8% of our sales
were made to distributors in the United Arab Emirates and 8.2% of sales to
distributors in Russia.  We do not have long-term contracts with any
of our customers.





We sell
our products to a small number of customers, each of which is a distributor of
our products. Different customers may account for significant revenue in each
period.  As a result, the loss of any customer could have a material
adverse effect upon our business if we are not able to replace that
customer.  The following table sets forth information as to each
customer that accounted for 5% or more of our revenue for the fiscal year ended
December 31, 2008 and 2007 (dollars in thousands).





Year
      Ended December 31,2008
                      
                      
                      2007Amount
                      
                      
                      %
                      
                      
                      Amount
                      
                      
                      %Super
      Way General Trading L.L.C
                      
                      $
                      21,207
                      
                      
                      
                      61.0
                      %
                      
                      $
                      
                      *
                      
                      
                      *Isabella
      Hardware Trading L.L.C.
                      
                      
                      8,710
                      
                      
                      
                      25.1
                      %
                      
                      
                      12,810
                      
                      
                      
                      50.1
                      %Venus
      Building Materials Trading L.L.C.
                      
                      
                      2,123
                      
                      
                      
                      6.1
                      %
                      
                      
                      *
                      
                      
                      
                      *Al
      Jibrin General Trading L.L.C.
                      
                      
                      *
                      
                      
                      
                      *
                      
                      
                      
                      7,021
                      
                      
                      
                      27.4
                      %Al
      Jaber Building Material Trading L.L.C.
                      
                      
                      *
                      
                      
                      
                      *
                      
                      
                      
                      2,415
                      
                      
                      
                      9.4
                      %*
      less than 5%.








At
December 31, 2008, we had accounts receivable of $4.91 million, net of allowance
of doubtful accounts of $2.04 million, representing accounts receivables from
five customers, all of which were less than 90 days old.  The largest
three customers for the fiscal year of 2008 listed in the above table accounted
for 80.7%, 14.8% and 2.4% of our accounts receivable, respectively.





Our
growth is dependent on expanding the production capacity, upgrading the
products, improving quality and expanding our marketing effort to develop a
larger customer base.  In the second quarter 2008, we completed the
construction of a new factory, which was put into operation in April
2008.  In addition, the upgrade and improvement of our original
facilities has also finished in the third quarter of 2008.  As a
result of this expansion, our production capacity increased to 3.5 million sets,
as compared to 1.2 million sets at the end of 2007.  During 2008, we
produced 1.3 million sets.





Since our
products are generally sold to companies in the construction and home
improvement segments, any downturn in the housing and renovation market in those
areas where we sell our products could have a material adverse effect upon our
business.  In 2008, our sales were made primarily to distributors in
Dubai, United Arab Emirates, and, to a lesser extent, in Russia.  The
worldwide economic downturn has affected these markets as well, commencing in
the second half of 2008.  As a result, our sales went down $2.3
million, or 12%, to $16.2 million for the second half of 2008, compared to the
first half of 2008.





Our
operations have been financed largely with short-term bank loans in the form of
export invoice financings, which typically have a two or three-month term and
have generally been rolled over at the end of the term.  Although in
the past these notes have been rolled over at the then current interest rate, we
cannot assure you that the banks will continue to lend us money.





-17-









Recent Accounting
Pronouncements




See Note
2 of Notes to Consolidated Financial Statements with respect to Recent
Accounting Pronouncements.




Results of
Operations




The
following table sets forth information from our statements of operations for the
years ended December31, 2008 and 2007, in dollars and as a percentage of revenue
(dollars in thousands).





Years
      Ended December 31,2008
                                
                                
                                2007Dollars
                                
                                
                                %
      of
                                  Net
      sales
                                
                                
                                Dollars
                                
                                
                                %
      of
                                  Net
      salesNet
      sales from unrelated parties
                                
                                $
                                34,739
                                
                                
                                
                                100.0
                                %
                                
                                $
                                18,567
                                
                                
                                
                                72.6
                                %Net
      sales from related parties
                                
                                
                                -
                                
                                
                                
                                0.0
                                %
                                
                                
                                7,021
                                
                                
                                
                                27.4
                                %Net
      sales – Total
                                
                                
                                34,739
                                
                                
                                
                                100.0
                                %
                                
                                
                                25,588
                                
                                
                                
                                100.0
                                %Cost
      of sales (exclusive of items shown separately below)
                                
                                
                                16,061
                                
                                
                                
                                46.2
                                %
                                
                                
                                5,209
                                
                                
                                
                                20.4
                                %Cost
      of sales - related parties
                                
                                
                                11,475
                                
                                
                                
                                33.0
                                %
                                
                                
                                15,200
                                
                                
                                
                                59.4
                                %Cost
      of sales – Total
                                
                                
                                27,536
                                
                                
                                
                                79.3
                                %
                                
                                
                                20,410
                                
                                
                                
                                79.8
                                %Gross
      profit
                                
                                
                                7,203
                                
                                
                                
                                20.7
                                %
                                
                                
                                5,178
                                
                                
                                
                                20.2
                                %Operating
      expenses:Selling
      expenses
                                
                                
                                510
                                
                                
                                
                                1.5
                                %
                                
                                
                                395
                                
                                
                                
                                1.5
                                %General
      and administrative
                                
                                
                                900
                                
                                
                                
                                2.6
                                %
                                
                                
                                313
                                
                                
                                
                                1.2
                                %Provision
      for doubtful accounts
                                
                                
                                4,198
                                
                                
                                
                                12.1
                                %
                                
                                
                                -
                                
                                
                                
                                0.0
                                %Officers'
      compensation
                                
                                
                                161
                                
                                
                                
                                0.5
                                %
                                
                                
                                24
                                
                                
                                
                                0.1
                                %Depreciation and amortization
                                
                                
                                212
                                
                                
                                
                                0.6
                                %
                                
                                
                                39
                                
                                
                                
                                0.2
                                %Consulting
      and professional
                                
                                
                                420
                                
                                
                                
                                1.2
                                %
                                
                                
                                73
                                
                                
                                
                                0.3
                                %Total
      operating expenses
                                
                                
                                6,410
                                
                                
                                
                                18.5
                                %
                                
                                
                                845
                                
                                
                                
                                3.3
                                %Income
      from transfer of patents - Net
                                
                                
                                -
                                
                                
                                
                                0.0
                                %
                                
                                
                                576
                                
                                
                                
                                2.3
                                %Reverse
      acquisition costs
                                
                                
                                -
                                
                                
                                
                                0.0
                                %
                                
                                
                                (917
                                )
                                
                                
                                (3.6
                                %)Operating
      income
                                
                                
                                793
                                
                                
                                
                                2.3
                                %
                                
                                
                                3,992
                                
                                
                                
                                15.6
                                %Other
      income
                                
                                
                                14
                                
                                
                                
                                0.0
                                %
                                
                                
                                38
                                
                                
                                
                                0.1
                                %Interest
      expense
                                
                                
                                (844
                                )
                                
                                
                                (2.4
                                %)
                                
                                
                                (371
                                )
                                
                                
                                (1.4
                                %)Foreign
      exchange loss
                                
                                
                                (403
                                )
                                
                                
                                (1.2
                                %)
                                
                                
                                (198
                                )
                                
                                
                                (0.8
                                %)Net
      (loss) income
                                
                                $
                                (440
                                )
                                
                                
                                (1.3
                                %)
                                
                                $
                                3,461
                                
                                
                                
                                13.5
                                %Other
      comprehensive incomeForeign
      currency translation adjustment
                                
                                
                                936
                                
                                
                                
                                2.7
                                %
                                
                                
                                578
                                
                                
                                
                                2.3
                                %Comprehensive
      income
                                
                                $
                                497
                                
                                
                                
                                1.4
                                %
                                
                                $
                                4,039
                                
                                
                                
                                15.8
                                %(Loss)
      earnings per common shareBasic
                                
                                $
                                (0.04
                                )
                                
                                
                                
                                
                                $
                                0.32Diluted
                                
                                $
                                (0.04
                                )
                                
                                
                                
                                
                                $
                                0.21Weighted
      average number of common shares outstandingBasic
                                
                                
                                10,742,480
                                
                                
                                
                                
                                
                                
                                10,725,438Diluted
                                
                                
                                10,742,480
                                
                                
                                
                                
                                
                                
                                16,704,605








-18-









Net
Sales




Net sales
were $34,739,033 and $25,587,594 for 2008 and 2007, respectively, representing
an increase $9,151,439, or 35.8%.  The significant increase is mainly
due to our expanded marketing efforts in Dubai, United Arab Emirates, which is a
retail and wholesale center of bathroom supply distributors in the Middle East,
and Russia.  During 2008, our net sales in Dubai increased $9.36
million, or 41.6%, to $31.88 million as compared to $22.52 million in
2007.  In addition, we generated revenue of $2.86 million in Russia
during 2008, an annual increase rate of 77.5% from 2007.  Our sales
were affected by the worldwide economic downturn commencing in the second half
of 2008.  As a result, our sales declined 12% to $16.2 million for the
second half of 2008, compared to $18.5 million in the first half of
2008.




Cost
of Sales; Gross Profit




Cost of
sales was $27,535,796 (of which $11,475,236 represented the raw materials
purchased from Kunpeng, a related party) for 2008 and $20,409,749 (of which
$15,200,461 represented purchases from Kunpeng) for 2007.  The
increase of $7,126,047 or 34.9% in cost of sales was primarily due to the rapid
increase of sales.  Cost of sales is the costs of finished goods sold,
including raw materials, labor costs and manufacturing
overhead.  Manufacturing overhead covers the depreciation of
production facilities.  Our gross margins are not comparable to those
of other entities, which record delivery expenses into cost of sales, since we
include delivery expenses in selling expenses.





Gross
profit was $7,203,237 for 2008, representing a gross margin of 20.7%, and
$5,177,845 for 2007, representing a gross margin of 20.2%.  Although
we were able to significantly increase our sales in years 2008 from 2007, the
gross margin increased very little, which was mainly attributed to our
production cost structure.  Most of our production cost is variable
cost and just a small part is fixed cost, which has the effect of increasing
gross margin with the increase of production volume.




Selling
Expenses




During
2008, selling expenses were $510,448, an increase of $115,395, or 29.2%, as
compared to $395,053 for 2007.  Selling expenses include delivery
expense, salaries of sales staff, expenses of sales offices and
advertising.  This increase is mainly attributable to significant
increases in delivery expenses resulting from the growth of sales volume. During
2008, delivery expenses increased by $169,025, or 85.3%, to $367,101 from
$198,076 in 2007.




General
and Administrative




General
and administrative expenses were $900,328 and $313,008 for 2008 and 2007,
respectively, reflecting an increase of $587,320, or 187.6%.  General
and administrative expenses include salaries, business entertainment, travel and
entertainment, rent, office expense, car expenses and insurance
costs.  The increase is mainly resulted from operation as a public
company since December 2007 and the expansion of our operating activities in
Fuda Yiyang, which led to the increased amount of salaries, business
entertainment, car expenses, travel, office and related expenses.




Provision
for Doubtful Accounts




During
twelve months ended December 31, 2008, our provision for doubtful accounts was
$4,197,771.  The entire provision for doubtful accounts was accrued in the
fourth quarter of 2008, and resulted from the effects of the worldwide economic
downturn, particularly in the real estate industry, and the resulting inability
of major customers to make payments as scheduled.  The charge for
doubtful accounts represents two components -- $2,159,012 was written off in
2008 for receivables which had been scheduled for payment in the fourth quarter
of 2008, and $2,038,759 was reserved against the remaining outstanding
receivables as of December 31, 2008.  We had no comparable expense in
2007.




Officers’
Compensation




Officers’
compensation was $161,133 and $24,353 for 2008 and 2007, respectively,
representing an increase of $136,780, or 561.7%.  The increase
reflects compensation to our independent directors, who were elected in April
2008 and did not receive any compensation in 2007.




-19-









Depreciation
and Amortization




Depreciation
and amortization, excluding depreciation included in cost of production,
increased $181,529, or 460.4%, from $ 39,426 in 2007 to $220,955 in
2008.  The increase in depreciation and amortization is mainly due to
completion of the new factory and acquisition of the relating land use right, as
well as the improvements in our original facilities in 2008.




Consulting
and Professional Fees




Consulting
and professional fees increased $346,262, or 471.5%, from $73,433 in 2007 to
$419,695 in 2008.  This increase was mainly attributable to increased
fees for legal, accounting and accounting consulting, investor relations and
other services required by us as a public company which we did not incur in
2007.




Income
from Transfer of Patents




During
2007, we transferred two patents to a non-affiliated company for
$621,451.  The costs relating to the development of these patents had
been expensed as incurred and not capitalized.  As a result, the basis
of these patents was zero.  We recognized income of $576,493,
representing the purchase price less related taxes and
expenses.  There was no similar transaction in twelve months ended
December 31, 2008.




Reverse
Acquisition Costs




We
incurred costs $916,908 in relation to the reverse acquisition completed in
December 2007.  This amount includes the payment of $625,000 to the
former principal stockholders to purchase their shares, and professional fees of
$291,908, including a non-cash charge of $33,852, representing the fair value of
33,517 shares of common stock issued to a reverse acquisition
consultant.  These reverse acquisition costs in 2007 are
non-recurring.




Net
Interest Expense




Net
interest expense, offsetting minor interest income, was $843,885 and $371,334
for 2008 and 2007, respectively, representing a $472,551, or 127.3%, increase as
a result of the increase of short-term bank loans.  During 2008, we
had an average of $10,430,200 of short term bank loans outstanding, at a
weighted average interest rate of 7.40%, as compared with average loan balance
of $4,414,100 at a weighted average interest rate of 7.19% in 2007.




Foreign
Currency Transaction Loss




Net
foreign currency transaction loss was $402,966 for 2008 and $198,373 for 2007,
which reflected a foreign exchange loss on accounts receivable from the
customers out of China, offsetting minor foreign exchange gain, which was
generated from loans denominated in United States dollars.




Net
Income (Loss)




As a
result of the factors described above, our net loss for 2008 was $439,525, or
$0.04 per share (basic and diluted), compared to net income of $3,460,510, or
$0.32 per share (basic) and $0.21 per share (diluted) for 2007.





With the
approval of the County Government of Yiyang, Fuda Yiyang was exempt from
corporate income taxes for 2008 and 2007.  As a result, we did not pay
any income tax in either 2008 or 2007.




Liquidity and Capital
Resources




At
December 31, 2008, we had working capital deficiency of $1,050,098, compared to
working capital of $7,988,451 for 2007.  Our current ratio was 0.9:1
at December 31, 2008, as compared with 2.0:1 at December 31,
2007.  The following table sets forth information as to the principal
changes in the components of our working capital from December 31, 2007 to
December 31, 2008 (dollars in thousands):




-20-









December 31,
                
                
                December 31, 2007 to December 31,
      2008Category
                
                2008
                
                
                2007
                
                
                Change
                
                
                Percent ChangeCurrent
      assets:Cash
      and cash equivalents
                
                $
                1,683
                
                
                $
                169
                
                
                $
                1,514
                
                
                
                895.9
                %Accounts
      receivable, net
                
                
                4,912
                
                
                
                487
                
                
                
                4,425
                
                
                
                908.6
                %Due
      from related party – trade
                
                
                -
                
                
                
                6,996
                
                
                
                (6,996
                )
                
                
                (100.0
                %)Prepayments
      to suppliers
                
                
                606
                
                
                
                14
                
                
                
                592
                
                
                
                *Inventories
                
                
                5,702
                
                
                
                8,260
                
                
                
                (2,558
                )
                
                
                (31.0
                %)Other
      current assets
                
                
                226
                
                
                
                252
                
                
                
                (26
                )
                
                
                (10.3
                %)Current
      liabilities:Short-term
      bank loans
                
                
                12,352
                
                
                
                5,253
                
                
                
                7,099
                
                
                
                135.1
                %Accounts
      payable
                
                
                968
                
                
                
                686
                
                
                
                282
                
                
                
                41.1
                %Due
      to related parties (trade and non-trade)
                
                
                508
                
                
                
                2,058
                
                
                
                (1,550
                )
                
                
                (75.3
                %)Accrued
      expenses
                
                
                315
                
                
                
                112
                
                
                
                203
                
                
                
                181.3
                %Other
      payables
                
                
                36
                
                
                
                81
                
                
                
                (45
                )
                
                
                (55.6
                %)Working
      capitalTotal
      current assets
                
                
                13,129
                
                
                
                16,178
                
                
                
                (3,049
                )
                
                
                (18.8
                %)Total
      current liabilities
                
                
                14,179
                
                
                
                8,190
                
                
                
                5,989
                
                
                
                73.1
                %Working
      capital
                
                
                (1,050
                )
                
                
                7,988
                
                
                
                (9,038
                )
                
                
                *


* The
percentage is not included.





During
2008, our operations generated net cash inflow of $4,065,808, as compared with
net cash used by our operating activities of $4,011,085 for 2007.  The
improvement primarily resulted from the increase of sales with regular
collection of receivables from January to October 2008, and the reduction of
inventory in the second half of 2008, which was offset by the provision for
doubtful accounts of $4,197,771 during the fourth quarter of 2008.





During
2008, we used $9,872,620 to purchase property, plant and equipment, including
the acquisition of land use right, the construction of a new factory and the
improvement of our original facilities.  As a result of the completion
of the new factory, the $1,867,513 reflected at December 31, 2007 as
construction in progress was classified at buildings at December 31,
2008.  During 2007, we utilized $2,354,500 to purchase fixed assets,
including progress payments for construction of new facilities, which are
reflected on the balance sheet as construction in progress, and we received
$612,451 from the sale of two patents.





During
2008, we generated $6,380,251 from financing activities, consisting of (1)
proceeds of $54,000 from exercise of warrants; (2) proceeds of $36,773,310 from
short-term bank loans, which was partially offset by repayments of $30,082,076;
(3) loans from Ms. Wu Yiting, a related party, of $3,114,675, which were more
than offset by repayments to Ms. Wu of $3,479,658 in respect of loans made by
Ms. Wu.  During 2007, we generated $4,330,422 from financing
activities, consisting of (1) proceeds of $3,043,000 from issuance of
convertible preferred stock and warrants, net of issuance costs; (2) proceeds of
$13,576,349 from short-term bank loans, which was partially offset by repayments
of $12,363,917; (3) loans from Ms. Wu of $4,596,921, which were substantially
offset by repayment of loans of $4,521,931; and (4) proceeds of $932,657 from
advances from employees, which have been fully repaid.





Except
for the December 2007 private placement, we have financed our operations
principally through rolling short-term bank loans and, to a lesser extent,
through loans from related parties.  The bank loans, which are granted
against delivery documents and are partially secured by a mortgage on one of our
parcels of land and ten workshop buildings, typically have terms of two or three
months and are used to fund export sales.  There can be no assurance
that we will be able to obtain necessary working capital from banks as we may
require bank loans in the future.





During
2008, our average monthly fixed expenses were approximately $240,000. We believe that our
normal operation can meet this cash requirement for the next 12
months.  However, we believe that we require equity or debt financing
with longer maturity to improve our short-term liquidity, develop new markets
and make acquisitions to expand our product mix.  We will need to seek
additional sources of funding to achieve these objectives.  However,
because of our net losses, combined with the economic problems facing our
customer base and our net loss for 2008, it will be very difficult to obtain
long-term financing, and we cannot assure you that any necessary financing will
be available on reasonable terms, if at all.




-21-









Off-Balance Sheet
Arrangements




At
December 31, 2008, we did not have any off-balance sheet
arrangements.




ITEM
      8.
            FINANCIAL
      STATEMENTS.




The
Consolidated Financial Statements, including notes thereto, together with the
report thereon of Bernstein & Pinchuk LLP, are presented beginning on page
F-1.




ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE




None.




ITEM
9A(T). CONTROLS AND PROCEDURES.






Disclosure Controls and
Procedures




As of the
end of the period covered by this annual report, management performed, with the
participation of our chief executive officer and chief financial officer, an
evaluation of the effectiveness of our disclosure controls and procedures as
defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure
controls and procedures are designed to ensure that information required to be
disclosed in the report we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the
SEC’s forms, and that such information is accumulated and communicated to our
management including our chief executive officer and chief financial officer, to
allow timely decisions regarding required disclosures. Based on the evaluation
and the identification of the material weaknesses in internal control over
financial reporting described below, our chief executive officer and chief
financial officer concluded that, as of December 31, 2008 our disclosure
controls and procedures were effective.




Management’s Report of
Internal Control over Financial Reporting.




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange
Act. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements in accordance with GAAP.  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projection of any evaluation
of effectiveness to future periods is subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.




Management
has conducted, with the participation of our chief executive officer and our
chief financial officer, an assessment, including testing of the effectiveness,
of our internal control over financial reporting as of December 31,
2008.  Management’s assessment of internal control over financial
reporting was conducted using the criteria in Internal Control over Financial
Reporting - Guidance for Smaller Public Companies issued by the Committee of
Sponsoring Organizations of the Treadway Commission.




A
material weakness is a deficiency, or a combination of deficiencies, in internal
controls over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis.  In
connection with management’s assessment of our internal control over financial
reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002, we
concluded there were no material deficiencies in our internal controls over
financial reporting, and, accordingly, our controls are effective.




This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the SEC that permit the
Company to provide only management’s report in this annual report.




-22-









Changes in Internal Control
Over Financial Reporting.




There
were no changes in our internal control over financial reporting during the
fourth quarter ended December 31, 2008 that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




PART
III




ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.


Directors and Executive
Officers




The
directors and executive officers of the Company are as follows:




Name
              
              Age
              
              PositionWu
      Yiting
              
              45
              
              Chief
      executive officer and chairman of the board of
directorsWu
      Yaxu
              
              43
              
              Chief
      financial officer, directorYu
      Hao(1)
      (3)
              
              36
              
              DirectorZhang
      Ning(1)(2)(3)
              
              50
              
              DirectorDavid
      Yaudoon Chiang(1)(2)(3)
              
              39
              
              DirectorDavid
      Oldridge(2)(3)
              
              55
              
              DirectorJibrin
      Issa Jibrin Al Jibrin
              
              50
              
              Director


(1)
Member of the audit committee.


(2)
Member of the compensation committee.


(3)
Independent director.




Wu Yiting
became our chief executive officer and chairman of the Board of Directors on
December 3, 2007.  In 1995, Ms. Wu founded Fuda Yiyang and has been
its chief executive officer from its organization until the
present.  Ms. Wu majored in economy management, graduated from Central
China Political University in 2000 and is a registered accountant in
China.




Wu Yaxu
became our chief financial officer and one of our directors on December 3,
2007.  She worked as accounting supervisor in Jiangxi Gandongbei
Bushing Factory from 1983 to 1994.  Ms. Wu has been working at Fuda
Yiyang since 1995. She majored in corporation management, graduated from Beijing
Academy of Social Science in 1989. She is a registered accountant in
China.





Yu
Hao has more than 15 years of work experience in finance and
accounting.  Ms. Yu is a chartered certified
accountant.  Ms. Yu has been chief financial officer of Shen Zhen Min
Run Agriculture Products Distribution Chain Store Co., Ltd. since March
2008.  Ms. Yu worked as a financial controller at DeCoro Limited from
July 2004 to March 2008, as chief financial officer at Hubei Tianhua
Shareholding Co., Ltd from May 2000 to July 2004, and as an internal audit and
business control manager at Shenzhen IBM Technology Product Co., Ltd. from July
1998 to May 2000.  Ms. Yu Hao graduated with a MS in accounting from
The Chinese University of Hong Kong Business School and a BS in technical
economics from Huazhong Science & Technology University.





Zhang
Ning has more than 20 years of experience in accounting and corporate
finance.  Mr. Zhang has been a senior financial consultant at
Friedland Capital Corporation since July 2005.  He worked in the
finance consulting division at Benchmark Capital from July 2002 to June 2005, as
an audit manager at Beijing Xiwen Accounting firm from July 1997 to July 2002,
and as an audit manager at Beijing Dexin Accounting firm from March 1993 to June
1997.  Mr. Zhang received a BS in Finance and Accounting from Renmin
University of China





David
Yaudoon Chiang has more than 15 years of experience in finance.  Since
July 2004, Mr. Chiang has been a managing director in the investment banking
division of Northeast Securities, Inc.  Mr. Chiang was a principal of
Bayview Consulting from June 2003 to July 2004, a vice president at C.E.
Unterberg, Towbin Asset Management from February 2002 to March 2003, an analyst
at C.E. Unterberg Towbin from December 1999 to December 2001, a senior equity
analyst at Nikko Securities International from June 1997 to February
1999.  Mr. David Yaudoon Chiang graduated with honors from New York
University - Stern School of Business and holds a BS degree in Finance and
International Business.




-23-







David
Oldridge has more than 30 years of experience in operations management and
entrepreneurship.  Mr. Oldridge has been the head of Contract
Logistics North Asian for CEVA since October 2007.  Mr. Oldridge was
managing director of Asian Insight from January 2007 to October 2007, chief
executive officer of SCFulfil Logistics Limited from March 2006 to January 2007,
chief executive officer of Tradeport Hong Kong Limited from January 2002 to
March 2006, vice president of BAX Global from December 1998 to January 2002 and
an executive director at PT Global Indonesia from December 1997 to December
1998.





Jibrin
Issa Jibrin Al Jibrin joined Fuda’s affiliated company in 2006 and has served as
sales director since January 2008.  Mr. Jibrin held director positions
in Dammam Dome Group in Saudi Arabia from 2002 to 2006, Issa Al Jiblin from 1999
to 2002; and Gabieal International Corporation from 1983 to 1999.  Mr.
Jibrin graduated from Kent State University with a Bachelors degree in Computer
Science and Business Management.




Family
Relationships




Wu Yiting
and Wu Yaxu are sisters.  No other directors and executive officers
are related.




Committees of the Board of
Directors and Financial Expert




Ms. Yu,
Mr. Zhang, Mr. Chiang, and Mr. Oldridge are independent directors. The audit
committee consists of Yu Hao, as chairperson, Zhang Ning and David Yaudoon
Chiang. The Board has determined that at least one person on the audit
committee, Ms. Yu Hao, qualifies as a “financial expert” as defined by SEC
rules. The compensation committee consists of Zhang Ning, as chairperson, David
Yaudoon Chiang and David Oldridge.





Our audit
committee is involved in discussions with our independent auditor with respect
to the scope and results of our year-end audit, our quarterly results of
operations, our internal accounting controls and the professional services
furnished by the independent auditor. Our board of directors has adopted a
written charter for the audit committee which the audit committee reviews and
reassesses for adequacy on an annual basis.   Our audit committee also
has the authority to select our independent registered accounting
firm.




Our audit
committee:




·
            Has
      reviewed and discussed the Form 10-Q and the unaudited financial
      statements for the second and third quarters of 2008 with management and
      the independent auditors,




·
            Has
      discussed with the independent auditors the matters required to be
      discussed by the Public Company Accounting Oversight Board Statement on
      Auditing Standards No. 61 as amended titled Communication With Audit
      Committees, including the selection and any changes in the
      accounting policies used by the company, the auditor’s responsibility
      under the generally accepted auditing standards, and the process used by
      management to formulate accounting
estimates.




·
            Has
      received the written disclosures and letter from the independent
      accountants required by Independence Standards Board Standard No. 1 and
      discussed with the independent accountants the independence of the
      independent accountants.




·
            Recommended
      based on the review and discussion set forth above, to the board of
      directors that the unaudited financial statements be included in the
      Quarterly Report on Form 10-Q for the second and third quarters of
      2008.




·
            Recommended
      that the firm of Bernstein & Pinchuk LLP be engaged as our independent
      registered accounting firm for
2008.




The
charter for the compensation committee outlines the committee’s purpose,
operating purpose, and responsibilities.  Members of the committee are
required to meet at least once per year though the company anticipates biannual
meetings.    All member of the compensation committee are
independent directors as defined in accordance with the rules of the Nasdaq
Stock Market. The committee charter provides oversight and guidance for
compensation for all of our employees.  Under the charter, members of
the compensation committee review and make recommendation to the board with
respect to incentive compensation plans and equity-based plans for the senior
management and board members.






-24-







Compensation Committee
Interlocks and Insider Participation





No member
of the compensation committee:





·
            Was
      an officer or employee during the current fiscal
  year.





·
            Was
      formerly an officer.





·
            Had
      any relationship with us that is required to be disclosed as a related
      party transaction.





Board and Committee
Attendance





The Board
and its committees held the following number of meetings during
2008.





NumberBoard
      of directors
                  1Audit
      committee
                  1Compensation
      committee
                  1





The
number of meetings includes meetings that were held by means of a conference
call and does not include actions taken by unanimous written
consent.




Each
director attended all the meetings of the board and those committees on which he
served during the year.




Code of
Ethics




We have
adopted a Code of Business Conduct and Ethics (the “Code”) that is applicable to
all employees, consultants and members of the Board of Directors, including the
Chief Executive Officer, Chief Financial Officer and Secretary. This Code
embodies our commitment to conduct business in accordance with the highest
ethical standards and applicable laws, rules and regulations. We will provide
any person a copy of the Code, without charge, upon written request to the
Company’s Secretary.  Requests should be addressed in writing to Ms.
Chen Jingqiu: Ge Jia Ba, Hua Ting, Yiyang Jiangxi, P.R.C. 334400.




Section 16(a) Beneficial
Ownership Compliance




Section
16(a) of the Securities Exchange Act of 1934 requires our officers, directors
and certain persons holding more than 10% of a registered class of our common
stock to file with the Securities and Exchange Commission initial reports of
ownership and reports of changes in ownership of our common stock. Officers,
directors and certain other shareholders are required by the Securities and
Exchange Commission to furnish the Company with copies of all Section 16(a)
forms they file. To the best of the Company’s knowledge,
based solely upon a review of the copies of such reports, our officers and
directors did not file a timely Form 3.




-25-









ITEM
      11.
                EXECUTIVE
      COMPENSATION.


Summary Compensation
Table




No
executive officer’s total compensation exceeded $100,000 during 2008 and
2007.  The following table sets forth all compensation paid for the
past two years to our chief executive officer and our chief financial officer
for 2008 and 2007.  Compensation includes compensation from Fuda
Yiyang.





Name
      and Principal Position
                                        
                                        Year
                                        
                                        Salary(1)
                                          ($)
                                        
                                        
                                        Total
                                          ($)Wu
      Yiting, chief executive officer
                                        
                                        2008
                                        
                                        $
                                        8,700
                                        
                                        
                                        $
                                        8,7002007
                                        
                                        
                                        8,100
                                        
                                        
                                        
                                        8,100Wu
      Yaxu, chief financial officer
                                        
                                        2008
                                        
                                        
                                        8,700
                                        
                                        
                                        
                                        8,7002007
                                        
                                        
                                        6,500
                                        
                                        
                                        
                                        6,500





(1)
            The
      change of Wu Yiting’s salary from fiscal 2008 and 2007 results from the
      appreciation of RMB against the United States dollar.  The
      compensation in RMB was unchanged from 2007 to
  2008.





Neither
Wu Yiting nor Wu Yaxu has an employment contract with us, and they did not
receive any options or other equity-based incentives or any other form of
compensation other than salary.





We do not
have a stock option or other equity-based incentive plan.





We do not
have any plans that provide for the payment of retirement benefits, or benefits
that will be paid primarily following retirement. There are no compensatory
plans or arrangements that provide for payment(s) to a named executive officer
at, following, or in connection with the resignation, retirement or other
termination of a named executive officer, or a change in control or a change in
the named executive officer's responsibilities following a change in control,
with respect to each named executive officer.




Compensation of
Directors




The
following table sets forth information as to the compensation paid to our
directors (other than those named in the summary compensation table) for
2008.




Name
                    
                    Fees
      Paid
                      in
      Cash
                      ($)
                    
                    Stock
                      Awards
                      ($)
                    
                    Total
                      ($)Yu
      Hao
                    
                    $7,500*
                    
                    $7,500
                    
                    $15,000Zhang
      Ning
                    
                    7,500*
                    
                    7,500
                    
                    15,000David
      Yaudoon Chiang
                    
                    7,500*
                    
                    7,500
                    
                    15,000David
      Oldridge
                    
                    7,500*
                    
                    7,500
                    
                    15,000Jibrin
      Issa Jibrin AlJibrin
                    
                    70,588
                    
                    -0-
                    
                    70,588*
      In addition to $7,500 paid in 2008, we also accrued $3,750, which was
      outstanding as of March 23,
2009.





We pay
each independent director an annual fee of $15,000 , payable quarterly, and
issue to each of them common stocks valued at $10,000 for their one-year
service.  We agreed to issue to each of these directors 2,632 shares
of common stock, which had a value of $10,000 on the date of their
election.  Their services started in April 2008.




The
compensation paid to Jibrin Issa Jibrin AlJibrin for 2008 reflects his
compensation as our sales director.  We did not pay Mr. Al Jibrin any
compensation in 2008 for services as a director.




ITEM
      12.
                  SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.


The
following table provides information as to shares of common stock beneficially
owned as of March 23, 2009 by:




·
            each
      director;






-26-









·
            each
      officer named in the summary compensation
table;


·
            each
      person owning of record or known by us, based on information provided to
      us by the persons named below, to own beneficially at least 5% of our
      common stock; and


·
            all
      directors and executive officers as a
group.





Name
                          
                          Shares
      of Common
                            Stock
      Beneficially Owned(1)
                          
                          Percentage
      of Outstanding
                            Common
      StockWu
      Yiting (2)
                            Ge
      Jia Ba, Hua Ting, Yiyang
                            Jiangxi,
      PRC 334400
                          
                          9,739,645
                          
                          90.47%Jibrin
      Issa Jibrin AlJibrin, Trustee of Wu Yiting Trust (2)
                            Ge
      Jia Ba, Hua Ting, Yiyang
                            Jiangxi,
      PRC 334400
                          
                          7,017,620
                          
                          65.18%Yu
      Hao
                          
                          2,632
                          
                          *Zhang
      Ning
                          
                          2,632
                          
                          *David
      Yaudoon Chiang
                          
                          2,632
                          
                          *David
      Oldridge
                          
                          2,632
                          
                          *Wu
      Yaxu
                          
                          0
                          
                          0%All
      directors and management as a group(2)
                          
                          9,750,173
                          
                          90.56%




*           Less
than 1%





Except as
otherwise indicated, each person has the sole power to vote and dispose of all
shares of common stock listed opposite his name.





(1)
            Shares
      are deemed to be beneficially owned by a person if the person has the
      right to acquire the shares within 60 days of March 23, 2009.(2)
            Jibrin
      Issa Jibrin AlJibrin is trustee of the Wu Yiting Stock
      Trust.  Wu Yiting is our chief executive officer and chairman of
      our board of directors.  The shares held by the trust are deemed
      to be beneficially owned by Wu Yiting since she has a right to instruct
      the trustee as to the voting or disposition of the shares.  Wu
      Yiting is also the beneficial owner of 2,722,025 shares of common stock
      which are held by certain of our employees as nominee for
her.


Barron
Partners owns series A preferred stock which, if fully converted, would result
in the ownership of more than 5% of our outstanding common
stock.  However, the series A preferred stock may not be converted if
such conversion would result in Barron Partners and its affiliates owning more
than 4.9% of our outstanding common stock.  This limitation may not be
waived.  As a result, Barron Partners is not deemed to be a 5%
stockholder.




Change in
Control




There
were not any arrangements, known to us as of the date of this report, the
operation of which may result in a change in control.




ITEM
      13.
                    CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.


Related Party
Transactions




Wu Yiting
is the sole owner of Fuda Yiyang.  Moral Star China is party to a
series of agreements with Fuda Yiyang. These agreements, which consist of a
management agreement, a purchase agreement, a voting proxy agreement, a share
pledge agreement, an exclusive option agreement, a patent transfer agreement and
a trademark transfer agreement, and provide that we operate the business of Fuda
Yiyang and derive the profits (and sustain the losses) of Fuda Yiyang. These
agreements provide that we operate the business of Fuda Yiyang and derive the
profits (and sustain the losses) of Fuda Yiyang and are described in “Item 1. –
Business.”






-27-







Wu Yiting
is also the chief executive officer and an 80% stockholder of
Kunpeng.  Kunpeng has agreed to supply Fuda Yiyang and Moral Star
China on an exclusive basis with recycled copper at its original cost, which
will be not greater than the local market price.  When the price of
worn copper fluctuates in the local market by 20%, Kunpeng must notify Fuda
Yiyang and Moral Star China.  The agreement has no fixed
term.  We purchase most of our raw copper from Kunpeng.  Our
purchases from Kunpeng totaled $10,240,000, representing 49.2% of our total
purchases, in 2008 and $16,491,000, representing 70.5% of our purchases, in
2007.  As of December 31, 2008 and 2007, the amount due to Kunpeng in
connection with these transactions was $4,089 and $1,189,152,
respectively.





On
January 1, 2008, Jibrin Issa Jibrin Al Jibrin is a director and is sales
director of Fuda Yiyang. Al Jibrin General Trading L.L.C., a Dubai-based
distribution company that is owned by Mr. Al Jibrin, was our second largest
customer in 2007, accounting for sales of $7.0 million, or 27.4% of our
sales.  Sales to Al Jibrin General Trading were made at the same
prices and on the same terms, including credit terms, as sales to non-affiliated
distributors. As of December 31, 2007, the amount due from Jibrin Company was
$6,996,322, all of which had been collected during the first quarter of
2008.  Mr. Al Jibrin is the trustee of the Wu Yiting Trust, which is
our controlling stockholder.  There was no transaction of the same
kind in 2008.





We have
from time to time borrowed money from related parties on a non-interest bearing
basis.





As of
December 31, 2007, we owed Wu Yiting $869,802 for advances which she made to
us.  In 2008, Wu Yiting advanced $3,114,675 to us and we repaid her
$3,479,658.  As of December 31, 2008, the balance due to Ms. Wu was
$504,819.




Director
Independence




Under the
independence standard applicable to Nasdaq listed companies, which is the
independence standard that we have chosen to report under, four of the members
of our board of directors are independent. They are Yu Hao, Zhang Ning, David
Yaudoon Chiang and David Oldridge.




ITEM
      14.
                      CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.


Principal Accounting
Fees




Our
financial statements at for the years ended December 31, 2008 and 2007 were
audited by Bernstein & Pinchuk LLP (“Bernstein”). Bernstein was the
independent registered accounting firm for Fuda Yiyang prior to the reverse
acquisition in December 2007.  The following is a summary of the fees
for professional services rendered by Bernstein for the years ended
December 31, 2008 and December 31, 2007:





Year Ended December 31,2008
                  
                  
                  2007Audit
      fees
                  
                  $
                  97,500
                  
                  
                  $
                  75,000Audit-related
      fees
                  
                  
                  9,250
                  
                  
                  
                  --Tax
      fees
                  
                  
                  --
                  
                  
                  
                  --All
      other fees
                  
                  
                  --
                  
                  
                  
                  --Total
                  
                  $
                  106,750
                  
                  
                  $
                  75,000





Audit fees.Audit fees represent
fees for professional services performed by Bernstein for the audit of our
annual financial statements and the review of our quarterly financial
statements, as well as services that are normally provided in connection with
statutory and regulatory filings or engagements.





Audit -related Fees.
Audit-related fees represent fees for assurance and related services by
Bernstein that are reasonably related to the performance of the audit or review
of our financial statements. The specific services was related to Bernstein’s
review of our registration statement covering the sale of common stock by
selling stockholders.





Tax Fees.Tax fees represent
fees for tax compliance services.  Bernstein did not perform any tax
compliance services during 2008 or 2007.




All other
fees.    Bernstein did not perform any other services
for us during 2008 or 2007.




-28-









Policy
on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors




Our audit
committee was created in April 2008.  The audit committee’s policy is
to pre-approve all audit and permissible non-audit services provided by the
independent registered public accounting firm. These services may include audit
services, audit-related services, tax services and other
services.  The independent registered public accounting firm and
management are required to periodically report to the audit committee regarding
the extent of services provided by the independent registered public accounting
firm in accordance with this pre-approval, and the fees for the services
performed to date.  The audit committee may also pre-approve
particular services on a case-by-case basis.  All services since April
2008 were pre-approved by the audit committee.





Since we
did not have a formal audit committee in 2007, our board of directors served as
our audit committee. We have not adopted pre-approval policies and procedures
with respect to our accountants in 2007. All of the services provided and fees
charged by our independent registered accounting firms in 2007were approved by
the board of directors.




PART
IV




ITEM
      15.
                        EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES.
  Description of
Exhibits


Exhibit
                No.
              Description
              Incorporated
      by Reference in Document
              Exhibit
      No. in Incorporated Document2.1
              Share
      Exchange Agreement, dated December 3, 2007
              Form
      8-K filed on December 10, 2007
              99.73.1
              Restated
      Certificate of Incorporation
              Form
      8-K filed on December 10, 2007
              3.13.2
              Certificate
      of Ownership and Merger of Fuda Faucet Works, Inc. and Capital Solutions
      I, Inc., dated December 3, 2007
              Form
      8-K filed on December 10, 2007
              3.23.2
              Certificate
      of Designation of Series A Preferred Stock
              Form
      8-K filed on December 10, 2007
              99.23.3
              Restated
      by-laws
              Filed
      herewith4.1
              Form
      of $1.80 Warrants, dated December 3, 2007
              Form
      8-K filed on December 10, 2007
              99.34.2
              Form
      of $3.00 Warrants, dated December 3, 2007
              Form
      8-K filed on December 10, 2007
              99.410.1
              Securities
      Purchase Agreement, dated December 3, 2007
              Form
      8-K filed on December 10, 2007
              99.110.2
              Registration
      Rights Agreement, dated December 3, 2007
              Form
      8-K filed on December 10, 2007
              99.510.3
              Closing
      Escrow Agreement, dated December 3, 2007
              Form
      8-K filed on December 10, 2007
              99.610.4
              Buyback
      Agreement. Dated December 3, 2007
              Form
      8-K filed on December 10, 2007
              99.810.5
              Frequently
      Related Transactions Structural Agreement between Moral Star China, Fuda,
      and Kunpeng
              Form
      8-K filed on December 10, 2007
              99.910.6
              Purchase
      Agreement between Moral Star China and Fuda Yiyang
              Form
      8-K filed on December 10, 2007
              99.1010.7
              Amendment
      to the Securities Purchase Agreement dated January 30,
2009
              Form
      8-K filed on February 6, 2009
              99.121.1
              List
      of Subsidiaries
              Form
      S-1 filed on February 14, 2008
              21.131.1
              Certification
      by Chief Executive Officer pursuant to Sarbanes Oxley Act of 2002 Section
      302.
              Filed
      herewith31.2
              Certification
      by Chief Financial Officer pursuant to Sarbanes Oxley Act of 2002 Section
      302.
              Filed
      herewith32.1
              Certification
      by chief executive officer and chief financial officer pursuant to
      Sarbanes-Oxley Act of 2002 Section 906.
              Filed
      herewith










-29-









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.





Fuda
      Faucet Works, Inc.By:
              /s/
      Wu YitingWu
      YitingChief
      Executive Officer and Chairman of the Board of
Directors(Principal
      Executive Officer)April
      13, 2009





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities on the dates indicated. Each person whose signature appears below
hereby authorizes Wu Yiting as his or her true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution for him or her and in
his or her name, place and stead, in any and all capacities to sign any and all
amendments to this report, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission.




Signature
              
              Title
              
              Date/s/
      Wu Yiting
              
              President,
      chief executive officer and director
              
              April
      13, 2009Wu
      Yiting
              
              (Principal
      executive officer)/s/
      Wu Yaxu
              
              Chief
      financial officer and director
              
              April
      13, 2009Wu
      Yaxu
              
              (Principal
      financial and accounting officer)/s/
      Yu Hao
              
              Director
              
              April
      9, 2009Yu
      Hao/s/
      Zhang Ning
              
              Director
              
              April
      13, 2009Zhang
      Ning/s/
      David Yaudoon Chiang
              
              Director
              
              April
      8, 2009David
      Yaudoon Chiang/s/
      David Oldridge
              
              Director
              
              April
      13, 2009David
      Oldridge/s/Jibrin
      Issa Jibrin AlJibrin
              
              Director
              
              April
      10, 2009Jibrin
      Issa Jibrin AlJibrin









-30-






Index
to Consolidated Financial Statements






Report
      of Independent Registered Public Accounting Firm
                          F-1Consolidated
      Balance Sheets
                          F-2Consolidated
      Statements of Operations and Comprehensive Income
                          F-3Consolidated
      Statements of Cash Flows
                          F-4Consolidated
      Statements of Stockholders’ Equity
                          F-5Notes
      to Consolidated Financial Statements
                          F-6














Report
of Independent Registered Public Accounting Firm
 
  To the
Board of Directors and Stockholders of
 
 Fuda
Faucet Works, Inc
 
 We have
audited the accompanying consolidated balance sheets of Fuda Faucet Works, Inc
(“the Company”) as of December 31, 2008 and 2007 and the related consolidated
statements of operations and comprehensive income, changes in stockholders’
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2008 and 2007 and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
 
 /s/ Bernstein
& Pinchuk LLP
 
 New
York, New York
 March 29,
2009





F-1





FUDA
      FAUCET WORKS, INC.CONSOLIDATED
      BALANCE SHEETS(US
      dollars)Item
                
                December
      31, 2008
                
                
                December
      31, 2007RestatedASSETSCurrent
      assetsCash
      and cash equivalents
                
                
                1,683,220
                
                
                
                169,319Accounts
      receivable - net of allowance for doubtful
                  accounts
      of $2,038,759 and nil, respectively
                
                
                4,912,266
                
                
                
                487,471Due
      from related parties - trade
                
                
                -
                
                
                
                6,996,322Prepayments
      to suppliers
                
                
                605,939
                
                
                
                14,326Inventories
                
                
                5,701,896
                
                
                
                8,260,479Other
      current assets
                
                
                226,375
                
                
                
                251,619Total
      current assets
                
                
                13,129,696
                
                
                
                16,179,536Property,
      plant and equipment:Land
      use right
                
                
                2,101,081
                
                
                
                869,251Buildings
                
                
                7,183,807
                
                
                
                1,180,427Machinery
      and equipment
                
                
                5,784,845
                
                
                
                983,079Automobiles
                
                
                210,467
                
                
                
                128,495Office
      equipment
                
                
                38,026
                
                
                
                14,003Property
      plant and equipment - total
                
                
                15,318,226
                
                
                
                3,175,255Accumulated
      depreciation
                
                
                (1,448,788
                )
                
                
                (777,600
                )Property
      plant and equipment - net
                
                
                13,869,438
                
                
                
                2,397,655Construction
      in progress
                
                
                881
                
                
                
                1,867,513Other
      long-term assets - idle assetsMachinery
      and equipment - net
                
                
                177,059
                
                
                
                165,662Land
      use right - net
                
                
                196,873
                
                
                
                184,205Total
      assets
                
                
                27,373,947
                
                
                
                20,794,571LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesShort-term
      bank loans
                
                
                12,351,817
                
                
                
                5,252,594Accounts
      payable
                
                
                967,745
                
                
                
                686,114Due
      to related parties - trade
                
                
                4,089
                
                
                
                1,189,152Due
      to related parties - non-trade
                
                
                504,819
                
                
                
                869,802Accrued
      expenses
                
                
                314,979
                
                
                
                112,280Other
      payables
                
                
                36,345
                
                
                
                81,143Total
      current liabilities
                
                
                14,179,794
                
                
                
                8,191,085Commitments
      and ContingenciesStockholders’
      equityPreferred
      stock, 20,000,000 shares authorized; 0.001 par value  and
                  0.0000001
      par value on December 31, 2008 and 2007,
      respectively;
                  3,090,909
      shares issued and outstanding on December 31, 2008 and
                  2007,
      respectively
                
                
                3,091
                
                
                
                -Common
      stock, 110,000,000 shares and 900,000,000
      shares
                  authorized
      on December 31, 2008 and 2007; 0.001 par value  and
                  0.0000001
      par value; 10,765,966 shares and 10,725,438 shares issued
                  and
      outstanding on December 31, 2008 and
      2007,
                  respectively
                
                
                10,766
                
                
                
                1Additional
      paid-in capital
                
                
                7,397,961
                
                
                
                3,748,785Surplus
      reserve
                
                
                260,430
                
                
                
                260,430Retained
      earnings
                
                
                3,745,028
                
                
                
                7,753,585Accumulated
      other comprehensive income
                
                
                1,776,877
                
                
                
                840,685Total
      stockholders’ equity
                
                
                13,194,153
                
                
                
                12,603,486Total
      liabilities and stockholders’ equity
                
                
                27,373,947
                
                
                
                20,794,571See
      notes to consolidated financial statements.






F-2









FUDA
      FAUCET WORKS, INC.CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOMEItem
                        
                        (US
      dollars)Years
      Ended December 31,2008
                        
                        
                        2007RestatedNet
      salesNet
      sales from unrelated parties
                        
                        
                        34,739,033
                        
                        
                        
                        18,566,873Net
      sales from related parties
                        
                        
                        -
                        
                        
                        
                        7,020,721Net
      sales – Total
                        
                        
                        34,739,033
                        
                        
                        
                        25,587,594Cost
      of salesCost
      of sales (exclusive of items shown separately below)
                        
                        
                        16,060,560
                        
                        
                        
                        5,209,288Cost
      of sales - related parties
                        
                        
                        11,475,236
                        
                        
                        
                        15,200,461Cost
      of sales – Total
                        
                        
                        27,535,796
                        
                        
                        
                        20,409,749Gross
      margin
                        
                        
                        7,203,237
                        
                        
                        
                        5,177,845Operating
      expenses:Selling
      expenses
                        
                        
                        510,448
                        
                        
                        
                        395,053General
      and administrative
                        
                        
                        900,328
                        
                        
                        
                        313,008Allowance
      for doubtful accounts
                        
                        
                        4,197,771
                        
                        
                        
                        -Officers'
      compensation
                        
                        
                        161,133
                        
                        
                        
                        24,353Depreciation
      and amortization
                        
                        
                        220,955
                        
                        
                        
                        39,426Consulting
      and professional
                        
                        
                        419,695
                        
                        
                        
                        73,433Total
      operating expenses
                        
                        
                        6,410,330
                        
                        
                        
                        845,273Income
      from transfer of patents – Net
                        
                        
                        -
                        
                        
                        
                        576,493Reverse
      acquisition costs
                        
                        
                        -
                        
                        
                        
                        (916,908
                        )Operating
      income
                        
                        
                        792,907
                        
                        
                        
                        3,992,157Other
      income
                        
                        
                        14,419
                        
                        
                        
                        38,060Interest
      expense
                        
                        
                        (843,885
                        )
                        
                        
                        (371,334
                        )Foreign
      exchange loss
                        
                        
                        (402,966
                        )
                        
                        
                        (198,373
                        )Net
      (loss) income
                        
                        
                        (439,525
                        )
                        
                        
                        3,460,510Other
      comprehensive incomeForeign
      currency translation adjustment
                        
                        
                        936,192
                        
                        
                        
                        578,147Comprehensive
      income
                        
                        
                        496,667
                        
                        
                        
                        4,038,657(Loss)
      earnings per common shareBasic
                        
                        
                        (0.04
                        )
                        
                        
                        0.32Diluted
                        
                        
                        (0.04
                        )
                        
                        
                        0.21Weighted
      average number of shares outstandingBasic
                        
                        
                        10,742,480
                        
                        
                        
                        10,725,438Diluted
                        
                        
                        10,742,480
                        
                        
                        16,704,605See
      notes to consolidated financial statements.






F-3





FUDA
      FAUCET WORKS, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWSItem
                      
                      (US
      dollars)Years
      Ended December 31,2008
                      
                      
                      2007Cash
      flows from operating activities:Net
      (loss) income
                      
                      
                      (439,525
                      )
                      
                      
                      3,460,510Adjustments
      to reconcile net income to
                        net
      cash provided by in operating activities:Depreciation
      and amortization
                      
                      
                      671,188
                      
                      
                      
                      202,659Provision
      for doubtful accounts
                      
                      
                      4,197,771
                      
                      
                      
                      -Gain
      from transfer of patent
                      
                      
                      -
                      
                      
                      
                      (576,493
                      )Amortization
      of fair value of warrants and stocks as
                        compensation
                      
                      
                      89,562
                      
                      
                      
                      39,570Changes
      in operating assets and liabilitiesAccounts
      receivable
                      
                      
                      (8,622,566
                      )
                      
                      
                      2,685,326Due
      from related parties - trade
                      
                      
                      6,996,322
                      
                      
                      
                      (6,996,322
                      )Prepayments
      to suppliers
                      
                      
                      (591,613
                      )
                      
                      
                      357,608Inventories
                      
                      
                      2,558,583
                      
                      
                      
                      (3,153,039
                      )Other
      current assets
                      
                      
                      (48,383
                      )
                      
                      
                      (105,246
                      )Accounts
      payable
                      
                      
                      281,631
                      
                      
                      
                      (31,115
                      )Due
      to related parties-trade
                      
                      
                      (1,185,063
                      )
                      
                      
                      20,189Accrued
      expenses
                      
                      
                      202,699
                      
                      
                      
                      76,524Other
      payables
                      
                      
                      (44,798
                      )
                      
                      
                      8,744Net
      cash provided by (used in) operating activities:
                      
                      
                      4,065,808
                      
                      
                      
                      (4,011,085
                      )Cash
      flows from investing activities:Purchase
      of property, plant and equipment
                      
                      
                      (9,872,620
                      )
                      
                      
                      (2,354,500
                      )Proceeds
      from transfer of patents
                      
                      
                      -
                      
                      
                      
                      612,451Net
      cash used in investing activities
                      
                      
                      (9,872,620
                      )
                      
                      
                      (1,742,049
                      )Cash
      flows from financing activities:Proceeds
      from issuance of common stock
                      
                      
                      54,000
                      
                      
                      
                      3,043,000Proceeds
      from short-term bank loans
                      
                      
                      36,773,310
                      
                      
                      
                      13,576,349Repayment
      of short-term bank loans
                      
                      
                      (30,082,076
                      )
                      
                      
                      (12,363,917
                      )Loans
      from related parties
                      
                      
                      3,114,675
                      
                      
                      
                      4,596,921Repayment
      to related parties
                      
                      
                      (3,479,658
                      )
                      
                      
                      (4,521,931
                      )Loans
      from employees
                      
                      
                      -
                      
                      
                      
                      932,657Repayment
      to employees
                      
                      
                      -
                      
                      
                      
                      (932,657
                      )Net
      cash provided by financing activities
                      
                      
                      6,380,251
                      
                      
                      
                      4,330,422Effect
      of exchange rate fluctuation on cash and cash equivalents
                      
                      
                      940,462
                      
                      
                      
                      1,211,318Net
      increase (decrease) in cash and cash equivalents
                      
                      
                      1,513,901
                      
                      
                      
                      (211,395
                      )Cash
      and cash equivalents, beginning of period
                      
                      
                      169,319
                      
                      
                      
                      380,714Cash
      and  cash equivalents, end of period
                      
                      
                      1,683,220
                      
                      
                      
                      169,319Supplemental
      Disclosures of Cash flow Information:Cash
      paid for interest
                      
                      
                      843,885
                      
                      
                      
                      316,846Cash
      paid for income taxes
                      
                      
                      -
                      
                      
                      
                      -Non-cash
      investing and financing activities:Common
      stock issued as compensation to financing consultants
                      
                      
                      -
                      
                      
                      
                      307,827Warrants
      issued to an investment relation consultant
                      
                      -
                      
                      
                      
                      68,613Increase
      of paid-in capital of Fuda Yiyang by transfer from
      retained earnings
                      
                      
                      3,569,032
                      
                      
                      
                      -Change
      of par value of authorized shares
                      
                      
                      13,845
                      
                      
                      
                      -Issuance
      of common stock to independent directors as
                        compensation
                      
                      
                      40,000
                      
                      
                      
                      -See
      notes to consolidated financial statements.




F-4






FUDA
      FAUCET WORKS, INC.CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITYItem
                                            (US
      dollars)Number
      of common stocks
                                            
                                            
                                            Amount
      of common stocks
                                            
                                            
                                            Number
      of preferred stocks
                                            
                                            
                                            Amount
      of preferred stocks
                                            
                                            
                                            Additional
      paid-in capital
                                            
                                            
                                            Surplus
      reserve
                                            
                                            Retained
      earnings
                                            
                                            
                                            Other
      comprehensive income
                                            
                                            
                                            Total
      stockholders' equityBalance
      as of  January 1, 2007
                                            
                                            10,564,647
                                            
                                            
                                            
                                            1
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            603,320
                                            
                                            
                                            
                                            260,430
                                            
                                            
                                            4,293,075
                                            
                                            
                                            
                                            262,538
                                            
                                            
                                            
                                            5,419,364Issuance
      of stock in recapitalization in December 2007 (Restated)
                                            
                                            53,537
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Issuance
      of common stock for services of  a reverse
      merger  consultant in December 2007 (Restated)
                                            
                                            107,254
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            33,852
                                            
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            33,852Issuance
      of preferred stocks and warrants in December 2007 (Restated)
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3,090,909
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3,043,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3,043,000Issuance
      of warrants to a investor relation consultant in December
    2007
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            68,613
                                            
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            68,613Net
      income for the year ended December 31, 2007
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            3,460,510
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3,460,510Other
      Comprehensive income (loss)
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            
                                            578,147
                                            
                                            
                                            
                                            578,147Balance
      as of December 31, 2007
                                            
                                            10,725,438
                                            
                                            
                                            
                                            1
                                            
                                            
                                            
                                            3,090,909
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3,748,785
                                            
                                            
                                            
                                            260,430
                                            
                                            
                                            7,753,585
                                            
                                            
                                            
                                            840,685
                                            
                                            
                                            
                                            12,603,486Increase
      of paid-in capital of Fuda Yiyang by transfer from retained
      earnings
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3,569,032
                                            
                                            
                                            
                                            -
                                            
                                            
                                            (3,569,032
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Issuance
      of 30,000 shares of common stock (exercise of $1.8
    warrants)
                                            
                                            30,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            54,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            54,000Issuance
      of common stock to independent directors as compensation
                                            
                                            10,528
                                            
                                            
                                            
                                            11
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            39,989
                                            
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            40,000Change
      of par value of authorized shares
                                            
                                            -
                                            
                                            
                                            
                                            10,754
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3,091
                                            
                                            
                                            
                                            (13,845
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Net loss
      for the year ended December 31, 2008
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            (439,525
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (439,525
                                            )Other
      comprehensive income (loss) for the year ended December 31,
      2008
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            
                                            936,192
                                            
                                            
                                            
                                            936,192Balance
      as of December 31, 2008
                                            
                                            10,765,966
                                            
                                            
                                            
                                            10,766
                                            
                                            
                                            
                                            3,090,909
                                            
                                            
                                            
                                            3,091
                                            
                                            
                                            
                                            7,397,961
                                            
                                            
                                            
                                            260,430
                                            
                                            
                                            3,745,028
                                            
                                            
                                            
                                            1,776,877
                                            
                                            
                                            
                                            13,194,153See
      notes to consolidated financial statements.


F-5




Fuda
Faucet Works, Inc.
 Notes to
Consolidated Financial Statements







1.
            Organization
      and Basis of Presentation




(1) Organization




Fuda
Faucet Works, Inc. (the “Company,” “we,” “us,” “our”) was incorporated in
Delaware on June 10, 1969 under the name Magnum Communications
Corp.  The Company subsequently changed its name to Vacation Ownership
Marketing, Inc.  As of May 10, 2004, the Company changed its corporate
name to Capital Solutions I, Inc.  Prior to December 3, 2007, the
Company was not engaged in any business.  On January 3, 2008, the
Company changed its name to Fuda Faucet Works, Inc.





On
December 3, 2007, the Company entered into a buy-back agreement with Richard
Astrom and Christopher Astrom, who were the Company’s principal stockholders and
sole directors and Christopher Astrom was the Company’s president, chief
executive officer and chief financial officer, pursuant to which they sold to
the Company all of the shares of common stock owned by them, which constituted
75% of the Company’s outstanding common stock, for a purchase price of $625,000.
Richard and Christopher Astrom resigned from all positions as officers and
directors simultaneously.





Contemporaneously
with the purchase of stock from the former principal stockholders, the Company
executed a share exchange agreement with Jibrin Issa Jibrin Al Jibrin, trustee
of the Wu Yiting Stock Trust, the sole stockholder of Moral Star Development
Limited, a British Virgin Islands company (“Moral Star BVI”), pursuant to which
the trustee transferred to the Company all of the capital stock of Moral Star
BVI in exchange for 10,564,647 shares of the Company’s common stock,
approximately 98.5% of the Company’s outstanding common stock, which were issued
to the Trust and the designees of the Trust. As a result, Moral Star BVI became
the Company’s wholly-owned subsidiary and the business of Moral Star BVI and its
affiliated companies became our business.  The sole beneficiary of the
trust is Ms. Wu Yiting, who, as a result of the exchange, became the chief
executive officer, president and a director of the Company.





Moral
Star BVI owns 100% of the stock of Jiangxi Moral Star Copper Technology Co.,
Ltd. (“Moral Star China”), which is a wholly foreign-owned enterprise organized
under the laws of the Peoples’ Republic of China (“PRC”).  Moral Star
China is a party to a series of contractual arrangements with Jiangxi Yiyang
Fuda Copper Co. Ltd. (“Fuda Yiyang”), a limited liability company headquartered
in, and organized under the laws of, the PRC. The relationship among the above
companies as follows:





Under
generally accepted accounting principles, the acquisition by the Company of
Moral Star BVI is considered to be capital transactions in substance, rather
than a business combination.  That is, the acquisition is equivalent,
in the acquisition by Moral Star BVI of the Company, then known as Capital
Solutions I, Inc., with the issuance of stock by Moral Star BVI for the net
monetary assets of the Company.  This transaction is accompanied by a
recapitalization, and is accounted for as a change in capital
structure.  Accordingly, the accounting for the acquisition is
identical to that resulting from a reverse acquisition, except that no goodwill
is recorded.  Under reverse takeover accounting, the comparative
historical financial statements of the Company, as the legal acquirer, are those
of the accounting acquirer, Moral Star BVI. Since Moral Star BVI and Moral Star
China did not have any business activities, the Company’s financial statements
prior to the closing on the reverse acquisition, reflect only business of Fuda
Yiyang.  The accompanying financial statements reflect the
recapitalization of the stockholders’ equity as if the transactions occurred as
of the beginning of the first period presented.  Thus, the 10,564,647
shares of common stock issued to the trust and its designees are deemed to be
outstanding from December 31, 2006.






F-6


Fuda
Faucet Works, Inc.
 Notes to
Consolidated Financial Statements


The
contractual arrangements among Moral Star China, Fuda Yiyang, its sole owner, Wu
Yiting, and related parties are represented by a series of agreements, including
management agreement, related transactions agreement, purchase agreement,
stockholders’ voting proxy agreement, shares pledge agreement, exclusive option
agreement, patent transfer agreement, and trademark transfer agreement, pursuant
to which the Company obtained control over the business and operations of Fuda
Yiyang, and became the primary beneficiary of Fuda Yiyang
operations.




(2) Stock Distribution, Change in Par
Value




On
January 3, 2008, the Company effected a 3.2-for-one stock distribution pursuant
to which each share of common stock was converted into 3.2 shares of common
stock.  On July 31, 2008, the Company amended and restated its
certificate of incorporation which changed the par value of the preferred stock
and common stock from $0.0000001 per share to $0.001 per share, and decreased
the number of authorized shares of common stock from 900,000,000 to 110,000,000
shares.   All references in these financial statements to shares
and per share information give effect to the stock distribution and to the
change in the par value of the preferred stock and common stock.




(3) Business




The
Company’s business is the development, manufacture and distribution of a wide
range of brass faucets and related spouts and fittings, which is the business
conducted by Fuda Yiyang prior to the share exchange.  The Company’s
products include kitchen and bar faucets, bathroom faucets and bathroom
accessories.  The Company produces all of its products in China and
exports most of them into the international marketplace.  The Company
started doing business by focusing on copper re-processing when Fuda Yiyang was
formed in 1995.  In 2002, the Company began to produce and sell the
European style brass faucets, spouts and fittings to the Chinese local market,
and in 2004, it began to sell our products internationally.  The
Company did not make any sales in the Chinese market in 2008.  The
Company sells its products to bathroom supplies distributors




(4)
Basis of Presentation




The
consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (“SEC”) and in accordance
with generally accepted accounting principles in the United States of America
(“US GAAP”).  The Company’s functional currency is the Chinese
Renminbi; however the accompanying consolidated financial statements have been
translated and presented in United States dollars.





Principles of consolidation –
The Company’s consolidated financial statements include the financial statements
of its wholly owned subsidiaries, Moral Star BVI and Moral Star China, as well
as Fuda Yiyang, which is a variable interest entity whose financial statements
are consolidated with those of the Company pursuant to FASB Interpretation No.
46R “Consolidation of Variable Interest Entities” (“FIN 46R”), an Interpretation
of Accounting Research Bulletin No. 51.  All significant intercompany
accounts and transactions have been eliminated in the combination.





FIN 46R
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss for the variable interest
entity or is entitled to receive a majority of the variable interest entity’s
residual returns.  Variable interest entities are those entities in
which the Company, through contractual arrangements, bears the risks of, and
enjoys the rewards normally associated with ownership of the entities, and
therefore the Company is the primary beneficiary of these entities.





Moral
Star China is a party to a series of contractual arrangements with Fuda
Yiyang.  These agreements include a management agreement pursuant to
which all net income after deduction of necessary expenses, if any, generated by
Fuda Yiyang is paid to Moral Star China and Moral Star China is responsible for
paying Fuda Yiyang’s obligations incurred in connection with its business. In
addition, Moral Star China manages and controls all of the funds of Fuda
Yiyang.  Moral Star China also has the right to purchase Fuda Yiyang’s
equipment and patents and lease its manufacturing plants, land and remaining
equipment.  This agreement is designed so that Moral Star China can
conduct its business in China.  Pursuant to two other agreements, the
sole stockholder of Fuda Yiyang, who is also the Company’s chief executive
officer, has pledged all of her equity in Fuda Yiyang as security for
performance of Fuda Yiyang’s obligations to Moral Star China, and she granted
Moral Star China an irrevocable grant of a proxy over her stock in Fuda Yiyang.
As a result, Fuda Yiyang is considered a variable interest entity.




F-7




Fuda
Faucet Works, Inc.
 Notes to
Consolidated Financial Statements


Use of Estimates – The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.  Significant accounting estimates include bad debt
provision, impairment of long-lived assets, depreciation and amortization,
etc.





Country Risk – As the
Company’s manufacturing base is located in China and its market is mainly
located in Middle East, Russia and Africa, the Company is subject to special
considerations and significant risks not typically associated with companies in
North America and/or Western Europe.  These risks include, among
others, risks associated with the political, economic and legal environments and
foreign currency exchange limitations encountered in these areas.  The
Company’s results of operations may be adversely affected by changes in the
economic, political and social conditions in these areas, and by changes in
governmental policies with respect to laws and regulations, among other
things.





In
accordance with the relevant Chinese rules and regulations on management of
foreign exchanges, the foreign exchanges generated by Fuda Yiyang and Moral Star
China from sales of our products out of China shall be brought back into China
and exchanged to RMB in designated banks instead of being deposited out of China
without authorization.  The Company also has to buy foreign exchanges
from designated banks when paying current expenditures with foreign
exchanges.  Both the conversion of RMB into foreign currencies and the
remittance of foreign currencies abroad require the approval of the Chinese
government.  In recent years, the Chinese government has gradually
relaxed its control over foreign exchange, especially on current foreign
exchange accounts, for instance, canceling of advance examination and approval
for the opening of current foreign exchange accounts and enhancing of quota of
current foreign exchange accounts.





Credit Risk– The Company
performs ongoing credit evaluations of its customers and intends to establish an
allowance for doubtful accounts when outstanding balances are not considered
fully collectable.  The Company maintains a policy that all sales are
final and does not allow returns.  The Company generally requires
payment within three months.  According to the Company’s credit
policy, the Company generally provides 100% bad debt provision for the amounts
outstanding over 180 days after the deduction of the amount subsequently settled
after the balance sheet date, which management believes is consistent with
industry practice.  However, if there are abundant facts or proofs,
which indicate part or whole of specific receivables may not collectible, to the
reasonable extent; we will establish corresponding allowance for doubtful part
with reference to historical facts or proofs, even though the age of these
receivables has not reached 180 days yet.





Due to
global economic crisis and sharp decline in copper prices in the second half of
2008 and corresponding adverse effects to our customers’ liquidity, we made
special payment arrangements with our customers in order to insure timely
collection of most of these receivables without delay, pursuant to which we gave
some discounts of specific percentage to our customers.  We recognized
this discount as a bad debt expense in the fourth quarter of 2008.





The
Company’s expense for bad debts for 2008 was $4,197,771, all of which was
incurred in the fourth quarter of 2008.  This amount reflects two
components --  $2,159,012 was written off in 2008 in respect of
accounts receivables which had been scheduled for payment the fourth quarter of
2008, and an additional $2,038,759 reserved against the remaining outstanding
amounts of receivables as of December 31, 2008.





Foreign Currency Translation –
The functional currency of the Company is China RMB, which is the primary medium
of exchange where the Company operates. The Company reports its financial
results in United States dollars.





The
Company translates its assets and liabilities into U.S. dollars using the rate
of exchange prevailing at the balance sheet date, and the statement of
operations is translated at the average rates over each month during the
reporting period.  Equity items are translated at historical exchange
rates. Adjustments resulting from the translation from RMB into U.S. dollars are
recorded in stockholders’ equity as part of accumulated comprehensive income
(loss).  Gains or losses resulting from transactions in currencies
other than RMB are reflected in the statement of operations and comprehensive
income.  The translation rates from RMB to US dollars for the fiscal
years of 2008 and 2007 are as follows






F-8


Fuda
Faucet Works, Inc.
 Notes to
Consolidated Financial Statements


2008
                2007Translation
      rate for assets and liabilities as of December 31,
                6.8346:1
                7.3046:1Translation
      rate for income statement items for the year
                6.9253:1
                7.3912:1





Revenue Recognition – The
Company recognizes sales of its products in accordance with Securities and
Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101, “ Revenue
Recognition in Financial Statements,” as amended by SAB No. 104, “Revenue
Recognition.”  Revenues represent the invoiced value of goods, net of
value added tax (“VAT”), if any, and are recognized upon delivery of goods and
passage of title.





Pursuant
to China’s VAT rules and regulations, Fuda Yiyang’s sales in China mainland are
subject to a tax rate of 17% (“output VAT”) as an ordinary VAT taxpayer, and the
relating revenues were recognized by the invoiced value offsetting 17% output
VAT.  However, its sales outside of China mainland are applicable for
VAT exemption, credit and refund policy, and the relating revenues were equal to
the invoiced value.  The applicable refund rate from January 1, 2007
to June 30, 2007 was 13% and it has been adjusted down to 9% since July 1, 2007.
However the refund rate for valves, one of our product catagories, has resumed
at 13% since July 1, 2008.  The actual VAT payable is the balance
after offsetting both VAT paid on purchases (“input VAT”) and the amount
exempted or credited.  The actual VAT refund is recognized as other
income.





Shipping and handling cost –
We bear shipping and handling costs from our factory to our customers’
designated location, and not billed them to our customers.  From
accounting perspective, we record such costs as delivery expenses, which are
accounted for as part of selling expenses.  Delivery expenses for the
twelve months ended December 31, 2008 and 2007 were $367,101 and $198,072,
respectively.





Advertising - The Company
expenses all advertising costs as incurred. The advertising cost for the twelve
months ended December 31, 2008 and 2007 was $14,732 and $48,343,
respectively.





Comprehensive Income (Loss) –
The Company has adopted SFAS No. 130, “Reporting Comprehensive Income” which
establishes standards for reporting and presentation of comprehensive income
(loss) and its components in a full set of general-purpose financial
statements.  The Company has chosen to report comprehensive income
(loss) in the statements of operations and comprehensive income.





Income Taxes – The Company
accounts for income taxes under the provisions of SFAS No. 109, “ Accounting for
Income Taxes” which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the consolidated financial statements or tax returns.  Deferred tax
assets and liabilities are recognized for the future tax consequence
attributable to the difference between the tax bases of assets and liabilities
and their reported amounts in the financial statements.  Deferred tax
assets and liabilities are measured using the enacted tax rate expected to apply
to taxable income in the years in which those temporary differences are expected
to be recovered or settled.  The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.  The Company establishes a valuation
allowance when it is more likely than not that the assets will not be
recovered.





On March
16, 2007, China’s parliament, the National People’s Congress, adopted the
Enterprise Income Tax Law, which took effect on January 1, 2008.  The
new income tax law sets unified income tax rate for domestic and foreign
companies at 25% except a 15% corporate income tax rate for qualified high and
new technology enterprises. In accordance with this new income tax law, low
preferential tax rate in accordance with both the tax laws and administrative
regulations prior to the promulgation of this law shall adopt the new tax rate
within five years after the implementation of this law.





With the
approvals of the county government of Yiyang on July 17, 2007, Fuda Yiyang was
exempt from corporate income taxes for 2008 and 2007.  The local tax
bureau of Yiyang County (“Yiyang Tax Authority”) also retroactively confirmed
the above-said preferential tax treatment on September 30, 2007.





Fuda
Yiyang has filed its income tax returns for 2008 with Yiyang Tax Authortiy.
These returns showed no tax due as a result of the exemption
policy.  Management believes Fuda Yiyang can continue to benefit from
the income tax exemption policy in 2008.




F-9




Fuda
Faucet Works, Inc.
 Notes to
Consolidated Financial Statements


Cash and Cash Equivalents –
Highly liquid investments with a maturity of three months or less at the time of
acquisition are considered to be cash equivalents.





Inventories – Inventories are
stated at the lower of cost, determined on a weighted average basis, and net
realizable value.  Work in progress and finished goods are composed of
direct material, direct labor and a portion of manufacturing
overhead.  Net realizable value is the estimated selling price, in the
ordinary course of business, less estimated costs to complete and
dispose.  Management believes that inventory as of December 31, 2008
and 2007 is reflected at net realizable value.





Property, Plant and Equipment
– Property, plant and equipment are stated at cost.  Major
expenditures for betterments and renewals are capitalized while ordinary repairs
and maintenance costs are expensed as incurred.  Depreciation and
amortization is provided using the straight-line method over the estimated
useful life of the assets after taking into account the estimated residual
value.  The estimated useful life of property, plant and equipment are
as follows:





Land
      use rights
                50
      yearsBuildings
                30
      yearsMachinery
      and equipment
                10
      yearsAutomobiles
                5
      yearsOffice
      equipment
                5
      years





There is
no private ownership of land in the PRC.  All land is owned by the
government which grants a transferable land use right pursuant to which the
holder of the land use right has the right to use the land for the term of the
land use rights.  The estimated useful life of the land use rights is
based on the term of the land use rights, which is 50 years.





The
Company periodically evaluates its investment in long-lived assets, including
property and equipment, for recoverability whenever events or changes in
circumstances indicate the net carrying amount may not be
recoverable.  The Company’s judgments regarding potential impairment
are based on legal factors, market conditions and operational performance
indicators, among others.  In assessing the impairment of property and
equipment, the Company makes assumptions regarding the estimated future cash
flows and other factors to determine the fair value of the respective
assets.  If these estimates or the related assumptions change in the
future, the Company may be required to record impairment charges for these
assets. From December 2004 to present, fixed assets carried at $373,932 were
left unused, including land, workshop building and equipment.  Since
value of land in similar sections of the city was increasing, no impairment on
land use right has been charged.  The workshop buildings were
maintained in good condition, and most of the equipment would be transported and
reinstalled into the Company’s new workshop building. Therefore a provision for
impairment of certain idle assets in the amount of $177,478 was made previously
when they were turned into idle status.  As of December 31, 2008,
although such equipment had been transported and reinstalled in the new workshop
building, which was completed in the second quarter of 2008, the relevant
production line has not been in operation; therefore such equipment was still
regarded as idle assets.





Derivative Instruments - The
Company accounts for financial instruments under the provisions of SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock,” which requires that all derivative financial
instruments be recognized in the consolidated financial statements and
maintained at fair value regardless of the purpose or intent for holding
them.





The
Company accounted for its series A convertible preferred stock and the related
freestanding warrants (See Note 13) as equity.  At the same time, the
Company determined the fair value of such preferred stock, warrants and embedded
conversion feature and made the allocation of proceeds between the warrants and
the series A preferred stock based on their relative fair values.





Financial Instruments and Fair
Value - SFAS No. 107 “Disclosures about Fair Value of Financial
Instruments,” requires that the Company disclose estimated fair values of
financial instruments.





The
carrying amounts for cash and cash equivalents, accounts receivable,
prepayments, short-term loans, accounts payable, advances, accruals and other
payables approximate their fair values because of the short maturity of those
instruments.






F-10


Fuda
Faucet Works, Inc.
 Notes to
Consolidated Financial Statements


Reclassification from Prior Period
Financial Statements - Certain prior period comparative figures have been
reclassified to conform to the current year presentation.




2.
            Recent
      Accounting Pronouncements




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities-an amendment of FASB Statement No. 133.”  SFAS
No. 161 gives financial statement users better information about the reporting
entity’s hedges by providing for qualitative disclosures about the objectives
and strategies for using derivatives, quantitative data about the fair value of
and gains and losses on derivative contracts, and details of credit-risk-related
contingent features in their hedged positions. SFAS No. 161 is effective for
financial statements issued for fiscal years beginning after November 15, 2008
and interim periods within those years.  The Company does not expect
the adoption of SFAS No. 161 to have a material effect on the Company’s
financial statements.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.”  SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP.  SFAS No. 162 directs the GAAP
hierarchy to the entity, not the independent auditors, as the entity is
responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP.  SFAS No. 162 is effective 60
days following the SEC’s approval of the Public Company Accounting Oversight
Board amendments to remove the GAAP hierarchy from the auditing
standards.  SFAS No. 162 is not expected to have an impact on the
Company’s financial statements.





In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60.”  SFAS
No. 163 is primarily geared towards financial guarantee insurance contracts by
insurance enterprises and it not expected to have any material effect on the
reporting of the Company’s results of operations.





In
June 2008, the FASB ratified Emerging Issues Task Force Issue
No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 mandates a two-step
process for evaluating whether an equity-linked financial instrument or embedded
feature is indexed to the entity’s own stock.  Warrants that a company
issues that contain a strike price adjustment feature, upon the adoption of EITF
07-5, are no longer being considered indexed to the company’s own stock.
Accordingly, adoption of EITF 07-5 will change the current classification (from
equity to liability) and the related accounting for such warrants outstanding at
that date. EITF 07-5 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The
Company is currently evaluating the impact the adoption of EITF 07-5 will have
on its financial statement presentation and disclosures.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company’s present or future
consolidated financial statements.




3.
            Variable
      Interest Entity




As a
result of the contractual arrangements among Moral Star China, Fuda Yiyang, its
sole shareholder, Wu Yiting, and related parties, the Company was given control
over the business and operations of Fuda Yiyang and became the primary
beneficiary of Fuda Yiyang.  The consolidated financial statements for
the fiscal year ended December 31, 2008 and 2007 included the results of
operations of Fuda Yiyang for the same periods pursuant to FIN 46R, even though
the Company does not own any of Fuda Yiyang’s equity.





Fuda
Yiyang’s assets and liabilities as of December 31, 2008 and 2007 are as
follows:




F-11




Fuda
Faucet Works, Inc.
 Notes to
Consolidated Financial Statements


(US
      dollars)Item
                    
                    December
      31, 2008
                    
                    
                    December
      31, 2007Cash
      and cash equivalents
                    
                    
                    1,617,683
                    
                    
                    
                    167,148Accounts
      receivable – net
                    
                    
                    4,912,266
                    
                    
                    
                    487,471Due
      from related parties - trade
                    
                    
                    -
                    
                    
                    
                    6,996,322Prepayments
      to suppliers
                    
                    
                    605,939
                    
                    
                    
                    14,326Inventories
                    
                    
                    5,679,949
                    
                    
                    
                    8,239,944Other
      current assets
                    
                    
                    206,547
                    
                    
                    
                    55,724Property
      plant and equipment - net
                    
                    
                    13,640,069
                    
                    
                    
                    2,131,044Construction
      in progress
                    
                    
                    881
                    
                    
                    
                    1,867,513Other
      long-term assets
                    
                    
                    373,932
                    
                    
                    
                    349,868Total
      assets
                    
                    
                    27,037,266
                    
                    
                    
                    20,309,360Short-term
      bank loans
                    
                    
                    12,351,817
                    
                    
                    
                    5,252,594Accounts
      payable
                    
                    
                    847,497
                    
                    
                    
                    602,901Due
      to related parties-trade
                    
                    
                    4,089
                    
                    
                    
                    1,189,152Due
      to related parties-non-trade
                    
                    
                    17,558
                    
                    
                    
                    676,559Accrued
      expenses
                    
                    
                    283,049
                    
                    
                    
                    112,280Other
      payables
                    
                    
                    36,345
                    
                    
                    
                    81,143Total
      liabilities
                    
                    
                    13,540,355
                    
                    
                    
                    7,914,629





A
$2,045,676 intercompany payable on Fuda Yiyang’s books was not included in the
above table, since this balance had been eliminated during
consolidation.




4.
            Accounts
      Receivable




As of
December 31, 2008 and 2007, the balance of accounts receivable, excluding
receivables from related parties, was $4,912,266 and $487,471,
respectively.  All the outstanding accounts receivable at December 31,
2008 were outstanding for less than 180 days.





Due to
global economic crisis and sharp decline in copper prices in the second half of
2008 and corresponding adverse effects to our customers’ liquidity, the Company
agreed, in the fourth quarter of 2008, to accept a reduced payment from
customers.





As a
result, the Company incurred bad debt expense of $4,197,771, which reflects (i)
a $2,159,012 write off in connection with receivables that had been scheduled
for payment by the end of December 31, 2008 and (ii) an additional $2,038,759
reserve against the remaining outstanding accounts receivable as of December 31,
2008.





During
the last few months of 2007, we exported $7.02 million through Jibrin Company, a
related party, of which $7 million was outstanding as of December 31, 2007. This
receivable is reflected as “due from related parties - trade.”  This
amount was fully collected in 2008.




5.
            Inventories




Inventories
consisted of the following as of December 31, 2008 and 2007:





(US
      dollars)Item
                    
                    December
      31, 2008
                    
                    
                    December
      31, 2007Raw
      materials
                    
                    
                    1,122,756
                    
                    
                    
                    3,844,897Work
      in progress
                    
                    
                    3,801,539
                    
                    
                    
                    2,098,383Finished
      goods
                    
                    
                    777,601
                    
                    
                    
                    2,317,199Total
                    
                    
                    5,701,896
                    
                    
                    
                    8,260,479





Management
believes that no inventory was obsolete on each balance sheet date thus no
impairment on inventories was provided.






F-12


Fuda
Faucet Works, Inc.
 Notes to
Consolidated Financial Statements


6.
            Property,
      Plant and Equipment




Total
cost of property, plant and equipment was $15,318,226 and $3,175,255 as of
December 31, 2008 and 2007, respectively. The increase $12,142,971 in gross
amount of property, plant and equipment was mainly attributable to Fuda Yiyang’s
(1) establishment of new manufacturing facilities, including purchase of new
equipment, completion of new workshop buildings; (2) purchase of the land use
right of one block of land from Wu Yiting, a related party (See Note 11), on
which the new factory buildings are located; and (3) the completion of the
upgrade and improvement of Fuda Yiyang’s original facilities.





In China,
all land is owned by the government and there is no private ownership of
land.  The government issues a certificate of use right, which is
transferable, and permits the holder to use the land.  Under four
“State-owned Land Use Right Certificates,” the Company owns the use right for
three blocks of industrial-use land (covering approximately 491,374 square feet)
for the term of 50 years, beginning from issuance date of the
certificates.





Depreciation
expense was $671,188 and $202,659 for the fiscal year of 2008 and 2007,
respectively.  As a result, accumulated depreciation was $1,448,788
and $777,600 as of December 31, 2008 and 2007, respectively.





The land
use rights for one parcel of land with the acreage of 210,435square feet and 10
workshop buildings are used as collateral pursuant to a mortgage agreement with
a commercial bank.  The mortgage agreement initially matured on
September 5, 2007, and, on September 6, 2007, was replaced by a mortgage
agreement that expires on September 5, 2010.  The net book value of
this collateral as of December 31, 2008 and 2007 was$1,480,951 and $1,517,483
respectively.  Under the terms of the mortgage agreement, the Company
may borrow from time to time up to the maximum amount provided in the mortgage
agreement, which is RMB13 million ($1.9 million).  At December 31,
2008, we had borrowed approximately $1.9 million under the mortgage
agreement.




7.
            Construction
      in Progress




As of
December 31, 2008 and December 31, 2007, the balance of construction in progress
was $881 and $1,867,513, respectively. The property is owned by Fuda Yiyang. The
Company made progress payments to the contractor in based on the construction
progress, with the amount paid being consistent with the work
performed.




The
balance $1,867,513 of construction in progress as of December 31, 2007
represented the construction of new workshop buildings to expand current
production capability in a new location, which started in the early part of
2007. In the second quarter of 2008, with the completion of these workshop
buildings, this balance together with the new investment occurred during the
first half of 2008 was transferred to the property, plant and
equipment.




The
upgrade or betterment of the original manufacturing facilities and also
construction of a new warehouse, which started in the early of 2008, was
finished during the third quarter of 2008. Thus, at September 30, 2008, this
property is reflected as property, plant and equipment.





The
balance $881 as of December 31, 2008, represented upfront expenses for new
production facility which is in the pre-planning stage.




8.
            Other
      long-term assets




As of
December 31, 2008 and December 31, 2007, other long-term assets were $373,932
and $349,867, respectively. The increase was due to appreciation of value of the
RMB against U.S. dollars. These other long-term assets include land use rights
on one block of land of 51,235 square feet and a workshop building and
equipment, which have not been used since 2004. Since value of land in similar
sections of the city was increasing, no impairment on land use right has been
charged. The workshop buildings were maintained in good condition, and most of
the equipment would be transported and reinstalled into the Company’s new
workshop buildings. A provision for impairment of certain idle assets in the
amount of $177,478 was made previously when they were turned into idle status.
As of December 31, 2008, although such equipment had been transported and
reinstalled in the new workshop building, which was completed in the second
quarter of 2008, the relevant production line has not been in operation;
therefore such equipment was still regarded as idle assets.






F-13


Fuda
Faucet Works, Inc.
 Notes to
Consolidated Financial Statements


9.
            Short-term
      bank loans




The
balance of short-term bank loans as of December 31, 2008 and 2007 was
$12,351,817 and $5,252,594, respectively as follows:





Main
      Terms
                    
                    (US
      dollars)December
      31, 2008
                    
                    December
      31, 2007Principal
                    
                    Interest
      rate (per annum)
                    
                    Principal
                    
                    Interest
      rate (per annum)Industrial
      and Commercial Bank of China Ltd., YiYang Branch(1)
                    Two
      or three-month-term loans, bearing benchmark interest rate announced by
      People's Bank of China
                    
                    
                    
                    
                    
                    444,925
                    
                    7.776%521,589
                    
                    8.07%2,349,205
                    
                    8.42%383,320
                    
                    8.54%5,489,714
                    
                    6.57%
                    
                    130,055
                    
                    9.13%Subtotal
                    
                    5,489,714
                    
                    
                    
                    3,829,094Bank
      of China, YiYang Branch
                    Two
      or three-month-term loans, bearing benchmark interest rate announced by
      People's Bank of China57,000
                    
                    6.25%140,000
                    
                    6.44%960,000
                    
                    7.00%1,229,000
                    
                    8.693%
                    
                    266,500
                    
                    8.69%Subtotal
                    
                    1,229,000
                    
                    
                    
                    1,423,500China
      Construction Bank
                    Two
      or three-month-term unsecured loans
                    
                    2,414,187
                    
                    6.57%
                    
                    -
                    
                    -Subtotal
                    
                    2,414,187
                    
                    
                    
                    -Agricultural
      Bank of China
                    One-year
      term unsecured loans
                    3,218,916
                    
                    8.591%
                    
                    -
                    
                    -Total
                    
                    12,351,817
                    
                    
                    
                    5,252,594





(1)  Loans
of approximately $1.9 million from Industrial and Commercial Bank of China,
Yiyang Branch, were secured by the land use right for one block of land and ten
workshop buildings under a mortgage agreement with the bank dated September 6,
2004, and on September 6, 2007, this mortgage contract was replaced by a
mortgage which will expire on September 5, 2010. See Note 6.




10.
            Accounts
      Payable




The
balance of accounts payable was $967,745 and $686,114 as of December 31, 2008
and 2007, respectively, which included payables to material suppliers and
professional service providers.




11.
            Related
      party transactions




The
transactions between the Company and related parties are classified into two
categories: non-trade and trade.




(1)
Non-trade transactions with related parties




(i)
            Wu
      Yiting





Ms. Wu
Yiting is our chief executive officer and Chairman of the Board.




F-14




Fuda
Faucet Works, Inc.
 Notes to
Consolidated Financial Statements


As of
January1, 2007, we owed Wu Yiting $38,419.  In 2007, Wu Yiting
advanced $926,614 to us.  We repaid Ms. Wu $95,231 during 2007. As of
December 31, 2007, the balance due to Ms. Wu was $869,802.  In 2008,
Wu Yiting advanced $3,114,675 to us and we repaid her $3,479,658.  As
of December 31, 2008, the balance due to Ms. Wu was $504,819.





(ii)
            Wu
      Yaxu




Wu Yaxu
is one of our directors and our chief financial officer and sister of Wu
Yiting.




During
fiscal 2007, Wu Yaxu lent to the Company $3,643,826, which was paid in full
during 2007.





(iii)
            Yu Zeshi




Mr. Yu
Zeshi owned 51% of the equity in Fuda Yiyang until April 8, 2007.  He
was also Chairman of the Board during the same period. On April 8, 2007, Mr. Yu
Zeshi transferred all of his equity to his wife, Wu Yiting, who is the Company’s
chief executive officer and a director and was, at the time of the transfer,
Fuda Yiyang’s other stockholder.




As of
December 31, 2006, the Company owed Mr. Yu $507,926.  In 2007, Mr. Yu
advanced $268,689 to the Company and the Company repaid all outstanding balance
to Mr. Yu.





All of
the abovementioned loans bore no interest.




(2)
Trade transactions with related parties




(i)
            Wu
      Yiting





In April
2008, Ms. Wu Yiting transferred to Fuda Yiyang the land use right of one block
of land (covering 229,703 square feet), on which its new workshop buildings are
located. The consideration due to Ms. Wu for the land use right, $1,167,866, has
been paid by the Company.





(ii)
            Yiyang
      Kunpeng Worn Metal Recycling Co.,
Ltd.





Wu Yiting
holds 80% equity of Yiyang Kunpeng Metal Recycling Co., Ltd.
(“Kunpeng”).  Ms. Wu Yiting is also the Chairman of
Kunpeng.  Mr. Kun Yang, the vice-president of Fuda holds the remaining
20% equity of Kunpeng.





The
Company purchased a significant percentage of our copper from Kunpeng. During
2008 and 2007, the Company purchased$10,239,754 and $16,491,264, representing
49.2% and 70.5% of the total raw material purchase amount, respectively, from
Kunpeng.





As of
December 31, 2008 and 2007, the amount due to Kunpeng in connection with
above-said trade transactions was $4,089 and $1,189,152,
respectively.





(iii)
            Al
      Jibrin Gereral Trading Co.,Ltd.





Jibrin
Issa Jibrin Al Jibrin is the owner of Al Jibrin Gereral Trading Co., Ltd.
(“Jibrin company”).  He is the trustee of the Wu Yiting Stock Trust
and became Sales Director of Fuda Yiyang from January 1, 2008.





During
fiscal year 2007, the Company sold products amounted to $7,020,721 to Jibrin
company, representing 21% of our total net sales, which contributed
approximately gross profit of $1.4 million for the Company.





As of
December 31, 2007, the amount due from Jibrin company was $6,699,322, all of
which has been collected in the first quarter of 2008.




12.
            Accrued
      Expenses




As of
December 31, 2008 and 2007, accrued expenses were $314,979 and $112,280
respectively.  Accrued expenses mainly consist of accrued salaries and
delivery expenses




F-15




Fuda
Faucet Works, Inc.
 Notes to
Consolidated Financial Statements


13.
            Equity-based
      Transactions




As above
mentioned in Note 1, the consolidated financial statements reflect the equity
structure as if the recapitalization transactions occurred as of the beginning
of the first period required to be presented.




(1)
            Authorized
      shares




At
December 31, 2008, the Company’s authorized capital stock consisted of
20,000,000 shares of preferred stock, par value $0.001 per share and 110,000,000
shares of common stocks, par value $0.001 per share.





In
December 2007, the Company’s board of directors and the holders of a majority of
its capital stock approved a restated certificate of incorporation which changes
the authorized capital stock to 130,000,000 shares, of which 20,000,000 are
shares of preferred stock, par value $.001 per share, and 110,000,000 are shares
of common stock, par value $.001 per share.  The restated certificate
of incorporation which reflected the change in authorized capital and par value
became effective on July 31, 2008.




(2)
            Common
      Stock




As of
December 31, 2008 and 2007, the Company had 10,765,966 shares and 10,725,438
shares of common stock issued and outstanding, respectively.





In July
2008, the Company issued 30,000 shares of common stock upon exercise of
warrants, for which it received $54,000.





In August
2008, the Company issued 10,528 shares to four independent directors (2,632
shares each independent director) as part of their compensation.  The
stock was valued at the market price on the date the board approved the stock
grants.




(3)
            Preferred
      Stock and Related Warrants




As of
December 31, 2008 and 2007, the Company had 3,090,909 shares of series A
preferred stock issued and outstanding, which were issued on December 3,
2007.





(i)
            December
      2007 Private Placement





On
December 3, 2007, the Company entered into a securities purchase agreement and
an escrow agreement with three investors, pursuant to which the Company closed a
private financing of $3,400,000 and correspondingly issued to the investors
3,090,909 shares of series A preferred stock and warrants to purchase 2,060,606
share of common stock at $1.80 per share (“$1.80 Warrants”) and 4,121,212 shares
of common stock at $3.00 per share (“$3.00 Warrants”).  Pursuant to
the Certificate of Designation of series A preferred stock, each share of series
A preferred stock is convertible into one share of common stock, at a conversion
price of $1.10, subject to adjustment.  The Company accounted for the
series A preferred stock and related freestanding warrants as equity according
to their features, as set forth in the certificate of designation of Series A
preferred stock and terms of relevant agreements.




On July
18, 2008, one of the investors exercised warrants to purchase 30,000 shares of
the Company’s common stock at $1.80 per share, from which the Company received
proceeds $54,000.





In
addition, 3,000,000 shares of series A preferred stock were placed in escrow for
issuance in the event that the Company does not meet target levels of earnings
before interest and taxes as defined are less than specified levels. The
3,000,000 shares that are held in escrow are not treated as outstanding since
the condition which would result in the delivery of the shares from escrow has
not occurred.  If the targets are not met, the number of shares to be
delivered to the investors was determined by a formula.  The target
level was met for 2007, and, pursuant to an amendment, described below, the
provision for an adjustment based on targeted earnings was
eliminated.






F-16


Fuda
Faucet Works, Inc.
 Notes to
Consolidated Financial Statements


The
Company agreed that, by March 2, 2008, which is 90 days after the closing on
December 3, 2007, it would have appointed such number of independent directors
that would result in a majority of our directors being independent directors and
we would have an audit committee composed solely of at least three independent
directors and a compensation committee would have a majority of independent
directors. The agreement provides that the Company pay liquidated damages (i) if
the Company fails to have a majority of independent directors 90 days after the
closing or (ii) thereafter, if the Company subsequently fails to meet these
requirements for a period of 60 days for an excused reason, as defined in the
purchase agreement, or 75 days for a reason which is not an excused reason.
Liquidated damages are payable in cash or additional shares of series A
preferred stock, with the series A preferred stock being valued at its
liquidation preference of $1.10 per share. The liquidated damages are computed
at the rate of 12% per annum of the purchase price, with a limit of $408,000.
The appointment of four directors, all of whom are independent directors, took
effect on April 28, 2008 and related board committees were created on the same
day. The investors waived their right to liquidated damages resulting from the
failure to have met the required schedule.





The
Company and the investors entered into a registration rights agreement pursuant
to which the Company is required to have a registration statement filed with the
SEC by February 1, 2008 and declared effective by the SEC not later than June
29, 2008. We are required to pay liquidated damages at the rate of 1,000 shares
of series A preferred stock for each day after June 29, 2008 that the
registration statement is not declared effective or for any period that we fail
to keep the registration statement effective, up to a maximum of 370,000 shares.
The number of shares of series A preferred stock issuable pursuant to the
liquidated damages provision is subject to reduction based on the maximum number
of shares that can be registered under the applicable SEC guidelines. The
registration statement was declared effective on June 17, 2008 and no liquidated
damage were incurred.




(ii)
            Amendment
      to Securities Purchase Agreement and Registration
  Agreement




On
February 3, 2009, the Company entered into an amendment with the investors in
the Company’s December 2007 private placement, which amended the securities
purchase agreement and the registration rights agreement among the Company and
the investors.  Pursuant to the amendment:





·
            The
      investors exchanged all of the then outstanding warrants issued to the
      investors pursuant to the purchase agreement for a total of 1,350,000
      shares of series A preferred stock.





·
            The
      date by which the Company is to apply to list its common stock on the
      Nasdaq Global Market, Nasdaq Capital Market or the New York or American
      Stock Exchange was deferred from June 3, 2009 to June 3,
    2010.





·
            The
      requirement that the Company deliver up to 3,000,000 shares of series A
      preferred stock to the investors based on the Company’s EBIT per share for
      the years ended December 31, 2007 and 2008 was
      deleted.





·
            The
      definition of “Required Effective Date” in the Registration Agreement was
      amended so that the next registration statement to be filed pursuant to
      the Registration Agreement is to be declared effective by June 3, 2010,
      and the Company is not be required to update the registration statement
      which was declared effective by the SEC on June 17, 2008 and which covers
      1,250,000 shares of common stock issuable upon exercise of
      warrants.




14.
              Retained
      Earnings


As of December 31, 2008 and 2007, the
retained earnings were $3,745,028 and $7,753,585, respectively.  The
decrease of $4,008,557 was due to: (1) net loss $439,525 incurred during 2008;
(2) allocation of retained earnings of $3,569,032 (RMB 25 million) to increase
registered capital of Fuda Yiyang in April 2008, which resulted in the increase
of Fuda Yiyang’s registered capital from $603,321 (RMB 5 million) to $4,389,430
(RMB 30 million).


15.
              (Loss)
      Earnings per Share


Basic
(loss) earnings per share are calculated based on the weighted average shares
outstanding during the period. Diluted (loss) earnings per share include the
dilutive effect of warrants, subject treasury stock method, and convertible
preferred stock, subject to if-converted method.





As of
December 31, 2008, there were outstanding warrants to purchase 6,251,818 common
shares.  Since the warrant exercise prices are greater than the
average market price of the Company’s common stock for 2008, these warrants were
not included in the calculation of diluted loss per share for
2008.  The potentially dilutive securities included 3,090,909 shares
of series A preferred stock.  However, because the Company incurred
net loss during 2008, the effect of these dilutive securities would have been
anti-dilutive. Accordingly, basic and diluted loss per share for 2008 is the
same.




F-17


Fuda
Faucet Works, Inc.
 Notes to
Consolidated Financial Statements


As of
December 31, 2007, there were outstanding warrants to purchase 6,281,818 common
shares which had exercise prices lower than the average market price of the
Company’s common stock for 2007. Thus these warrants and 3,090,909 shares of
Serial A Preferred Stock had dilutive effect in 2007.





The
computation of basic and diluted earnings (loss) per share is as
follows:





Years
      Ended December 31,2008
                                            
                                            2007Basic
      (loss) earnings per shareNet
      (loss) income
                                            
                                            $
                                            (439,525
                                            )
                                            
                                            $
                                            3,460,510Weighted
      average shares of common stock
                                            
                                            
                                            10,742,480
                                            
                                            
                                            
                                            10,725,438Basic
      (loss) earnings per share
                                            
                                            $
                                            (0.04
                                            )
                                            
                                            $
                                            0.32Diluted
      (loss) earnings per shareNet
      (loss) income
                                            
                                            $
                                            (439,525
                                            )
                                            
                                            $
                                            3,460,510Weighted
      average shares of common stock
                                            
                                            
                                            10,742,482
                                            
                                            
                                            
                                            10,725,438Dilutive
      warrants
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2,888,258Dilutive
      convertible preferred stock
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3,090,909Diluted
      weighted average shares
                                            
                                            
                                            10,742,480
                                            
                                            
                                            
                                            16,704,6057Diluted
      (loss) earnings per share
                                            
                                            $
                                            (0.04
                                            )
                                            
                                            $
                                            0.21





The
diluted earnings per share for 2007 were restated due to the correction of
calculation method of the average number of diluted common
shares.  The effect of this restatement is as follows:





Year
      Ended December 31, 2007As
      restated
                                    
                                    As
      previously
                                      reported
                                    
                                    
                                    ChangeNet
      income
                                    
                                    $
                                    3,460,510
                                    
                                    
                                    $
                                    3,460,510
                                    
                                    
                                    $
                                    -Weighted
      average shares of common stock
                                    
                                    
                                    10,725,438
                                    
                                    
                                    
                                    10,725,438
                                    
                                    
                                    
                                    -Dilutive
      warrants
                                    
                                    
                                    2,888,258
                                    
                                    
                                    
                                    481,893
                                    
                                    
                                    
                                    2,406,365Dilutive
      convertible preferred stock
                                    
                                    
                                    3,090,909
                                    
                                    
                                    
                                    237,111
                                    
                                    
                                    
                                    2,853,798Diluted
      weighted average shares
                                    
                                    
                                    16,704,605
                                    
                                    
                                    
                                    11,444,442
                                    
                                    
                                    
                                    5,260,163Diluted
      earnings per share
                                    
                                    $
                                    0.21
                                    
                                    
                                    $
                                    0.30
                                    
                                    
                                    $
                                    (0.09
                                    )




16.
              Concentration
      of Suppliers and Customers


Three
suppliers accounted for 49.2%, 26.2% and 9.3% of our net purchase for the fiscal
year ended December 31, 2008.  Two significant suppliers accounted for
70.5% and 26.9% of our net purchase for the fiscal year ended December 31,
2007.  No other single supplier accounted for more than 3% of our
purchases for both periods.  Kunpeng was the biggest supplier for the
fiscal year 2008 and 2007, is 80% owned by the Company’s chief executive officer
and she is also the chief executive officer of the supplier.  See Note
11.





For the
year ended December 31, 2008, three customers accounted for 61.0%, 25.1% and
6.1% of our net sales.  During the year ended December 31, 2007, three
customers accounted for 50.1% , 27£.4% and 9.4% of
our net sales. The second largest customer for 2007 is a related
party.  See Note 11.  No other single customer accounted for
more than 5% of net sales.




17.
            Segment
      Reporting




We
operate in one segment – producing and distributing brass faucets and related
spouts and fittings, no business segment information is
presented.  The following table sets forth, by geographic region,
information concerning the Company’s net sales classified by the major
geographic areas in which we sold our products:






F-18




Fuda
Faucet Works, Inc.
 Notes to
Consolidated Financial Statements


Years
      ended December 31,2008
                            
                            
                            2007Country
                            
                            Amount
                            
                            
                            %
                            
                            
                            Amount
                            
                            
                            %United
      Arab Emirates
                            
                            $
                            31,882
                            
                            
                            
                            91.8
                            %
                            
                            $
                            22,522
                            
                            
                            
                            88.0
                            %Russia
                            
                            
                            2,857
                            
                            
                            
                            8.2
                            %
                            
                            
                            1,610
                            
                            
                            
                            6.3
                            %Spain
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            457
                            
                            
                            
                            1.8
                            %China
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            406
                            
                            
                            
                            1.6
                            %Turkey
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            155
                            
                            
                            
                            0.6
                            %Other
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            438
                            
                            
                            
                            1.7
                            %Total
                            
                            $
                            34,739
                            
                            
                            
                            100.0
                            %
                            
                            $
                            25,588
                            
                            
                            
                            100.0
                            %





Our
products fall within three categories - kitchen and bar faucets, bathroom
faucets and bathroom accessories, which are presented by the following
table.





Years
      ended December 31,2008
                
                
                2007Category
                
                Amount
                
                
                %
                
                
                Amount
                
                
                %Kitchen
      and bar faucets
                
                $
                11,745
                
                
                
                33.8
                %
                
                $
                15,969
                
                
                
                62.4
                %Bathroom
      faucets
                
                
                16,941
                
                
                
                48.8
                %
                
                
                8,914
                
                
                
                34.8
                %Bathroom
      accessories
                
                
                6,053
                
                
                
                17.4
                %
                
                
                705
                
                
                
                2.8
                %Total
                
                $
                34,739
                
                
                
                100.0
                %
                
                $
                25,588
                
                
                
                100.0
                %




18.
            Income
      Tax




The
income (loss) generated in Fuda, Moral Star BVI, Moral Star China and Fuda
Yiyang before income taxes in 2008 and 2007, respectively, was as
follows:





Years Ended December 31,2008
                      
                      2007Loss
      in Fuda
                      
                      $
                      (601,013
                      )
                      
                      $
                      (1,019,000
                      )Loss
      in Moral Star BVI
                      
                      
                      -
                      
                      
                      
                      (82
                      )Loss
      in Moral Star China
                      
                      
                      (41,777
                      )
                      
                      
                      (2,081
                      )Income in Fuda Yiyang
                      
                      
                      203,265
                      
                      
                      
                      4,481,673$
                      (439,525
                      )
                      
                      $
                      3,460,510





The
effective income tax rate was as follows:





Years Ended December 31,2008
                  
                  
                  2007Fuda
                  
                  
                  15
                  %
                  
                  
                  15
                  %Moral
      Star BVI
                  
                  
                  -
                  
                  
                  
                  -Moral
      Star China
                  
                  
                  -
                  
                  
                  
                  -Fuda
      Yiyang
                  
                  
                  -
                  
                  
                  
                  -




In
accordance with the relevant tax laws in the British Virgin Islands, Moral Star
BVI, as an international business company, is exempt from income
taxes.




In
accordance with the income tax laws applicable to Moral Star China when it was
established in September 2007, Moral Star China is exempt from corporate income
taxes for its first two profitable years and is entitled to a 50% tax reduction
for the succeeding three years based on the normal income tax rate 30%. After
the Enterprise Income Tax Law of the PRC promulgated on March 16, 2007 took
effect as of January 1, 2008, the year ended December 31, 2008 shall be regarded
as the first year for determining eligibility for the 100% tax exemption, even
though Moral Star China was not profitable in 2008.




F-19


Fuda
Faucet Works, Inc.
 Notes to
Consolidated Financial Statements


With the
approvals of the County Government of Yiyang, Fuda Yiyang was exempt from
corporate income taxes during 2008 and 2007. Simultaneously the Local Tax Bureau
of Yiyang County has also confirmed the above said preferential tax
treatment.




There was
no provision (benefit) for income taxes for fiscal years 2008 and 2007 since
Fuda as a holding company will not be profitable in the expected future and the
Company did not conduct any business in the United States. The tax effect of
temporary differences and operating loss carryforwards is as follows as of
December 31, 2008 and 2007:





December
      31,2008
                
                
                2007Deferred
      tax assetsAccrued
      expenses
                
                $
                4,790
                
                
                $
                -Net
      operating loss carryforwards
                
                
                120,870
                
                
                
                44,153125,660
                
                
                
                44,153Deferred
      tax liabilitiesPrepaid
      expenses
                
                
                (2,974
                )
                
                
                (29,384
                )Valuation
      allowance
                
                
                (122,686
                )
                
                
                (14,769
                )Net
      deferred tax assets
                
                $
                -
                
                
                $
                -





The
operating carryforwards occurred in Fuda and Moral Star China. Fuda’s operating
loss could be carried forward and taken against any taxable income for a period
of not more than twenty years from the year of the initial loss pursuant to
Section 172 of the Internal Revenue Code of 1986, as amended. The net operating
loss of Moral Star China could be carried forward for a period of not more than
five years from the year of the initial loss pursuant to relevant P.R.C. tax
laws and regulations.




19.
            Commitments
      and Contingencies




We lease
an office in Dubai at an annual rental of $18,000.  The lease, which
had a March 4, 2009 expiration date, has been extended to March 4, 2010. Rent
expense under this lease was approximately $18,000 for the 2008 and
2007.




20.
            Subsequent
      Events




On
February 3, 2009, the Company entered into an amendment dated January 30,
2009, with the investors in the Company’s December 2007 private placement,
which amended the securities purchase agreement and the registration rights
agreement dated as of December 3, 2007 among the Company and the
investors.  See Note 13.