UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
20-F




(Mark
One)




 ̈
            REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
      OF 1934




OR




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




OR




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




For the transition period from________________ to ___________________




OR




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




Date of
event requiring this shell company report _______________




Commission
file number: 001-33176




Fuwei Films (Holdings) Co.,
Ltd.


(Exact
name of Registrant as specified in its charter)


(Translation
of Registrant’s name into English)




Cayman
Islands


(Jurisdiction
of incorporation or organization)




No. 387
Dongming Road


Weifang
Shandong


People’s Republic of China, Postal
Code: 261061


(Address
of principal executive offices)








Securities
registered or to be registered pursuant to Section 12(b) of the
Act.





Title
      of each class
            
            Name
      of each exchange on which registeredOrdinary
      Shares
            
            NASDAQ
      Global Market




Securities
registered or to be registered pursuant to Section 12(g) of the
Act.





None





(Title of
Class)




Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act.





None





(Title of
Class)




As of
March 30, 2009, there were 13,062,500 ordinary shares
outstanding.




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




 ̈ Yes  x No




If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.




 ̈Yes  x No




Note -
Checking the box will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from
their obligations under those Sections.




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.




x Yes   ̈ No




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):




Large
accelerated filer  o  Accelerated
filer  o  Non-accelerated
filer  x




Indicate
by check mark which financial statement item the registrant has elected to
follow




 ̈ Item
17  x
Item 18




If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).




 ̈ Yes  x No





2




SPECIAL
NOTE ON FORWARD-LOOKING STATEMENTS




This
Annual Report contains many statements that are “forward-looking” and uses
forward-looking terminology such as “anticipate,” “believe,” “expect,”
“estimate,” “future,” “intend,” “may,” “ought to,” “plan,” “should,” “will,”
negatives of such terms or other similar statements. You should not place undue
reliance on any forward-looking statement due to its inherent risk and
uncertainties, both general and specific. Although we believe the assumptions on
which the forward-looking statements are based are reasonable and within the
bounds of our knowledge of our business and operations as of the date of this
annual report, any or all of those assumptions could prove to be inaccurate. As
a result, the forward-looking statements based on those assumptions could also
be incorrect. The forward-looking statements in this Annual Report include,
without limitation, statements relating to:




·
            our
      goals and strategies;




·
            our
      future business development, results of operations and financial
      condition;




·
            our
      ability to protect our intellectual property
  rights;




·
            expected
      growth of and changes in the PRC BOPET film industry and in the demand for
      BOPET film products;




·
            projected
      revenues, profits, earnings and other estimated financial
      information;




·
            our
      ability to maintain and strengthen our position as a leading provider of
      BOPET film products in China;




·
            our
      ability to maintain strong relationships with our customers and
      suppliers;




·
            our
      planned use of proceeds;




·
            effect
      of competition in China and demand for and price of our products and
      services; and




·
            PRC
      governmental policies regarding our
industry.




The
forward-looking statements included in this Annual Report are subject to risks,
uncertainties and assumptions about our businesses and business environments.
These statements reflect our current views with respect to future events and are
not a guarantee of our future performance. Actual results of our operations may
differ materially from information contained in the forward-looking statements
as a result of risk factors some of which are described under “Risk Factors” and
elsewhere in this Annual Report, Risks, uncertainties and assumptions include,
among other things:




·
            adverse
      effect on our business caused by the global financial
    crisis;




·
            competition
      in the BOPET film industry;




·
            growth
      of, and risks inherent in, the BOPET film industry in
    China;




·
            uncertainty
      as to future profitability and our ability to obtain adequate financing
      for our planned capital expenditure
  requirements;




·
            uncertainty
      in our ability to obtain additional funding in order to complete the
      construction of the new production line (thick film) project and begin
      production ;




·
            uncertainty
      as to our ability to continuously develop new BOPET film products and keep
      up with changes in BOPET film
technology;




·
            risks
      associated with possible defects and errors in our
    products;





3




·
            uncertainty
      as to our ability to protect and enforce our intellectual property
      rights;




·
            uncertainty
      as to our ability to attract and retain qualified executives and
      personnel; and




·
            uncertainty
      in acquiring raw materials on time and on acceptable terms, particularly
      in view of the volatility in the prices of petroleum products in recent
      years.




These
risks, uncertainties and assumptions are not exhaustive. Other sections of this
Annual Report include additional factors which could adversely impact our
business and financial performance. The forward-looking statements contained in
this Annual Report speak only as of the date of this annual report or, if
obtained from third-party studies or reports, the date of the corresponding
study or report, and are expressly qualified in their entirety by the cautionary
statements in this Annual Report. Since we operate in an emerging and evolving
environment and new risk factors and uncertainties emerge from time to time, you
should not rely upon forward-looking statements as predictions of future events.
Except as otherwise required by the securities laws of the United States, we
undertake no obligation to update or revise any forward-looking statements to
reflect events or circumstances after the date of this Annual Report or to
reflect the occurrence of unanticipated events.





4




Introduction




This
annual report on Form 20-F includes our audited consolidated financial
statements as of December 31, 2007 and 2008 and for the years ended December 31,
2006, 2007 and 2008.




Our
ordinary shares are listed on the Nasdaq Global Market, or NASDAQ, under the
symbol “FFHL.”




Except as
otherwise required and for purposes of this Annual Report only:




·
            “Fuwei”,
      “Company”, “us” or “we” refer to Fuwei Films (Holding) Co., Ltd. The term
      “you” refers to holders of our ordinary
shares.




·
            “China”
      or “PRC” and the “Chinese government” refer to the People’s Republic of
      China and its government.




·
            All
      references to “Renminbi,” or “RMB” are to the legal currency of China, all
      references to “U.S. dollars,” “dollars,” “$” or “US” are to the legal
      currency of the United States and all references to “Hong Kong dollars” or
      “HK$” are to the legal currency of Hong Kong. Any discrepancies in any
      table between totals and sums of the amounts listed are due to
      rounding.




·
            “BOPET”
      refers to the Biaxially Oriented Polyester
Film.





5




PART
I




Item
1. Identity of Directors, Senior Management and Advisers




Not
Applicable.




Item
2. Offer Statistics and Expected Timetable




Not
Applicable.




Item
3. Key Information




A.
Selected financial data.




The
following selected financial data should be read in conjunction with Item 5 -
the “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the Financial Statements and Notes thereto included elsewhere in
this Annual Report.




The
following selected historical statement of income date for the years ended
December 31, 2006, 2007 and 2008 and the selected historical balance sheet data
as of December 31, 2007 and 2008 have been derived from the Company’s audited
consolidated financial statements included in this Annual Report beginning on
page F-1. The following selected historical statement of income data for the
period from August 9, 2004 through December 31, 2004 and the year ended December
31, 2005 and the selected historical balance sheet data as of December 31, 2004,
2005 and 2006 have been derived from the Company’s audited financial statements
not included in this Annual Report. The following selected historical statement
of income data for the period from January 1, 2004 to October 26, 2004 and the
selected historical balance sheet data as of October 26, 2004 have been derived
from the audited financial statements of Fuwei Films (Shandong) Co., Ltd. (the
“Predecessor Company”) not included in this Annual Report. The audited financial
statements are prepared and presented in accordance with United States generally
accepted accounting principles, or U.S. GAAP.




Certain
factors that affect the comparability of the information set forth in the
following table are described in the “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” and the Financial Statements and
related notes thereto included elsewhere in this Annual Report.




Predecessor
                        Company
                      
                      
                      Fuwei Films (Holdings) Co., Ltd.January 1
                        through
                      
                      
                      August 9
                        through
                        December 31,
                      
                      
                      Year Ended
                        December 31,October 26,2004
                      
                      
                      2004
                      
                      
                      2005
                      
                      
                      2006
                      
                      
                      2007
                      
                      
                      2008(in
      thousands, except per share data)
                      
                      (RMB)
                      
                      
                      (RMB)
                      
                      
                      (RMB)
                      
                      
                      (RMB)
                      
                      
                      (RMB)
                      
                      
                      (RMB)
                      
                      
                      (US$)Statement
      of Income Data:Revenues,
      net
                      
                      
                      286,114
                      
                      
                      
                      81,364
                      
                      
                      
                      346,205
                      
                      
                      
                      436,884
                      
                      
                      
                      449,373
                      
                      
                      
                      447,255
                      
                      
                      
                      65,253Gross
      profit
                      
                      
                      78,950
                      
                      
                      
                      17,326
                      
                      
                      
                      87,115
                      
                      
                      
                      102,543
                      
                      
                      
                      99,842
                      
                      
                      
                      70,332
                      
                      
                      
                      10,261Operating
      income
                      
                      
                      68,326
                      
                      
                      
                      12,403
                      
                      
                      
                      65,999
                      
                      
                      
                      78,017
                      
                      
                      
                      64,266
                      
                      
                      
                      24,604
                      
                      
                      
                      3,590Interest
      expense
                      
                      
                      (7,291
                      )
                      
                      
                      (1,370
                      )
                      
                      
                      (13,747
                      )
                      
                      
                      (12,884
                      )
                      
                      
                      (13,233
                      )
                      
                      
                      (3,995
                      )
                      
                      
                      (583
                      )Income
      before income tax
                      
                      
                      61,557
                      
                      
                      
                      13,811
                      
                      
                      
                      57,069
                      
                      
                      
                      68,422
                      
                      
                      
                      51,941
                      
                      
                      
                      21,123
                      
                      
                      
                      3,082Net
      income
                      
                      
                      61,531
                      
                      
                      
                      14,099
                      
                      
                      
                      57,128
                      
                      
                      
                      67,665
                      
                      
                      
                      47,260
                      
                      
                      
                      18,157
                      
                      
                      
                      2,649Earnings
      per shareBasic
                      
                      
                      
                      
                      
                      
                      18,287
                      
                      
                      
                      74,096
                      
                      
                      
                      61.46
                      
                      
                      
                      3.62
                      
                      
                      
                      1.39
                      
                      
                      
                      0.20Diluted
                      
                      
                      
                      
                      
                      
                      18,287
                      
                      
                      
                      74,096
                      
                      
                      
                      61.37
                      
                      
                      
                      3.62
                      
                      
                      
                      1.39
                      
                      
                      
                      0.20Weighted
      average number ordinary shares, Basic and dilutedBasic
                      
                      
                      -
                      
                      
                      
                      771
                      
                      
                      
                      771
                      
                      
                      
                      1,101,031
                      
                      
                      
                      13,062,500
                      
                      
                      
                      13,062,500
                      
                      
                      
                      13,062,500Diluted
                      
                      
                      -
                      
                      
                      
                      771
                      
                      
                      
                      771
                      
                      
                      
                      1,102,488
                      
                      
                      
                      13,062,500
                      
                      
                      
                      13,062,500
                      
                      
                      
                      13,062,500




6




Predecessor
                          Company
                        
                        
                        Fuwei Films (Holdings) Co., LtdAs of
                        
                        
                        As of
                        
                        
                        As of December 31,October 26,
                        
                        
                        December 31,2004
                        
                        
                        2004
                        
                        
                        2005
                        
                        
                        2006
                        
                        
                        2007
                        
                        
                        2008(in thousands)
                        
                        (RMB)
                        
                        
                        (RMB)
                        
                        
                        (RMB)
                        
                        
                        (RMB)
                        
                        
                        (RMB)
                        
                        
                        (RMB)
                        
                        
                        (US$)Balance
      Sheet Data:Cash
                        
                        
                        12,144
                        
                        
                        
                        5,903
                        
                        
                        
                        7,427
                        
                        
                        
                        249,939
                        
                        
                        
                        30,909
                        
                        
                        
                        15,823
                        
                        
                        
                        2,308Accounts
      receivable, net
                        
                        
                        39,542
                        
                        
                        
                        25,460
                        
                        
                        
                        46,129
                        
                        
                        
                        75,530
                        
                        
                        
                        58,195
                        
                        
                        
                        38,579
                        
                        
                        
                        5,628Inventories
                        
                        
                        26,365
                        
                        
                        
                        18,032
                        
                        
                        
                        24,887
                        
                        
                        
                        23,783
                        
                        
                        
                        41,670
                        
                        
                        
                        30,589
                        
                        
                        
                        4,463Total
      current assets
                        
                        
                        163,446
                        
                        
                        
                        72,288
                        
                        
                        
                        93,349
                        
                        
                        
                        372,001
                        
                        
                        
                        211,842
                        
                        
                        
                        104,105
                        
                        
                        
                        15,188Property,
      plant and equipment, net
                        
                        
                        204,804
                        
                        
                        
                        304,600
                        
                        
                        
                        303,596
                        
                        
                        
                        317,690
                        
                        
                        
                        493,562
                        
                        
                        
                        578,643
                        
                        
                        
                        84,421Total
      assets
                        
                        
                        383,532
                        
                        
                        
                        407,005
                        
                        
                        
                        440,361
                        
                        
                        
                        738,082
                        
                        
                        
                        738,975
                        
                        
                        
                        739,904
                        
                        
                        
                        107,949Short-term
      bank loans
                        
                        
                        199,600
                        
                        
                        
                        200,590
                        
                        
                        
                        248,046
                        
                        
                        
                        239,678
                        
                        
                        
                        188,027
                        
                        
                        
                        164,764
                        
                        
                        
                        24,038Total
      current liabilities
                        
                        
                        264,533
                        
                        
                        
                        392,905
                        
                        
                        
                        367,401
                        
                        
                        
                        272,175
                        
                        
                        
                        226,445
                        
                        
                        
                        204,305
                        
                        
                        
                        29,807Total
      shareholders’ equity
                        
                        
                        118,514
                        
                        
                        
                        14,100
                        
                        
                        
                        72,960
                        
                        
                        
                        465,907
                        
                        
                        
                        512,530
                        
                        
                        530,599
                        
                        
                        
                        77,412




If our
subsidiary, Fuwei Films (Shandong) Co. Ltd., or Shandong Fuwei was not entitled
to a reduced enterprise income tax, or EIT, rate of 0% for the period year ended
December 31, 2004, 2005 and 2006, and rate of 7.5% for the year ended December
31, 2007, it would have had an EIT rate of 15% for both of those years. Shandong
Fuwei was entitled to preferential tax treatment at an EIT rate of 15% for the
year ended December 31, 2008 due to its status as a High-and-New Tech Enterprise
since December 2008.  If Shandong Fuwei was no longer designated as
such, it would have been subject to a standard enterprise income tax at a rate
of 25%. Net income and basic and diluted earnings per share would be reduced by
the following amounts if Shandong Fuwei was not entitled to a reduced EIT rate
for the period/years 2004, 2005, 2006, 2007 and 2008:




7




Predecessor
                        Company
                      
                      
                      Fuwei Films (Holdings) Co., Ltd(In thousands, except per share data)
                      
                      Jan. 1
                      
                      
                      Aug. 9
                      
                      
                      Year Ended December 31,through
                      
                      
                      throughOct. 26,
                      
                      
                      December2004
                      
                      
                      31,2004
                      
                      
                      2005
                      
                      
                      2006
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2008(RMB)
                      
                      
                      (RMB)
                      
                      
                      (RMB)
                      
                      
                      (RMB)
                      
                      
                      (RMB)
                      
                      
                      (RMB)
                      
                      
                      (US$)Net
      income
                      
                      
                      (9,204
                      )
                      
                      
                      (3,098
                      )
                      
                      
                      (8,736
                      )
                      
                      
                      (10,453
                      )
                      
                      
                      (4,340
                      )
                      
                      
                      (2,966
                      )
                      
                      
                      (433
                      )Earnings
      per share- basic
                      
                      
                      -
                      
                      
                      
                      (4,019.00
                      )
                      
                      
                      (11,331.00
                      )
                      
                      
                      (9.50
                      )
                      
                      
                      (0.33
                      )
                      
                      
                      (0.23
                      )
                      
                      
                      (0.03
                      )- diluted
                      
                      
                      -
                      
                      
                      
                      (4,019.00
                      )
                      
                      
                      (11,331.00
                      )
                      
                      
                      (9.48
                      )
                      
                      
                      (0.33
                      )
                      
                      
                      (0.23
                      )
                      
                      
                      (0.03
                      )




The 2008
RMB amounts included in the above selected financial data have been translated
into U.S. dollars at the rate of US $1.00 = RMB 6.8542, which was the noon
buying rate for U.S. dollars in effect on December 31, 2008 in the City of New
York for cable transfer in RMB per U.S. dollar as certified for custom purposes
by the Federal Reserve Bank. No representation is made that the RMB amounts
could have been, or could be, converted into U.S. dollars at that rate or at any
other certain rate on December 31, 2008, or at any other date.




Exchange
Rate Information




On July
21, 2005 the Chinese government changed its policy of pegging the value of the
Renminbi to the U.S. dollar. This revaluation of the Renminbi was based on a
conversion of Renminbi into United States dollars at an exchange rate of
US$1.00=RMB8.11. Under the new policy, the Renminbi will be permitted to
fluctuate within a band against a basket of certain foreign currencies. In
December 2008, this change in policy resulted in an approximately 15.5%
appreciation in the value of the Renminbi against the U.S. dollar compared to
2005. Although the Company generates its revenue in the PRC in Renminbi which
has become more valuable in U.S. dollars, the Company’s overseas sales and U.S.
dollars cash deposits are subject to foreign currency translations which will
impact net income.




We have
calculated and presented our financial statements in Renminbi. Our business is
primarily conducted in China and denominated in Renminbi. Reports will be made
to shareholders and will be expressed in Renminbi. The conversion of Renminbi
into U.S. dollars in this Annual Report is based on the noon buying rate in The
City of New York for cable transfers of Renminbi as certified for customs
purposes by the Federal Reserve Bank of New York. Unless otherwise noted, all
translations from Renminbi to U.S. dollars in this annual report were made at
the rate of US$1.00 = RMB6.8542, being the noon buy rate for U.S. dollars in
effect on December 31, 2008 in the City of New York for cable transfer in RMB
per U.S. dollar as certified for custom purposes by the Federal Reserve Bank. We
make no representation that any Renminbi or U.S. dollar amounts could have been,
or could be, converted into U.S. dollars or Renminbi, as the case may be, at any
particular rate, the rates stated below, or at all.




The
following table sets forth various information concerning exchange rates between
the Renminbi and the U.S. dollar for the periods indicated. These rates are
provided solely for your convenience and are not necessarily the exchange rates
that we used in this Annual Report or will use in the preparation of our other
periodic reports or any other information to be provided to you. The source of
these rates is the Federal Reserve Bank of New York.





8





Average
              
              
              High
              
              
              Low
              
              
              Period-end(Rmb
      per U.S.$1.00)2004(1)
              
              
              8.2768
              
              
              
              8.2774
              
              
              
              8.2764
              
              
              
              8.27652005(1)
              
              
              8.1472
              
              
              
              8.2765
              
              
              
              8.0702
              
              
              
              8.07092006(1)
              
              
              7.9723
              
              
              
              8.0702
              
              
              
              7.8041
              
              
              
              7.80412007(1)
              
              
              7.6038
              
              
              
              7.7881
              
              
              
              7.2946
              
              
              
              7.29462008(1)
              
              
              6.9623
              
              
              
              7.2941
              
              
              
              6.7480
              
              
              
              6.8542September
      2008(2)
              
              
              6.8500
              
              
              
              6.8450
              
              
              
              6.7926
              
              
              
              6.8551October
      2008(2)
              
              
              6.8504
              
              
              
              6.8443
              
              
              
              6.7480
              
              
              
              6.8520November
      2008(2)
              
              
              6.8413
              
              
              
              6.8343
              
              
              
              6.8028
              
              
              
              6.8359December
      2008(2)
              
              
              6.8676
              
              
              
              6.8810
              
              
              
              6.8045
              
              
              
              6.8542January
      2009(2)
              
              
              6.8471
              
              
              
              6.8430
              
              
              
              6.8030
              
              
              
              6.8497February
      2009(2)
              
              
              6.8465
              
              
              
              6.8390
              
              
              
              6.8147
              
              
              
              6.8488March
      2009(2)
      (3)
              
              
              6.8462
              
              
              
              6.8354
              
              
              
              6.8114
              
              
              
              6.8419




(1)
            Annual averages are calculated by
      averaging the rates on the last business day of each month during
      the relevant period.




(2)
            Monthly
      average is calculated by averaging the daily rates during the relevant
      period.




(3)
            As
      of March 30, 2009, the exchange rate was
  6.8419.




B.  Capitalization and
indebtedness.




Not
Applicable.




C. Reasons for the offer and use of
proceeds.




Not
Applicable.




D. Risk factors.




The
following matters and other additional risks not presently known to us or that
we deem immaterial, may have a material adverse effect on our business,
financial condition, liquidity, results of operations or prospects, financial or
otherwise. Reference to a cautionary statement in the context of a
forward-looking statement or statements shall be deemed to be a statement that
any one or more of the following factors may cause actual results to differ
materially from those in such forward-looking statement or
statements.




(a)
            Risks
      Associated with Our Business




Risks
Related to Our Business




Since
the fourth quarter of 2008, the global financial crisis has adversely affected
our business, including a heavy decline in customers ’ demands, sharp decrease
in the sales prices and a decrease in the export of our products.  If
the economy does not recover, we will continue to face such
declines.




Since the
fourth quarter of 2008, our business has been significantly affected by the
global financial crisis. The domestic market has experienced a drop in demand
for our products , especially in the volume of high value-added special films,
and our export markets have suffered as well. In addition, as a result of the
significant decrease in the price of our products, our results of operation
encountered a significant decline beginning in the fourth quarter of 2008. We
suspended the lease production line for about two months in the fourth quarter
of 2008 and we decided to temporarily close the office in Japan at the end of
2008 as a result of insufficient demand. We have taken and will continuously
take actions, such as reducing costs and decreasing expenses in order to
strengthen our profitability and lessen the adverse effect on our business
caused by the financial crisis. However, if the economy does not recover, we may
continue to face such declines.





9




In
addition, the financial crisis may affect our suppliers and customers. Such
adverse affect on our supplies and customers may, in turn, adversely affect our
business.




A
sharp fluctuation in the demand for raw materials may have a negative impact on
our operations if we are unable to pass on all increases in cost of raw
materials to our customers on a timely basis




The total
cost of raw materials made up approximately 80.9%, 76.0% and 78.6%, of our cost
of goods sold in 2006, 2007 and 2008, respectively. The main raw materials used
in our production of BOPET film are polyethylene terephthalate (or PET) resin
and additives, which respectively made up approximately 76.1% and 23.9% of
our total cost of raw materials in the past three years on average.




Currently
the PET resin is mainly used as a raw material in China’s textile
industry.  The market prices of PET resin may fluctuate due to changes
in supply and demand conditions in that industry. Any sudden shortage of supply,
or significant increase in demand, of PET resin and additives may result in
higher market prices and thereby increase our cost of sales. The prices of PET
resin and additives are, to a certain extent, affected by the price movement of
crude oil.




International
market prices for crude oil have been subject to wide swings in the last three
years, especially in the first three quarters of 2008. There have been
significant increases in the price of our raw materials for PET resin as a
result of significant crude oil price spikes. However, since the global
financial crisis began in October 2008, the international price of crude oil has
declined heavily, with significant reduction in the price of raw materials and a
significant decrease in our sale price.  Despite the decline in raw
material prices, however, our ability to make a profit has been limited due to
the fact that it is difficult to pass the increase in costs of inventory to our
customers within a short time frame. In addition, the anti-dumping policy
towards the Chinese textile industry enforced by the United States and European
countries has caused decreased demand for PET resin in the domestic textile
industry, which further contributes to a decrease in the sales price of our
products..




In 2009,
if there is a significant increase in the cost of raw materials, we may not be
able to pass the increase in costs of raw materials to our customers on a timely
basis, which may continuously have an adverse effect on our results of
operations. Our ability to hedge against these fluctuations by either entering
into long-term supply contracts or otherwise offsetting our exposure to these
commodity price variations has been extremely limited.  Currently we
have no hedging transactions in place with respect to PET resin or any other
petroleum product.




Entry
of new BOPET producers and continuously expanded production capacity of current
BOPET film manufacturers in the industry in the PRC may increase the supply of,
and decrease the prices of, BOPET film in the industry, and hence lead to a
decline in our profit margins




We
believe that we are currently one of the few producers of BOPET film in the PRC
with research and development capability. Over time, there may be new investors
into BOPET film industry, whether as a result of increased access to the
production technology of BOPET film or otherwise. At the same time, the current
BOPET film manufacturers may expand their productivity. Accordingly, we may
experience increased competition and the entry of new BOPET producers will also
lead to an increase in the industry supply of BOPET film resulting in more
competitive pricing. We may have to price our products in response to
competitive market conditions. In the event that we are unable to compete
successfully or retain effective control over the pricing of our products, our
profit margins will decrease and, our revenues and net income may also
decrease.




In
addition, China has gradually lowered import tariffs and relaxed foreign
investment restrictions after its entry into the World Trade Organization in
December 2001. This may lead to increased competition from foreign companies in
our industry, some of which are significantly larger and financially stronger
than us. If we fail to compete effectively with these companies in the future,
our current business and future growth potential would be adversely
affected.




A
significant portion of our revenue is derived from the flexible packaging
industry in the PRC




A
significant portion of our revenue is currently derived from the production and
sale of BOPET film. Our BOPET film is largely used for the flexible packaging
industry, such as relating to the processed food and tobacco packaging,
cosmetics and alcohol. The demand for our BOPET film is therefore indirectly
affected by the demand for flexible packaging.





10




Any
decrease in the demand for our BOPET film will significantly affect our
financial performance. The global financial crisis, which began in the fourth
quarter of 2008, has caused a slowdown in the demand for growth in the PRC
market and a decrease in demand in the overseas market for our products, which
as a result, has led to the decline both in sales quantity or the sales price of
our products.  If the slowdown continues, it could continue to have an
adverse impact on our financial condition, business and operation.




We
rely on key managerial and technical personnel and failure to attract or retain
such personnel may compromise our ability to perform our decided strategies and
then to develop new products and to effectively carry on our research and
development and other efforts




Our
success to date has been largely attributable to the contributions of key
management and experienced personnel, some with whom we have entered into
service agreements. The loss of their services might impede the achievements of
strategies and our development objectives and might damage the close business
relationship we currently enjoy with some of our larger customers. Our continued
success is dependent, to a large extent, on our ability to attract or retain the
services of these key personnel. Except for Mr. Xiaoan He, we do not currently
maintain any other key man insurance for our directors or officers.




Our
R&D center is managed by Mr. Hanyong Lee. If they do not effectively lead
the R&D team to research and develop new products and facilitate the
marketing process, or we are unable to receive their services continuously, or
we are unable to recruit outstanding R&D personnel as a replacement, this
may have an adverse affect on our ability to progress and develop new products,
and may adversely affect our business results and market
competitiveness.




Marketability
of any of our new products is uncertain and low acceptance levels of any of our
new products will adversely affect our revenue and profitability




The
development of our products is based on complex technology, and requires
significant time and expertise in order to meet industry standards and
customers’ specifications. Although we have developed some products that meet
customers’ requirements in the past, there is no assurance that any of our
research and development efforts will necessarily lead to any new or enhanced
products or generate sufficient market share to justify commercialization. We
must continually improve our current products and develop and introduce new or
enhanced products that address the requirements of our customers and are
competitive in terms of functionality, performance, quality and price in order
to maintain and increase our market share. If our new products are unable to
gain market acceptance, we would be forced to write-off the related inventory
and would not be able to generate future revenue from our investment in research
and development. In such event, we would be unable to increase our market share
and achieve and sustain profitability. Our failure to further refine our
technology and develop and introduce new products attractive to the market could
cause our products to become uncompetitive or obsolete, which could reduce our
market share and cause our sales to decline.




We
may not be able to complete our new production line (thick film) currently under
construction and start production in the near future. This may have an adverse
impact on us due to potential claims that may be raised by the supplier of
equipments.




The new
production line (thick film) project, which is currently under construction,
still has a shortage of funds of US$ 15 million to US$ 20 million out of the
total expected investment required for this new production line of approximately
US$ 35 million to US$ 40 million.  Although our management has made
its best efforts to obtain additional financing, it has not been successful due
to various adverse factors, such as due to the general weak economy and our
inability to obtain financing through issuing shares or bonds caused by the
continuous decline in our share price.  As a result, we may fail to
make payments to suppliers on equipment that we have ordered in connection with
this production line and are near to being completed. In the event that we are
unable to obtain additional financing and pay our suppliers, we may encounter
potential litigation from our suppliers. In the event that there is a claim for
the breach of contract by our suppliers, we may endure a significant loss. In
addition, although the plant has been completed and certain other equipment has
been delivered, we cannot begin production without the main production line
being completed.  This may further have an adverse impact on
us.





11




The
circumstances under which we acquired ownership of our main productive assets
may jeopardize our ability to continue as an operating business




Substantially
all of our operating assets were acquired through two auction proceedings under
relevant PRC law. We acquired the Brückner production line in 2003 as a result
of a foreclosure proceeding enforcing an effective court judgment and the DMT
production in 2004 as a result of a commercial auction from a consigner who
obtained such assets through a bankruptcy proceeding. In the opinion of our PRC
counsel, Concord & Partners, these proceedings are both valid under Chinese
auction and bankruptcy law based on certain factual assumptions. Our PRC
counsel’s opinion solely relates to the legal procedure of the auctions and is
based upon certain factual assumptions, our written representations and written
reports of the auction company and other related parties. There can be no
assurance that relevant authorities or creditors of the predecessor owner of
these assets will not challenge the effectiveness of these asset transfers based
upon the facts and circumstances of these transfers, despite the existence of
independent appraisals, and other facts and circumstances of the auctions that
cannot be verified by our PRC counsel. Taking into consideration the facts known
by our PRC counsel related to the auction of the Brückner production line and
the significant difference in the price paid for the DMT production line at the
two bankruptcy auctions involved in our purchase of that asset and, assuming the
representations and reports received by our PRC counsel are true and correct in
all material respects, our PRC counsel is of the opinion that the auctions of
the Brückner and DMT production lines were valid under PRC law and the
possibility of the creditors of Shandong Neo-Luck successfully exercising
recourse or claiming repayment with respect to our assets purchased in the
bankruptcy proceeding should be remote.  Certain of the assumptions
relied upon in providing that opinion have, however, been called into question
by the verdict referred to below.  In addition, should any such
challenge be brought in China (or elsewhere) and prevail, we may incur
substantial liabilities and be required to pay substantial damages as a result
of acquiring these assets. Although we believe any such challenge is unlikely to
lead to the forfeiture of the related assets, it could materially affect our
ability to continue operations.




On June
25, 2007, we announced the investigation of three controlling shareholders, Mr.
Jun Yin, Mr. Duo Wang, and Mr. Tongju Zhou, and on September 28, 2007, the three
shareholders have been arrested, relating to the suspicion of the Crime of
Irregularities for Favoritism and to sell state-owned assets at low
prices.




On March
10, 2009, we announced the Company became aware of the initial verdict issued by
the Jinan Intermediate People's Court in the city of Jinan, Shandong Province,
concerning the Company's three major shareholders, Mr. Jun Yin, Mr. Tongju Zhou
and Mr. Duo Wang. The verdict finds the three major shareholders guilty of the
crime of misappropriation of state-owned assets relating to tens of millions of
RMBs' worth of assets during the reorganization of Shandong Neoluck Plastics
Co., Ltd. The court sentenced Mr. Yin to death, with a stay of execution for two
years. The other two defendants, Mr. Zhou and Mr. Wang, each received life
imprisonment. All of the personal property of the three individuals will be
confiscated.  They own an aggregate of approximately 65% of the
ordinary shares of Fuwei by their holdings of Apex Glory and Easebright
Investments. None of these individuals is currently involved in Fuwei's
day-to-day operations, however, the possibility of shareholder changes may
adversely affect the operation of the Company.




We have, in the
past, experienced and may, from time to time, experience negative working
capital. We also face risks associated with debt financing (including exposure
to variation in interest rates)




Our total
short-term loan as of December 31, 2008 was RMB 164.8 million (US$24.0 million),
which excludes RMB 5 million (US$ 0.7 million) in long-term loans.  We
have pledged property, plant and equipment and lease prepayments as security for
RMB 167.6 million (US$ 24.5 million) of the above outstanding indebtedness. In
January 2009, we renegotiated the current loans with the bank. In the event that
we default on all or any portion of this indebtedness, our lenders could
foreclose on our assets. In the event that our assets are foreclosed upon, we
will not be able to continue to operate our business.




Our
obligations under our existing loans have been mainly met through the cash flow
from our operations and our financing activities. We are subject to risks
normally associated with debt financing, including the risk of significant
increases in interest rates and the risk that our cash flow will be insufficient
to meet required payment of principal and interest. In the past, cash flows from
operations have been sufficient to meet payment obligations and/or we have been
able to extend our borrowings. There is however, no assurance that we will be
able to continue to do so in the future. We may also underestimate our capital
requirements and other expenditures or overestimate our future cash flows. In
such event, we may consider additional bank loans, issuing bonds, or other forms
of financing to satisfy our capital requirements. If any of the aforesaid events
occur and we are unable for any reason to raise additional capital, debt or
other financing to meet our working capital requirements, our business,
operating results, liquidity and financial position will be adversely
affected.  For example, if we fail to get appropriate financing, it
will negatively impact the investment in and the production of our third
production line.  In addition, if we do not obtain financing or have
negative working capital, there is a possibility that we may not be able to
perform our contracts with our suppliers as a result of our inability to pay
them. All these factors may cause a significant adverse effect on our
operations.





12




We
may lose our competitive advantage and our operations may suffer if we fail to
prevent the loss or misappropriation of, or disputes over, our intellectual
property




At
December 31, 2008, we have received four patents from, and have seven patent
applications pending with, the PRC authorities.  All these patents are
related to our products and production processes. We may not be able to
successfully obtain the approvals of the PRC authorities for the pending patent
applications. Furthermore, third parties may assert claims to our proprietary
processes and technologies. These products, proprietary processes and
technologies are important to our business as they allow us to maintain our
competitive edge over our competitors.




Our
ability to compete in our markets and to achieve future revenue growth will
depend, in significant part, on our ability to protect our proprietary
technology and operate without infringing upon the intellectual property rights
of others. The legal regime in China for the protection of intellectual property
rights is still at its early stage of development. Intellectual property
protection became a national effort in China in 1979 when China adopted its
first statute on the protection of trademarks. Since then, China has adopted its
Patent Law, Trademark Law and Copyright Law and promulgated related regulations,
such as the Regulation on Computer Software Protection, Regulation on the
Protection of Layout Designs of Integrated Circuits and Regulation on Internet
Domain Names. China has also acceded to various international treaties and
conventions in this area, such as the Paris Convention for the Protection of
Industrial Property, Patent Cooperation Treaty, Madrid Agreement and its
Protocol Concerning the International Registration of Marks. In addition, when
China became a party to the World Trade Organization in 2001, China amended many
of its laws and regulations to comply with the Agreement on Trade-Related
Aspects of Intellectual Property Rights. Despite many laws and regulations
promulgated and other efforts made by China over the years with a view to
tightening up its regulation and protection of intellectual property rights,
private parties may not enjoy intellectual property rights in China to the same
extent as they would in many Western countries, including the United States, and
enforcement of such laws and regulations in China have not achieved the levels
reached in those countries. Both the administrative agencies and the court
system in China are not well-equipped to deal with violations or handle the
nuances and complexities between compliant technological innovation and
non-compliant infringement.




We rely
on trade secrets and registered patents and trademarks to protect our
intellectual property. We have also entered into confidentiality agreements with
our management and employees relating to our confidential proprietary
information. However, the protection of our intellectual properties may be
compromised as a result of:




·
            departure
      of any of our management members or employees in possession of our
      confidential proprietary
information;




·
            breach
      by such departing management member or employee of his or her
      confidentiality and non-disclosure  undertaking to
  us;




·
            expiration
      of the protection period of our registered patents or
      trademarks;




·
            infringement
      by others of our proprietary technology and intellectual property rights;
      or




·
            refusal
      by relevant regulatory authorities to approve our patent or trademark
      applications.




Any of
these events or occurrences may reduce or eliminate any competitive advantage we
have developed, causing us to lose sales or otherwise harm our business. There
is no assurance that the measures that we have put into place to protect our
intellectual property rights will be sufficient. As the number of patents,
trademarks, copyrights and other intellectual property rights in our industry
increases, and as the coverage of these rights and the functionality of the
products in the market further overlap, we believe that business entities in our
industry may face more frequent infringement claims. Litigation to enforce our
intellectual property rights could result in substantial costs and may not be
successful. If we are not able to successfully defend our intellectual property
rights, we might lose rights to technology that we need to conduct and develop
our business. This may seriously harm our business, operating results and
financial condition, and enable our competitors to use our intellectual property
to compete against us.





13




Furthermore,
if third parties claim that our products infringe their patents or other
intellectual property rights, we might be required to devote substantial
resources to defending against such claims. If we are unsuccessful in defending
against such infringement claims, we may be required to pay damages, modify our
products or suspend the production and sale of such products. We cannot
guarantee that we will be able to modify our products on commercially reasonable
terms.




We
may incur capital expenditures in the future in connection with our growth plans
and therefore may require additional financing




To expand
our business, we will need to increase our production variety and productivity
which will require substantial capital expenditures. Such expenditures are
likely to be incurred in advance of any increase in sales. We cannot assure you
that our revenue will increase after such capital expenditures are incurred as
this will depend on, among other factors, our ability to maintain or achieve
high capacity utilization rates. Any failure to increase our revenue after
incurring capital expenditures to expand production capacity will reduce our
profitability.




In
addition, we may need to obtain additional debt or equity financing to fund our
capital expenditures. Additional equity financing may result in dilution of
existing shareholders’ return. Additional debt financing may be required which,
if obtained, may:




·
            limit
      our ability to pay dividends or require us to seek consents for the
      payment of dividends;




·
            increase
      our vulnerability to general adverse economic and industry
      conditions;




·
            limit
      our ability to pursue our growth
plan;




·
            require
      us to dedicate a substantial portion of our cash flow from operations as
      payment for our debt, thereby reducing availability of our cash flow to
      fund capital expenditures, working capital and other general corporate
      purposes; and/or




·
            limit
      our flexibility in planning for, or reacting to, changes in our business
      and our industry.




We cannot
assure you that we will be able to obtain the additional financing on terms that
are acceptable to us, if at all.




A
disruption in the supply of utilities, fire or other calamity at our
manufacturing plant would disrupt production of our products and adversely
affect our sales




Our BOPET
films are manufactured solely at our production facility located in Weifang City
in the PRC. While we have not in the past experienced any calamities which have
disrupted production, any disruption in the supply of utilities, in particular,
electricity or power supply or any outbreak of fire, flood or other calamity
resulting in significant damage at our facilities would severely affect our
production of BOPET film and, as a result, we could incur substantial
liabilities that could reduce or eliminate the funds available for product
development or result in a loss of equipment and properties.




While we
maintain insurance policies covering losses in respect of damage to our
properties, machinery and inventories of raw materials and products, we cannot
assure you that our insurance would be sufficient to cover all of our potential
losses.





14




We
have limited experience in operating outside mainland China, and failure to
achieve our overseas expansion strategy may have an adverse effect on our
business growth in the future




Our
future growth depends, to a considerable extent, on our ability to develop both
the domestic and overseas markets. We are currently exploring new business
opportunities outside mainland China for our BOPET film products. We have a
limited number of customers outside China, mainly in South Korea, the United
States and Europe and others. However, we have limited experience in operating
outside mainland China, have limited experience with foreign regulatory
environments and market practices, and cannot guarantee that we will be able to
penetrate any overseas market. In connection with our initial efforts to expand
overseas, we have encountered many obstacles, including cultural and linguistic
differences, difficulties in keeping abreast of market, business and technical
developments in foreign jurisdictions, and political and social disturbances.
Failure in the development of overseas markets may have an adverse effect on our
business growth in the future.




We have encountered anti-dumping
investigations in South Korea and the United States. Although we received
approvals for comparatively low anti-dumping tax rates in the final anti-dumping
arbitration judgments in South Korea and the United States, our overseas
expansion strategy in our future business growth may be adversely
affected.




Since
2007, the manufacturers in China, India and other countries have encountered
anti-dumping investigation conducted by South Korea and the United States. The
Korean Trading Committee (KTC) announced the final results for anti-dumping
investigations for enterprises in China and India on August 27,
2008.  Although we finally received the anti-dumping duties (ADD) rate
of 5.67% which is much lower than the average rate of 23.60% for other
enterprises in China, our export to South Korea is still adversely affected by
paying the ADD to a certain extent.




The US
Department of Commerce conducted the anti-dumping investigation in October, 2007
covering exporters in China, Brazil, Thailand and the United Arab
Emirates.  41 exporters in China were under
investigation.  in October 2008, the anti-dumping judgments were
announced.  Although we received the lowest ADD rate of 3.49% among
the five exporters that received a duty, our export to the United States, to a
certain extent, is still adversely affected by paying the ADD.




Our
primary source of funds for dividends and other distributions from our operating
subsidiary in China is subject to various legal and contractual restrictions and
uncertainties, and our ability to pay dividends or make other distributions to
our shareholders are negatively affected by those restrictions and
uncertainties




We are a holding company established in
the Cayman Islands and conduct our core business operations through our
principal operating subsidiary, Shandong Fuwei, in China. As a result, our
profits available for distribution to our shareholders are dependent on the
profits available for distribution from Shandong Fuwei. If Shandong Fuwei incurs
debt on its own behalf, the debt instruments may restrict its ability to pay
dividends or make other distributions, which in turn would limit our ability to
pay dividends on our ordinary shares. Under the current PRC laws, because we are
incorporated in the Cayman Islands, our PRC subsidiary, Shandong Fuwei, is
regarded as a wholly foreign-owned enterprise in China. The PRC laws permit
payment of dividends only out of net income as determined in accordance with PRC
accounting standards and regulations.Determination of net income under PRC
accounting standards and regulations may differ from determination under U.S.
GAAP in significant respects, such as the use of different principles for
recognition of revenues and expenses. In addition, distribution of additional
equity interests by our PRC subsidiary, Shandong Fuwei, to us (which is credited
as fully paid through capitalizing its undistributed profits) requires
additional approval of the PRC government due to an increase in our registered
capital and total investment in Shandong Fuwei. Under the PRC laws, Shandong
Fuwei, a wholly foreign-owned enterprise, is required to set aside a portion of
its net income each year to fund designated statutory reserve funds. These
reserves are not distributable as cash dividends. As a result, our primary
internal source of funds of dividend payments from Shandong Fuwei is subject to
these and other legal and contractual restrictions and uncertainties, which in
turn may limit or impair our ability to pay dividends to our shareholders.
Moreover, any transfer of funds from us to Shandong Fuwei, either as a
shareholder loan or as an increase in registered capital, is subject to
registration with or approval by PRC governmental authorities. These limitations
on the flow of funds between us and Shandong Fuwei could restrict our ability to
act in response to changing market conditions.





15




Investor
confidence and the market price of our shares may be adversely impacted if we or
our independent registered public accountants are unable to issue an unqualified
opinion on the adequacy of our internal controls over our financial reporting
beginning as of December 31, 2009, as required by Section 404 of the U.S.
Sarbanes-Oxley Act of 2002


As a
public company, we are required by section 404 of the Sarbanes-Oxley Act 2002 to
include a report by management on our internal controls over financial reporting
that contains our management’s assessment of the effectiveness of our internal
controls in our annual report on Form 20-F beginning with the fiscal year ended
December 31, 2008 and the report of our independent registered public accounting
firm on our internal control over financial reporting in our annual report on
Form 20-F beginning with the fiscal year ending December 31, 2009. We have
documented, tested, and evaluated our internal controls as required. Our
management has concluded that our internal controls over financial reporting are
effective in 2008.  Moreover, although our management does conclude
that our internal controls over financial reporting are effective, if our
independent registered public accountants are not satisfied with our internal
control structure and procedures, the level at which our internal controls are
documented, designed, operated or reviewed, or if the independent registered
public accountants interpret the requirements, rules or regulations differently
from us, they may conclude that our internal controls over financial reporting
are not effective. Any of these possible outcomes could result in an adverse
reaction in the financial marketplace due to a loss of investor confidence in
the reliability of our financial statements, which could lead to a decline in
the market price of our shares.




Also,
there are certain controls that will not occur until close to the time of our
annual filing. We have tested these controls during our quarterly filings and do
not anticipate any deficiencies to be identified in these processes. However, it
is possible that significant deficiencies or material weaknesses may be
identified when we test certain financial reporting controls related to our
annual filing.




Risks
Relating to Business Operations in China




Changes
in China’s political and economic policies and conditions could cause a
substantial decline in the demand for our products and services




Currently,
we derive substantially most of our revenues from mainland China. We anticipate
that mainland China will continue to be our primary production and sales base in
the near future.  In addition, currently, substantially all of our
assets are located in China and all of our services are performed in China. In
2006, 2007 and 2008, sales to our customers in the PRC accounted for
approximately 79.0%, 75.5% and 86.9%, respectively, of our total revenue.
Accordingly, any significant slowdown in the PRC economy or decline in demand
for our products from our customers in the PRC will have an adverse effect on
our business, financial condition and results of our operations. Furthermore,
any unfavorable changes in the social and political conditions of the PRC may
also adversely affect our business and operations.




Since the
adoption of the “open door policy” in 1978 and the “socialist market economy” in
1993, the PRC government has been reforming and is expected to continue to
reform its economic and political systems. Any changes in the political and
economic policy of the PRC government may lead to changes in the laws and
regulations or the interpretation of the same, as well as changes in the foreign
exchange regulations, taxation and import and export restrictions, which may in
turn adversely affect our financial performance. While the current policy of the
PRC government seems to be one of imposing economic reform policies to encourage
foreign investments and greater economic decentralization, there is no assurance
that such a policy will continue to prevail in the future. We cannot make any
assurances that our operations would not be adversely affected should there be
any policy changes.




Since
2007, the Chinese government has adjusted its macroeconomic-policies, and has
increased bank loan interest rates and bank deposit reserve rates, to control
the excess rapid investment growth, which results in an increase on financial
costs, and creates a decrease in loan availability from bank. Furthermore, these
changes may slow down the growth of domestic market reliance on BOPET film, and
make it more difficult to obtain financing and investments, and have an adverse
effect on our corporate financial results. The Chinese government has changed
its policies since October 2008 when the global economy began to dramatically
worsen.  It has, since then, encouraged investing, reduced deposit and
loan interest rates, and promoted a policy in consumption spending in order to
stimulate economic growth.  However, we cannot make assurances as to
whether these policies will not be changed or if these policies will stimulate
the economic growth. If the Chinese government changes these policies or these
policies do not bring on the intended results, our operations may be adversely
affected.





16




The
discontinuation of any preferential tax treatments or other incentives currently
available to us in the PRC could materially and adversely affect our business,
financial condition and results of operations




Our
subsidiary Shandong Fuwei was converted into a wholly foreign owned enterprise
in January 2005 and enjoys certain special or preferential tax treatments
regarding enterprise income tax in accordance with the “Income Tax Law of the
PRC for Enterprises with Foreign Investment and Foreign Enterprises.”
Accordingly, it is entitled to tax concessions whereby the profit for the first
two financial years beginning with the first profit-making year (after setting
off tax losses carried forward from prior years) is exempt from income tax in
the PRC and the profit for each of the subsequent three financial years is taxed
at 50% of the prevailing tax rates set by the relevant tax authorities. In
addition, as a “High Technology Enterprise,” Shandong Fuwei currently enjoys
enterprise income tax at an incentive rate of 15%. Although Shandong Fuwei was
redesignated as a High-and-New Tech Enterprise in December, 2008 and enjoys the
favorable income tax rate, if there are any future changes in PRC tax laws,
rules and regulations or Shandong Fuwei is no longer designated as a
High-and-New Tech Enterprise,Shandong Fuwei
will no longer enjoy the preferential tax treatment .  If that were to
occur, Shandong Fuwei would be subject to a 25% standard enterprise income tax
rate which would significantly increase our effective tax rate and materially
adversely affect our operating results.




On March
16, 2007, the National People’s Congress of the PRC passed the Enterprise Income
Tax Law of the People’s Republic of China, which law took effect on January 1,
2008. In accordance with the new law, a unified enterprise income tax rate of
25% and unified tax deduction standards were applied equally to both
domestic-invested enterprises and foreign-invested enterprises such as Shandong
Fuwei. Enterprises established prior to March 16, 2007, eligible for
preferential tax treatment in accordance with the currently prevailing tax laws
and administrative regulations would, under the regulations of the State
Council, gradually become subject to the new tax rate over a five-year
transition period starting from the date of effectiveness of the new law. We
expect details of the transitional arrangement for the five-year period from
January 1, 2008 to December 31, 2012 applicable to enterprises approved for
establishment prior to March 16, 2007, such as Shandong Fuwei, to be set out in
more detailed implementing rules to be adopted in the future. In addition,
certain qualifying “High Technology Enterprises” may still benefit from a
preferential tax rate of 15% under the new tax law if they meet the definition
of “Government Developing High Technology Enterprise” to be set forth in the
more detailed implementing rules when they become adopted. Shandong Fuwei was
redesignated as a High-and-New Tech Enterprise in December, 2008 and enjoys the
favorable income tax rate of 15% pursuant to the Enterprise Income Tax Law.




We
are subject to environmental laws and regulations in the PRC




We are
subject to environmental laws and regulations in the PRC. Any failure by us to
comply fully with such laws and regulations will result in us being subject to
penalties and fines or being required to pay damages. Although we believe we are
currently in compliance with the environmental regulations in all material
respects, any change in the regulations may require us to acquire equipment or
incur additional capital expenditure or costs in order to comply with such
regulations. Our profits will be adversely affected if we are unable to pass on
such additional costs to our customers.




Changes
in foreign exchange regulations in China may affect our ability to pay dividends
in foreign currencies




We
currently receive most of our operating revenues in Renminbi. Currently,
Renminbi is not a freely convertible currency and the restrictions on currency
exchanges in China may limit our ability to use revenues generated in Renminbi
to fund our business activities outside China or to make dividends or other
payments in U.S. dollars. The PRC government strictly regulates conversion of
Renminbi into foreign currencies. Over the years, the PRC government has
significantly reduced its control over routine foreign exchange transactions
under current accounts, including trade- and service-related foreign exchange
transactions, foreign debt service and payment of dividends. In accordance with
the existing foreign exchange regulations in China, our PRC subsidiary, Shandong
Fuwei, is able to pay dividends in foreign currencies, without prior approval
from the PRC State Administration of Foreign Exchange, or SAFE, by complying
with certain procedural requirements. The PRC government may, however, at its
discretion, restrict access in the future to foreign currencies for current
account transactions and prohibit us from converting our Renminbi-denominated
earnings into foreign currencies. If this occurs, our PRC subsidiary may not be
able to pay us dividends in foreign currency without prior approval from SAFE.
In addition, conversion of Renminbi for most capital account items, including
direct investments, is still subject to government approval in China and
companies are required to open and maintain separate foreign exchange accounts
for capital account items. This restriction may limit our ability to invest
earnings of Shandong Fuwei.





17




Fluctuation
in the value of Renminbi could adversely affect our overseas sales and import of
raw materials and  the value of, and dividends payable on, our shares
in foreign currency terms




The value
of Renminbi is subject to various factors and depends to a large extent on
China’s domestic and international economic, financial and political
developments, as well as the currency’s supply and demand in the local market.
From 1994, the conversion of Renminbi into foreign currencies, including the
U.S. dollar, was based on exchange rates set and published daily by the People’s
Bank of China, the PRC central bank, based on the previous day’s interbank
foreign exchange market rates in China and exchange rates on the world financial
markets. The official exchange rate for the conversion of Renminbi into U.S.
dollars remained stable until Renminbi was revalued in July 2005 and allowed to
fluctuate by reference to a basket of foreign currencies, including the U.S.
dollar. Under the new policy, Renminbi is permitted to fluctuate within a band
against a basket of foreign currencies. This change in policy resulted initially
in an approximately 2.0% appreciation in the value of Renminbi against the U.S.
dollar. There remains significant international pressure on the PRC government
to adopt a substantially more liberalized currency policy, which could result in
a further and more significant appreciation in the value of Renminbi against the
U.S. dollar. Further revaluations of Renminbi against the U.S. dollar may also
occur in the future. Since our income and profits are denominated in Renminbi,
fluctuation in the value of Renminbi could adversely affect our overseas sales
and import of raw materials and further negtively affect our revenue and net
income.  Any appreciation of Renminbi would increase the value of, and
any dividends payable on, our shares in foreign currency terms. Conversely, any
depreciation of Renminbi would decrease the value of, and any dividends payable
on, our shares in foreign currency terms.




The
uncertain legal environment in China could limit the legal protections available
to you




The PRC
legal system is a civil law system based on written statutes. Unlike the common
law system, the civil law system is a system in which decided legal cases have
little precedential value. In the late 1970s, the PRC government began to
promulgate a comprehensive system of laws and regulations to provide general
guidance on economic and business practices in China and to regulate foreign
investment. Our PRC subsidiary, Shandong Fuwei, is a wholly foreign-owned
enterprise and is subject to laws and regulations applicable to foreign
investment in China in general and laws and regulations applicable to wholly
foreign-owned enterprises in particular. China has made significant progress in
the promulgation of laws and regulations dealing with economic matters such as
corporate organization and governance, foreign investment, commerce, taxation
and trade. However, the promulgation of new laws, changes of existing laws and
abrogation of local regulations by national laws may have a negative impact on
our business and prospects. In addition, as these laws, regulations and legal
requirements are relatively recent and because of the limited volume of
published cases and their non-binding nature, the interpretation and enforcement
of these laws, regulations and legal requirements involve significant
uncertainties. These uncertainties could limit the legal protections available
to foreign investors, including you. For example, it is not clear if a PRC court
would enforce in China a foreign court decision brought by you against us in
shareholders’ derivative actions. Moreover, the enforceability of contracts in
China, especially with the government, is relatively uncertain. If
counterparties repudiated our contracts or defaulted on their obligations, we
might not have adequate remedies. Such uncertainties or inability to enforce our
contracts could materially and adversely affect our revenues and
earnings.





18




Outbreak
of SARS, Avian Influenza or other epidemics could materially and adversely
affect our overall operations and results of operations




From
March to July 2003, mainland China, Hong Kong, Singapore, Taiwan and some other
areas in Asia experienced an outbreak of a new and contagious form of atypical
pneumonia known as severe acute respiratory syndrome, or SARS. A recurrent
outbreak, or an outbreak of a similarly contagious disease, such as the H5N1
avian flu, could potentially disrupt our operations to the extent that any one
of our employees is suspected of having the infection or that any of our
facilities is identified as a possible source of spreading the virus or disease.
We may be required to quarantine employees who are suspected of having an
infection. We may also be required to disinfect our facilities and therefore
suffer a suspension of production of indefinite duration. Any quarantine or
suspension of production at any of our facilities will adversely affect our
overall operations. In the recent two years, infectious disease like Avian
Influenza has occurred in high frequency worldwide, which would have adverse
effect on the consumption on fowl packaged foods, and have influence on our
products sales. In addition, any such outbreak will likely restrict the level of
economic activities in the affected areas, which could lead to a substantial
decrease in our revenues accompanied by an increase in our costs, resulting in
lower levels of net income.




Regulations
relating to offshore investment activities by PRC residents may limit our
ability to acquire PRC companies and adversely affect our business and
prospects




In
October 2005, SAFE issued a circular (SAFE circular 75) concerning foreign
exchange regulation on investments by PRC residents in China through special
purpose companies incorporated overseas. The circular states that, if PRC
residents use assets or equity interests in their domestic entities as capital
contribution to establish offshore companies or inject assets or equity
interests of their PRC entities into offshore companies to raise capital
overseas, such PRC residents must register with local SAFE branches with respect
to their overseas investments in offshore companies and must also file
amendments to their registrations if their offshore companies experience
material events, such as changes in share capital, share transfer, mergers and
acquisitions, spin-off transactions or use of assets in China to guarantee
offshore obligations. Our existing shareholders prior to our initial public
offering have completed the relevant SAFE registration procedures as required by
SAFE circular 75.




On May
29, 2007, SAFE issued the operative measures of SAFE circular 75 (SAFE circular
106), which specified the registration and approval procedures of SAFE circular
75.




As it is
uncertain how these existing regulations, and any future legislation concerning
offshore or cross-border transactions, will be interpreted, amended and
implemented by the relevant government authorities, we cannot predict how
this circular and other SAFE circulars will affect our business operations or
future strategies. For example, we may be subject to a more stringent review and
approval process with respect to our foreign exchange activities, such as
remittance of dividends and foreign currency-denominated borrowings, which may
adversely affect our ability to provide funds to us to pay dividends on our
ordinary shares.




Item
4. Information on the Company




Overview




We were
formed as a Cayman Islands corporation in August 2004 under the name “Fuwei
Films (Holding) Co. Ltd.” Our corporate headquarters, principal place of
business, production and ancillary facilities occupy an area of approximately
74,251 square meters at No. 387 Dongming Road, Weifang Shandong, People’s
Republic of China, 261061. Our agent for service in the United States is CT
Corporation System located at 111 Eighth Avenue, NY, NY 10011.




We
develop, manufacture and distribute high quality plastic film using the
biaxially oriented stretch technique, otherwise known as BOPET film (Biaxially
oriented polyethylene terephthalate). The film is light-weight, non-toxic,
odorless, transparent, glossy, high temperature and moisture-resistant, and
retains high barrier resistance, making it suitable for many forms of flexible
packaging, printing, laminating, aluminum-plating and other applications. In
addition, it retains high dielectric strength and volume resistance even at high
temperatures, which are essential qualities for electrical and electronic uses.
Our BOPET film is widely used in consumer based packaging (such as the food,
pharmaceutical, cosmetics, tobacco and alcohol industries), imaging (such as
printing plates and microfilms), electronics and electrical industries (such as
wire and cable wrap, capacitors and motor insulation), as well as in magnetic
products (such as audio and video tapes). We market our products under our brand
name “Fuwei Films.” We export our products to packaging customers and
distributors mainly in South Korea, the United States, and others. The principal
products we produce are namely:





19




·
            Printing
      base film used in printing and
lamination;




·
            Stamping
      foil base film used for packaging of luxury items to increase the
      aesthetic presentation of the item;




·
            Metallization
      film or aluminum plating base film used for vacuum aluminum plating for
      paper or flexible plastic
lamination;




·
            Transfer
      base film used for environmental friendly cigarettes and alcohol
      packaging;




·
            High-gloss
      film used for aesthetically enhanced packaging
  purposes;




·
            Heat-sealable
      film used for processed food packaging and other
    applications;




·
            Laser
      holographic base film used as anti-counterfeit film for food, medicine,
      cosmetics, cigarettes and alcohol packaging;
and




·
            Matte
      film used for printing, metallization, stamping and transfer
      metallization.




Since our
establishment, all of our revenues have been derived from the sales of BOPET
film, particularly our printing film, stamping film, metallization film,
transfer film and high-gloss film.




We
currently operate three production lines. The first line is a Brückner 6.3 m (in
width) production line with an annual designed production capacity of 13,000
tons of BOPET film. The second line is a DMT production line which is
three-layer co-extruded with 6.7 m (in width), and has an annual designed
production capacity of 16,100 tons of BOPET film. The third line is a leased
production line that has an annual designed production capacity of 8,000 tons
with leasing period commencing from April 2007.  As of December 31,
2008, our manufacturing operations had a total annual designed production
capacity of 37,100 metric tons of BOPET/CBOPET film based upon 7,200 production
hours per annum.




We sell
most of our BOPET film products to customers in the flexible packaging industry
in the PRC in the coastal region of China. Our top five customers over the three
years ended December 31, 2008 were Dongguan Klaser Technologies Co., Ltd., Woo
Sung Multi-film Co., Ltd., Dare Technical Co., Ltd. Danyang Advance Packaging
Material Subsidiary Company, Cangnan Shuncheng Packaging Material Trade Co.,
Ltd. and Holotek Technology Co., Ltd.None of our
customers accounted for more than 10% of our total revenues in any such year. In
addition, we expect to continue to expand our product portfolio to exploit
opportunities in different market sectors, such as the production of thick BOPET
film products to be used in electrical and electronics industries. The BOPET
products for high-end and special usage used by these industries are currently
imported and are costly. We began marketing and selling our products overseas to
customers and distributors mainly in South Korea, the United States and Europe
and others. in the second half of 2004. In 2006, 2007and 2008 our sales to our
overseas customers constituted approximately 21.0%, 24.5% and 13.1%,
respectively, of our total revenue.




Competitive
Strengths




We
believe that our competitive strengths have enabled us over the years to meet
the needs of our customers and become a leading provider of BOPET film products
in China. We also believe that our strengths will continue to help us grow in
the BOPET film industry in both China and internationally. Our principal
strengths include the following:




We
have the capability to expand our product range and markets by introducing new
products required by customers




We
believe that our experience in the industry and personnel will enable us to
continue to provide new BOPET film products required by customers. While other
companies in our industry have also made significant advances in BOPET
technology and production, we have introduced a variety of BOPET film products
by developing and formulating our own blend of additives used in the production
of BOPET film. Our research and development team has been headed by Mr. Hanyong
Lee since January 2008, and comprised of fourteen research personnel in
total.





20




We
have an established brand name and are recognized for our product quality in the
PRC




Although
our operating history is relatively short and our market presence is primarily
in the PRC, our products are marketed under our brand name, “Fuwei Films.” We
believe that this brand name is well known in the BOPET film market in the PRC
and, although our selling prices sometimes exceed those of our competitors, our
products have achieved significant market acceptance because of its high quality
and our superior customer service.




We
manufacture high quality products that can be customized for our
clients




We
implement and enforce stringent quality controls on our production process and
products. As part of our production process, we formulate different blends of
PET resins and additives to produce film with specific properties for our
customers based on their requirements. In addition, we have improved on our own
formulations, which we believe have resulted in quality products that meet our
customers’ requirements.




We
have an experienced management team with extensive industry
experience




Our
management team is led by our Chairman and Chief Executive Officer, Mr. Xiaoan
He who has more than ten years of related experience in the plastics and
packaging industries. He has been instrumental in our operations and strategies,
contributing his knowledge and experience in the industry.  Each
member of our management team has many years of experience in industries related
to the manufacturing and development of products.




Since
January, 2008, our R&D center has been managed by Mr. Hanyong Lee. Mr.
Hanyong Lee has more than 20 years management and research experience in the
BOPET industry.




Our
technical expertise and production facilities are advanced in the
PRC




We
consider our technical expertise and production facilities to be highly advanced
with respect to the BOPET film industry in the PRC. Our first production line
was German made and manufactured by Brückner. It is a 6.3 m (in width)
production line with an annual designed production capacity of 13,000 tons of
BOPET film. Our second production line was manufactured in France by DMT. It is
a 6.7 m (in width) production line that has an annual designed production
capacity of 16,100 tons of BOPET film. We believe that both of our production
lines are able to provide high quality products and to compete effectively with
our competitors.




Awards
and Certifications




Our
subsidiary, Shandong Fuwei, has received the following awards and certificates,
each of which, we believe, is an indication of our achievements, the quality of
our products and makes us more attractive to our potential customers and
therefore a more competitive company both in the local and international
markets:





Date
            
            Award/Certificate
            
            Issuing
      AuthoritySeptember
      2004(1)
            
            ISO
      9001:2000 Certificate
            
            China
      Certification Center for Quality MarkJanuary
      2005(2)
            
            Top
      50 Industrial Enterprises in 2004
            
            Weifang
      City local governmentJuly
      2006(3)
            
            ISO
      14001 Certificate
            
            International
      Organization for StandardizationDecember
      2007(4)
            
            Key
      High-Tech Enterprise of the National Torch Program
            
            Ministry
      of Science and Technology  21
  January
      2008 (5)
            
            ·Advanced Enterprise of Foreign Export;
              
              ·Advanced Enterprise in Promoting Foreign Investment;
              
              ·Advanced Enterprise for Tax Payment
              
              ·2007 Advanced Enterprise in Safety
            
            Management
      Committee of Weifang High-and-new technological and industrial development
      zoneJuly
      2008 (6)
            
            ·Designated as an A-Category taxpayer by the
      National Taxation Bureau and the Local Taxation Bureau of Shandong
      Province.
            
            the
      National Taxation Bureau and the Local Taxation Bureau of Shandong
      ProvinceDecember
      2008 (7)
            
            ·Redesignated as a High-and-New Tech Enterprise
      by Shandong Department of Science and Technology, National and Local
      Taxation Bureau of Shandong Province, as well as from the Shandong
      Province Financial Bureau
            
            Shandong
      Department of Science and Technology, National and Local Taxation Bureau
      of Shandong Province, and Shandong Province Financial Bureau




(1)
            ISO
      9000 certification has become an international reference for quality
      management requirements in business-to-business dealings. This
      certification enables us to compete on many more markets around the world
      and provides our customers with assurances about our quality, safety and
      reliability.




(2)&
      (5)
            This
      citation generates goodwill with the government officials in Weifang
      city.




(3)
            After
      strict examination and approval by China Environment United (Beijing)
      Certification Center Co., Ltd (Environment Conformity Assessment Center of
      State Environment Protection Bureau), Fuwei Films (Shandong) Co., Ltd. has
      successfully passed the ISO14001 Environmental Administration
      System in July 2006




(4)
            Fuwei
      Films (Shandong) Co., Ltd. was awarded as Key High-Tech Enterprise of the
      National Torch Program in December
2007.




(6)
              The
      A-Category is the top of the four ratings for corporate taxpayers in
      China. Candidates eligible for the category are reviewed and designated by
      the authorities every two
years.




(7)
            Because
      of China’s new Enterprise Income Tax Law which became effective on January
      1, 2008, the status Fuwei Shandong as an HNTE had to be renewed. On
      December 2008, Fuwei Films was re-designated High-and-New Tech Enterprises
      by Shandong Department of Science and Technology, National and Local
      Taxation Bureau of Shandong Province, as well as from the Shandong
      Province Financial Bureau.




Business
Prospects




Since the
second half year of 2008, the global financial crisis has had a significant
adverse impact on the global economy, including China. We believe that the
slowdown in the global economic growth will, in turn, cause a slowdown in the
growth of the BOPET film market, including in developed countries, such as the
United States. We believe that the slowdown of the economic growth will be much
more acute in China.




We have
identified thick BOPET film (typically with a thickness of between 50 to 250
microns), which is mainly used in the electrical and electronics industries, as
a key market segment for potential growth. With the expansion of the electrical
and electronics industries in China, the market for thick BOPET film, used
particularly in the manufacturing of thin film transistor-liquid crystal display
(or TFT-LCD) screens, is also anticipated to increase significantly. Although
there are BOPET manufacturers in the PRC that are able to produce BOPET film of
such thickness, we believe that generally their product quality is not able to
meet requirements for high-end usage such as TFT-LCD screens. As a result,
manufacturers of TFT-LCD screens requiring thick BOPET film generally obtain
their supply from overseas.





22




Business
Development Strategies




We
believe we have the ability to increase our sales and expand our markets. To
strengthen our market position, we intend to improve our product offerings. As
manufacturers based in the PRC strive to reduce their costs in the face of
competition, we believe that there will be greater demand for locally-produced
BOPET film products. We will also explore suitable opportunities to look for new
customers and markets in the PRC and overseas.




Our
future plans include:




Continue
construction of the new BOPET production line




We have
commenced construction of a new production line capable of producing BOPET film
that is between 50 to 250 microns thick in our current premises at Weifang City,
PRC. The BOPET film production using this new production line is targeted at
industrial use, such as TFT-LCD screen films. We expect to penetrate into the
electrical and electronics industry with such new product offerings. Such
industries for high-end and special usage currently rely on expensive imports.
The construction of the new BOPET production line has been postponed due to a
shortage of funds.  However, we will continue to make efforts to
obtain the required funds to complete the new BOPET production line. The total
investment for this new production line is expected to be approximately US$35
million to US$ 40 million.




Expansion
into overseas markets and promotion of our products in the PRC




We
believe that the overseas markets hold significant potential for future growth.
We believe that our venture into the overseas markets which began in 2004 has
been successful. Although we are not focused on any particular overseas market,
we have identified North America as an area of potential growth. We would also
like to expand our European and Japanese market. In 2008, our overseas sales
were significantly affected by the anti-dumping investigations conducted by
South Korea and the United States against BOPET exporters in China, India and
other countries and the appreciation of Renminbi. Although we have overcome many
difficulties and received the lowest rates in the anti-dumping investigations,
we experienced a significant decrease in our overseas market demand, such as in
the United States, Europe and South Korea, due to the global financial crisis
and, as a result, our overseas sales significantly decreased in 2008. With our
low manufacturing and labor costs compared to overseas manufacturers and with
high quality products and competitive prices, we believe that we can capture
certain market share in the overseas market. As we believe that the domestic
market for BOPET products has significant potential for growth, we also intend
to engage in promotional activities in this area and further develop our
customer relationships. In 2006, 2007 and 2008, sales to our customers in the
PRC accounted for approximately 79.0%, 75.5% and 86.9%, respectively, of our
total revenue, while the remainder was sold overseas in US dollars.




Investment
in research and development




As we
have a strong focus on research and development, we plan to continue to invest
substantially in this area. We are constructing a small-scale production line
for the purpose of conducting research and development. Such a production line
may also produce small batches of high value-added products. This trial
production line will enable us to save experimental costs and reduce waste
during the process of development, particularly during test production. We also
intend to expand our research and development team by hiring additional research
personnel.




In 2006,
the Weifang government established the Hi & New Technology Project
Industrial Development Fund (“IDF”) for the purpose of enhancing independent
innovation and technical R&D ability of local enterprises in order to
support the development of local Hi & New Technology enterprises. On January
31, 2007, we obtained the first installment of a loan from the industrial
development fund from our local government. Our subsidiary, Shandong Fuwei, used
these funds for the construction of the Fuwei technology center trial production
line project mentioned above. In 2008, Shandong Fuwei received a second IDF loan
to continue supporting our R&D. These funds have made a significant
contribution to the development of our R&D for new products.





23




Our
Products and Services




We are
principally engaged in the manufacture and distribution of BOPET film. We
currently produce BOPET films from the three production lines, with an aggregate
annual designed production capacity of 37,100 metric tons with thicknesses
varying between 8 - 125 microns.




BOPET is
a high quality plastic film manufactured using the Biaxially oriented stretch
(transverse and machine direction) technique. Our advanced production process
improves the physical properties of the plastic film such as its tensile
strength, resistance to impact, resistance to tearing and malleability. The high
dimensional stability of the film over a wide range of humidity and temperature
fulfills the basic requirements for flexible packaging. The film is
light-weight, non-toxic, odorless, transparent, glossy, moisture-resistant, and
retains high barrier resistance, making it suitable for many forms of flexible
packaging, printing, laminating, aluminum-plating and other processes. In
addition, it retains high dielectric strength and volume resistance even at high
temperatures, which are essential qualities for electrical and electronic uses.
The three-layer co-extruded structure enables us to develop high quality BOPET
products.




BOPET
film has been widely used in the packaging (such as food, pharmaceutical and
cosmetics), imaging (such as printing plates and microfilms), electronics and
electrical (such as wire and cable wrap, capacitors and motor insulation) and
industries. Due to its unique qualities, it has become a popular choice as a
flexible packaging material in these industries in recent years.




We market
our products under our brand name “Fuwei Films.” Our operations are based
primarily in Shandong Province, PRC, where we manufacture our products for sale
to customers engaged in flexible packaging businesses in the PRC, in particular
the coastal region. We also export our products to packaging customers and
distributors mainly in South Korea, the United States, Europe and
others.




Our BOPET
film is mainly used in the flexible packaging industry for consumer products
such as those relating to processed foods, pharmaceutical products, cosmetics,
tobacco and alcohol. Our products may be sub-divided into five main categories
constituting the following percentages of our total revenue for each of the
twelve months ended 2006, 2007 and 2008.





Category
                  
                  2006
                  
                  
                  2007
                  
                  
                  2008Printing
      film
                  
                  
                  21.8
                  %
                  
                  
                  18.6
                  %
                  
                  12.6
                  %Stamping
      foil film
                  
                  
                  22.9
                  %
                  
                  
                  21.0
                  %
                  
                  
                  31.2
                  %Metallization
      film
                  
                  
                  8.0
                  %
                  
                  
                  6.8
                  %
                  
                  
                  10.1
                  %Special
      film
                  
                  
                  36.7
                  %
                  
                  
                  37.8
                  %
                  
                  
                  24.0
                  %Base
      film for other applications
                  
                  
                  10.7
                  %
                  
                  
                  15.8
                  %
                  
                  
                  22.0
                  %




The above
categorizes BOPET film products by application.




Printing
film




This is a
high transparency film that is corona treated on one side to provide excellent
adhesion to ink. This is primarily used in printing and lamination.





24




Stamping
foil film




This is a
film that displays excellent thermal stability and tensile strength and is used
in metallized film and laser stamping foil and transfer.




Metallization
film




This is
an aluminum plating base film that displays good thermal stability and tensile
strength and provides good adhesion between film and aluminum layer. This is
mainly used for vacuum aluminum plating for paper or flexible plastic
lamination.




Special
film




We mainly
produce the following types of special film:




·
            High-gloss
      film: Film with high levels of reflection approaching a mirror-like
      surface, used for aesthetically-enhanced packaging
    purposes.




·
            Heat-sealable
      film: Film with a three layer structure. The heat-sealable film is
      primarily sold for use in printing and making heat sealable
      bags.




·
            Laser
      holographic base film: A directly embossable film with high transparency,
      used as anti-counterfeit film and for aesthetics for food, medicine,
      cosmetics, cigarette and alcoholic
packaging.




·
            Matte
      film: Film with single or double matte surface, achieved by adding special
      additive to the base polymer, used for printing, metallization, stamping
      and transfer metallization.




Base
films for other applications




Base
films for other application are ordinary commodity polyester films with
applications other than for the usages mentioned above.




Production




Our
operating subsidiary, Shandong Fuwei, currently operates three production lines.
The first is a Brückner 6.3 m (in width) production line with an annual designed
production capacity of 13,000 tons of BOPET film. The second is a DMT 6.7 m (in
width) production line, which could produce three layers co-extruded production
with annual designed production capacity of 16,100 tons of BOPET film. In
addition, we leased a production line in April 2007 with an annual designed
production capacity of 8,000 tons. As of December 31, 2008, Shandong Fuwei has a
total annual designed production capacity of 37,100 metric tons of BOPET
film.




BOPET
film is manufactured from polyethylene terephthalate (PET) resin, which is a
petrochemical product. BOPET film is produced by melting the granulated PET
resin and extruding it into a flat sheet. This sheet is stretched to 3.0 to 3.6
times its original length, and then horizontally to 3.6 times its width, before
being heat-set and finally wound into reels. The orientation process (stretching
during the application of heat) gives the film its mechanical strength, barrier
and optical properties (clarity and gloss). Our Brückner production line
comprises a single extruder which can produce single-layer BOPET film, whereas
our DMT production line comprises one main extruder and two co-extruders which
can produce CBOPET film comprising three layers, of which the core layer and the
outer co-polymer layers are made of different materials. Depending on the
additives used, the films produced have varying physical and chemical
properties. The main steps of our manufacturing process involve:





25




Dosing
and Mixing




PET resin
is dosed and mixed with relevant additives to give it its desired
characteristics. In the case of the production three-layer co-extruded BOPET
film, the materials are dosed and mixed separately for each of the core and
outer layers.




Extrusion/Co-extrusion




The mixed
material is melted and plasticized to achieve the required homogenous state with
the requisite characteristics and then it is filtered and transported to the die
unit. Our DMT production line has one main extruder and two auxiliary extruders
to allow us to produce multiple-layer co-extruded BOPET film.




Die
Casting




The
respective mixed materials are extruded from the die unit which produces a flat
layered cast sheet and casted on the chill roll which is cooled by the pinning
system.




Machine
Direction Orientation (vertical stretching)




The cast
sheet is then heated and stretched by machine direction before annealing the
cast sheet, which is a process of heat-setting so as to control the shrinkage of
the sheet after the vertical stretching.




Transversal
Direction Orientation (horizontal stretching)




After the
machine direction stretching, the cast sheet is horizontally stretched before
annealing again.




Pull
Roll Station




The
stretched sheet is trimmed and measured for thickness. For the production of
base film for printing, the surface is treated by corona treatment. Corona
treatment is the process which enables the BOPET film to become receptive to
printing. At the pull roll station, continuous feedback on the thickness of the
BOPET film is also relayed back to the die unit which therefore ensures
consistency in the thickness of the BOPET film.




Winder




The final
BOPET film is then wound up into metal rolls in the mill roll by the
winder.




Slitter




The wound
BOPET film is then unwound from the metal rolls, divided to the requisite width
and length, and wound again into paper core for delivery to
customers.




Inventory
Management




Our
warehousing facilities are located in the Shandong Province, PRC. Our warehouses
are guarded by security personnel and loss of our inventory is covered under our
insurance policies. As of December 31, 2008, our total inventories amounted to
approximately RMB 56.6 million and our raw materials, work-in-progress, finished
goods and consumables and spare parts made up approximately 14.7%, 4.8%, 55.4%
and 25.1% of our inventories, respectively.




To ensure
an accurate inventory record and to monitor our inventory aging, we conduct
monthly stock counts. We typically maintain sufficient raw materials for one
weeks’ production. For our finished goods, we typically manufacture such goods
upon our receipt of orders.





26




Our
inventory turnover periods (in days) for 2006, 2007 and 2008 were 26.0, 34.2 and
34.9, respectively. Inventory turnover is calculated as 365 days time average
inventory at period/year end date divided by cost of sales in respect of the
financial period/year.




There
were no provisions for inventory obsolescence, inventory written off or
inventory written down to net realizable value in 2007 and 2008.




Manufacturing
Facilities and Utilization Rates




As of
December 31, 2008, we have the following production lines:





Production
      Line
              
              Designed
      Production Capacity
              
              Estimated
      Remaining Life SpanBrückner
      Production Line
              
              13,000
      tons per annum
              
              Approximately
      9 yearsDMT
      Production Line
              
              16,100
      tons per annum
              
              Approximately
      16 yearsLeased
      Production Line
              
              8,000
      tons per annum
              
              N/A




The
designed production capacity as given by the manufacturer is determined based on
the assumption of the production of a specific mix of BOPET films of varying
thicknesses. Our Brückner and DMT production lines have been in use since 1996
and 2003, respectively. The production lines are depreciated on the
straight-line method over their respective estimated useful lives.




Our
approximate annual production volumes and the average annual utilization rates
for our facilities for 2006, 2007 and 2008, based on our estimated operational
production capacities were as follows.




Approximate Annual Production
                    Volume (tons)
                
                
                Average Annual Utilization Rate
                    (%)Production Line
                
                2006
                
                
                2007
                
                
                2008
                
                
                2006
                
                
                2007
                
                
                2008Brückner
      Production Line
                
                
                12,945
                
                
                
                12,299
                
                
                
                12,092
                
                
                
                99.6
                %
                
                
                94.6
                %
                
                
                93.0
                %DMT
      Production Line
                
                
                14,669
                
                
                
                12,378
                
                
                
                13,769
                
                
                
                91.1
                %
                
                
                76.9
                %
                
                
                85.5
                %Leased
      Production Line
                
                
                N/A
                
                
                
                2,849
                
                
                
                5,174
                
                
                
                N/A
                
                
                
                35.6
                %
                
                
                64.7
                %




There are
currently no regulatory requirements that may materially affect the utilization
rates of our property, plant and equipment. However, certain of the fixed assets
relating to our production lines have been mortgaged in respect of certain of
our bank loans as described under “Properties” for further details.




Quality
Control




The
quality and reliability of our products are essential for our continued success.
We adopt strict measures for quality control in the entire production process of
all our products, from the purchase and selection of raw materials, to each
stage of the manufacturing processes and to the final inspection of the end
products. Our quality control procedures were certified for ISO 9001:2000
compliance in September 2004.




As of
December 31, 2008, our product inspection and quality control department
comprised of 20 employees. We have one manager, one deputy manager, one
inspection supervisor, one quality control engineer, 13 end-product inspection
technicians, one raw materials inspector and two sales personnel. Members of our
quality control departments have had relevant training in the area of quality
control in accordance with ISO 9001:2000 procedures. Our product inspection and
quality control department ensures that our production process, raw materials
and end products are of the quality to our customers’ satisfaction. Only
products which have been endorsed with our certified quality marks are delivered
to our customers.




Raw
Materials




We adopt
and adhere to a set of quality inspection procedures and internal controls for
the procurement, selection and quality checks of raw materials. Different types
of checks are utilized for different categories of raw materials. Our suppliers
are also required to meet our internal qualification criteria such as the
quality and pricing of their suppliers, their ability to meet our requirements
and timely delivery. We conduct batch inspections for raw materials delivered to
us before they are accepted and stored in our warehouses. Defective materials
are returned to our suppliers for necessary corrective action to ensure that
such defects are not repeated. The raw materials are inspected again prior to
selection for use in the production process.





27




Production
Process




We have
established standard operational procedures and implementation rules for each
stage of the production process to ensure that our products comply with and
adhere to our stringent quality control standards and that our productivity is
optimized. We only permit employees who have undergone and completed the
relevant training to work on our production lines. At each stage of the
production process, our inspectors check and ensure that our production process
complies with our quality standards, while our quality control department
monitors and ensures that our products-in-process and final products comply with
our internal and international standards of quality control by carrying out
random sampling of the products.




End
Products




To ensure
that our products fulfill our quality criteria established by our product
inspection and quality control department, our products undergo final quality
inspection upon production, labeling and packaging. Our product inspection and
quality control department continues to monitor and ensure that our products are
properly handled and stored in our warehouses. Prior to delivery to our
customers, our products are inspected one final time to ensure that they are in
good condition and not damaged.




Maintenance




Our
maintenance engineers regularly maintain and repair our machinery and equipment
to ensure that they are in good working order and functioning properly. We also
conduct periodic maintenance of all our machinery on a rotation basis. On an
average basis, we replace our filters every 25-35 days and this replacement
process takes about six to eight hours. We believe that because of our stringent
maintenance policies, we have not faced any major disruptions in our production
processes due to a breakdown or malfunction of our machinery and equipment. Our
monthly average downtime for 2008 (primarily for maintenance) was less than 1.2%
of our monthly production time.




For 2008,
the rejection rates of our products were generally less than 0.85% of our total
production volume. Defective or inferior products that do not fulfill our
quality control standards are recycled. We ensure that these recycled products
meet our customers’ quality standards and requirements before selling them to
our customers.




New
Products




Through
years of R&D endeavors, we have introduced a variety of BOPET film products.
The following are some of the new products for which commercial production has
begun:





Product
              
              AchievementLaser
      holographic base film
              
              Our
      laser holographic base film is a directly embossable BOPET film, ideal for
      holographic applications. This film eliminates the need to coat and
      prepare substrates for holographic embossing, thus reducing costs for our
      customers. It can be used for anti-counterfeit purposes and in packaging
      to help enhance the aesthetic perception of food, medicine, cosmetics,
      cigarettes and alcohol.Single/double
      surface matte film
              
              Our
      matte film is mainly used for aesthetically-enhanced packaging purposes.
      Our ability to produce single-sided matte films offers significant cost
      savings for our customers as the non-matte side of the film may be used
      for other applications without further processing.Anti-counterfeit
      film
              
              Our
      anti-counterfeit film changes color under ultraviolet rays. Accordingly,
      it is used for packaging branded products for anti-counterfeit
      purposes.




28




Product
                
                AchievementChemical
      pretreated film
                
                Our
      film is pretreated in-line and coated, which results in a strong adhesion
      to ink and aluminum.Heat-sealable
      film
                
                Heat-sealable
      film is a three layers co-extruded Biaxially oriented polyester film with
      an amorphous polyester heat seal layer. Available with corona treatment on
      the non-seal side to give improved adhesion to typical packaging inks and
      metallizing. It cannot only provide permanent seals to itself for package
      bag, but also to APET, CPET, PETG and others. Heat-sealable film can be
      aluminized, printed and composite with other films. It is microwave
      ovenable film for packaging refrigerated and frozen
  foods.High-gloss
      film
                
                By
      using special raw chips and process, provides very high gloss, uniform
      thickness, good mechanical properties, and surface smoothness. It can be
      used under -70~200°C for packaging food, cigarettes, alcohol and laser
      embossing, holographic anti-fake and, metallic
  yarn..




New
Product Development




We have
also begun working on the following projects which are currently in the test
production phase:





Product
                
                Objectives
                
                Commercialization Date ExpectedHeat
      sealable film for steel
                
                To
      improve the heat-sealable strength between the film and steel and adjust
      the stretchable capability so as to be more suitable for steel’s heat
      sealing. Mainly used for protection and decoration of colorful armor plate
      for home appliances.
                
                July
      2009White
      film
                
                To
      be used for print, composite, coating, and others. such as advertising
      lamp house, release film and reflector film.
                
                August
      2009DFR
      base film
                
                To
      be used for dry film photo resist.
                
                August
      2009Hot
      shrink film
                
                To
      change the hot shrinkage rate by enlarging the draw ratio.  It
      is mainly used for PET beverage bottle shrinkable tags. Hot shrink film
      uses PET structure which is the substitute of PVC shrinkable tags, which
      is also in line with the requirements of environmental protection and
      recyclable.
                
                September
      2009




We have
applied for patents in respect of some of our new processes and technologies
used in our business and, as of December 31, 2008, these are pending approvals
from the relevant PRC authorities. We do not believe that the denial of any of
these applications will affect our ability to continue to manufacture our
products on a competitive basis. As our operations expand internationally, we
plan to evaluate the benefits of seeking international protection of our
intellectual property in relevant markets. In addition to our patent
applications, we seek to protect our proprietary know-how by subjecting our
employees to confidentiality, non-compete and non-solicitation obligations
through our labor contracts with them and restricting access to our research and
development center and access to technology know-how to authorized
personnel.





29




Our
expenditure on research and development, excluding staff salaries and related
expenses, in 2006, 2007 and 2008 were as follows (in thousands):




Year Ended
                  Dec. 31, 2006
              
              
              Year Ended
                  Dec. 31, 2007
              
              
              Year Ended
                  Dec. 31, 2008RMBResearch
      and Development Expenses
              
              
              3,650
              
              
              
              1,596
              (1)
              
              
              2,631
              (2)




(1)&(2)
In addition to the above-mentioned expenses in 2007 and 2008 RMB of 1.6
million and2.6 million respectively, the R&D capital expenditure is RMB 48.8
million and 3.2 million respectively.




We view
research and development as an essential part of our business. In the face of
increasing competition, we increased our expenditure on research and development
from 2006 to 2008, as we believe that higher investment in the equipment of our
R&D center and in the development of new products and upgrading of existing
products will enhance our ability to compete.




Sales,
Marketing and Key Customers




As of
December 31, 2008, our sales and marketing department comprised of 16 employees
in the domestic sales division and 6 employees in the international sales
division. Our sales and marketing department is responsible for our market
penetration, such as cultivating new customers and businesses, and market
development such as developing existing accounts through better service support
and customer relationship. In addition, we also conduct market research of the
flexible packaging industry. Our management is actively involved in overseeing
and supervising our sales and marketing activities and often visits our clients
together with our sales personnel. They have established and maintained close
business relationship with our key customers.




Customers
and Markets




Over the
past years, we have established good working relationships with our customers in
the flexible packaging industry. Our products are mainly used in the packaging
of consumer products such as those relating to processed foods, pharmaceutical
products, cosmetics, tobacco and alcohol.




The
majority of our domestic customers are located in the coastal region of the PRC.
Our overseas customers are mostly based in South Korea, the United States,
Europe and others. In 2007, sales from our domestic and overseas customers
constituted approximately 86.9% and 13.1%, respectively, of our annual revenue.
Although we are continuing to expand to international markets, as substantially
most of our business is currently conducted in mainland China and we have not
taken any action outside mainland China to protect our intellectual property.
Please see the section entitled “Research and development, patents and licenses”
on page 50 for an explanation of the extent to which our products are dependent
on intellectual property protection.




The
following are our top five customers and their respective percentages of
contribution to our total revenue for each of the years ended December 31, 2006,
2007 and 2008:





PercentageofTotalRevenue(%)Name of Customer
                  
                  2006
                  
                  
                  2007
                  
                  
                  2008Dongguan
      Klaser Technologies Co.,Ltd.
                  
                  
                  0.3
                  
                  
                  
                  0.9
                  
                  
                  
                  4.9Woo
      Sung Multi -film Co. Ltd.
                  
                  
                  0.9
                  
                  
                  
                  8.5
                  
                  
                  
                  3.5Dare
      Technical Co., Ltd. Danyang Advance Packaging Material Subsidiary
      Company
                  
                  
                  2.4
                  
                  
                  
                  3.1
                  
                  
                  
                  3.4Cangnan
      Shuncheng packaging material trade Co., Ltd.
                  
                  
                  1.1
                  
                  
                  
                  2.2
                  
                  
                  
                  3.2Holotek
      Technology Co., Ltd.
                  
                  
                  -
                  
                  
                  
                  0.9
                  
                  
                  
                  2.7





30




None of
our customers accounted for more than 10% of our total revenue in any of the
previous three years.




None of
our directors or principal shareholders or any of their affiliates has any
interest, direct or indirect, in any of our customers listed above.




Since the
second half of 2004, we have begun the sale of specialized BOPET products. These
products represented approximately 24.0% of our total revenue during the year
ended December 31, 2008.




Sales




Because
of our broad range of product offerings and customers, our sales and marketing
efforts are generally specific to a particular product, customer or geographic
region. Most of our products are sold by our own direct sales force. These
salespeople, including our management, maintain close relationships with
customers by paying visits to our customers from time to time to understand
their needs, and to obtain their feedback and suggestions. Our sales personnel
provide technical support to our customers when required. We also regularly
invite our existing and potential customers to our manufacturing facilities for
visits as we believe that such visits enable our customers to better understand
our production processes and operations and also enhance our customers’
confidence in us.




We adopt
a risk assessment model to our customer credit management system, and we offer
different credit terms to our customers based on criteria such as working
relationship, payment history, creditworthiness and their financial position. We
offer our domestic customers credit terms of up to 30 - 45 days. Our
international sales are settled through telegraphic transfer and letters of
credit, which generally have payment terms of between 30 and 60
days.




We offer
a basic salary and commission package for our sales personnel. The scale for the
commission payable is dependent on a number of factors such as sales completion
targets, debt collection, and credit rating of our customers, customer service
rendered, customer feedback and development of new customers.




Customer
Service




We place
great emphasis on good, fast and effective pre-sales and after-sales customer
support services. As such, all our sales personnel have undergone stringent
training and have sufficient knowledge and understanding of our products. Our
sales personnel are responsible for coordinating and providing after-sales
services which include following through with our customers’ orders, maintaining
relationships with our customers, handling complaints effectively, ensuring that
our customers’ needs are met and understanding the future needs of our
customers. Our quality department gives support to our customer service, and is
responsible for explaining questions related to our products usage from
customers. If there are complaints as to our product quality, they are
responsible for receiving  and settling complaints on our customers’
site.




Marketing




We have
the following marketing channels:




·
            we regularly attend trade fairs
      and exhibitions as we believe that they serve as a good platform for us to
      exhibit our new products and expand our sales network. In addition,
      participation in seminars, fairs and exhibitions provides us with
      opportunities to network with our potential and existing customers and
      allows us to obtain up-to-date information on new products, market trends
      and consumer demand;




·
            referrals
      from existing customers as well as business associates to generate sales
      opportunities; and




·
            promotion
      through our corporate website. Information on our products and services
      are also found on our corporate website, which allows us to reach out to
      potential domestic and overseas
customers.




Our sales
personnel also conduct PRC domestic and overseas market surveys and research.
The statistics, findings and information obtained from such surveys and research
are then passed on to our management and production department for their
analysis on the demand for and supply of our products, which allows them to make
adjustments to our production and sales targets, as well as our marketing
strategies.





31




Suppliers
and Raw Materials




Suppliers




We
purchase raw materials according to the relevant technical specifications and
production requirements. We select our suppliers based on the following
considerations and/or methods:




·
            the
      consistency of the quality of raw materials supplied and any relevant
      certifications;




·
            our
      inspection of the supplier’s quality control
  system;




·
            positive
      feedback from the supplier’s other
customers;




·
            pricing
      of raw materials;




·
            timely
      delivery of raw materials;




·
            the
      supplier’s financial position and
viability;




·
            the
      service provided by the supplier;




·
            qualifying
      suppliers by sample testing and batch purchasing of their raw materials;
      and




·
            annual
      evaluation and review of our
suppliers.




The
following are the suppliers that supplied 5% or more of our purchases of raw
materials for each of the years ended December 31, 2006, 2007and
2008:





Percentage of total purchases (%)Name of Supplier
              
              Supply
              
              2006
              
              
              2007
              
              
              2008Sinopec
      Yizheng
              
              PET
      resin
              
              
              58.5
              
              
              
              46.4
              
              
              
              44.8Hyosung
      Corporation
              
              PET
      resin
              
              
              2.1
              
              
              
              18.0
              
              
              
              5.0Yizheng
      Tianbao Polyester Co., Ltd.
              
              Additives
              
              
              23.9
              
              
              
              16.6
              
              
              
              10.3Jiangyin
      Xingtai New Material Co., Ltd.
              
              PET
      resin
              
              
              6.7
              
              
              
              12.3
              
              
              
              9.7




We
purchase the majority of our PET resin from Sinopec Yizheng as the quality of
its supply of PET resin consistently meets our requirements. We currently have
an annual supply agreement with Sinopec Yizheng pursuant to which Sinopec
Yizheng has agreed to supply us fixed quantities of PET resin monthly at the
prevailing market prices. Such supply agreement is renewable annually. We have
not entered into any long-term supply contracts with any other supplier. Our
purchases of raw materials are on a cash basis. While we believe that there are
only a limited number of suppliers of PET resin that can consistently meet our
quality and quantity requirements on a timely basis, there are numerous PET
resin suppliers in the PRC or overseas market from whom we may easily obtain PET
resin, on a short-term basis, if necessary.




None of
our directors or principal shareholders or any of their affiliates has any
interest, direct or indirect, in any of our major suppliers mentioned
above.




Raw
Materials




The main
raw materials that we purchase from our suppliers are as follows:





Percentage of Total Purchases (%)Raw Material
                
                2006
                
                
                2007
                
                
                2008
                
                CountryPET
      resin
                
                
                68.0
                
                
                
                59.8
                
                
                
                70.6
                
                PRCAdditives
                
                
                27.1
                
                
                
                22.1
                
                
                
                22.8
                
                PRCPET
      resin
                
                
                4.9
                
                
                
                18.2
                
                
                
                6.6
                
                Korea





32




The
market prices of PET resin and additives may fluctuate due to changes in supply
and demand conditions. Any sudden shortage of supply, or significant increase in
demand, of PET resin and additives may result in higher market prices and
thereby increase our costs of sales. The prices of PET resin and additives are,
to a certain extent, affected by the price movement of crude oil. Since
September 2008, the intense fluctuation of the crude oil price has significantly
affected the price of raw materials. Prior to August 2008, the crude oil price
had maintained a higher price which kept the price of PET resin and additives at
a high level. However, since September 2008, the crude oil price has
significantly decreased which has led to a significant decline of the price of
PET resin and additives.




As we are
unable to predict the price movements of such raw materials and to minimize the
impact of such price fluctuations on our cost, we generally purchase such raw
materials in quantities sufficient for our production process for approximately
one week. We may also adjust the prices of our end products, when appropriate,
and pass portion of cost increases to our customers.




Competition




We face
intense competition in the PRC plastic film industry. We believe that there are
currently many plastic film manufacturers in the PRC and we expect further
entrants into this market in the future. Among the flexible packaging
industries, in particular those involving packaging of processed food and
pharmaceutical products, the primary types of plastic films in the packaging
products include BOPET, Biaxially oriented polyester (BOPP); and Biaxially
oriented polyamide (BOPA).




The
following table gives a general comparison of the key differences in the
technical specifications and usage of the above types of plastic
films.




Comparison
of BOPP Film, BOPET Film and BOPA Film(1)





Features
              
              BOPP
              
              BOPET
              
              BOPAWater
      vapor barrier
              
              Excellent
              
              Fair
              
              PoorGas
      barrier properties
              
              Poor
              
              Excellent
              
              ExcellentBreak
      down voltage
              
              Poor
              
              Excellent
              
              ExcellentMachine-ability
              
              Fair
              
              Excellent
              
              ExcellentPrint-ability
              
              Fair
              
              Excellent
              
              FairSuitability
      for Metallizing
              
              Poor
              
              Excellent
              
              FairDensity
      (gm/cc)
              
              Low
      (0.91)
              
              High
      (1.39)
              
              Medium
      (1.15)Tensile
      strength
              
              Poor
              
              Excellent
              
              Excellent




(1)
            This
      comparison is based on the book of Biaxially Oriented Plastics Film,
      edited by Yanping Yin and published by China Chemical Press in August
      1999.




The
production of BOPET film in the PRC presents high barriers to entry, such as
requiring a large capital investment to acquire or manufacture a production line
and to support productive research and development of new products, and the need
for the services of experienced management and personnel with technical
expertise. We believe that we are one of the few BOPET film manufacturers in the
PRC with research and development capabilities.




We
believe that the major competitive factors in our industry include:




·
            research
      and development capability;




·
            quality
      and reliability of products;




·
            technical/manufacturing
      capability; and





33




·
            industrial
      reputation.




We
believe that our major competitors in BOPET manufacturing are
currently:




·
            Dupont
      Hongji Films Foshan Co., Ltd;




·
            Yihua
      Toray Polyester Film Co., Ltd.; and




·
            Ningbo
      Shunsu Film Co., Ltd.




We
believe that we have established a good reputation and management track record
as a manufacturer of BOPET film and are able to offer quality
products.




C.
Organizational structure.




The
following table set forth the details of our subsidiaries as at the date of this
Annual Report:




Name
              
              Country of
                  Incorporation
              
              Ownerships Interests
              
              Direct ParentFuwei
      Films (Shandong) Co., Ltd.
              
              China
              
              100%
      wholly owned by Direct Parent
              
              Fuwei
      Films (BVI) Co. Ltd.Fuwei
      (BVI) Co., Ltd.
              
              British
      Virgin Islands
              
              100%
      wholly owned by Direct Parent
              
              Fuwei
      Films (Holdings) Co. Ltd.




D.
Property, plant and equipment.




Our
corporate headquarters and production and ancillary facilities occupy an area of
approximately 74,251 square meters in Weifang City, Shandong Province. The land
at our facilities is covered by land use rights held by us. The land use rights
for the land upon which our buildings and facilities are located have terms of
50 years, the earliest of which expires in November 2050. All of our research
and development, manufacturing, warehousing and administrative functions are
conducted at our corporate headquarters. The total gross floor area of
production and other facilities owned by us is approximately 29,808 square
meters. We own all the buildings and facilities on the premises. Most of our
land use rights, office buildings and two facilities in operation have been
mortgaged to a bank in the PRC for loans totaling RMB 167.6million.
Additionally, the workshop area of the leased production line is 9,310 square
meters (including the warehouse).




We are in
the process of constructing our new production line located in Weifang Hi &
New Technology Development Zone. We anticipate that this new production line
will produce BOPET film that is between 50 to 250 microns thick. The BOPET film
produced using this new production line is targeted at industrial use, such as
the TFT-LCD screen films. The construction of the plants has already been
completed.  We initially planned to obtain additional funding during
the first half of 2008 and complete the production line construction at the end
of 2008.  Due to various reasons, such as the general weakened economy
and our inability to obtain financing through issuing shares or bonds caused by
the continuous decline in our share price, we could not fulfill the financing
plan as expected.  However we are still making great efforts to obtain
additional funding to complete the project.  If the project becomes
further postponed, there may be contract disputes between us and the suppliers
of the project, which will significantly impact our operations.




Item
4 A. Unsolved Staff Comments




None.





34




Item
5. Operating and Financial Review and Prospects




MANAGEMENT’S
DISCUSSION AND


ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS




You
should read the following discussion and analysis of our financial condition and
results of operations in conjunction with our consolidated financial statements
included in this Annual Report beginning on page F-1. The consolidated financial
statements have been prepared in accordance with U.S. GAAP. The following
discussion and analysis contain forward-looking statements that involve risks
and uncertainties.




Overview




We
develop, manufacture and distribute high quality plastic film using the
Biaxially oriented stretch technique, otherwise known as BOPET film. Since the
establishment of our predecessor company in 2003, all of our revenues have been
derived from the sales of BOPET film. We sell most of our BOPET film products to
domestic customers in China in the flexible packaging industry. We established
an international sales division in June 2004 and have been selling our products
into overseas markets, most notably South Korea the United States, Europe and
others.




Our
Operating History and Corporate Structure




The
diagram below illustrates our corporate structure:









Shandong
Fuwei, our PRC operating subsidiary, was formed on January 28, 2003, as a
Sino-foreign equity joint venture under the name Weifang Fuwei Plastic Co., Ltd.
In July 2003, this company began production of BOPET film, initially renting the
necessary fixed assets from Shandong Neo-Luck, a company involved in BOPET film
production for which Mr. Xiaoming Wang, our current executive officer, served as
executive officer at the time.




Shandong
Fuwei subsequently acquired these fixed assets through two auction proceedings,
the first in October of 2003 and the second in December 2004. At the first
auction proceeding in October 2003, Shandong Fuwei acquired assets related to
the Brückner production line that it had been renting from Shandong Neo-Luck.
This line had been previously mortgaged by Shandong Neo-Luck to the Bank of
China, Weifang city branch as security for several loans extended to Shandong
Neo-Luck’s affiliates. When these loans went into default, the Bank of China
brought a series of legal actions in Weifang Municipal People’s Court that
resulted in the assets securing the loans being sold at a public auction.
Following its successful bid at an auction on October 9, 2003, Shandong Fuwei
acquired the Brückner production line (with an appraised value of approximately
RMB 169 million) for RMB 156 million.





35




In
November 2003, Shandong Fuwei’s shares were sold to Shenghong Group Co., Ltd.
(“Shenghong Group”) and Shandong Baorui for an aggregate consideration of RMB
98.2 million. Tongju Zhou, a former director of the Company, and Duo Wang each
indirectly own 50% of Easebright Investments Limited (“Easebright”), one of our
principal shareholders, and are both officers and directors of Shandong Baorui.
Jun Yin and Duo Wang own 17.5% and 4.6%, respectively, of Shandong Baorui. In
2004, Messrs. Zhou and Wang, along with Jun Yin established several offshore
holding companies in the British Virgin Islands and the Cayman Islands to
acquire and hold these shares. In October 2004, Fuwei (BVI) entered into a sale
and purchase agreement with Shenghong Group and Shandong Baorui pursuant to
which Fuwei (BVI) acquired the respective equity interest of Shenghong Group and
Shandong Baorui in Shandong Fuwei for an aggregate consideration of RMB 91
million. Shandong Fuwei thereafter became a wholly-owned subsidiary of Fuwei
(BVI) and was converted into a wholly-foreign owned enterprise pursuant to PRC
law.




As a
result of its ongoing financial difficulties, Shandong Neo-Luck was declared
bankrupt by the Weifang Municipal People’s Court in the PRC on September 24,
2004. Prior to the bankruptcy, Shandong Neo-Luck’s then major operating asset,
the DMT production line, had been pledged by Shandong Neo-Luck to Weifang City
Commercial Bank. When Shandong Neo-Luck was declared bankrupt, the Shandong
Branch of the Bank of China seized the production line by order of the Qingdao
Intermediate People’s Court and the Qingdao Southern District People’s Court
while the Weifang Branch of Bank of Communications did so through Weifang
Intermediate People’s Court. As such, the effectiveness of the pledge in favor
of Weifang City Commercial Bank was under dispute. Subsequently, pursuant to the
decision from Weifang Intermediate People’s Court, Weifang City Commercial Bank
ranked senior in terms of the right of claims.




The
pledged DMT production line was put up for public auction by the Shandong
Neo-Luck liquidation committee on October 22, 2004. In view of the above
complexities, the auction was deemed to be tremendously risky at that time, and
therefore, our PRC operating subsidiary did not directly participate in the
first auction, which began with a bid price of approximately RMB 53 million by
reference to an independent valuation performed on a forced sale basis. However,
due to the potential tremendous risk involved, the auction had been withdrawn
twice and the starting bid price had been further reduced to approximately RMB
34 million and was finally purchased by Beijing Baorui, a company indirectly
controlled by Shandong Baorui. When the DMT production line was put for public
auction by Beijing Baorui three months later, our PRC operating subsidiary
purchased it for approximately RMB 119 million, which was supported by an
independent valuation performed on a going concern basis. We understood that
acquiring the DMT production line from Beijing Baorui through the first auction
would be an effective way to minimize the risk associated with the uncertainties
arising from the bankruptcy of Shandong Neo-Luck. The price difference of
approximately RMB 85 million represented a risk premium paid to Beijing Baorui,
which bore the ultimate risks of recourse from creditors of Shandong
Neo-Luck..




A few
years subsequent to the auction, the PRC government conducted an investigation
into the conduct of certain individuals in connection with such transactions and
has determined that Messrs Yin, Wang and Zhou committed the crime of
misappropriation of state owned assets by verdict of the Jinan Intermediate
People’s Court in the city of Jinan, Shandong Province. At the time of the
Company’s initial public offering, we had obtained an opinion of PRC counsel
with respect to the validity of the auction proceedings under PRC law, although
you should read the description of the opinion and the subsequent development in
March 2009 described set forth under the title “Risk Factors — The circumstances
under which we acquired ownership of our main productive assets may jeopardize
our ability to continue as an operating business.”Certain of the assumptions
relied upon in providing that opinion have been called into question by the
verdict referred to above.




Key
Factors Affecting Our Results of Operations




The
following are key factors that affect our financial condition and results of
operations and we believe them to be important to the understanding of our
business:




Raw
Material Prices




During
the period for the years ended 2006, 2007 and 2008, the total cost of raw
materials made up approximately 80.9%, 76.0% and 78.6% of our cost of goods
sold, respectively. The primary raw materials used in our production of BOPET
film are polyethylene terephthalate (or PET) resin and additives, which made up
approximately 76.1%, and 23.9%, respectively, of our total cost of raw materials
in 2008. PET resin trades as a commodity and its market price is influenced
significantly by global energy prices, including the price of crude oil. In
addition, PET resin is also largely used in the textile industry and accordingly
the demand from that industry will also affect the price of PET
resin.





36




Although
we try to pass on all increases in our raw material costs to our customers, and
have generally been able to pass partial certain increases in recent years on to
them, we are occasionally constrained partially in this regard by industry
practice and preexisting obligations. We obtain a significant amount of the PET
resin used at our facilities from one supplier, who has agreed to supply us
fixed quantities of PET resin monthly at the prevailing market price. We have
not engaged in any hedging transactions to limit our exposure to fluctuations in
the market prices of these raw materials or their components. We believe that
there are sufficient alternative suppliers of PET resin if our existing
suppliers are unable to supply us PET resin in the amounts or in the time frame
we may require.




Prices
of Our Products




Our BOPET
film products generally fall into two categories: commodity products and
specialty products. The price of commodity products, such as our printing,
stamping foil and metallization films, is typically driven by supply and demand
conditions in the market. We have more control over setting the prices for our
specialty products, such as our laser holographic based film, and our matte and
high-gloss films.




As
selling prices are generally higher for those types of BOPET film products which
require higher technical expertise, our revenue will be affected, to certain
extent, by our product mix. Our product mix is dependent on, among other things,
our production facilities. Presently, our Brückner production line is capable of
producing single-layer BOPET film while our DMT production line is capable of
producing both single-layer and three-layer BOPET films.




Demand
for Our Products




We have
been able to expand our product range and markets by introducing new products
required by customers. We believe that our technical expertise is important in
introducing products that are in demand.




Our BOPET
film products are mostly sold to customers in the flexible packaging industry
for consumer products such as processed foods, pharmaceutical products,
cosmetics, tobacco and alcohol. In the fiscal years ended December 31, 2006,
2007 and 2008, approximately 79.0%, 75.5% and 86.9%, respectively, of our total
revenue was derived from the PRC. The demand for our products is therefore, to a
large extent, affected by the general economic conditions in the PRC. A
significant improvement in the economic environment in the PRC will likely
improve consumer spending, increase the demand for our customers’ products and
consequently increase the demand for our BOPET film. However, the economic
downturn of the PRC market will impact our customers’ demand and will decrease
of the demand for our products. For example, since the global financial crisis,
which began in the fourth quarter of 2008, our operation has been adversely
affected as a result of the insufficient demand of our products in the global
market.




Production
Capacity and Utilization Rates




Our sales
volume is limited by our operational annual production capacity.




As we
grow our business in the future, our ability to fulfill more and larger orders
will be dependent on our ability to increase our production capacity. As our
business is capital-intensive, our ability to expand our production capacity
will depend on, inter
alia, the availability of capital to meet our needs of expansion or
upgrading of production lines.




Competition




We
believe that we are currently one of the few producers of BOPET film in the PRC
with research and development capability. Our past financial performance is
attributable to our market position in the industry. Over time, there may be new
investors into our industry, and the current BOPET film manufacturers may expand
their production capacity. We believe that currently our major competitors in
the BOPET manufacturing market in the PRC include Dupont Hongji Films Foshan
Co., Ltd, Yihua Toray Polyester Film Co., Ltd and Ningbo Shunsu Film Co.,
Ltd.





37




Our
ability to enhance existing products, introduce new products to meet customers’
demand, deliver quality products to our customers and maintain our established
industry reputation will affect our competitiveness and our market
position.




Our
ability to compete against new and existing competitors to maintain or improve
our market position and secure orders will affect our revenue and financial
performance.




Description
of Certain Statements of Income Line Items




Revenues




Revenue
from the sale of our domestic BOPET film products is recognized when significant
risks and rewards of ownership have been transferred to the buyer. No revenue is
recognized if there are significant uncertainties regarding recovery of the
consideration due, associated costs or the possible return of goods, or when the
amount of revenue and costs incurred or to be incurred in respect of the
transaction cannot be measured reliably. In respect of our overseas sales, we
ship directly to the destinations of our overseas customers and our revenue is
recognized at the time when we receive customs clearance of our exports. Most of
our overseas sales were conducted on a Cost, Insurance and Freight (or “CIF”)
basis, meaning that we pay the costs and freight necessary to get the products
to the port of destination, and the risk of loss is transferred from us to the
buyer when the goods pass the ship’s rail at the port of destination. In
addition, we have to procure marine insurance against the buyer’s risk of loss
of damage to the goods during the carriage. Most of our sales invoices are
denominated in the Renminbi Yuan, although certain of our overseas sales are
denominated in US dollars.




Cost
of Goods Sold




Our cost
of goods sold comprises mainly of materials costs, factory overheads, packaging
materials and direct labor. The breakdown of our cost of goods sold in
percentage is as follows:





Year Ended
                  Dec. 31, 2006
              
              
              Year Ended
                  Dec. 31, 2007
              
              
              Year Ended
                  Dec. 31, 2008Materials
      costs
              
              
              80.9
              %
              
              
              80.9
              %
              
              
              78.6
              %Factory
      overhead
              
              
              15.9
              %
              
              
              15.5
              %
              
              
              17.2
              %Packaging
      materials
              
              
              2.6
              %
              
              
              2.7
              %
              
              
              2.9
              %Direct
      labor
              
              
              0.6
              %
              
              
              0.9
              %
              
              
              1.3
              %




Material
Costs




As noted
above, the raw materials used in our BOPET film production are PET resin and
additives, which made up approximately 76.1% and 23.9%, respectively, of our
total materials costs in 2008.




Factory
Overhead




Factory
overhead comprises primarily of depreciation, electricity and water charges, and
repair and maintenance of our machinery and equipment. In 2008, the repair and
maintenance of our machinery and equipment were RMB 5.1 million, accounting for
1.4% of Cost of Goods Production.




Packaging
Materials




Our
packaging materials comprise of, among other things, packaging pallets and
carton boxes, used for the packaging of our BOPET film products for delivery to
customers. Generally, our unit cost of packaging materials does not fluctuate
significantly and our total costs for packaging materials typically vary in line
with our sales volume.





38




Direct
Labor




Direct
labor cost includes salaries, wages, bonuses and other payments to our employees
in the PRC who are involved in the production of our products. The main factors
affecting our direct labor cost are the demands and supplies of semi-skilled
labor and the implementation or changes of any new government policies or laws
relating to employment, such as defined contribution plans stipulated by the PRC
municipal government.




Operating
Expenses




Our
operating expenses comprise of administrative expenses, distribution expenses
and other operating expense.




Our
administrative expenses comprise mainly of allowance for doubtful trade
receivables, administrative staff salaries and related welfare costs,
entertainment expenses, depreciation charges of office equipment, furniture and
fixtures, amortization charges relating to our trademark and land use rights,
professional fees, government duties and fees, insurance expenses, rental
expenses, travel expenses, office expenses, research and development expenses,
and other miscellaneous expenses.




Our
distribution expenses comprise mainly of freight costs, travel expenses, selling
and promotion expenses as well as salaries, allowances and welfare benefits paid
to our sales and marketing personnel.




Our gross
margins may not be comparable to those of other entities, since some entities
include all of the costs related to their distribution network in cost of goods
sold.




Other
operating expenses comprise mainly of loss on disposal of property, plant and
equipment and other miscellaneous expenses.




Finance
Costs




Finance
costs comprise mainly of interest expense relating to our loans, exchange
deficit, bank charge and interest paid on discounting outstanding accounts
receivable.




Income
Tax Expense




For the
period from January 28, 2003 to December 31, 2004, Shandong Fuwei was granted
certain tax relief under which it was exempted from PRC income tax. As of
January 2005, Shandong Fuwei has been a wholly foreign-owned enterprise under
the laws of the PRC. Accordingly, Shandong Fuwei is entitled to tax concessions
whereby the profit for the first two financial years beginning with the first
profit-making year (after setting off tax losses carried forward from prior
years) is exempt from income tax in the PRC and the profit for each of the
subsequent three financial years is taxed at 50% of the prevailing tax rates set
by the relevant tax authorities.




On March
16, 2007, the National People’s Congress of the PRC passed the Enterprise Income
Tax Law of the People’s Republic of China, which law will took effect on January
1, 2008 (the “New Tax Law”). Under the New Tax Law, domestic enterprises and
foreign-invested enterprises will generally become subject to a unified
enterprise income tax rate of 25%, except that enterprises incorporated prior to
March 16, 2007 may continue to enjoy existing preferential tax treatments until
January 1, 2013. In addition, certain qualifying “High Technology Enterprises”
may still benefit from a preferential tax rate of 15% under the New Tax Law if
they meet the definition of “Government Developing High Technology Enterprise”
to be set forth in the more detailed implementing rules when they become
adopted.  Shandong Fuwei was redesignated as a High-and-New Tech
Enterprise in December, 2008 and enjoyed the favorable income tax rate of 15%
pursuant to the New Tax Law in 2008.





39




Inflation




According
to the National Bureau of Statistics of China, the change in the consumer price
index in China was 1.5% and 4.8%, 5.9% in 2006, 2007 and 2008,
respectively.  Inflation in the PRC has not had any material impact on
our business in 2006, 2007 and 2008. But since 2008, the increase in raw
materials and energy in China has resulted in the increase of our costs, such as
raw materials costs, freight costs and packaging costs. Meanwhile, the Chinese
government has required increasing the salaries and welfare (such as increase
pensions) of the employees, resulting in the increase of our labor costs in
2007.




Critical
Accounting Policies




We
prepare our financial statements in accordance with the U.S. GAAP, which
requires us to make estimates and assumptions that affect the reported amounts
of our assets and liabilities, to disclose contingent assets and liabilities on
the date of the financial statements, and to disclose the reported amounts of
revenues and expenses incurred during the financial reporting period. We
continue to evaluate these estimates and assumptions based on the most recently
available information, our own historical experience and various other
assumptions that we believe to be reasonable under the circumstances. We rely on
these evaluations as the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Since
the use of estimates is an integral component of the financial reporting
process, actual results could differ from those estimates. Some of our
accounting policies require higher degrees of judgment than others in their
application. We consider the policies discussed below to be critical to an
understanding of our financial statements as their application assists
management in making their business decisions.




Goodwill
Impairment Goodwill is tested for impairment at least annually based on a
two-step approach. The first step is conducted by comparing the fair value of
each reporting unit to its carrying amount, including goodwill. If the fair
value of a reporting unit is less than its carrying amount, the second step
requires a comparison of the implied fair value of goodwill to its carrying
value. The excess of the fair value of the reporting unit over the amounts
assigned to the assets and liabilities is the implied fair value of goodwill.
This allocation process is only performed for purposes of evaluating goodwill
impairment and does not result in an entry to adjust the value of any assets or
liabilities. An impairment loss is recognized for any excess in the carrying
value of goodwill over its implied fair value.




We have
determined that Shandong Fuwei, our operating subsidiary in the PRC, is the
reporting unit for goodwill impairment testing. The fair value of Shandong Fuwei
is determined based on the discounted expected cash flow method. The discount
rate was based on the subsidiary’s weighted average cost of capital. The use of
discounted cash flow methodology requires significant judgments including
estimation of future revenues and costs, industry economic factors, future
profitability, determination of Shandong Fuwei’s weighted average cost of
capital and other variables. Although we believe that the assumptions adopted in
our discounted cash flow model are reasonable, those assumptions are inherently
unpredictable and uncertain.




We had
goodwill of RMB 10.3 million, as of December 31, 2006, 2007 and 2008. The
estimated fair value of the reporting unit significantly exceeded its carrying
value at December 31, 2008. Consequently, no goodwill impairment has been
recognized.




Collectibility of
Accounts Receivable Our management has a credit policy in place and the
exposure to credit risk is monitored on an ongoing basis. Credit evaluations are
performed on all customers requiring credit over a certain amount. Generally, we
offer our customers in the PRC credit terms of up to 30-45 days. Our
international sales are settled through telegraphic transfer and letters of
credit, which generally have payment terms of between 30 and 60
days.




We adopt
a risk assessment model to our customer credit management system, and we offer
different credit terms to our customers based on criteria such as working
relationship, payment history, creditworthiness and their financial position.
All credit terms are to be approved by our finance department, in consultation
with our sales and marketing department. For extension of larger credit limits,
approvals have to be sought from our credit committee which is made up of
members from our finance department, sales department and the General Manager.
Our finance department and sales and marketing department review our outstanding
debtor balances on a monthly basis and follow up with customers when payments
are due. We do not impose interest charges on overdue account
receivable.





40




As of
December 31, 2008, our largest trade debtor was Dongguan Klaser Technologies
Co., Ltd, a company based in PRC. The trade receivables from Dongguan Klaser
Technologies Co., Ltd amounted to approximately RMB6.6 million as of December 31
2008, of which RMB 0.5 million exceeded the credit term granted. We collected
the excess amount in January 2009.




We make
specific allowance for doubtful trade receivables when our management takes the
view (taking into account the aging of trade receivables and in consultation
with our sales and marketing department) that we will not be able to collect the
amounts due. Our customers pay by installments, creating long accounts
receivable cycles. We provide for an allowance for doubtful accounts based on
our best estimate of the amount of losses that could result from the inability
or intention of our existing customers not to make the required payments. We
generally review the allowance by taking into account factors such as historical
experience, age of the accounts receivable balances and economic
conditions.




Specific
write-off of trade receivables is made when the outstanding trade receivables
have been due for more than two years.




The
analysis of the allowance for doubtful amounts for 2006, 2007 and 2008 is as
follows (in thousands):





2006
              
              
              2007
              
              
              2008
              
              
              2008RMB
              
              
              RMB
              
              
              RMB
              
              
              US$Balance
      at beginning of year
              
              
              2,015
              
              
              
              872
              
              
              
              2,644
              
              
              
              386Bad
      debt (recovery) / expense
              
              
              (1,143
              )
              
              
              1,772
              
              
              
              1,430
              
              
              
              209Write-offs
              
              
              –
              
              
              
              –Balance
      at end of year
              
              
              872
              
              
              
              2,644
              
              
              
              4,074
              
              
              
              594




Impairment of
Long-lived Assets We review periodically the carrying amounts of
long-lived assets, including property, plant and equipment and intangible
assets, to assess whether they are impaired. We test these assets for impairment
whenever events or changes in circumstances indicate that their carrying amounts
may not be recoverable, such as a change of business plan, technical
obsolescence, or a period of continuous losses. When we determine an asset or
asset group is not recoverable, we adjust the carrying amount to fair value. We
measure the recoverability of assets by comparing the carrying amount of an
asset to the estimated undiscounted future cash flows expected to be generated
by the asset, or, for identifiable intangibles with finite useful lives, by
determining whether the amortization of the intangible asset balance in the
remaining life can be recovered through undiscounted future cash flows. In
determining estimates of future cash flows, significant judgment in terms of
projection of future cash flows and assumptions is required. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized for the excess of the carrying amount of the asset over its fair
value. Fair value is determined by discounting forecasted cash flow or utilizing
an observed market value if readily determinable. There has been no impairment
charges recognized for the year through December 31, 2006, December 31, 2007 and
December 31, 2008.




Results
of Operations




The
following discussion of our results of operations is based upon our audited
consolidated financial statements beginning on page F-1 of this Annual
Report.




The table
below sets forth certain line items from our Statement of Income as a percentage
of revenues:




Year Ended
                    Dec. 31, 2006
                
                
                Year Ended
                    Dec. 31, 2007
                
                
                Year Ended
                    Dec. 31, 2008(%
      of Total Revenue)Gross
      Profit
                
                
                23.5
                
                
                
                22.2
                
                
                
                15.7Operating
      expenses
                
                
                5.6
                
                
                
                7.9
                
                
                
                10.2Other
      expense
                
                
                (2.2
                )
                
                
                (2.7
                )
                
                (0.8
                )Income
      tax expense
                
                
                (0.2
                )
                
                
                (1.0
                )
                
                (0.7
                )Net
      income
                
                
                15.5
                
                
                
                10.6
                
                
                
                4.1





41




Fiscal
year ended 2008 compared to fiscal year ended 2007




Revenues




Our
revenue can be analyzed as follows:





December31,2007
                  
                  
                  December31,2008(RMB in thousands)
                  
                  
                  % of Total
                  
                  
                  (RMB in thousands)
                  
                  
                  % of TotalPrinting
      film
                  
                  
                  83,453
                  
                  
                  
                  18.6
                  
                  
                  
                  56,607
                  
                  
                  
                  12.7Stamping
      film
                  
                  
                  94,366
                  
                  
                  
                  21
                  
                  
                  
                  139,571
                  
                  
                  
                  31.2Metallization
      film
                  
                  
                  30,668
                  
                  
                  
                  6.8
                  
                  
                  
                  45,148
                  
                  
                  
                  10.1Base
      film for other applications
                  
                  
                  70,925
                  
                  
                  
                  15.8
                  
                  
                  
                  98,526
                  
                  
                  
                  22.0Special
      film
                  
                  
                  169,961
                  
                  
                  
                  37.8
                  
                  
                  
                  107,404
                  
                  
                  
                  24.0449,373
                  
                  
                  
                  100
                  
                  
                  
                  447,255
                  
                  
                  
                  100




During
the fiscal year ended December 31, 2008, our revenues were RMB 447.3 million,
which is a decrease of, RMB 2.1 million, or 0.5%, as compared to the same period
for 2007. In 2008, sales of special films were RMB 107.4 million and 24.0% of
our total revenues as compared to RMB 170.0 million and 37.8% in 2007, which is
a decrease of RMB 62.6 million, or 36.8%, as compared to the same period in
2007. The decrease, in the first three quarters of 2008, was largely
attributable to the change in demand for luxurious packaging caused by the
change in regulations in the packaging design of tobaccos, which require a large
quantity of our laser holographic base film and matter film, as well as others.
In addition, the global financial crisis, which began in the second half of
2008, has caused a further decline in the demand for specialty
film.




Cost
of Goods Sold




Our cost
of goods sold was RMB376.9 million for the year ended December 31, 2008, which
is an increase of RMB 27.4 million or 7.8%, as compared to the same period for
2007. The increase resulted from the increased sales quantity in 2008 by
3,508ton,
or 12.7 %.




Gross
Profit




Our gross
profit during the year ended December 31, 2008 was RMB 70.3 million representing
a gross margin of 15.7%, compared to 22.2% for the year ended December 31,
2007.  The decrease in gross profit margin was mainly due to the
decline in sales quantity of specialty films and a sharp decline in sale prices
as a result of the global financial crisis.




Operating
Expenses




Our
operating expenses during the year ended December 31, 2008 was RMB 45.7 million,
which is an increase of RMB 10.2 million or 28.5%, as compared to the same
period for 2007. The increase was mainly a result of increases in the costs of
professional service fees related to being a public company and increased
delivery fees caused by expanded sales quantity and the allowances for doubtfull
account receivable and other receivables.





42




Other
Expense




Our other
expenses during the year ended December 31, 2008 was RMB 3.5 million, which is a
decrease of RMB 8.8 million, or 71.8%, as compared to the same period for
2007.  The decrease was mainly due to the decreased expenditure of
interest by RMB 1.1 million and capitalized expenditure of interest by RMB 7.7
million.




Income
Tax Expense




The
effective tax rate was 14.0% in 2008 and 8.7% in 2007. The higher effective tax
rates were primarily attributable to the fact that our operating subsidiary,
Shandong Fuwei, was subject to the 15.0% income tax rate in 2008 pursuant to the
prevailing PRC income Tax Law, while such rate was 7.5% in 2007.




Fiscal
year ended 2007 compared to fiscal year ended 2006




Revenues




Our
revenue can be analyzed as follows:




December 31, 2006
              
              
              December 31, 2007(RMB in
                  thousands)
              
              
              % of Total
              
              
              (RMB in
                  thousands)
              
              
              % of TotalPrinting
      film
              
              
              95,315
              
              
              
              21.8
              
              
              
              83,453
              
              
              
              18.6Stamping
      film
              
              
              99,856
              
              
              
              22.9
              
              
              
              94,366
              
              
              
              21.0Metallization
      film
              
              
              34,772
              
              
              
              8.0
              
              
              
              30,668
              
              
              
              6.8Base
      film for other applications
              
              
              46,784
              
              
              
              10.7
              
              
              
              70,925
              
              
              
              15.8Special
      film
              
              
              160,157
              
              
              
              36.6
              
              
              
              169,961
              
              
              
              37.8436,884
              
              
              
              100.0
              
              
              
              449,373
              
              
              
              100.0




During
the fiscal year ended December 31, 2007, our revenues were RMB 449.4 million,
which is an increase of RMB 12.5 million, or 2.9%, as compared to the same
period for 2006. In 2007, sales of special films were RMB 170.0 million and
37.8% of our total revenues as compared to RMB 160.2 million and 36.7% in 2006,
which is an increase of RMB 9.8 million, or 6.1%, as compared to 2006. The
increase was largely attributable to an increase in the sales of heat-sealable
films, high-gloss films, and other special films as more customers shifted to
use high-end special films for packaging to enhance their product image, and
continued growth in export sales to South Korea, the United States, Europe and
others. The increase was also due to increased sales from the rental
production.




Cost
of Goods Sold




Our cost
of goods sold amounted to RMB 349.5 million for the year ended December 31,
2007, which is an increase of and was RMB 15.2 million, or 4.5%, as compared to
2006. The increase resulted from the increase of raw material costs, packaging
costs, and labor costs. In addition, since the second half of 2007, the decrease
of export tax rebates rate from 11% to 5% has also largely increased our cost of
goods sold by RMB 2.5 million.




Gross
Profit




Our gross
profit during the year ended December 31, 2007 was RMB 99.8 million representing
a gross margin of 22.2%. Gross margin decreased 1.3% from 23.5% for the year
ended December 31, 2006 to 22.2% in 2007 mainly due to increased raw material
consumption on the rental production line. In addition, since the second half of
2007, the decrease of export tax rebates rate from 11% to 5% has also decreased
our gross profit.





43




Operating
Expenses




Our
operating expenses during the year ended December 31, 2007 was RMB 35.6 million,
which is an increase of RMB 11.1 million, or 45.1%, as compared to 2006, This
increase was mainly as a result of increases in  the costs of
professional service fees related to being a public company and administrative
expenses, such as wage increases. During 2007, our operating expenses as a
percentage of revenue was 7.9% which was comparable to that in 2006, which was
5.6%.




Other
Expense




Our other
expenses during the year ended December 31, 2007 was RMB 12.3 million, which is
an increase of RMB 2.7 million, or 28.1% as compared to 2006.  The
increase was mainly due to the decrease in other income by RMB 2.8
million.




Income
Tax Expense




The
effective tax rate was 8.7% in 2007 and 1.1% in 2006. The higher effective tax
rates were primarily attributable to the fact that our operating subsidiary,
Shandong Fuwei was subject to the 7.5% income tax rate in 2007 pursuant to the
prevailing PRC income Tax Law, while such rate was 0% in 2006.




Liquidity
and Capital Resources




Since
inception, our sources of cash were mainly from cash generated from our
operations and borrowings from financial institutions and capital contributed by
our shareholders.




Our
capital expenditures in 2008 have been primarily financed through short-term
borrowings from financial institutions and from our initial public offering
funds. The interest rates of short-term borrowings from financial institutions
during the three year period from 2006 to 2008 ranged from 0% to 6.73%, and
these borrowings may not be prepaid prior to maturity. We believe that our
principal banker in Shandong Province had been granting short-term loans to its
customers as a result of the efforts of the bank branch to reduce the level of
its long-term loans.




Since our
inception, we have utilized significant amounts of secured short-term financing
to fund our acquisition of the Brückner and DMT production lines and our working
capital needs. At December 31, 2008, we had borrowings of RMB 169.8 million
including several different loan agreements with three financial institutions in
the PRC. In January 2009, we received an extension for our RMB20 million loan
agreement, of which RMB10 million was extended for a term of one year and the
remaining RMB10 million was extended for a term of three
years.  During 2008, we received an interest-free loan of RMB 25
million from the Weifang City Commercial Bank entrusted by the Weifang City Hi
& New Technology Project Industrial Development Fund. Each of the related
loan agreements contains provisions regarding collateral, covenants prohibiting
us from engaging in certain activities (including selling, mortgaging or
otherwise disposing of or encumbering all or substantially all of our assets or
before any merger, acquisition, spin-off, or other transaction resulting in a
change in our corporate structure) without the lenders consent and acceleration
(and setoff) provisions in the event of default in payment or failure to comply
with such covenants. Because of appreciation in the exchange rate of RMB
compared to the US dollar, the estimated total investment of our thick film
project is US$35 million to US$ 40 million.  As a result, we will need
an additional US $15 million to $20 million to complete this
project.  The management is currently seeking sources of financing in
order to recommence this project soon.




We are of
the opinion that, after taking into consideration our present banking
facilities, existing cash and the expected cash flows to be generated from our
operations, we have adequate sources of liquidity to meet our short-term
obligations, and our working capital.





44




A summary
of our cash flows for 2006, 2007 and 2008 is as follows:





Year Ended
                  Dec. 31, 2006
              
              
              Year Ended
                  Dec. 31, 2007
              
              
              Year Ended
                  Dec. 31, 2008(RMB
      in thousands)Net
      cash generated from operating activities
              
              
              58,492
              
              
              
              82,856
              
              
              
              80,027Net
      cash used in investing activities
              
              
              (43,479
              )
              
              
              (246,787
              )
              
              
              (76,750
              )Net
      cash (used in)/generated from financing activities
              
              
              227,499
              
              
              
              (51,651
              )
              
              
              (18,262
              )Effect
      of foreign exchange rate change
              
              
              –
              
              
              
              (3,448
              )
              
              
              (104
              )Net
      increase/(decrease) in cash and cash equivalents
              
              
              242,512
              
              
              
              (219,030
              )
              
              
              (15,086
              )Cash
      at the beginning of the year
              
              
              7,427
              
              
              
              249,939
              
              
              
              30,909Cash
      at the end of the year
              
              
              249,939
              
              
              
              30,909
              
              
              
              15,823




Operating
Activities




Net cash
from operating activities was RMB 80.0 million (US$11.7 million) for the year
ended December 31, 2008 as compared to RMB 82.9 million for the year ended
December 31, 2007. The decrease was mainly due to the decline of net income
which resulted from the financial crisis in the fourth quarter that caused the
inventory cost to be higher than the sales price.




Net cash
from operating activities was RMB 82.9 million for the year ended December 31,
2007. We implemented better controls over the collection of accounts receivable
from customers and resulted in a smaller balance of accounts receivable as of
December 31, 2007.  In addition, we had more inventories stored at the
end of 2007.




Net cash
from operating activities was RMB 58.5 million for the year ended December 31,
2006. During this period, we experienced an increase in bills receivablesof
RMB 29.5 million as a result of an increase in new customers who were required
to pay by bills with maturity period from one to six months.




Investing
Activities




Net cash
used in investing activities was RMB (76.8 million) (US$11.2 million) in 2008,
which is mainly used in rebuilding the equipment of the second production line,
expenditures related to the third production line and the equipment for trial
production line.




Net cash
used in investing activities was RMB (246.8 million) in 2007, which was mainly
used for construction of the plant and purchase equipment for the third
production line as well as the expenditures related to the trial production
line.




Net cash
used in investing activities was RMB (43.4 million) in 2006 mainly due to the
increase in expenditures for purchasing property, plant and
equipment.




Financing
Activities




Net cash
generated from financing activities was RMB (18.3 million) (US$2.7 million) for
the year ended December 31, 2008, which was mainly used to repay short-term
loans to banks and pay the interest.




Net cash
generated from financing activities was RMB 51.7 million for the year ended
December 31, 2007, which was mainly used to repay loans.




Net cash
generated from financing activities was RMB 227.5 million for the year ended
December 31, 2006 as compared to RMB 10.6 million used in financing activities
for the year ended December 31, 2005. In December 2006, we successfully listed
on the NASDAQ Global Market and received net proceeds of RMB235.9 million as a
result of the initial public offering.





45




Foreign
Exchange Exposure




Translations




Our
reporting currency is RMB. The functional currency of our operating subsidiary
in the PRC is RMB and our operating subsidiary also maintains its books and
records in RMB. Accordingly, we are not exposed to any material foreign currency
translation effects.




Transactions




We are,
to a certain extent, exposed to transaction foreign currency exposure arising
from our operations in the PRC.




We began
conducting part of our sales in foreign currency in 2004 with the commencement
of our overseas sales business. During 2006, 2007 and 2008, approximately 79.0%,
75.5% and 86.9%, respectively, of our revenue was denominated in RMB and the
remainder was in US dollars. The proportion of raw materials we procured within
the PRC during 2006, 2007 and 2008 were 100.0%, 81.9%, 93.4%, respectively. The
remainder was purchased in US dollars.




Our
foreign currency exchange risk arises mainly from this mismatch between the
currency of our sales, purchases and operating expenses.  We may,
therefore, be susceptible to foreign exchange exposure.




In
addition, we also maintain US dollar accounts with financial institutions for
our US dollar receipts and US dollar payments. We may also incur foreign
exchange gains or losses when we convert the US dollar balances into
RMB.




Currently,
we do not have a formal foreign currency hedging policy as our foreign exchange
gains and losses in 2006, 2007 and 2008 were insignificant. Our management
believes that it is more efficient for us to assess the hedging need of each
transaction on a case-by-case basis. We will continue to monitor our foreign
exchange exposure in the future and will consider hedging any material foreign
exchange exposure should such need arise.




Capital
Expenditures and Contractual Commitments




Capital
Expenditures




Our
capital expenditures in 2006, 2007 and 2008 were as follows:




Year Ended
                    Dec. 31, 2006
                
                
                Year Ended
                    Dec. 31, 2007
                
                
                Year Ended
                    Dec. 31, 2008(RMB
      in thousands)Buildings
                
                
                —
                
                
                
                —
                
                
                
                —Plant
      and equipment
                
                
                37,051
                
                
                
                1,685
                
                
                
                50,553Motor
      vehicles
                
                
                —
                
                
                
                184
                
                
                
                466Assets
      under construction
                
                
                —
                
                
                
                181,308
                
                
                
                4,645Others
      (computer and furniture fittings)
                
                
                422
                
                
                
                114
                
                
                
                4,134Total
                
                
                37,473
                
                
                
                183,291
                
                
                
                59,798




The
following table summarizes our contractual commitments as of December 31, 2008
and the effect those commitments are expected to have on our liquidity and cash
flow in future periods:





Payments Due by PeriodContractual Commitments
              
              Total
              
              
              Less than
                  1 Total
                  Year
              
              
              1-3 Years
              
              
              3-5 Years
              
              
              More than
                  5 Years(RMB
      in thousands)Equipment
      Purchase Contract(i)
              
              
              155,058
              
              
              
              155,058
              
              
              
              —
              
              
              
              —
              
              
              
              —Bank
      loans(ii)Principal
              
              
              169,764
              
              
              
              164,764
              
              
              
              5,000
              
              
              
              —
              
              
              
              —Interest(iii)
              
              
              11,705
              
              
              
              11,705
              
              
              
              —
              
              
              
              —
              
              
              
              —Operating
      leases(iv)
              
              
              4,448
              
              
              
              3,448
              
              
              
              1,000
              
              
              
              —
              
              
              
              —Total
              
              
              340,975
              
              
              
              334,975
              
              
              
              6,000
              
              
              
              —
              
              
              
              —





46







(i)
            The
      purchase of equipment has been financed by the sale of our ordinary shares
      and in the future would be financed by bank borrowings, bond issuing and
      other financing funds and internally generated funds from
      operations.




(ii)
            We
      had short-term and long-term bank loans of RMB 169.8 million at December
      31, 2008 that are due at various times in 2009. We renegotiated
      substantially all of our outstanding indebtedness resulting in
      approximately RMB 167.6 million of secured indebtedness of the total
      outstanding. Our obligations under our existing loans have been mainly met
      through the cash flow from our operations and our financing activities. In
      the past, cash flow from operations has been sufficient to meet payment
      obligations and/or we have been able to extend our borrowings. In the
      event that our cash flows are insufficient to satisfy these obligations,
      we may consider additional bank loans, issuing bonds, or other forms of
      financing to satisfy our capital
requirements.




(iii)
            The
      interest expenses are estimated based on the interest rate of short-term
      borrowings adopted by People Bank of China on December 31, 2008 plus an
      estimated risk premium on
borrowing.




(iv)
            The
      operating leases mainly relate to our rental of production line, warehouse
      and staff quarters. The term of these leases typically ranges from 1 to 5
      years, and are renewable, subject to renegotiation of terms, upon
      expiration. We intend to finance these operating leases from our cash
      flows from operations.




Off-Balance
Sheet Arrangements and Contingent Liabilities




We do not
have any off-balance sheet guarantees, any outstanding derivative financial
instruments, interest rate swap transactions or foreign currency forward
contracts.




Inflation




Inflation
in China has not had a material impact on our results of operations in recent
years. According to the National Bureau of Statistics of China, the change in
the consumer price index in China was 1.5%, 4.8 % and 5.9% in 2006, 2007 and
2008, respectively.




Recent
Accounting Pronouncements




FASB
Interpretation No. 48. In July 2006, FASB issued
FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the
accounting for uncertainty in income taxes recognized in the Company’s
consolidated financial statements in accordance with SFAS No.109, Accounting
from Income Taxes. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. The Company has no material unrecognized tax benefit
which would favorably affect the effective income tax rate in future periods and
do not believe there will be any significant increases or decreases within the
next twelve months. The Company has elected to classify interest and penalties
related to unrecognized tax benefits, if and when required, as part of interest
expenses and administrative expenses in the statements of income, respectively.
No Interest or penalties have been accrued at the date of adoption.




In
February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal
years beginning after November 15, 2007. Early adoption is permitted subject to
specific requirements outlined in the new Statement. Therefore, calendar-year
companies may be able to adopt FAS 159 for their first quarter 2007 financial
statements.




The new
Statement allows entities to choose, at specified election dates, to measure
eligible financial assets and liabilities at fair value that are not otherwise
required to be measured at fair value. If a company elects the fair value option
for an eligible item, changes in that item’s fair value in subsequent reporting
periods must be recognized in current earnings. FAS 159 also establishes
presentation and disclosure requirements designed to draw comparison between
entities that elect different measurement attributes for similar assets and
liabilities. On January 1, 2008, the Company elected not to adopt the option
statement.





47




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”. This Statement amends ARB 51 to establish
accounting and reporting standards for the noncontrolling (minority) interest in
a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 160 will be effective for the Company’s fiscal
year beginning October 1, 2009. Management is currently evaluating the effect of
this pronouncement on financial statements.




In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This
Statement replaces SFAS No. 141, Business Combinations. This Statement retains
the fundamental requirements in Statement 141 that the acquisition method of
accounting (which Statement 141 called the purchase method) be used for all
business combinations and for an acquirer to be identified for each business
combination. This Statement also establishes principles and requirements for how
the acquirer: a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquire; b) recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase; and c) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS No. 141(R)
will apply prospectively to business combinations for which the acquisition date
is on or after Company’s fiscal year beginning January 1, 2009. While the
Company has not yet evaluated this statement for the impact, if any, that SFAS
No. 141(R) will have on its consolidated financial statements, the Company will
be required to expense costs related to any acquisitions after September 30,
2009.




On March
19, 2008, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 161, Disclosures about Derivative Instruments and Hedging Activities. The
new standard is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity’s financial position,
financial performance, and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. “Use and complexity of derivative instruments
and hedging activities have increased significantly over the past several years.
This has led to concerns among investors that the existing disclosure
requirements in FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, do not provide enough information about how these
instruments and activities affect the entity’s financial position and
performance,” explained Kevin Stoklosa, project manager. “By requiring
additional information about how and why derivative instruments are being used,
the new standard gives investors better information upon which to base their
decisions.” The new standard also improves transparency about the location and
amounts of derivative instruments in an entity’s financial statements; how
derivative instruments and related hedged items are accounted for under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows. FASB Statement
No. 161 achieves these improvements by requiring disclosure of the fair values
of derivative instruments and their gains and losses in a tabular format. It
also provides more information about an entity’s liquidity by requiring
disclosure of derivative features that are credit risk-related. Finally, it
requires cross-referencing within footnotes to enable financial statement users
to locate important information about derivative instruments. Management is
currently evaluating the effect of this pronouncement on financial
statements.




In May of
2008, FASB issued SFASB No.162, “The Hierarchy of Generally Accepted Accounting
Principles”. The pronouncement mandates that the GAAP hierarchy reside in the
accounting literature as opposed to the audit literature. This has the practical
impact of elevating FASB Statements of Financial Accounting Concepts in the GAAP
hierarchy. This pronouncement will become effective 60 days following SEC
approval. The Company does not believe this pronouncement will impact its
financial statements.




In May of
2008, FASB issued SFASB No. 163, “Accounting for Financial Guarantee Insurance
Contracts-an interpretation of FASB Statement No. 60”. The scope of the
statement is limited to financial guarantee insurance (and reinsurance)
contracts. The pronouncement is effective for fiscal years beginning after
December 31, 2008. The Company does not believe this pronouncement will impact
its financial statements.




On
December 30, 2008 FASB issued FIN 48-3, “Effective Date of FASB Interpretation
No. 48 for Certain Nonpublic Enterprises”. This FSP defers the effective date of
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, for
certain non-public enterprises as defined in paragraph 289, as amended, of FASB
Statement No. 109, Accounting for Income Taxes, including non-public
not-for-profit organizations. However, non-public consolidated entities of
public enterprises that apply U.S. GAAP are not eligible for the deferral.
Nonpublic enterprises that have applied the recognition, measurement, and
disclosure provisions of Interpretation 48 in a full set of annual financial
statements issued prior to the issuance of this FSP also are not eligible for
the deferral. This FSP will be effective upon issuance. The Company does not
believe this pronouncement will impact its financial statements.





48




On
January 12, 2009 FASB issued FSP EITF 99-20-01, “Amendment to the Impairment
Guidance of EITF Issue No. 99-20”. This FSP amends the impairment guidance in
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to be Held
by a Transferor in Securitized Financial Assets,” to achieve more consistent
determination of whether an other-than-temporary impairment has occurred. The
FSP also retains and emphasizes the objective of an other-than-temporary
impairment assessment and the related disclosure requirements in FASB Statement
No. 115, Accounting for Certain Investments in Debt and Equity Securities, and
other related guidance. The FSP will be effective for interim and annual
reporting periods ending after December 15, 2008, and will be applied
prospectively. Retrospective application to a prior interim
or  annual reporting period is not permitted. The Company does not
believe this pronouncement will impact its financial statements.




Research
and Development, Patents and Licenses




We rely
on copyright, patent, trademark and other intellectual property law,
nondisclosure agreement and technical know-how to protect our intellectual
property and proprietary rights. We enter into confidentiality and licensing
agreements with our employees. Our senior employees and employees who work in
our research and development department and other technical departments have
signed agreements acknowledging that we own the rights to all technology,
inventions, trade secrets, works of authorship, developments and other processes
generated in connection with their employment with us or their use of our
resources or relating to our business or our property and that they must assign
any ownership rights that they may claim in those works to us. As most of our
business is currently conducted in mainland China, we have not taken any action
outside mainland China to protect our intellectual property.




As of the
date of this Annual Report, we have received four patents from, and have seven
patent applications pending with, the Patent Office of the National Intellectual
Property Office of China with respect to our BOPET film technology. Two of these
applications are not being used in our production process as they require
expensive imported raw materials and, most importantly, they have been replaced
by the films used in LCD and electronic products in the market.




We
currently sell our products in the PRC under our brand “Fuwei Films.” We have a
pending application for the registration of the trademark “Fuwei Films” with the
Trademark Bureau of the State Administration of Industry and Commerce in the
PRC. Our ability to compete in our markets and to achieve future revenue growth
will depend, in significant part, on our ability to protect our proprietary
technology and operate without infringing upon the intellectual property rights
of others. An infringement upon these rights may reduce or eliminate any
competitive advantage we have developed, causing us to lose sales or otherwise
harm our business. We are not aware of any infringement or unauthorized use of
our intellectual property rights. We will take appropriate legal actions to
protect our rights if there is any unauthorized use or infringement of our
rights in the future. To date, we have not been sued for infringement of
intellectual property rights by any third party.




Trend
Information




Other
than as disclosed elsewhere in this Annual Report, we are not aware of any
trends, uncertainties, demands, commitments or events that are reasonably likely
to have a material effect on our net sales, profitability, liquidity or capital
resources, or that caused the disclosed financial information to not necessarily
be indicative of future operating results or financial conditions.





49




Item
6. Directors, Senior Management and Employees




A. Directors and senior
management.




Our
directors and executive officers and their present positions with us, as at
March 30, 2009, are as follows:




Directors
and Executive Officers




Name
              
              Age
              
              PositionXiaoan
      He
              
              47
              
              Chairman
      and Chief Executive OfficerXiuyong
      Zhang(1)
              
              39
              
              Chief
      Financial Officer and DirectorTee
      Chuang Khoo
              
              63
              
              Independent
      DirectorChangrong
      Ji
              
              63
              
              Independent
      DirectorYudong
      Huang
              
              44
              
              Independent
      DirectorBo
      Xu(2)
              
              46
              
              SecretaryZhibing
      Qian
              
              44
              
              Senior
      Vice PresidentBin
      Sun(3)
              
              54
              
              President
      of Shandong FuweiXiaoming
      Wang
              
              49
              
              Vice
      President (Production) of Shandong FuweiHanyong
      Lee(4)
              
              53
              
              Vice
      President (Research & Development) of Shandong
  Fuwei




(1)
            Mr.
      Zhang was appointed to serve as the Chief Financial Officer of the Company
      on April 11, 2008 replacing Ms.Cindy Lu who resigned as a director and
      Chief Financial Officer of the Company effective March 31,
      2008.




(2)
            Mr.Xu
      tendered his resignation as the Secretary of the Board of Directors,
      effective April 1, 2009. Mr. Zhibing Qian will assume Mr. Xu’s
      responsibility as the Secretary of the Board of Directors of the Company
      from April 1, 2009, in addition to keeping his current position as our
      Senior Vice President.




(3)
            The
      term of Mr. Sun’s service agreement will end at the end of April,
      2009.  Mr. Xiaoan He will assume Mr. Sun’s position as
      President of Shandong Fuwei and take over Mr. Sun’s responsibility for the
      general management of our business operation from that time, in addition
      to keeping his current responsibility as our Chairman and Chief Executive
      Officer.




(4)
            Mr.
      Hanyong Lee has been the Vice President of Research and Development of
      Shandong Fuwei since January 8,
2008.




Information
about Directors and Officers




Set forth
below is certain information with respect to each director and officer as of
December 31, 2008:




Xiaoan
Hehas been the Chairman of the Board of Directors and Chief Executive
Officer of our Company since 2005 and is responsible for the formulation and
implementation of our business strategies and management of our business
operations. Mr. He has more than ten years of management experience in the
plastics and packaging industries in the PRC. From June 2004 to January 2005,
Mr. He was our General Manager responsible for our daily operation and
management. Prior to joining us as the General Manager in June 2004, Mr. He was
the general manager of Suzhou Broadway Plastic Packaging Co., Ltd from 1996 to
2003. From 1990 to 1996, he was the vice general manager at Suzhou Xiangxuehai
Freezer Co., Ltd and from 1983 to 1990, he was the vice general manager at
Suzhou Marine Machinery Co., Ltd. Mr. He obtained his EMBA from the China Europe
International Business School in 2003 and Bachelor in Engineering from the
Shanghai Jiaotong University in 1983.





50




Xiuyong
Zhang has been a director of our Company since November 2007. He began
serving as our Chief Financial Officer on April 11, 2008. He had accumulated
more than 10 years of experience in investment, accounting and financial fields.
He is responsible for the day-to-day management of our investment, financing,
accounting and auditing matters in the Company and financing, financial and
taxation matters for its subsidiary. Prior to join us as a director of the
Company, Mr. Zhang has also been the director of Shandong Fuwei. since July
2004, and its Vice President since January 2005. Mr. Zhang was the vice-head of
an audit firm, Shandong Zhengyuan Hexin Auditors, Weifang branch from 1999 to
2004. From 1991 to 1999, he was an accounting supervisor at the main office of
the Weifang City Local Products Company. Mr. Zhang was jointly certified as a
Public Valuer by the Ministry of Personnel and Ministry of Finance in the PRC in
2004. He was certified as the Chinese Certified Public Accountant by the
Ministry of Finance of the PRC in 1997. He received the Professional
Certification in Law from China University of Political Science and Law and
China Central Radio and TV University in 2005. He received the Certification of
Financial Accounting from the Shandong Television University in
1996.




Tee Chuang
Khoo has been a director of our Company since November 2007. Mr. Khoo was
a Senior Partner in Management Consulting at DENEC Management Consulting Co.
Ltd. (“DENCE”) in Shanghai from October 2005 to October 2007. From November 2000
to September 2005, Mr. Khoo was a Senior Partner at Improve Management
Consulting Services in Malaysia where he was responsible for reducing
manufacturing costs and process improvement. Mr. Khoo was an Executive Director
at JPK (M) Sdn Bhd, a Malaysian-listed company, from October 1998 to September
2000, where he assisted the Managing Director with the entire operation of the
company. From November 1996 to August 1998, he was the General Manager of
Broadway Group’s (a Singapore-listed company) product factories in Johor Baru,
Malaysia, and in China. He also held managerial positions at the Malaysian
conglomerate, The Lion Group, and he was a Human Resources Manager at Metal Box
Singapore Ltd, a Singapore-listed company owned by the British Metal Box Group.
Mr. Khoo received a Bachelor of Arts in Finance & Management from the
University of Oregon (USA), a Masters in Business Administration (MBA) from
University of Southern California (USA) and a diploma in Accounting from the
Association of International Accountants from the United Kingdom.




Changrong
Ji has been a director of our Company since March 2007. Mr. Ji is
currently the Investigation Officer of the People’s Bank of China, Weifang city
central branch and has been since 2004. Mr. Ji was the president of People’s
Bank of China, Weifang City central branch from 2001 to 2004 and was the
president of People’s Bank of China, Weihai City central branch from 1999 to
2001. From 1989 to 1997, Mr. Ji was the vice-president of People’s Bank of
China, Weifang city central branch. He joined the State Administration of
Foreign Exchange, Weifang branch as its deputy director from 1989 to 1997 and
was appointed as the director of the State Administration of Foreign Exchange,
Weihai branch from 1999 to 2001. Mr. Ji was the director of the State
Administration of Foreign Exchange, Weifang branch from 2001 to 2004. Mr. Ji
obtained his Master’s degree in Economics in 1999 from Shanghai Fudan University
and his bachelor’s degree in international economics in 1993 from East China
Normal University.




Yudong
Huang has been a director of our Company since November 2007. Professor
Huang is a Professor and Director of the Department of Applied Chemistry of
Harbin Institute of Technology. His research coverage includes PET films. Since
1992, Professor Huang has performed more than 20 research projects, out of which
3 projects have won science and technology awards at the provincial and
ministerial levels. He has published more than 60 papers in the national and
international levels. He was awarded the “Excellent Scientist Prize” of
Heilongjiang Province in 1998. Professor Huang graduated from Department of
Applied Chemistry of Harbin Institute of Technology with doctor’s
degree.




Bo Xu
joined the Company in October 2006 and was appointed as the Board Secretary of
the Company in December 2006.  From 2002 to September 2006, he was the
director of finance for Beijing Platinum Investment Co., Ltd. where he was in
charge of accounting and finance. Prior to that, he was a finance manager at
Weifang Wanyou Enterprise Co., Ltd. from 1993 to 2002. Mr. Xu received his
bachelor’s degree in finance from Weifang Staff and Worker’s University in
1989.




Zhibing
Qian has been appointed as the Senior Vice President of the Company since
April 2007. From 2003 to March 2007, he was the general manager of Beijing
Capital Jindian Technology Limited. From 2000 to 2003, Mr. Qian was appointed as
the general manger of Beijing Zhongguancun International Incubator Limited,
comprehensively responsible for the company’s set up and operations. Mr. Qian
also worked at senior management level at other state-owned and joint venture
companies in China. Mr. Qian received his Doctor’s and Master’s degrees from
University of Idaho in 1995 and 1993, respectively.





51




Bin Sun
has been the President of Shandong Fuwei since January 2007, and is responsible
for the general management of our business operations. Mr. Sun has more than ten
years of management experience in the Mechanical & Electrical and plastics
industries before he joined us. Mr. Sun was the general manager of Jiangsu
Geliling Group from 2005 to 2006, and he was the general manager of Wuxi Dayu
Electric Group from 2002 to 2004. Mr. Sun obtained his master’s degree in
Economics from the Renmin University of China in 1994 and bachelor’s degree in
Engineering from the Northwestern Polytechnical University in 1981.




Xiaoming
Wang has been Vice President (Production) of Shandong Fuwei since January
2005 and is responsible for the management of our production facilities. Prior
to joining us, Mr. Wang was the vice manager of Weifang Engine Manufacturing Co.
from 1986 to 1998 and the deputy general manager of Shandong Neo-Luck from 1998
to 2003, Mr. Wang was the deputy general manager of Shandong Fuwei during 2004.
Mr. Wang was certified as a professional economist by the Shandong Province
Human Resources Committee in 2001 and obtained a certificate in Economics
Management awarded by the PRC Central Party Learning Institute and obtained a
certificate in Business Enterprises Operational Management from the Shandong
Television University in 1986.




Hanyong
Lee has been Vice President of Research and Development of Shandong Fuwei
since January 8, 2008. He has more than 22 years of experience in the BOPET film
industry, especially in the aspects of development and management. He worked for
18 years at SKC Co., Ltd., a world-famous BOPET supplier. From 2002 to 2007, Mr.
Lee was Vice President of i-components and Polystar International in South
Korea. From 1987 to 1997, he was mainly responsible for the management of the
R&D team, including the development of the BOPET film technology, the
refinement of the manufacturing process and the production in general at SKC in
Korea. At SKC from 1998 to 2000, he worked in the American Branch of SKC where
he was responsible for evaluating the technology, monitoring the production
growth and managing a professional staff.




None of
our directors or officers is related to each other. To the best of our knowledge
and belief, there are no arrangements or understandings with any of our
principal shareholders, customers, suppliers, or any other person, pursuant to
which any of our directors or executive officers were appointed.




The
business address of our directors and executive officers is No. 387 Dongming
Road, Weifang Shandong, People’s Republic of China, Postal Code:
261061.




Board
Committees




Our Board
of directors has established an Audit Committee, Compensation Committee and a
Corporate Governance and Nominating Committee, and adopted charters for each of
these committees. We have appointed independent directors to each of our
committees.




Under the
Nasdaq Marketplace Rule 4350(c)(5), a “Controlled Company” is exempt from the
requirements to have a majority of independent directors. A “Controlled Company”
is a company of which more than 50% of the voting power is held by an
individual, a group or another company. Currently, as of the date of this Annual
Report, Apex Glory Holding Limited holds 53% of our outstanding ordinary shares.
As a result, Fuwei is considered to be a Controlled Company and relied upon the
exemption from December 25, 2007 until March 31, 2008, when Ms. Lu resigned from
her position as the Chief Financial Officer and Director of the
Company..




Audit
Committee




Our Audit
Committee currently consists of Tee Chuang Khoo, Changrong Ji and Yudong Huang.
The audit committee will oversee our accounting and financial reporting
processes and the audits of our financial statements. The audit committee is
responsible for, among other things:




·
            selecting
      the independent auditors and pre-approving all auditing and non-auditing
      services permitted to be performed by the independent
      auditors;




·
            reviewing
      and approving all proposed related-party
  transactions;




·
            discussing
      the annual audited financial statements with management and the
      independent auditors;





52




·
            annually
      reviewing and reassessing the adequacy of our audit committee
      charter;




·
            meeting
      separately and periodically with management and the independent
      auditors;




·
            reviewing
      such other matters that are specifically delegated to our audit committee
      by our board of directors from time to time;
and




·
            reporting
      regularly to the full board of
directors.




Compensation
Committee




Effective
November 21, 2007, Tee Chuang Khoo, Yudong Huang and Changrong Ji were appointed
as members of our Compensation Committee.  The Committee is
responsible for, among other things:




·
            reviewing
      and determining the compensation package for our senior
      executives;




·
            reviewing
      and making recommendations to our board with respect to the compensation
      of our directors;




·
            reviewing
      and approving officer and director indemnification and insurance
      matters;




·
            reviewing
      and approving any employee loan in an amount equal to or greater than RMB
      100,000; and




·
            reviewing
      periodically and approving any long-term incentive compensation or equity
      plans, programs or similar arrangements, annual bonuses, employee pension
      and welfare benefit plans.




Corporate
Governance and Nominating Committee




Our
Corporate Governance and Nominating Committee consists of Changrong Ji. The
Corporate Governance and Nominating Committee is responsible for, among other
things:




·
            identifying
      and recommending to the board nominees for election or re-election to the
      board;




·
            making
      appointments to fill any vacancy on our
board;




·
            reviewing
      annually with the board the current composition of the board in light of
      the characteristics of independence, age, skills, experience and
      availability of service to us;




·
            identifying
      and recommending to the board any director to serve as a member of the
      board’s committees;




·
            advising
      the board periodically with respect to significant developments in the law
      and practice of corporate governance, as well as our compliance with
      applicable laws and regulations, and making recommendations to the board
      on all matters of corporate governance and on any corrective action to be
      taken; and




·
            monitoring
      compliance with our code of business conduct and ethics, including
      reviewing the adequacy and effectiveness of our procedures to ensure
      proper compliance.




Duties
of Directors




Under
Cayman Islands laws, our directors have a common law duty of loyalty to act
honestly in good faith with a view to our best interests. Our directors also
have a duty to exercise the skill they actually possess and such care and
diligence that a reasonably prudent person would exercise in comparable
circumstances. In fulfilling their duty of care to us, our directors must ensure
compliance with our memorandum of association. A shareholder has the right to
seek damages if a duty owed by our directors is breached. You should read
“Description of Share Capital - Differences in Corporate Law” for a more
complete discussion of these matters.





53




B. Compensation.




Compensation
of Directors and Executive Officers




All
directors receive reimbursements from us for expenses which are necessary and
reasonably incurred by them for providing services to us or in the performance
of their duties. Our directors who are also our employees receive compensation
in the form of salaries, housing allowances, other allowances and benefits in
kind in their capacity as our employees. Our directors do not receive any
compensation in their capacity as directors in addition to their salaries and
other remunerations as members of our management team. We pay their expenses
related to attending board meetings and participating in board
functions.




The
aggregate cash compensation and benefits that we paid to our directors and
executive officers, a group of eleven persons for the year ended December 31,
2008 was approximately RMB2.9 million. No executive officer is entitled to any
severance benefits upon termination of his or her employment with our
company.




Employment
and Service Agreements




Executive
Officers




We have
entered into an Employment Agreement, dated as of April 27, 2005, with Mr. He
for the position of Chief Executive Officer for a three year period, effective
December 25, 2006. Under this Employment Agreement, Mr. He’s annual basic salary
is RMB 500,000 and is eligible for a discretionary bonus. Each of our other
current executive officers, Bo Xu, Zhibing Qian, Bin Sun, Xiaoming Wang, and
Hanyong Lee, have also entered into service agreements (the “Service Agreements”
and each a “Service Agreement”) with us. The term of service for the executive
officers is for an initial period of three years commencing January 1, 2009 in
the case of Xiaoming Wang, is for an initial period of three years commencing
December 6, 2006 in the case of Mr. Xu, is for an initial period of two years
commencing January 2007 in the case of Mr. Sun, is for an initial period of
three years, commencing April 2, 2007 in the case of Mr. Qian, and is for
an initial period of two years, commencing January 8, 2008 in the case of Mr.
Lee. We renewed our service agreement with Mr. Qian in March 2009 for one more
year.  We may only terminate the Service Agreement prior to the
expiration of the initial period (except by mutual agreement and except as
provided in the Service Agreement) upon the occurrence of certain events
including, without limitation, for cause, disability or personal bankruptcy. The
Service Agreement may be terminated by not less than three months’ notice in
writing served by either party to the Service Agreements. We have the option to
pay the executive officer salary in lieu of any required period of notice of
termination. Under the terms of their respective Service Agreements, Bo Xu,
Zhibing Qian, Bin Sun, Xiaoming Wang, and Hanyong Lee jointly are entitled to an
annual basic salary of RMB 1.7 million. Their annual salaries may be revised at
the discretion of the Compensation Committee. We may pay them discretionary
management bonuses for any financial year, the payment and the amount of which
are subject to the approval of the Compensation Committee. Except for the
payment in lieu of notice described above, there are no provisions for benefits
for termination of employment of our executive officers under the Service
Agreements. Mr.Xu submitted his resignation as Secretary of the Board of
Directors, effective on April 1, 2009. Mr. Sun will not renew his Service
Agreement with us after its expiration at the end of April 2009.




On April
11, 2008, Mr. Zhang was appointed to serve as our Chief Financial Officer,
replacing Ms. Lu who resigned as our Chief Financial Officer and director on
March 31, 2008.  Xiuyong Zhang has and our former Chief Financial
Officer had entered into service agreements (the “Service Agreements” and each a
“Service Agreement”) with us as well. The term of service for the executive
officers is for an initial period of two years in case of Cindy Lu commencing
March 26, 2007 and three years commencing March 1, 2006 in case of Xiuyong
Zhang. Under the terms of their respective Service Agreements, Cindy Lu and
Xiuyong Zhang is entitled to an annual basic salary of RMB 500,000 and RMB
300,000, respectively.  After the initial period, either party can
terminate the Employment Agreement upon three months prior written notice or by
paying the other party a sum equal to three months salary in lieu of such
notice. The agreement may also be terminated by either party without prior
notice or payment pursuant to the applicable provisions of the China Labor
Law.





54




Share
Option Plan




We plan
to adopt a share option plan that is a share incentive plan, the purpose of
which is to recognize and acknowledge the contributions the eligible
participants had or may have made to our company. The share option plan will
provide the eligible participants an opportunity to have a personal stake in our
company with the view to achieving the following objectives:




·      motivate
the eligible participants to optimize their performance efficiency for the
benefit of our company; and




·      attract
and retain or otherwise maintain an on-going business relationship with the
eligible participants whose contributions are or will be beneficial to our
long-term growth.




Indemnification




Cayman
Islands law does not limit the extent to which a company’s articles of
association may provide for indemnification of officers and directors, except to
the extent any such provision may be held by the Cayman Islands courts to be
contrary to public policy, such as to provide indemnification against civil
fraud or the consequences of committing a crime. Pursuant to our memorandum and
articles of association, our directors and officers, as well as any liquidator
or trustee for the time being acting in relation to our affairs, will be
indemnified and secured harmless out of our assets and profits from and against
all actions, costs, charges, losses, damages and expenses that any of them or
any of their heirs, executors or administrators may incur or sustain by reason
of any act done, concurred in or omitted in or about the execution of their
duties in their respective offices or trusts. Accordingly, none of these
indemnified persons will be answerable for the acts, receipts, neglects or
defaults of each other; neither will they be answerable for joining in any
receipts for the sake of conformity, or for any bankers or other persons with
whom any moneys or effects belonging to us may have been lodged or deposited for
safe custody, or for insufficiency or deficiency of any security upon which any
moneys of or belonging to us may be placed out or invested, or for any other
loss, misfortune or damage which may happen in the execution of their respective
offices or trusts. This indemnity will not, however, extend to any fraud or
dishonesty that may attach to any of said persons.




Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.




C. Board
practices.




Our
Articles provide that our board of directors will consist of not less than two
directors. Each director must retire from office at least once every three
years, but a director who is appointed by the board must retire at our next
annual general meeting of the shareholders following his or her appointment. The
chairman of the board is not subject to retirement by rotation or taken into
account in determining the number of directors to retire in each
year.  A retiring director is eligible for re-election.




D.
Employees.




As of
December 31, 2008,our
total staff consisted of 337 employees.




We do not
have any collective bargaining agreements with our employees. We have never
experienced any material labor disruptions and are unaware of any current
efforts or plans to organize employees. We believe we have good relationships
with our employees.




55




Item
7.  Major Shareholders and Related Party Transactions




A. Major
shareholders.




The
following table sets forth information with respect to the beneficial ownership,
within the meaning of Rule 13d-3 under the Exchange Act, of our ordinary shares,
as of March 30, 2009 for:




·
            each
      person known to us to own beneficially more than 5% of our ordinary
      shares; and




·
            each
      of our directors and executive officers who beneficially own our ordinary
      shares.




Beneficial
ownership includes voting or investment power with respect to the securities.
Except as indicated below, and subject to applicable community property laws,
the persons named in the table have or share the voting and investment power
with respect to all ordinary shares shown as beneficially owned by them. The
number of our ordinary shares used in calculating the percentage for each listed
person includes any options exercisable by such person within 60 days after the
date of this Annual Report. Percentage of beneficial ownership is based on
13,062,500 ordinary shares outstanding as of March 30, 2009.





Number
              
              
              PercentExecutive
      Officers and Directors:Xiaoan
      He
              
              
              —
              
              
              
              —Xiuyong
      Zhang(1)
              
              
              —
              
              
              
              —Tee
      Chuang Khoo
              
              
              —
              
              
              
              —Changrong
      Ji
              
              
              —
              
              
              
              —Yudong
      Huang
              
              
              —
              
              
              
              —Bin
      Sun
              
              
              —
              
              
              
              —Xiaoming
      Wang
              
              
              —
              
              
              
              —Hanyong
      Lee(2)
              
              
              —
              
              
              
              —All
      directors and executive officers as a group ( 8 persons)
              
              
              —
              
              
              
              —5%
      Shareholders:Apex
      Glory Holdings Limited(3)
              
              
              6,912,503
              
              
              
              52.9
              %Easebright
      Investments Limited(4)
              
              
              1,637,497
              
              
              
              12.5
              %




(1)
            Mr.
      Zhang was appointed to serve as Chief Financial Officer of the Company on
      April 11, 2008 replacing Ms. Lu who resigned as a director and Chief
      Financial Officer of the Company, effective March 31,
  2008.




(2)
            Mr.
      Hanyong Lee has been Vice President of Shandong Fuwei since January 8,
      2008.




(3)
            Apex
      Glory Holdings Limited is a wholly-owned subsidiary of Eastfaith Holdings
      Limited, a British Virgin Islands corporation. Mr. Jun Yin is the sole
      shareholder of Eastfaith Holdings
Limited.




(4)
            Easebright
      Investments Limited is a wholly-owned subsidiary of Goodsuccess
      Enterprises Ltd. Mr. Tongju Zhou and Mr. Duo Wang each indirectly own 50%
      of Goodsuccess Enterprises Ltd.




Except as
disclosed below, there were no related party transactions with major
shareholders during the period commencing January 1, 2006 and ending March 30,
2009.




B. Related party
transactions.




Our
Related-Party Transaction Policies




We have
conducted our related-party transactions on normal commercial terms that we
believe are fair and reasonable and in the interests of our shareholders as a
whole. We believe that the terms of our related-party transactions are
comparable to the terms we could obtain from independent third parties. Our
related-party transactions are subject to the review and approval of the Audit
Committee of our Board of Directors.




The
transactions and balances with related parties are analyzed as
follows:





56




(a)
Transactions with related parties


During
the years ended 2006, 2007 and 2008, we paid approximately RMB 151,000, RMB
143,047 and RMB182,625 (USD$26,231), respectively, to Fuhua Industrial Material
Management Co., Ltd. as rental payments in connection with living quarters for
our staff. Fuhua Industrial Material Management Co., Ltd. is an entity that is
owned and controlled by Weifang Neo-Luck.




C. Interests of experts and
counsel.




Not
Applicable.




Item 8.
Financial Information




A. Consolidated Statements and Other
Financial Information.




Our
consolidated financial statements are included herein under Item
18.




We have
not paid any dividends on our ordinary shares. The payment of dividends in the
future, if any, is within the discretion of our Board of Directors and will
depend upon our earnings, capital requirements and financial condition and other
relevant factors. We do not anticipate declaring or paying any dividends in the
foreseeable future.




Legal
Proceedings




DMT
Arbitration




In 2006,
Shandong Fuwei received correspondence relating to an arbitration proceeding
initiated by DMT S. A. (“DMT”) against Shandong Neo-Luck in the ICC
International Court of Arbitration (the “ICC”) in which DMT sought monetary
damages against Shandong Neo-Luck of approximately US $1,250 plus interest
relating to a claim of partial non-payment for the DMT production line Shandong
Fuwei acquired from Beijing Baorui in 2005. In early 2007, the ICC determined
that despite arguments made to the ICC that Company should not be a party to the
proceeding, the arbitration should proceed with Fuwei as the respondent pending
adjudication of issues relating to jurisdiction and liability.




A hearing
was held by the ICC in November 2007. Subsequent to the hearing, at the
invitation of Weifang Neoluck (Group) Co., Ltd (“Neoluck Group”), the original
majority shareholder of Shandong Neo-Luck, the Neoluck Group and DMT engaged in
efforts to achieve a settlement of the pending arbitration on January 18, 2008.
Shandong Fuwei joined these discussions later as an interested party and in
order to support a resolution of the pending dispute and to achieve resolution
of certain outstanding service and spare part issues.




After
several weeks of negotiations among the parties, in March 2008, the parties
entered into two agreements, a Service and Technical Assistance Agreement (the
“Service Agreement”), between DMT and Shandong Fuwei, and a Settlement Agreement
(the “Settlement Agreement”) between DMT and the Neoluck Group. Under the
Service Agreement, Shandong Fuwei would pay an amount of US$180 in two
installments with respect to service and spare parts. The Company made its first
payment in April 2008. As agreed by the Service Agreement, the remaining US$90
shall be paid within 60 days after the commencement of services described in the
Service Agreement.




Under the
Settlement Agreement, the Neoluck Group was obligated to pay an amount equal to
US$900 in RMB by delivery of a bank draft to DMT. In late April, the Neoluck
Group had not performed its obligation under the Settlement Agreement, and, the
Neoluck Group and DMT entered into a Supplemental Agreement pursuant to which
the Neoluck Group would pay the amount owed to DMT in two installments. The
Neoluck Group paid the first installment equal to US$ 450 in April 2008. As
agreed between Neoluck Group and DMT, the remaining US$450 will be paid in
installments by the end of December 2008. Neoluck Group has paid $ 200,000 on
November, 2008. On March 2009, Neoluck Group paid $50,000 to DMT.  As
of March 30, 2009, Neoluck Group has paid US$ 250 and still has US$200
outstanding to DMT.




In the
event the arbitration proceedings continue as a result of non-performance of the
payment obligation, it is possible for the arbitral tribunal for the ICC
International Court of Arbitration to rule in favor of DMT, which might result
in a liability for Fuwei for the amount claimed plus interest. However, any
possible liability regarding DMT’s claim should be reduced by the amount
previously paid to DMT in connection with the above-described settlement. It
should be noted further in such event that Fuwei might have sustainable claims
for damages as against the Neoluck Group for its failure to perform its
obligations under the Settlement Agreement.





57




HKG
Arbitration




At
December 31, 2007, Hampden Kent Group LLC had threatened the Company with
an arbitration, seeking a penalty fee in the amount of US$ 3,800, relating to
services allegedly performed by HKG in attempting to provide financing to Fuwei
pursuant to an August 19, 2006 letter agreement (the "Letter
Agreement") between the parties.  Pursuant to the Letter Agreement,
any dispute between the parties would be arbitrated by the American Arbitration
Association (“AAA”) in accordance with its Commercial Arbitration Rules.
Pursuant to these rules, a demand for arbitration must be filed with the AAA
regional office together with a filing fee by the claimant, in this case,
HKG.




In
December 2007, HKG filed a demand for arbitration with the International Centre
for Dispute Resolution of the AAA (“AAA/ICDR”). On January 28, 2008, the
AAA/ICDR informed us that an arbitration process would commence in
accordance with its rules.  On February 18, 2008, HKG submitted an
Amended Demand for Arbitration and Statement of Claim.




On March
14, 2008, the Company submitted its answering statement and counterclaim in
response to HKG's Amended Demand for Arbitration and Statement of Claim. The
Company denied HKG's claims for breach of contract and breach of the covenant of
good faith and fair dealing as legally and factually without merit and asserted
various defenses. The Company also asserted a counterclaim against HKG for
breach of the Letter Agreement, seeking to recover the over US$300 in fees and
costs paid to HKG and other consequential damages.




On March
27, 2008, HKG submitted a letter in reply to the Company's counterclaim,
generally denying the allegations and claims made by the Company.




At the
request of HKG, the Company had agreed to attempt to resolve this dispute
through mediation. A neutral mediator was been appointed by the AAA/ICDR. On
April 24, 2008, HKG unilaterally cancelled the mediation and sought to proceed
with the arbitration. A panel of threearbitrators (the
“Panel”) was appointed, and a hearing on the parties’ respective
claims was scheduled to commence on September 22, 2008.





By orders
dated September 9 and 15, 2008, the Panel suspended the hearing pending receipt
of a full deposit of the outstanding fees.  On November 7, 2008, the
Panel advised that if payment of the outstanding fees was not remitted on or
before February 6, 2009, the case would be terminated for nonpayment on that
date.  This deadline has been twice extended.





By order
dated February 23, 2009, the Panel directed that if payment of the full deposit
was not remitted to the ICDR on or before March 23, 2009, the case would be
terminated for
nonpayment, and no further extensions would be contemplated by the
Panel.




On March
27,2009, the Panel issued an order that this arbitration proceeding was
terminated for nonpayment of the deposits due in accordance with Sections R-52
and R-54 of the Commercial Arbitration Rules of the American Arbitration
Association.




Class
Action




On
October 19, 2007, the Company became aware that a class action lawsuit had been
filed in the United States District Court for the Southern District of New York,
on behalf of all purchasers of the Company’s stock from the date of the
Company’s IPO on December 19, 2006 through October 16, 2007. The complaint
alleged that the Company and certain of its present and former officers,
directors and shareholders (collectively, the “defendants”) violated the
Securities Act of 1933.




On
November 21, 2007, the Company was given notice that a second class action
lawsuit had been filed in the United States District Court for the Southern
District of New York, commenced on behalf of all purchasers of the Company’s
stock pursuant or traceable to the Registration Statement and Prospectus issued
in connection with the Company’s IPO on December 19, 2006 through November 12,
2007. The complaint alleged that the Company, its underwriters and certain of
its executives (collectively, the “Defendants”) violated Sections 11, 12(2) and
15 of the Securities Act of 1933. The complaint also alleged that the Defendants
misrepresented or omitted material information regarding the Company and its
business operation.





58




On
January 24, 2008, the Court consolidated into a single action the putative
securities class actions pending against the Company and certain of its
officers, directors, and shareholders.  The Court also appointed
Ninyat Tonyaz as lead plaintiff, appointed the Rosen Law Firm, P.A. as lead
counsel, and granted plaintiffs leave to file a consolidated amended class
action complaint.  The consolidated action is styled In re Fuwei
Films Securities Litigation, Case No. 07-CV-9416
(RJS).




On March
14, 2008, plaintiffs filed a consolidated amended class action
complaint  (the "Amended Complaint") naming as defendants the
Company, Xianoan He, Mark Stulga, Jun Yin, Tongju Zhou, Duo Wang, and the
Company's IPO underwriters — Maxim Group LLC, WR Hambrecht + Co. and
Chardan Capital Markets, LLC.  The Amended Complaint asserts
claims for violation of Sections 11, 12(a)(2), and 15 of the Securities Act of
1933.  The Company, Messrs. He and Stulga, and the Underwriter Defendants
were served with the Amended Complaint and, as described below, have moved to
dismiss the claims asserted against them. Pursuant to a scheduling order entered
by the Court on February 19, 2008, the parties named as defendants in the
consolidated class action were required to answer or otherwise respond to
the Amended Complaint on or before April 30, 2008.  The
Court subsequently extended defendants’ time to respond to the Amended
Complaint to May 14, 2008.




The
Company and Messrs. He and Stulga filed a motion to dismiss the Amended
Complaint in its entirety.  The Underwriter Defendants separately
moved to dismiss the Amended Complaint.  Both motions have been fully
briefed, and the parties await the Court's
decision.




On
November 3, 2008, Plaintiffs filed proofs of service with the Court, indicating
that Messrs. Yin, Wang and Zhou were served with the Amended Complaint on or
about August 14, 2008, and that they had 90 days after such date to serve an
answer to the Amended Complaint or a motion pursuant to Rule 12 of the Federal
Rules of Civil Procedure.




By letter
dated March 17, 2009, Plaintiffs apprised the Court of Fuwei’s March 10, 2009
Press Release disclosing the initial verdict against Messrs. Yin, Wang, and
Zhou.  Plaintiffs requested that the Court to take judicial notice of
Fuwei’s March 10, 2009 Press Release (as filed with the Company’s March 13, 2009
Form 6-K) in adjudicating the pending motions to dismiss.




The Court
has not ruled on the pending motions to dismiss to date.  All
discovery is stayed pending such ruling.




The
Company’s management believes that the allegations are without merit. The
Company intends to defend itself vigorously against the claims and has engaged a
law firm in this regard. However, the
Company’s management is currently unable to reasonably estimate
the amount or range of possible losses that will result from the ultimate
resolution of this matter.  As of March 30, 2009, the Company has
not accrued any liability in connection with these litigations except for the
defense expenses.




Other
significant events




At March
10, 2009, the Company became aware of the initial verdict issued by the Jinan
Intermediate People's Court in the city of Jinan, Shandong Province, concerning
the Company's three major shareholders, Mr. Jun Yin, Mr. Tongju Zhou and Mr. Duo
Wang. The verdict finds the three major shareholders guilty of the crime of
misappropriation of state-owned assets relating to tens of millions of RMBs'
worth of assets during the reorganization of Shandong Neoluck Plastics Co., Ltd.
The court sentenced Mr. Yin to death, with a stay of execution for two years.
The other two defendants, Mr. Zhou and Mr. Wang, each received life
imprisonment. All of the personal property of the three individuals will be
confiscated. None of these individuals is currently involved in Fuwei's
day-to-day operations. The three individuals are currently appealing the initial
verdict.




B. Significant
Changes.




Not
Applicable




Item 9.
The Offer and Listing.




A. Offer and listing
details.




We have
authorized capital of 20,000,000 ordinary shares, par value US$0.129752 per
share. As of March 30, 2009, 13,062,500 ordinary shares were issued and
outstanding.





59




The
annual high and low market prices of our ordinary shares for the three most
recent full financial years and subsequent period are as set forth
below:




Ordinary
      Shares(Year
      Ended)
                      
                      High
                      
                      
                      LowDecember
      31,2006
                      
                      $
                      18.43
                      
                      
                      $
                      8.30December
      31,2007
                      
                      $
                      17.14
                      
                      
                      $
                      2.12December
      31,2008
                      
                      $
                      6.19
                      
                      
                      $
                      0.70




The high
and low market prices of our ordinary shares for each financial quarter over the
two most recent full financial years and subsequent period are as set forth
below:


Ordinary
      Shares(Quarter
      Ended)
                      
                      High
                      
                      
                      LowMarch
      31,2007
                      
                      $
                      17.14
                      
                      
                      $
                      8.00June
      30, 2007
                      
                      $
                      12.28
                      
                      
                      $
                      5.67September
      30, 2007
                      
                      $
                      10.38
                      
                      
                      $
                      5.63December
      31,2007
                      
                      $
                      10.46
                      
                      
                      $
                      2.12March
      31,2008
                      
                      $
                      6.19
                      
                      
                      $
                      2.52June
      30, 2008
                      
                      $
                      3.69
                      
                      
                      $
                      2.27September
      30, 2008
                      
                      $
                      2.58
                      
                      
                      $
                      1.21December
      31,2008
                      
                      $
                      1.41
                      
                      
                      $
                      0.70




For the
most recent six months, the high and low market prices of our ordinary shares
are as set forth below:


Ordinary
      Shares(Month
      Ended)
                      
                      High
                      
                      
                      LowSeptember
      30, 2008
                      
                      $
                      2.13
                      
                      
                      $
                      1.21October
      31, 2008
                      
                      $
                      1.41
                      
                      
                      $
                      0.76November
      30, 2008
                      
                      $
                      1.40
                      
                      
                      $
                      0.84December
      31, 2008
                      
                      $
                      0.96
                      
                      
                      $
                      0.70January
      30, 2009
                      
                      $
                      0.99
                      
                      
                      $
                      0.66February
      28, 2009
                      
                      $
                      0.83
                      
                      
                      $
                      0.50




B. Plan of
Distribution.




Not
Applicable.




C. Markets.




Our
ordinary shares were included for quotation on the NASDAQ Global Market on
December 18, 2006 under the symbol “FFHL”.




D. Selling
Shareholders.




Not
applicable.




E. Dilution.




Not
applicable.





60




F. Expenses of the
issue.




Not
Applicable.




Item 10. Additional
Information.




A. Share capital.




Not
Applicable.




B. Memorandum and articles of
association.




We are a
Cayman Islands company and our affairs are governed by our memorandum and
articles of association and the Companies Law (2004 revision) of the Cayman
Islands, or the Companies Law. We have filed copies of our complete Memorandum
and Articles of Association as exhibits to our Annual Report on Form 20-F for
the year ended 2006 filed with the SEC on April 2, 2007.




As of the
date of this Annual Report, our authorized share capital consisted of 20,000,000
ordinary shares, par value US$0.129752 per share. As of the date of this Annual
Report, 13,062,500 ordinary shares were issued and outstanding, and no
preference shares were issued and outstanding.




Ordinary
Shares




We were
incorporated under the laws of the Cayman Islands as an exempted company. A
Cayman Islands exempted company:




·
            is
      a company that conducts its business outside the Cayman
      Islands;




·
            is
      exempted from certain requirements of the Companies Law, including the
      filing of any annual return of its shareholders with the Registrar of
      Companies or the Immigration Board;




·
            does
      not have to make its register of shareholders open to inspection;
      and




·
            may
      obtain an undertaking against the imposition of any future
      taxation.




The
following summarizes the terms and provisions of our share capital, as well as
the material applicable laws of the Cayman Islands. This summary is not
complete, and you should read our amended and restated memorandum and articles
of association, filed as exhibits to this Annual Report.




The
following discussion primarily concerns ordinary shares and the rights of
holders of ordinary shares.




Protection
of Minority Shareholders




The Grand
Court of the Cayman Islands may, on the application of shareholders holding not
less than one fifth of our shares in issue, appoint an inspector to examine our
affairs and report thereon in a manner as the Grand Court shall
direct.




Any
shareholder may petition the Grand Court of the Cayman Islands which may make a
winding up order, if the court is of the opinion that it is just and equitable
that we should be wound up. Where any such petition has been presented by our
shareholders, the Grand Court is permitted to make alternative order to a
winding-up order including orders regulating the conduct of our affairs in the
future, requiring us to refrain from doing an act complained of by the
petitioner or for the purchase of our shares by us or another
shareholder.





61




Claims
against us by our shareholders must, as a general rule, be based on the general
laws of contract or tort applicable in the Cayman Islands or their individual
rights as shareholders as established by our amended and restated memorandum and
articles of association.




The
Cayman Islands courts ordinarily would be expected to follow English case law
precedents which permit a minority shareholder to commence a representative
action against, or derivative actions in our name to challenge




·
            an
      act which is ultra vires or
illegal;




·
            an
      act which constitutes a fraud against the minority shareholder and the
      wrongdoers are themselves in control of us;
and




·
            an
      irregularity in the passing of a resolution which requires a qualified (or
      special) majority.




Pre-emption
Rights




There are
no pre-emption rights applicable to the issue of new shares under either Cayman
Islands law or our amended and restated memorandum and articles of
association.




Modification
of Rights




Except
with respect to share capital (as described below) alterations to our amended
and restated memorandum and articles of association may only be made by special
resolution of no less than two-thirds of votes cast at a meeting of the
shareholders.




Subject
to the Companies Law, all or any of the special rights attached to shares of any
class (unless otherwise provided for by the terms of issue of the shares of that
class) may be varied, modified or abrogated with the sanction of a special
resolution passed at a separate general meeting of the holders of the shares of
that class.




The
provisions of our amended and restated articles of association relating to
general meetings shall apply similarly to every such separate general meeting,
but so that the quorum for the purposes of any such separate general meeting or
at its adjourned meeting shall be a person or persons together holding (or
represented by proxy) not less than one third in nominal value of the issued
shares of that class, every holder of shares of the class shall be entitled on a
poll to one vote for every such share held by such holder and that any holder of
shares of that class present in person or by proxy may demand a
poll.




The
special rights conferred upon the holders of any class of shares shall not,
unless otherwise expressly provided in the rights attaching to or the terms of
issue of such shares, be deemed to be varied by the creation or issue of further
shares ranking pari passu therewith.




Alteration
of Capital




We may
from time to time by ordinary resolution:




·
            increase
      our capital by such sum, to be divided into shares of such amounts, as the
      resolution shall prescribe;




·
            consolidate
      and divide all or any of our share capital into shares of larger amount
      than our existing shares;




·
            cancel
      any shares which at the date of the passing of the resolution have not
      been taken or agreed to be taken by any person, and diminish the amount of
      our share capital by the amount of the shares so cancelled subject to the
      provisions of the Companies Law;




·
            sub-divide
      our shares or any of them into shares of smaller amount than is fixed by
      our amended and restated memorandum and articles of association, subject
      nevertheless to the Companies Law, and so that the resolution whereby any
      share is subdivided may determine that, as between the holders of the
      share resulting from such subdivision, one or more of the shares may have
      any such preference or other special rights, over, or may have such
      deferred rights or be subject to any such restrictions as compared with,
      the others as we have power to attach to unissued or new shares;
      and





62




·
            divide
      shares into several classes and without prejudice to any special rights
      previously conferred on the holders of existing shares, attach to the
      shares respectively as preferential, deferred, qualified or special
      rights, privileges, conditions or such restrictions which, in the absence
      of any such determination in a general meeting, may be determined by our
      directors.




We may,
by special resolution, subject to any confirmation or consent required by the
Companies Law, reduce our share capital or any capital redemption reserve in any
manner authorized by law.




Transfer
of Shares




Subject
to any applicable restrictions set forth in our amended and restated memorandum
and articles of association, any of our shareholders may transfer all or any of
his or her shares by an instrument of transfer in the usual or common form or in
any form prescribed by the NASDAQ Global Market or in any other form which our
directors may approve. You should note that, under Cayman Islands law, a person
whose name is entered on the register of members will be deemed to be a member
or shareholder of our company. We have designated Continental Stock Transfer and
Trust Company as our share registrar. Under Cayman Islands law, a share
certificate constitutes admissible evidence as proof of title of its holder to
the shares specified on such certificate.




Our
directors may decline to register any transfer of any share which is not paid up
or on which we have a lien. Our directors may also decline to register any
transfer of any share unless:




·
            the
      instrument of transfer is lodged with us accompanied by the certificate
      for the shares to which it relates and such other evidence as our
      directors may reasonably require to show the right of the transferor to
      make the transfer;




·
            the
      instrument of transfer is in respect of only one class of
      shares;




·
            the
      instrument of transfer is properly stamped (in circumstances where
      stamping is required);




·
            in
      the case of a transfer to joint holders, the number of joint holders to
      whom the share is to be transferred does not exceed four;
    and




·
            a
      fee of such maximum sum as the NASDAQ Global Market may at any time
      determine to be payable or such lesser sum as our directors may from time
      to time require is paid to us in respect
  thereof.




If our
directors refuse to register a transfer, they shall, within two months after the
date on which the instrument of transfer was lodged, send to each of the
transferor and the transferee notice of such refusal.




The
registration of transfers may, on notice being given by advertisement in such
one or more newspapers or by any other means in accordance with any requirements
of the NASDAQ Global Market, be suspended and the register closed at such times
and for such periods as our directors may from time to time determine; provided,
however, that the registration of transfers shall not be suspended nor the
register closed for more than 30 days in any year as our directors may
determine.




Share
Repurchase




We are
empowered by the Companies Law and our amended and restated memorandum and
articles of association to purchase our own shares, subject to certain
restrictions. Our directors may only exercise this power on our behalf, subject
to the Companies Law, our amended and restated memorandum and articles of
association and to any applicable requirements imposed from time to time by the
U.S. Securities and Exchange Commission, the NASDAQ Global Market, or by any
recognized stock exchange on which our securities are listed.





63




Dividends




Subject
to the Companies Law, we may declare dividends in any currency to be paid to our
shareholders. Dividends may be declared and paid out of our profits, realized or
unrealized, or from any reserve set aside from profits which our directors
determine is no longer needed. Our board of directors may also declare and pay
dividends out of the share premium account or any other fund or account which
can be authorized for this purpose in accordance with the Companies
Law.




Except in
so far as the rights attaching to, or the terms of issue of, any share otherwise
provides (1) all dividends shall be declared and paid according to the amounts
paid up on the shares in respect of which the dividend is paid, but no amount
paid up on a share in advance of calls shall be treated for this purpose as paid
up on that share and (2) all dividends shall be apportioned and paid pro rata
according to the amounts paid upon the shares during any portion or portions of
the period in respect of which the dividend is paid.




Our
directors may also pay any dividend that is payable on any shares semi-annually
or on any other dates, whenever our financial position, in the opinion of our
directors, justifies such payment.




Our
directors may deduct from any dividend or other moneys payable to any
shareholder all sums of money (if any) presently payable by such shareholder to
us on account of calls or otherwise.




No
dividend or other money payable by us on or in respect of any share shall bear
interest against us.




In
respect of any dividend proposed to be paid or declared on our share capital,
our directors may resolve and direct that (1) such dividend be satisfied wholly
or in part in the form of an allotment of shares credited as fully paid up,
provided that our shareholders entitled thereto will be entitled to elect to
receive such dividend (or part thereof if our directors so determine) in cash in
lieu of such allotment or (2) the shareholders entitled to such dividend will be
entitled to elect to receive an allotment of shares credited as fully paid up in
lieu of the whole or such part of the dividend as our directors may think fit.
We may also, on the recommendation of our directors, resolve in respect of any
particular dividend that, notwithstanding the foregoing, it may be satisfied
wholly in the form of an allotment of shares credited as fully paid up without
offering any right of shareholders to elect to receive such dividend in cash in
lieu of such allotment.




Any
dividend, interest or other sum payable in cash to any shareholder may be paid
by check or warrant sent by mail addressed to the shareholder at his registered
address, or addressed to such person and at such addresses as the shareholder
may direct. Every check or warrant shall, unless the shareholder or joint
shareholders otherwise direct, be made payable to the order of the shareholder
or, in the case of joint shareholders, to the order of the shareholder whose
name stands first on the register in respect of such shares, and shall be sent
at their risk and payment of the check or warrant by the bank on which it is
drawn shall constitute a good discharge to us.




All
dividends unclaimed by shareholders for one year after having been declared may
be invested or otherwise made use of by our board of directors for the benefit
of our company until claimed. Any dividend unclaimed by shareholders after a
period of six years from the date of declaration of such dividend may be
forfeited and, if so forfeited, shall revert to us.




Whenever
our directors have resolved that a dividend be paid or declared, our directors
may further resolve that such dividend be satisfied wholly or in part by the
distribution of specific assets of any kind, and in particular of paid up
shares, debentures or warrants to subscribe for our securities or securities of
any other company. Where any difficulty arises with regard to such distribution,
our directors may settle it as they think expedient. In particular, our
directors may issue fractional certificates, ignore fractions altogether or
round the same up or down, fix the value for distribution purposes of any such
specific assets, determine that cash payments shall be made to any of our
shareholders upon the footing of the value so fixed in order to adjust the
rights of the parties, vest any such specific assets in trustees as may seem
expedient to our directors, and appoint any person to sign any requisite
instruments of transfer and other documents on behalf of a person entitled to
the dividend, which appointment shall be effective and binding on our
shareholders.





64




Untraceable
Shareholders




We are
entitled to sell any shares of a shareholder who is untraceable, provided
that:




·
            all
      checks or warrants in respect of dividends of such shares, not being less
      than three in number, for any sums payable in cash to the holder of such
      shares have remained c for a period of twelve years prior to the
      publication of the advertisement and during the three months referred to
      in the third bullet point below;




·
            we
      have not during that time received any indication of the whereabouts or
      existence of the shareholder or person entitled to such shares by death,
      bankruptcy or operation of law; and




·
            we
      have caused an advertisement to be published in newspapers in the manner
      stipulated by our amended and restated memorandum and articles of
      association, giving notice of our intention to sell these shares, and a
      period of three months has elapsed since such advertisement and the NASDAQ
      Global Market has been notified of such
  intention.




The net
proceeds of any such sale shall belong to us, and when we receive these net
proceeds we shall become indebted to the former shareholder for an amount equal
to such net proceeds.




Issuance
of Additional Ordinary Shares or Preference Shares




Subject
to the Companies Law and the rules of the NASDAQ Global Market and without
prejudice to any special rights or restrictions for the time being attached to
any shares or any class of shares, our board of directors may issue additional
ordinary shares from time to time as our board of directors determines, to the
extent of available authorized but unissued shares and establish from time to
time one or more series of preference shares and to determine, with respect to
any series of preference shares, the terms and rights of that series,
including:




·
            the
      designation of the series;




·
            the
      number of shares of the series;




·
            the
      dividend rights, conversion rights, voting rights;
  and




·
            the
      rights and terms of redemption and liquidation
  preferences.




Subject
to the foregoing, our board of directors may issue series of preference shares
without action by our shareholders to the extent authorized but unissued.
Accordingly, the issuance of preference shares may adversely affect the rights
of the holders of the ordinary shares. In addition, the issuance of preference
shares may be used as an anti-takeover device without further action on the part
of the shareholders. Issuance of preference shares may dilute the voting power
of holders of ordinary shares.




Subject
to applicable regulatory requirements, our board of directors may issue
additional ordinary shares without action by our shareholders to the extent of
available authorized but unissued shares. The issuance of additional ordinary
shares may be used as an anti-takeover device without further action on the part
of the shareholders. Such issuance may dilute the voting power of existing
holders of ordinary shares.




Our
ordinary shares are listed  on the NASDAQ Global Market under the
symbol “FFHL”..




Committees
of Board of Directors




Pursuant
to our amended and restated articles of association, our board of directors, we
have established an audit committee, a compensation committee and a corporate
governance and nominating committee.





65




Differences
in Corporate Law




The
Companies Law is modeled after similar laws in the United Kingdom but does not
follow recent changes in United Kingdom laws. In addition, the Companies Law
differs from laws applicable to United States corporations and their
shareholders. Set forth below is a summary of the significant differences
between the provisions of the Companies Law applicable to us and the laws
applicable to companies incorporated in the United States, such as in the State
of Delaware.




Duties and
Directors




Under
Cayman Islands law, at common law, members of a board of directors owe a
fiduciary duty to the company to act in good faith in their dealings with or on
behalf of the company and exercise their powers and fulfill the duties of their
office honestly. This duty has four essential elements:




·
            a
      duty to act in good faith in the best interests of the
      company;




·
            a
      duty not to personally profit from opportunities that arise from the
      office of director;




·
            a
      duty to avoid conflicts of interest;
and




·
            a
      duty to exercise powers for the purpose for which such powers were
      intended.




In
general, the Companies Law imposes various duties on officers of a company with
respect to certain matters of management and administration of the company. The
Companies Law contains provisions, which impose default fines on persons who
fail to satisfy those requirements. However, in many circumstances, an
individual is only liable if he knowingly is guilty of the default or knowingly
and willfully authorizes or permits the default.




In
comparison, under Delaware law, the business and affairs of a corporation are
managed by or under the direction of its board of directors. In exercising their
powers, directors are charged with a fiduciary duty of care to protect the
interests of the corporation and a fiduciary duty of loyalty to act in the best
interests of its shareholders. The duty of care requires that directors act in
an informed and deliberative manner and inform themselves, prior to making a
business decision, of all material information reasonably available to them. The
duty of care also requires that directors exercise care in overseeing and
investigating the conduct of the corporation’s employees. The duty of loyalty
may be summarized as the duty to act in good faith, not out of self-interest,
and in a manner which the director reasonably believes to be in the best
interests of the shareholders.




Under
Delaware law, a party challenging the propriety of a decision of a board of
directors bears the burden of rebutting the applicability of the presumptions
afforded to directors by the “business judgment rule.” If the presumption is not
rebutted, the business judgment rule protects the directors and their decisions,
and their business judgments will not be second guessed. Where, however, the
presumption is rebutted, the directors bear the burden of demonstrating the
entire fairness of the relevant transaction. Notwithstanding the foregoing,
Delaware courts subject directors’ conduct to enhanced scrutiny in respect of
defensive actions taken in response to a threat to corporate control and
approval of a transaction resulting in a sale of control of the
corporation.




Interested
Directors




There are
no provisions under the Companies Law that require a director who is interested
in a transaction entered into by a Cayman Islands company to disclose his
interest. However, under our amended and restated memorandum and articles of
association, our directors are required to do so, and in the event that they do
not do so it may render such director liable to such company for any profit
realized pursuant to such transaction.




In
comparison, under Delaware law, such a transaction would not be voidable if (a)
the material facts as to such interested director’s relationship or interests
are disclosed or are known to the board of directors and the board in good faith
authorizes the transaction by the affirmative vote of a majority of the
disinterested directors, even though the disinterested directors are less than a
quorum, (b) such material facts are disclosed or are known to the shareholders
entitled to vote on such transaction and the transaction is specifically
approved in good faith by vote of the shareholders, or (c) the transaction is
fair as to the corporation as of the time it is authorized, approved or
ratified. Under Delaware law, a director could be held liable for any
transaction in which such director derived an improper personal
benefit.





66




Voting
Rights and Quorum Requirements




Under
Cayman Islands law, the voting rights of shareholders are regulated by the
company’s articles of association and, in certain circumstances, the Companies
Law. The articles of association will govern matters such as quorum for the
transaction of business, rights of shares, and majority votes required to
approve any action or resolution at a meeting of the shareholders or board of
directors. Under Cayman Islands law, certain matters must be approved by a
special resolution which is defined as two-thirds of the votes cast by
shareholders present at a meeting and entitled to vote or such higher majority
as is specified in the articles of association; otherwise, unless the articles
of association otherwise provide, the majority is usually a simple majority of
votes cast.




In
comparison, under Delaware law, unless otherwise provided in the corporation’s
certificate of incorporation, each shareholder is entitled to one vote for each
share of stock held by the shareholder. Unless otherwise provided in the
corporation’s certificate of incorporation or bylaws, a majority of the shares
entitled to vote, present in person or represented by proxy, constitutes a
quorum at a meeting of shareholders. In matters other than the election of
directors, with the exception of special voting requirements related to
extraordinary transactions, the affirmative vote of a majority of shares present
in person or represented by proxy at the meeting and entitled to vote is
required for shareholder action, and the affirmative vote of a plurality of
shares is required for the election of directors.




Mergers
and Similar Arrangements




Cayman
Islands law does not provide for mergers as that expression is understood under
United States corporate law. However, there are statutory provisions that
facilitate the reconstruction and amalgamation of companies, provided that the
arrangement in question is approved by a majority in number of each class of
shareholders and creditors with whom the arrangement is to be made, and who must
in addition represent three fourths in value of each such class of shareholders
or creditors, as the case may be, that are present and voting either in person
or by proxy at a meeting, or meetings convened for that purpose.




The
convening of the meetings and subsequently the arrangement must be sanctioned by
the Grand Court of the Cayman Islands. While a dissenting shareholder would have
the right to express to the court the view that the transaction should not be
approved, the court can be expected to approve the arrangement if it satisfies
itself that:




·
            the
      company is not proposing to act illegally or ultra vires and the statutory
      provisions as to majority vote have been complied
  with;




·
            the
      shareholders have been fairly represented at the meeting in
      question;




·
            the
      arrangement is such as a businessman would reasonably approve;
      and




·
            the
      arrangement is not one that would more properly be sanctioned under some
      other provision of the Companies Law or that would amount to a “fraud on
      the minority.”




When a
takeover offer is made and accepted by holders of 90% of the shares within four
months, the offerer may, within a two-month period, require the holders of the
remaining shares to transfer such shares on the terms of the offer. An objection
may be made to the Grand Court of the Cayman Islands but is unlikely to succeed
unless there is evidence of fraud, bad faith or collusion.




Cayman
Islands laws do not require that shareholders approve sales of all or
substantially all of a company’s assets as is commonly adopted by U.S.
corporations.




If the
arrangement and reconstruction are thus approved, any dissenting shareholders
would have no rights comparable to appraisal rights, which would otherwise
ordinarily be available to dissenting shareholders of United States
corporations, providing rights to receive payment in cash for the judicially
determined value of the shares.





67




Shareholders’
Suits




Derivative
actions have been brought under Cayman Islands law but were unsuccessful for
technical reasons. In principle, we will normally be the proper plaintiff and a
derivative action may not be brought by a minority shareholder. However, based
on English authorities, who would in all likelihood be of persuasive authority
in the Cayman Islands, exceptions to the foregoing principle apply in
circumstances in which:




·
            a
      company is acting or proposing to act illegally or beyond the scope of its
      authority;




·
            the
      act complained of, although not beyond the scope of its authority, could
      be effected duly if authorized by more than a simple majority vote which
      has not been obtained; and




·
            those
      who control the company are perpetrating a “fraud on the
      minority.”




Class
actions and derivative actions generally are available to shareholders under
Delaware law for, among other things, breach of fiduciary duty, corporate waste
and actions not taken in accordance with applicable law. In such actions, the
court generally has discretion to permit the winning party to recover attorneys’
fees incurred in connection with such action.




Corporate
Governance




Cayman
Islands laws do not restrict transactions with directors, requiring only that
directors exercise a duty of care and owe a fiduciary duty to the companies for
which they serve. Under our amended and restated memorandum and articles of
association, subject to any separate requirement for audit committee approval
under the applicable rules of The Nasdaq Stock Market, Inc. or unless
disqualified by the chairman of the relevant board meeting, so long as a
director discloses the nature of his interest in any contract or arrangement
which he is interested in, such a director may vote in respect of any contract
or proposed contract or arrangement in which such director is interested and may
be counted in the quorum at such meeting.




Cayman
Islands law does not limit the extent to which a company’s articles of
association may provide for indemnification of officers and directors, except to
the extent any such provision may be held by the Cayman Islands courts to be
contrary to public policy, such as to provide indemnification against civil
fraud or the consequences of committing a crime. Our amended and restated
memorandum and articles of association provide for the indemnification of our
directors, auditors and officers against all losses or liabilities incurred or
sustained by him or her as a director, auditor or officer of our company in
defending any proceedings, whether civil or criminal, in which judgment is given
in his or her favor, or in which he or she is acquitted provided that this
indemnity may not extend to any matter in respect of any fraud or dishonesty
which may attach to any of these persons.




Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
therefore is unenforceable.




We are
managed by our board of directors. Our amended and restated memorandum and
articles of association provide that the number of our directors shall not be
less than two and there shall be no maximum number of our directors unless our
shareholders in general meeting otherwise determine a maximum number. Initially
we have set our board of directors to have 4 directors. Any director on our
board may be removed by way of an ordinary resolution of shareholders. At each
annual general meeting, one-third of our directors for the time being (or, if
their number is not a multiple of three, the number nearest to but not less than
one-third) shall retire from office by rotation provided that every director
shall be subject to retirement at least once every three years. Any vacancies on
our board of directors or additions to the existing board of directors can be
filled by an ordinary resolution of our shareholders or the affirmative vote of
a majority of the remaining directors, although this may be less than a quorum
where the number of remaining directors falls below the minimum number fixed by
our board of directors. Our directors are not required to hold any of our shares
to be qualified to serve on our board of directors.





68




Meetings
of our board of directors may be convened at any time deemed necessary by any
one of our directors. Advance notice of a meeting is not required if each
director entitled to attend consents to the holding of such
meeting.




A meeting
of our board of directors shall be competent to make lawful and binding
decisions if a majority of the members of our board of directors are present or
represented. At any meeting of our directors, each director is entitled to one
vote.




Questions
arising at a meeting of our board of directors are required to be decided by
simple majority votes of the members of our board of directors present or
represented at the meeting. In the case of a tie vote, the chairman of the
meeting shall have a second or deciding vote. Our board of directors may also
pass resolutions without a meeting by unanimous written consent.




Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
therefore is unenforceable.




Inspection
of Corporate Records




Shareholders
of a Cayman Islands company have no general right under Cayman Islands law to
inspect or obtain copies of a list of shareholders or other corporate records of
the company. However, these rights may be provided in the articles of
association.




In
comparison, under Delaware law, shareholders of a Delaware corporation have the
right during normal business hours to inspect for any proper purpose, and to
obtain copies of list(s) of shareholders and other books and records of the
corporation and its subsidiaries, if any, to the extent the books and records of
such subsidiaries are available to the corporation.




Shareholder
Proposals




The
Companies Law does not provide shareholders any right to bring business before a
meeting or requisition a general meeting. However, these rights may be provided
in the articles of association.




Unless
provided in the corporation’s certificate of incorporation or bylaws, Delaware
law does not include a provision restricting the manner in which shareholders
may bring business before a meeting.




Approval
of Corporate Matters by Written Consent




The
Companies Law allows a special resolution to be passed in writing if signed by
all the shareholders and authorized by the articles of association.




In
comparison, Delaware law permits shareholders to take action by written consent
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting of shareholders.




Calling
of Special Shareholders Meetings




The
Companies Law does not have provisions governing the proceedings of shareholders
meetings that are usually provided in the articles of association.




In
comparison, Delaware law permits the board of directors or any person who is
authorized under a corporation’s certificate of incorporation or bylaws to call
a special meeting of shareholders.





69


Staggered
Board of Directors




The
Companies Law does not contain statutory provisions that require staggered board
arrangements for a Cayman Islands company. Such provisions, however, may validly
be provided for in the articles of association.




In
comparison, Delaware law permits corporations to have a staggered board of
directors.




Anti-takeover
Provisions




Neither
Cayman Islands nor Delaware law prevents companies from adopting a wide range of
defensive measures, such as staggered boards, blank check preferred, removal of
directors only for cause and provisions that restrict the rights of shareholders
to call meetings, act by written consent and submit shareholder
proposals.




C.
Material contracts.




We
entered into an agreement on January 20, 2007, and subsequently amended on
February 2, 2007, with Lindauer Dornier GmbH, whereby we placed an order to have
the latter manufacture and supply the equipment for our PET film production line
for a total amount of EUR 12.3million, including spares. As of the date of this
Annual Report, we have made a payment of EUR 3.075 million to Lindauer
Doenier GmbH. The equipment manufactured by Lindauer Doenier GmbH will be
delivered to us upon payment of the remaining amount of the purchase
price.







We also
entered into two Loan Contracts with the Bank of Communication for the amount of
(i) RMB 82,580,000, effective July 16, 2008, with a maturity date of June 10,
2009, and (ii) RMB 60,000,000, effective July 18, 2008, with a maturity date of
June 23, 2009.  The proceeds of these two loans are being used for
industrial working capital.  In addition, we entered into three Loan
Contracts with Weifang City Commercial Bank for the amount of (i) RMB 5,000,000,
effective December 2, 2008, with a maturity date of December 2, 2011, (ii) RMB
10,000,000, effective January 13, 2009, with a maturity date of January 12,
2010, and (iii) RMB 10,000,000, effective January 16, 2009, with a maturity date
of January 12, 2012. The proceeds of these three loans have been used for
construction the Trial Production line and research and development of special
BOPET films.




D. Exchange
controls.




China’s
government imposes control over the convertibility of Rmb into foreign
currencies. Under the current unified floating exchange rate system, the
People’s Bank of China publishes a daily exchange rate for Rmb, or the PBOC
Exchange Rate, based on the previous day’s dealings in the inter-bank foreign
exchange market. Financial institutions authorized to deal in foreign currency
may enter into foreign exchange transactions at exchange rates within an
authorized range above or below the PBOC Exchange Rate according to market
conditions.




Pursuant
to the Foreign Exchange Control Regulations issued by the State Council on
January 29, 1996 and effective as of April 1, 1996 (and amended on January 14,
1997) and the Administration of Settlement, Sale and Payment of Foreign Exchange
Regulations which came into effect on July 1, 1996 regarding foreign exchange
control, or the Regulations, conversion of Renminbi into foreign exchange by
foreign investment enterprises for current account items, including the
distribution of dividends and profits to foreign investors of joint ventures, is
permissible upon the proper production of qualified commercial vouchers or legal
documents as required by the Regulations. Foreign investment enterprises are
permitted to remit foreign exchange from their foreign exchange bank account in
China upon the proper production of, inter alia, the board resolutions declaring
the distribution of the dividend and payment of profits. Conversion of Rmb into
foreign currencies and remittance of foreign currencies for capital account
items, including direct investment, loans, security investment, is still subject
to the approval of the State Administration of Foreign Exchange, or SAFE, in
each such transaction. On January 14, 1997, the State Council amended the
Foreign Exchange Control Regulations and added, among other things, an important
provision, as Article 5 provides that the State shall not impose restrictions on
recurring international payments and transfers.


70




Under the
Regulations, foreign investment enterprises are required to open and maintain
separate foreign exchange accounts for capital account items (but not for other
items). In addition, foreign investment enterprises may only buy, sell and/or
remit foreign currencies at those banks authorized to conduct foreign exchange
business upon the production of valid commercial documents and, in the case of
capital account item transactions, document approval from SAFE.




Currently,
foreign investment enterprises are required to apply to SAFE for “foreign
exchange registration certificates for foreign investment enterprises.” With
such foreign exchange registration certificates (which are granted to foreign
investment enterprises, upon fulfilling specified conditions and which are
subject to review and renewal by SAFE on an annual basis) or with the foreign
exchange sales notices from the SAFE (which are obtained on a
transaction-by-transaction basis), foreign-invested enterprises may enter into
foreign exchange transactions at banks authorized to conduct foreign exchange
business to obtain foreign exchange for their needs.




E. Taxation.




United
States Federal Income Taxation




General




The
following is a summary of the material U.S. federal income tax consequences of
the acquisition, ownership, and disposition of our ordinary shares. The
discussion below of the U.S. federal income tax consequences to “U.S. Holders”
will apply if you are a beneficial owner of our ordinary shares and you are for
U.S. federal income tax purposes:




·
            an
      individual citizen or resident of the United
  States;




·
            a
      corporation (or other entity treated as a corporation) that
      is created or organized in or under the laws of the United States,
      any state thereof or the District of
Columbia;




·
            an
      estate whose income is includible in gross income for U.S. federal income
      tax purposes regardless of its source;
or




·
            a
      trust if (i) a U.S. court can exercise primary supervision over the
      trust’s administration and one or more U.S. persons are authorized to
      control all substantial decisions of the trust, or (ii) it has a valid
      election in effect under applicable U.S. Treasury regulations to be
      treated as a U.S. person.




If you
are not described as a U.S. Holder and are not an entity treated as a
partnership or other pass-through entity for U.S. federal income tax purposes,
you will be considered a “Non-U.S. Holder.” The U.S. federal income tax
consequences applicable to Non-U.S. Holders of owning and disposing of our
ordinary shares described below under the heading “Non-U.S.
Holders.”




This
summary is based on the Internal Revenue Code of 1986, as amended, or the Code,
its legislative history, Treasury regulations promulgated thereunder, published
rulings and court decisions, all as currently in effect. These authorities are
subject to change, possibly on a retroactive basis.




This
discussion does not address all aspects of U.S. federal income taxation that may
be relevant to any particular holder based on such holder’s individual
circumstances. In particular, this discussion considers only holders that will
own and hold our ordinary shares as capital assets within the meaning of Section
1221 of the Code and does not address the potential application of the
alternative minimum tax or the U.S. federal income tax consequences to holders
that are subject to special rules, including:




·
            financial
      institutions or financial services
entities;


71




·
            broker-dealers;




·
            taxpayers
      who have elected mark-to-market
accounting;




·
            tax-exempt
      entities;




·
            government
      or agencies or instrumentalities
thereof;




·
            regulated
      investment companies;




·
            real
      estate investment trusts;




·
            insurance
      companies;




·
            persons
      that actually or constructively own 10% or more of our voting
      shares;




·
            certain
      expatriates or former long-term residents of the United
      States;




·
            persons
      that hold our ordinary shares as part of a straddle, constructive sale,
      hedging, conversion or other integrated transaction;
  or




·
            persons
      whose functional currency is not the U.S.
dollar




This
discussion does not address any aspect of U.S. federal non-income tax laws, such
as gift or estate tax laws, or state, local or non-U.S. tax laws. Additionally,
the discussion does not consider the tax treatment of partnerships or other
pass-through entities or persons who hold our ordinary shares through such
entities. If a partnership (or other entity classified as a partnership for U.S.
federal income tax purposes) is the beneficial owner of our ordinary shares, the
U.S. federal income tax treatment of a partner in the partnership will generally
depend on the status of the partner and the activities of the
partnership.




We have
not sought and will not seek a ruling from the Internal Revenue Service (“IRS”)
or an opinion of counsel as to any U.S. federal income tax consequence described
herein. The IRS may disagree with the description herein, and its determination
may be upheld by a court. Moreover, there can be no assurance that future
legislation, regulations, administrative rulings or court decisions will not
adversely affect the accuracy of the statements in this summary.




BECAUSE
OF THE COMPLEXITY OF THE TAX LAWS AND BECAUSE THE TAX CONSEQUENCES TO ANY
PARTICULAR HOLDER MAY BE AFFECTED BY MATTERS NOT DISCUSSED HEREIN, EACH
PROSPECTIVE HOLDER IS URGED TO CONSULT WITH ITS TAX ADVISOR WITH RESPECT TO THE
SPECIFIC TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR
ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND
NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS.




U.S.
Holders




Taxation
of Distributions Paid on Ordinary Shares




Subject
to the passive foreign investment company (“PFIC”) rules discussed below, a U.S.
Holder will be required to include in gross income as ordinary income the amount
of any dividend paid on our ordinary shares. A distribution of our ordinary
shares will be treated as a dividend for U.S. federal income tax purposes to the
extent the distribution is paid out of our current or accumulated earnings and
profits (as determined for U.S. federal income tax purposes).  Such
dividend will not be eligible for the dividends-received deduction generally
allowed to U.S. corporations in respect of dividends received from other U.S.
corporations. Distributions in excess of such earnings and profits will be
applied against and reduce the U.S. Holder’s basis in its ordinary shares and,
to the extent in excess of such basis, will be treated as gain from the sale or
exchange of such ordinary shares. We do not expect, however, to maintain
calculations of earnings and profits in accordance with U.S. federal income tax
principles. As a result, the entire amount of any distribution paid by us to a
U.S. Holder generally will be treated as a dividend.


72




With
respect to noncorporate U.S. Holders for taxable years beginning before January
1, 2011, dividends may be taxed at the lower applicable long-term capital gains
rate (see “Taxation Upon Disposition of Ordinary Shares” below) provided that
(1) the ordinary shares are readily tradable on an established securities market
in the United States, (2) we are not a PFIC, as discussed below, for either the
taxable year in which the dividend was paid or the preceding taxable year, and
(3) certain holding period requirements are met. Under recently published IRS
authority, ordinary shares are considered for purposes of clause (1) above to be
readily tradable on an established securities market in the United States if
they are listed on certain exchanges, which currently include the NASDAQ Global
Market. While we expect that our shares will be listed on the NASDAQ Global
Market, U.S. Holders should consult their own tax advisors regarding the
availability of the lower rate for any dividends paid with respect to our
ordinary shares.




If PRC
taxes apply to dividends paid to a U.S. Holder on our ordinary shares, such
taxes may be treated as foreign taxes eligible for credit against such holder’s
U.S. federal income tax liability (subject to certain limitations), and a U.S.
Holder may be entitled to certain benefits under the income tax treaty between
the United States and the PRC. U.S. Holders should consult their own tax
advisors regarding the creditability of any such PRC tax and their eligibility
for the benefits of the income tax treaty between the United States and the
PRC.


Taxation
Upon Disposition of Ordinary Shares




Upon a
sale or other taxable disposition of our ordinary shares, and subject to the
PFIC rules discussed below, a U.S. Holder should recognize capital gain or loss
in an amount equal to the difference between the amount realized and the U.S.
Holder’s adjusted tax basis in the ordinary shares.




Capital
gains recognized by U.S. Holders generally are subject to U.S. federal income
tax at the same rate as ordinary income, except that long-term capital gains
recognized by non-corporate U.S. Holders are generally subject to U.S. federal
income tax at a maximum rate of 15% for taxable years beginning before January
1, 2011 (and 20% thereafter). Capital gain or loss will constitute long-term
capital gain or loss if the U.S. Holder’s holding period for the ordinary shares
exceeds one year. The deductibility of capital losses is subject to
limitations.




If PRC
taxes apply to any gain from the disposition of our ordinary shares by a U.S.
Holder, such taxes may be treated as foreign taxes eligible for credit against
such holder’s U.S. federal income tax liability (subject to certain
limitations), and a U.S. Holder may be entitled to certain benefits under the
income tax treaty between the United States and the PRC. U.S. Holders should
consult their own tax advisors regarding the creditability of any such PRC tax
and their eligibility for the benefits of the income tax treaty between the
United States and the PRC.


Passive
Foreign Investment Company Rules




A foreign
corporation will be a passive foreign investment company, or PFIC, if at least
75% of its gross income in a taxable year, including its pro rata share of the
gross income of any company in which it is considered to own at least 25% of the
shares by value, is passive income. Alternatively, a foreign corporation will be
a PFIC if at least 50% of its assets in a taxable year, ordinarily determined
based on fair market value and averaged quarterly over the year, including its
pro rata share of the assets of any company in which it is considered to own at
least 25% of the shares by value, are held for the production of, or produce,
passive income. Passive income generally includes dividends, interest, rents,
royalties (other than certain rents or royalties derived from the active conduct
of a trade or business), and gains from the disposition of passive
assets.




We do not
expect to be treated as a PFIC for U.S. federal income tax purposes, but this
conclusion is a factual determination that is made annually and thus may be
subject to change. Our actual PFIC status for any taxable year will not be
determinable until after the end of the taxable year, and accordingly there can
be no assurance that we will not be considered a PFIC for our current or any
future taxable year.


73




If we are
a PFIC for any taxable year during which a U.S. Holder held our ordinary shares,
the U.S. Holder that did not make either a timely qualified electing fund
(“QEF”) election for the first taxable year of its holding period or a
mark-to-market election, as described below, such holder will be subject to
special rules with respect to:




·
            any
      gain recognized by the U.S. Holder you realize on the sale or other
      disposition (including a pledge) of its ordinary shares,
    and




·
            any
      “excess distribution” made to the U.S. Holder (generally, any
      distributions to such U.S. Holder during a taxable year that are greater
      than 125% of the average annual distributions received by such U.S. Holder
      in respect of the ordinary shares during the three preceding taxable years
      or, if shorter, such holder’s holding period for the ordinary
      shares).




Under
these rules,




·
            the
      U.S. Holder’s gain or excess distribution will be allocated ratably over
      its holding period for the ordinary
shares,




·
            the
      amount allocated to the taxable year in which the U.S. Holder recognized
      the gain or received the excess distribution or to any taxable year prior
      to the first taxable year in which we are a PFIC will be taxed as ordinary
      income,




·
            the
      amount allocated to other taxable years will be taxed at the highest tax
      rate in effect for that year and applicable to the U.S. Holder (and cannot
      be offset by any net operating losses for such years),
  and




·
            the
      interest charge generally applicable to underpayments of tax will be
      imposed in respect of the tax attributable to each such other taxable
      year.




In
addition, if we are a PFIC, a U.S. Holder who acquires our ordinary shares from
a deceased U.S. Holder who dies before January 1, 2010 and who had not made a
timely QEF election for the ordinary shares generally will be denied the step-up
of U.S. federal income tax basis in such shares to their fair market value at
the date of the deceased holder’s death. Instead, such U.S. Holder would have a
tax basis in such shares equal to the deceased holder’s tax basis, if
lower.




In
general, a U.S. Holder may avoid the PFIC tax consequences described above in
respect to our ordinary shares by making a timely QEF election to include in
income its pro rata share of our net capital gains (as long-term capital gain)
and other earnings and profits (as ordinary income), on a current basis, in each
case whether or not distributed. However, a U.S. Holder may make a QEF election
only if we agree to provide certain tax information to such holder annually. At
this time, we do not intend to provide U.S. Holders with such information as may
be required to make a QEF election effective.




Alternatively,
if a U.S. Holder owns ordinary shares in a PFIC that are treated as marketable
stock, the U.S. Holder may make a mark-to-market election. If a U.S. Holder
makes a mark-to-market election for the first tax year in which the U.S. Holder
holds (or is deemed to hold) ordinary shares and for which we are determined to
be PFIC, such holder generally will not be subject to the PFIC rules described
above. Instead, in general, the U.S. Holder will include as ordinary income each
year the excess, if any, of the fair market value of its ordinary shares at the
end of its taxable year over the adjusted basis in its ordinary shares. The U.S.
Holder also will be allowed to take an ordinary loss in respect of the excess,
if any, of the adjusted basis of its ordinary shares over the fair market value
of such shares at the end of its taxable year (but only to the extent of the net
amount of previously included income as a result of the mark-to-market
election). The U.S. Holder’s basis in its ordinary shares will be adjusted to
reflect any such income or loss amounts, and any further gain recognized on a
sale or other taxable disposition of the ordinary shares will be treated as
ordinary income.




The
mark-to-market election is available only for stock that is regularly traded on
a national securities exchange that is registered with the Securities and
Exchange Commission (including NASDAQ), or on a foreign exchange or market that
the IRS determines has rules sufficient to ensure that the market price
represents a legitimate and sound fair market value. While we expect that our
ordinary shares will be listed on NASDAQ, U.S. Holders nonetheless should
consult their own tax advisors regarding the availability and tax consequences
of a mark-to-market election in respect to our shares under their particular
circumstances.


74




If we are
a PFIC and, at any time, have a non-U.S. subsidiary that is classified as a
PFIC, U.S. Holders generally would be deemed to own a portion of the shares of
such lower-tier PFIC, and generally could incur liability for the deferred tax
and interest charge described above if we receive a distribution from, or
dispose of all or part of our interest in, the lower-tier PFIC. U.S. Holders are
urged to consult their own tax advisors regarding the tax issues raised by
lower-tier PFICs.




If a U.S.
Holder owns (or is deemed to own) shares during any year in a PFIC, such holder
may have to file an IRS Form 8621 (whether or not a market-to-market election is
made).




The rules
dealing with PFICs and with the QEF and mark-to-market elections are very
complex and are affected by various factors in addition to those described
above. Accordingly, U.S. Holders should consult their own tax advisors
concerning the application of the PFIC rules to our ordinary shares under their
particular circumstances.




Non-U.S.
Holders




Dividends
paid to a Non-U.S. Holder in respect to its ordinary shares generally will not
be subject to U.S. federal income tax, unless the dividends are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business within the
United States (and, if required by an applicable income tax treaty are
attributable to a permanent establishment or fixed base that such holder
maintains in the United States).




In
addition, a Non-U.S. Holder generally will not be subject to U.S. federal income
tax on any gain attributable to a sale or other disposition of our ordinary
shares unless such gain is effectively connected with its conduct of a trade or
business in the United States (and, if required by an applicable income tax
treaty is attributable to a permanent establishment or fixed base that such
holder maintains in the United States) or the Non-U.S. Holder is an individual
who is present in the United States for 183 days or more in the taxable year of
sale or other disposition and certain other conditions are met (in which case
such gain may be subject to tax at a 30% rate or a lower applicable tax treaty
rate).




Dividends
and gains that are effectively connected with the Non-U.S. Holder’s conduct of a
trade or business in the United States (and, if required by an applicable income
tax treaty, attributable to a permanent establishment or fixed base in the
United States) generally will be subject to tax in the same manner as for a U.S.
Holder. Effectively connected dividends and gains received by a corporate
Non-U.S. Holder may also be subject to an additional branch profits tax at a 30%
rate or a lower applicable tax treaty rate.




Backup
Withholding and Information Reporting




In
general, information reporting for U.S. federal income tax purposes will apply
to distributions made on the shares within the United States to a non-corporate
U.S. Holder and to the proceeds from sales or other dispositions of our ordinary
shares by a non-corporate U.S. Holder to or through a U.S. office of a broker.
Payments made (and sales and other dispositions effected at an office) outside
the United States will be subject to information reporting in limited
circumstances.




In
addition, backup withholding of U.S. federal income tax, currently at a rate of
28%, generally will apply to dividends paid on our ordinary shares to a
non-corporate U.S. Holder and the proceeds from sales and other dispositions of
our ordinary shares by a non-corporate U.S. Holder, in such case
who:




·
            fails
      to provide an accurate taxpayer identification
  number,




·
            is
      notified by the IRS that backup withholding will be required,
      or




·
            in
      certain circumstances, fails to comply with applicable certification
      requirements.


75




A
Non-U.S. Holder generally may eliminate the requirement for information
reporting and backup withholding by providing certification of its foreign
status to the payor, under penalties of perjury, on a duly executed applicable
IRS Form W-8 or by otherwise establishing an exemption.




Back-up
withholding is not an additional tax. Rather, the amount of any back-up
withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S.
Holder’s U.S. federal income tax liability and may entitle such holder to a
refund, provided that certain required information is timely furnished to the
IRS.




Other Non-United States Taxation
Treatment




The
following discussion is a summary of certain anticipated Cayman Islands and PRC
tax consequences of an investment in our ordinary shares. The discussion does
not deal with all possible tax consequences relating to an investment in our
ordinary shares and does not purport to deal with the tax consequences
applicable to all categories of investors, some of which (such as dealers in
securities, insurance companies and tax-exempt entities) may be subject to
special rules. In particular, the discussion does not address the tax
consequences under state, local and other national tax laws. Accordingly, each
prospective investor should consult its own tax advisor regarding the particular
tax consequences to it of an investment in our ordinary shares. The following
discussion is based upon laws and relevant interpretations thereof in effect as
of the date of this Annual Report, all of which are subject to
change.




China
Taxation




There are
significant uncertainties under the new corporate income tax law of the PRC, or
the New Tax Law, which became effective on January 1, 2008, regarding our PRC
enterprise income tax liabilities, such as a tax on any dividends paid to us by
our PRC subsidiary.  The New Tax Law also contains uncertainties
regarding possible PRC withholding tax on dividends we pay to our overseas
shareholders and gains realized from the transfer of our shares by our overseas
shareholders.
  We are a
holding company incorporated in the Cayman Islands, which indirectly holds,
through Fuwei (BVI), our equity interest in Shandong Fuwei, our subsidiary and
actual operating body in the PRC.  Our business operations are
principally conducted through Shandong Fuwei.
  Under the
New Tax Law, enterprises established under the laws of jurisdictions outside
China with their “de facto management bodies” located within China may be
considered to be PRC tax resident enterprises for tax purposes and subjected to
the tax obligations of a PRC tax resident.  If we or Fuwei (BVI) is
considered as a PRC tax resident enterprise under the New Tax Law, then our
global income will be subject to PRC enterprise income tax at the rate of
25%.
  However,
China-sourced income of foreign enterprises, such as dividends paid by a PRC
subsidiary to its overseas parent, will normally be subject to PRC withholding
tax at a rate of 10%.
  Furthermore,
the implementation rules of the New Tax Law provide that (i) if the enterprise
that distributes the dividends is domiciled in the PRC, or (ii) if gains are
realized from transferring equity interests of enterprises domiciled in the PRC,
then such dividends or capital gains are treated as China-sourced
income.  It is not clear how “domicile” may be interpreted under the
New Tax Law, and it may be interpreted as the jurisdiction where the enterprise
is a tax resident.  Therefore, if we are considered as a PRC resident
enterprise for PRC tax purposes, any dividends we pay to our overseas
shareholders as well as gains realized by such shareholders from the transfer of
our shares may be regarded as China-sourced income and, thus, may be subject to
PRC withholding tax at a rate of 10%.
  As the New Tax Law and the
implementation rules have only recently taken effect, it is uncertain as to how
they will be implemented by the relevant PRC tax authorities.  If
dividend payments from Shandong Fuwei and from Fuwei (BVI) to us are subject to
PRC withholding tax, our financial condition, results of operations and the
amount of dividends available to pay our shareholders may be adversely
affected.  Also, if dividends we pay to our overseas shareholders or
gains realized by such shareholders from the transfer of our shares are subject
to PRC withholding tax, it may materially and adversely affect your investment
return and the value of your investment in us.  There is an income tax
treaty in effect between the United States and China, and U.S. shareholders may
be entitled to certain benefits under such treaty.


Cayman
Island Taxation




The
Cayman Islands currently has no exchange control restrictions and no income,
corporate or capital gains tax, estate duty, inheritance tax, gift tax or
withholding tax applicable to the Company or any holder of our ordinary shares.
Accordingly, payment of dividends on, and any transfer of, the shares will not
be subject to taxation in the Cayman Islands, no Cayman Islands withholding tax
will be required on such payments to any holder of a share and gains derived
from the sale of shares will not be subject to Cayman Islands income or
corporation tax. The Cayman Islands is not party to any double taxation
treaties.




F.
Dividends and paying agents.




Not
Applicable




G. Statement by
experts.




Not
Applicable




H.
Documents on display




We are
subject to the periodic reporting and other informational requirements of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the
Exchange Act, we are required to file reports and other information with the
Securities and Exchange Commission. Specially, we are required to file annually
a Form 20-F no later than six month after the close of each fiscal year, which
is December 31. Copies of reports and other information, when so filed, may be
inspected without charge and may be obtained at prescribed rates at the public
reference facilities maintained by the Securities and Exchange Commission at
Judiciary Plaza, 100 F. Street, N.E., Washington, D.C. 20549. The public may
obtain information regarding the Washington, D.C. Public Reference Room by
calling the Commission at 1-800-SEC-0330. The SEC also maintains a Web site at
www.sec.gov
that contains reports, proxy and information statements, and other information
regarding registrants that make electronic filings with the SEC using its EDGAR
system.


76




As a
foreign private issuer, we are exempt from the rules under the Exchange Act
prescribing the furnishing and content of quarterly reports and proxy
statements, and officers, directors and principal shareholders are exempt from
the reporting requirements pursuant to Section 16 of the Exchange
Act.




Documents
concerning the Company that are referred to in this document may also be
inspected at our office, which is at No. 387 Dongming Road, Weifang Shandong,
People’s Republic of China, 261061.




Subsidiary
Information.




Not
applicable.




Item
11. Quantitative and Qualitative Disclosures about Market Risk.




Foreign
exchange risk




We are
exposed to the risk of foreign currency exchange rate fluctuation. We have never
used derivative instruments to hedge our exchange rate risks, do not plan to do
so, and may not be successful should we attempt to do so in the future.
Nevertheless, we believe such risk is low as no foreign currency liabilities are
incurred and the principal operations are limited mainly to the market in
China.




Our
operating subsidiary, Shandong Fuwei’s functional currency is Renminbi while our
functional currency is Hong Kong Dollars. Transactions in other currencies are
recorded in Renminbi at the rates of exchange prevailing when the transactions
occur. Monetary assets and liabilities denominated in other currencies are
converted into Renminbi at rates of exchange in effect at the balance sheet
dates. Exchange gains and losses are recorded in our statements of operations as
a component of current period earnings.




The China
State Administration for Foreign Exchange, under the authority of the People’s
Bank of China, controls the conversion of Renminbi into foreign currencies. The
principal regulation governing foreign currency exchange in China is the Foreign
Currency Administration Rules (1996), as amended. Under the Rules, once various
procedural requirements are met, Renminbi is convertible for current account
transactions, including trade and services, but not for capital account
transactions, including direct investment, loan or investment in securities
outside China, unless the prior approval of the State Administration of Foreign
Exchange of China is obtained. Although the Chinese government regulations now
allow greater convertibility of Renminbi for current account transactions,
significant restrictions still remain. Currently, we are not involved in foreign
exchange transactions as all transactions are conducted in China are in Renminbi
and all exporting business is completed in U.S. dollars.




The value
of the Renminbi is subject to changes in China’s central government policies and
to international economic and political developments affecting supply and demand
in the China Foreign Exchange Trading System market. Since 1994, the conversion
of Renminbi into foreign currencies, including U.S. dollars, has been based on
rates set by the People’s Bank of China, which are set daily based on the
previous day’s interbank foreign exchange market rates and current exchange
rates on the world financial markets. Since 1994, the official exchange rate
generally has been stable. The official exchange rate for the conversion of
Renminbi into U.S. dollars remained stable until Renminbi was revalued in July
2005 and allowed to fluctuate by reference to a basket of foreign currencies,
including the U.S. dollar. Under the new policy, Renminbi is permitted to
fluctuate within a band against a basket of foreign currencies.




We
conduct substantially all of our operations through Shandong Fuwei, and its
financial performance and position are measured in terms of Renminbi. Any
appreciation of the Renminbi against the United States dollar would consequently
have an adverse effect on our financial performance and asset values when
measured in terms of United States dollar. Our solutions are primarily procured,
sold and delivered in China for Renminbi. The majority of our revenues are
denominated in Renminbi. Should the Renminbi appreciate against United States
dollar, such appreciation could have a material adverse effect on our profits
and the foreign currency equivalent of such profits repatriated by the Chinese
entities to us.


77




Interest
rate risk




We are
exposed to interest rate risk arising from having short-term variable rate
borrowings from time to time. Our future interest expense would fluctuate in
line with any change in our borrowing rates. We do not have any derivative
financial instruments and believe our exposure to interest rate risk and other
relevant market risks is not material.




Inflation




In recent
years, China has not experienced significant inflation, and thus inflation has
not had a material impact on our results of operations in recent years.
According to the National Bureau of Statistics of China, the change in Consumer
Price Index in China was 1.5%, 4.8% and 5.9% in 2006, 2007 and 2008,
respectively.




Credit
and liquidity risks




We adopt
a risk assessment model to our customer credit management system, and we offer
different credit terms to our customers based on criteria such as working
relationship, payment history, creditworthiness and their financial position.
All credit terms are approved by our finance department, in consultation with
our sales and marketing department. For extension of larger credit limits,
approvals have to be sought from our credit committee which is made up of
members from our finance department, sales department and the General Manager.
Our finance department and sales and marketing department review our outstanding
debtor balances on a monthly basis and follow up with customers when payments
are due. We believe that there would not material impact risk to our operations
in our credit and liquidity risk from sales and customers and other relevant
market risks.




Item
12. Description of Securities Other than Equity Securities




Not
Applicable.




PART
II




Item
13. Default, Dividend Arrearages and Delinquencies




None.




Item
14. Material Modifications to the Rights of Security Holders and Use of
Proceeds




We
completed our initial public offering of 4,312,500 ordinary shares on December
22, 2006. The shares sold in the initial public offering, or IPO, were
registered on a Registration Statement on Form F-1 (file number: 333-138948)
declared effective on December 18, 2006. Maxim Group LLC was the sole book
running manager for the offering of our ordinary shares. After the payment of
underwriting fees, proceeds from the initial public offering were $33,207,975,
of which $3,269,846 were used to pay legal, accounting and professional fees and
other related printing and filing fees.




The total
use of the net proceeds during the two fiscal periods from 2007 to 2008 are as
follows:





Approximate
                    Allocation of
                    Net Proceeds
                
                
                Approximate
                    Percentage of
                    Net ProceedsNet
      proceeds from IPO
                
                $
                29,938,129
                
                
                
                100.00
                %Investment
      in new production line equipment
                
                
                116,140,417
                
                
                
                53.91Buildings
      and property for new production line
                
                
                8,997,711
                
                
                
                30.05Sales
      and marketing
                
                
                300,000
                
                
                
                1.00General
      corporate purpose, including working capital
                
                
                4,500,000
                
                
                
                15.03


78




None of
the proceeds were paid, directly or indirectly, to our directors, officers or
their associates or to any person owning ten percent or more of our ordinary
shares or to our affiliates.




Item
15. Controls and Procedures




Under the
supervision and with the participation of our management, including the
principal executive officer and the principal accounting officer, we conducted
an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as of the end of the period covered by this
report (the “Evaluation Date”). Based on this evaluation, our principal
executive officer and principal accounting officer concluded as of the
Evaluation Date that our disclosure controls and procedures were effective such
that the material information required to be included in our Securities and
Exchange Commission (“SEC”) reports is accumulated and communicated to
management (including such officers) as appropriate to allow timely decisions
regarding required disclosure and recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms relating to us,
including our consolidated subsidiaries. Additionally, there were no changes in
our internal control over financial reporting that during the period covered by
this Annual Report on Form 20-F has materially affected, or is reasonably likely
to materially affect, our internal control over financial
reporting.




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting. Based on our evaluation, our principal executive
officer and principal financial officer have concluded that during the period
covered by this Annual Report, our internal controls over financial reporting
were effective.




All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can only
provide reasonable assurances with respect to financial statement preparation
and presentation. In addition, any evaluation of effectiveness for future
periods is subject to the risk that controls may become inadequate because of
changes in conditions in the future.




Item
16A. Audit Committee Financial Expert




Our Board
of Directors has nominated Tee Chuang Khoo, Changrong Ji, and Yudong Huang as
members of the Audit Committee, all of whom are “independent” under the rules of
Nasdaq Marketplace Rule 4200(a)(15).  In addition, Tee Chuang Khoo
qualifies as an audit committee financial expert as defined under the applicable
rules of the SEC issued pursuant to Section 407 of the Sarbanes-Oxley Act of
2002.




Item
16B. Code of Ethics




The Code
of Ethics for the members of our Board of Directors and Officers was approved by
our Board of Directors on March 27, 2007 and is filed as Exhibit 14.1
hereto.




Item
16C. Principal Accountant Fees and Services




Audit
Fees




The audit
fees paid to KPMG in 2007, our prior independent registered public accounting
firm, in connection with the re-issuance of audit report on our annual financial
statements for the fiscal years ended December 31, 2005 and 2006 was HK$
250,000. The audit fees paid to MHM, our prior independent registered public
accounting firm, in connection with our quarterly review in 2007 was US$30,000.
The audit fees of Kabani & Company, Inc. (“Kabani”), our independent
registered public accounting firm, in connection with three quarterly review in
2008 and audit of our annual financial statements for the fiscal years ended
December 31, 2008 and December 31, 2007, amounted to US$ 52,500 and US$ 80,000,
and US$115,000, respectively.


79




Audit-Related
Fees




The audit
related fee of MHM for out-of-pocket expenses, such as traveling and lodging,
amounted to US$7,683.75 for the fiscal year ended December 31, 2007. The audit
related fee of Kabani for out-of-pocket expenses, such as traveling and lodging,
for the fiscal years ended December 31, 2007 and 2008 amounted to US$847.84 and
USD$ 1,380, respectively.




All
Other Fees




Not
Applicable




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




The
policy of our directors who perform the functions customarily performed by an
audit committee is to pre-approve all audit and permissible non-audit services
provided by the independent auditors. These services may include audit services
and other services.




Audit
of Financial Statements




KPMG was
our principal independent registered public accounting firm for annual audited
financial statements for the year ended December 31, 2006. MHM was our
independent auditor from April 1, 2007 to November 1, 2007.  Our
current independent registered public accounting firm, Kabani is responsible for
the annual audit of financial statements for the years ended December 31, 2007
and 2008.




Item
16D. Exemptions from the Listing Standards for Audit Committee




Not
applicable.




Item
16E. Purchase of Equity Securities by the Issuer and Affiliated
Purchasers




None.




Item
17. Financial Statements




The
Company has elected to provide Financial Statements pursuant to Item 18 (see
below).




Item
18. Financial Statements




The
following documents are filed as Attachment A hereto and are included as part of
this Annual report on Form 20-F.




Audited
Consolidated Financial Statements of Fuwei Films (Holdings) Co., Ltd and
Subsidiaries




Report of
Independent Registered Public Accounting Firm.




Consolidated
Statements of Income and Comprehensive Income for the year ended December 31,
2006, 2007 and 2008.




Consolidated
Balance Sheets as of December 31, 2007 and 2008




Consolidated
Statements of Cash Flows for the year ended December 31, 2006, 2007 and
2008


80




Consolidated
Statements of Shareholders’ Equity for the year ended December 31, 2006, 2007
and 2008




Notes to
Consolidated Financial Statements.




Item 19.
Exhibits.




The
following exhibits are filed as part of this Annual Report:


No.
            
            Description1.2
            
            Form
      of Amended Memorandum of Association of Fuwei Films (Holdings) Co., Ltd.
      **1.3
            
            Articles
      of Association Fuwei Films (Holdings) Co., Ltd. ***4.1
            
            Form
      of Underwriting Agreement. *4.2
            
            Loan
      Agreement between Communication Bank of China of Fuwei Films (Shandong)
      Co., Ltd. dated January 15, 2007***4.3
            
            Loan
      Agreement between Communication Bank of China of Fuwei Films (Shandong)
      Co., Ltd. dated January 15, 2007***4.4
            
            Asset
      Purchase Agreement between Fuwei Plastics and Shandong Weifang Auction
      Firm dated October 9, 2003 **4.5
            
            Purchase
      Agreement between Beijing Baorui and Weifang Jing Cheng Auction Co., Ltd.
      dated December 17, 2004 **4.6
            
            Service
      Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiaoan
      He**4.7
            
            Employment
      Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiaoan He
      **4.8
            
            Employment
      Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiaoming Wang
      **4.9
            
            Employment
      Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiuyong Zhang
      **4.10
            
            Equipment
      Contract between Fuwei Films (Holdings) Co., Ltd. and Brükner dated as of
      June 2005**4.11
            
            Credit
      Letter from Communication Bank of China dated May 8, 2006
      **4.12
            
            Contract
      between Fuwei Films (Shandong) Co. Ltd. and Lindauer Dornier GmbH, dated
      January 20, 2007****4.13
            
            Amendment
      to the Contract of January 20, 2007 between Fuwei Films (Shandong) Co.
      Ltd. and Lindauer Dornier GmbH, dated February 2,
      2007****4.14
            
            Loan
      Contract between Fuwei Films (Shandong) Co. Ltd. and Bank of Communication
      Co., Ltd.,  dated July 16, 2008 ****4.15
            
            Loan
      Contract between Fuwei Films (Shandong) Co. Ltd. and Bank of Communication
      Co., Ltd.,  dated July 18, 2008****4.16
            
            Loan
      Contract between Fuwei Films (Shandong) Co. Ltd. and Weifang City
      Commercial Bank,, dated December 2, 2008
  ****




81





4.17
            
            Loan
      Contract between Fuwei Films (Shandong) Co. Ltd. and Weifang City
      Commercial Bank, dated January 13, 2009 ****4.18
            
            Loan
      Contract between Fuwei Films (Shandong) Co. Ltd. and Weifang City
      Commercial Bank, dated January 16, 2009 ****8.1
            
            List
      of the company’s significant subsidiaries, their jurisdiction of
      incorporation and the names under which they operate business, if
      different from their name. ***11.1
            
            Code
      of Ethics for CEO and Senior Financial Officers.
  ***12.1
            
            Certification
      of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley
      Act of 2002. ****12.2
            
            Certification
      of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley
      Act of 2002. ****13.1
            
            Certification
      of Chief Executive Officer and Chief Financial Officer required by Section
      906 of the Sarbanes-Oxley Act of 2002.
  ****




*
              Filed
      with the Company’s amendment to Registration Statement on Form F-1/A filed
      with the SEC on December 12,
2006.




**
              Filed
      with the Company’s Registration Statement on Form F-1 filed with the SEC
      on November 24, 2006.




***
              Filed
      with the Company’s Annual Report on Form 20-F for the year ended December
      31, 2006 filed with the SEC on April 2,
2007.




****
              Filed herewith.




SIGNATURES




The
registrant hereby certifies that it meets all of the requirements for filing
Form 20-F and has duly caused and authorized the undersigned to signthis Annual Report on
its behalf.




Fuwei
      Films (Holdings) Co., Ltd.By:
                          /s/
      Xiaoan HeName:
      Xiaoan HeTitle:
      Chairman, Chief Executive OfficerBy:
                          /s/
      Xiuyong ZhangName:
      Xiuyong ZhangTitle:
      Chief Financial
Officer




Dated:
March 31, 2009


82




INDEX
TO FINANCIAL STATEMENTS




PageAudited Consolidated Financial Statements of Fuwei
      Films (Holdings) Co., Ltd. and subsidiariesReport
      of Independent Registered Public Accounting Firm — Kabani & Company,
      Inc.
                                          
                                          F-2Report
      of Independent Registered Public Accounting Firm — KPMG
                                          
                                          F-3Consolidated
      Balance Sheets as of December 31, 2007 and 2008
                                          
                                          F-4Consolidated
      Statements of Income and Comprehensive Income for the years ended December
      31, 2006, 2007 and 2008
                                          
                                          F-5Consolidated
      Statements of Shareholders’ Equity for the years ended December 31, 2006,
      2007 and 2008
                                          
                                          F-6Consolidated
      Statements of Cash Flows for the years ended December 31, 2006, 2007 and
      2008
                                          
                                          F-7Notes
      to the Consolidated Financial Statements for the years ended December 31,
      2006, 2007 and 2008
                                          
                                          F-8
      -
F-34


F-1




Report
of Independent Registered Public Accounting Firm


Board of
Directors and Stockholders of
 Fuwei
Films (Holdings) Co., Ltd. and Subsidiaries
 
 We have
audited the accompanying consolidated balance sheets of Fuwei Films (Holdings)
Co., Ltd. and Subsidiaries as of December 31, 2008 and 2007, and the related
consolidated statements of income and comprehensive income, shareholders’
equity, and cash flows for the years ended December 31, 2008 and
2007.  These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
 
 We
conducted our audits 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
consolidated financial statements are free of material misstatement. 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 consolidated financial statement presentation. We
believe that our audits provides a reasonable basis for our
opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Fuwei Films (Holdings) Co., Ltd.
And Subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of income and comprehensive income and cash flows for the years ended
December 31, 2008 and 2007 in conformity with accounting principles generally
accepted in the United States of America.
 
 As
indicated in Note 25, the company is named as a defendant in a class action
lawsuit.
 
 
 
 /s/
Kabani & Company, Inc.
 Los
Angeles, California
 
 
 March 30,
2009  F-2




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Report
of Independent Registered Public Accounting Firm
 
 The Board
of Directors and Shareholders
 Fuwei
Films (Holdings) Co., Ltd:
  We have
audited the accompanying consolidated statements of income and comprehensive
income, shareholders’ equity, and cash flows of Fuwei Films (Holdings) Co., Ltd
and subsidiaries (the “Company”) for the year ended December 31, 2006. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
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. 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 results of operations and the cash flows of Fuwei
Films (Holdings) Co., Ltd and subsidiaries for the year ended December 31, 2006,
in conformity with U.S. generally accepted accounting principles.
 
 Hong
Kong, China
 April 2,
2007


F-3




FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS


As of
December 31, 2007and 2008


(amounts
in thousands, except share and per share data)





2007
                                    
                                    
                                    2008Note
                                    
                                    
                                    RMB
                                    
                                    
                                    RMB
                                    
                                    
                                    US$AssetsCurrent
      assetsCash
      and cash equivalents
                                    
                                    
                                    
                                    
                                    
                                    30,909
                                    
                                    
                                    
                                    15,823
                                    
                                    
                                    
                                    2,308Restricted
      cash
                                    
                                    
                                    
                                    
                                    
                                    64,909
                                    
                                    
                                    
                                    10,411
                                    
                                    
                                    
                                    1,519Accounts
      receivable, net
                                    
                                    
                                    5
                                    
                                    
                                    
                                    58,195
                                    
                                    
                                    
                                    38,579
                                    
                                    
                                    
                                    5,628Inventories
                                    
                                    
                                    6
                                    
                                    
                                    
                                    41,670
                                    
                                    
                                    
                                    30,589
                                    
                                    
                                    
                                    4,463Advance
      to suppliers
                                    
                                    7
                                    
                                    
                                    
                                    13,538
                                    
                                    
                                    
                                    6,846
                                    
                                    
                                    
                                    999Prepayments
      and other receivables
                                    
                                    
                                    7
                                    
                                    
                                    
                                    2,622
                                    
                                    
                                    
                                    1,857
                                    
                                    
                                    
                                    271Total
      current assets
                                    
                                    
                                    
                                    
                                    
                                    211,842
                                    
                                    
                                    
                                    104,105
                                    
                                    
                                    
                                    15,188Property,
      plant and equipment, net
                                    
                                    
                                    8
                                    
                                    
                                    
                                    228,309
                                    
                                    
                                    
                                    259,235
                                    
                                    
                                    
                                    37,821Construction
      in progress
                                    
                                    
                                    8
                                    
                                    
                                    
                                    265,253
                                    
                                    
                                    
                                    319,408
                                    
                                    
                                    
                                    46,600Lease
      prepayments
                                    
                                    
                                    9
                                    
                                    
                                    
                                    22,290
                                    
                                    
                                    
                                    22,507
                                    
                                    
                                    
                                    3,284Advanced
      to suppliers - Long Term
                                    
                                    
                                    
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    4,308
                                    
                                    
                                    
                                    629Intangible
      asset, net
                                    
                                    
                                    10
                                    
                                    
                                    
                                    36
                                    
                                    
                                    -
                                    
                                    
                                    -Goodwill
                                    
                                    
                                    11
                                    
                                    
                                    
                                    10,276
                                    
                                    
                                    
                                    10,276
                                    
                                    
                                    
                                    1,499Deposit
                                    
                                    
                                    12
                                    
                                    
                                    -
                                    
                                    
                                    
                                    17,613
                                    
                                    
                                    
                                    2,570Deferred
      income tax assets
                                    
                                    
                                    19
                                    
                                    
                                    
                                    969
                                    
                                    
                                    
                                    2,452
                                    
                                    
                                    
                                    358Total
      assets
                                    
                                    
                                    
                                    
                                    
                                    738,975
                                    
                                    
                                    
                                    739,904
                                    
                                    
                                    
                                    107,949LiabilitiesCurrent
      liabilitiesShort-term
      bank loans
                                    
                                    
                                    13
                                    
                                    
                                    
                                    188,027
                                    
                                    
                                    
                                    164,764
                                    
                                    
                                    
                                    24,038Accounts
      payable
                                    
                                    
                                    
                                    
                                    
                                    
                                    19,609
                                    
                                    
                                    
                                    23,301
                                    
                                    
                                    
                                    3,399Advance
      from customers
                                    
                                    
                                    14
                                    
                                    
                                    
                                    10,957
                                    
                                    
                                    
                                    8,781
                                    
                                    
                                    
                                    1,281Accrued
      expenses and other payables
                                    
                                    
                                    14
                                    
                                    
                                    
                                    7,587
                                    
                                    
                                    
                                    7,460
                                    
                                    
                                    
                                    1,089Deferred
      income tax liabilities
                                    
                                    
                                    20
                                    
                                    
                                    
                                    265
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Total
      current liabilities
                                    
                                    
                                    
                                    
                                    
                                    
                                    226,445
                                    
                                    
                                    
                                    204,305
                                    
                                    
                                    
                                    29,807Long-term
      loan
                                    
                                    
                                    13
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    5,000
                                    
                                    
                                    
                                    729Total
      liabilities
                                    
                                    
                                    
                                    
                                    
                                    226,445
                                    
                                    
                                    
                                    209,305
                                    
                                    
                                    
                                    30,537Shareholders’
      equity
                                    
                                    
                                    15Ordinary
      shares of US$0.129752 par value; 20,000,000 shares authorized; and
      13,062,500 issued and outstanding as of December 31, 2007 and 2008,
      respectively
                                    
                                    
                                    
                                    
                                    
                                    13,323
                                    
                                    
                                    
                                    13,323
                                    
                                    
                                    
                                    1,944Additional
      paid-in capital
                                    
                                    
                                    
                                    
                                    
                                    
                                    311,907
                                    
                                    
                                    
                                    311,907
                                    
                                    
                                    
                                    45,506Statutory
      reserve
                                    
                                    
                                    
                                    
                                    
                                    26,924
                                    
                                    
                                    
                                    29,338
                                    
                                    
                                    
                                    4,280Retained
      earnings
                                    
                                    
                                    
                                    
                                    
                                    
                                    159,228
                                    
                                    
                                    
                                    174,970
                                    
                                    
                                    
                                    25,527Accumulated
      other comprehensive income
                                    
                                    
                                    
                                    
                                    
                                    1,148
                                    
                                    
                                    
                                    1,061
                                    
                                    
                                    
                                    155Total
      shareholders’ equity
                                    
                                    
                                    
                                    
                                    
                                    512,530
                                    
                                    
                                    
                                    530,599
                                    
                                    
                                    
                                    77,412Total
      liabilities and shareholders’ equity
                                    
                                    
                                    
                                    
                                    
                                    
                                    739,975
                                    
                                    
                                    
                                    739,904
                                    
                                    
                                    
                                    107,949




See
accompanying notes to the consolidated financial statements.




F-4


FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


For the
years ended December 31, 2006, 2007 and 2008


(amounts
in thousands, except share and per share data)





2006
                                                
                                                
                                                2007
                                                
                                                
                                                2008Note
                                                
                                                
                                                RMB
                                                
                                                
                                                RMB
                                                
                                                
                                                RMB
                                                
                                                
                                                US$Revenues,
      net
                                                
                                                
                                                16
                                                
                                                
                                                
                                                436,884
                                                
                                                
                                                
                                                449,373
                                                
                                                
                                                
                                                447,255
                                                
                                                
                                                
                                                65,253Cost
      of revenue
                                                
                                                
                                                17,18
                                                
                                                
                                                
                                                (334,341
                                                )
                                                
                                                
                                                (349,531
                                                )
                                                
                                                
                                                (376,923
                                                )
                                                
                                                
                                                (54,992
                                                )Gross
      profit
                                                
                                                
                                                
                                                
                                                
                                                
                                                102,543
                                                
                                                
                                                
                                                99,842
                                                
                                                
                                                
                                                70,332
                                                
                                                
                                                
                                                10,261Operating
      expenses-
      Distribution expenses
                                                
                                                
                                                17,18
                                                
                                                
                                                
                                                (16,483
                                                )
                                                
                                                
                                                (15,061
                                                )
                                                
                                                
                                                (15,604
                                                )
                                                
                                                
                                                (2,277
                                                )-
      Administrative expenses
                                                
                                                
                                                17
                                                
                                                
                                                
                                                (8,043
                                                )
                                                
                                                
                                                (20,515
                                                )
                                                
                                                
                                                (30,124
                                                )
                                                
                                                
                                                (4,395
                                                )Total
      operating expenses
                                                
                                                
                                                
                                                
                                                
                                                
                                                (24,526
                                                )
                                                
                                                
                                                (35,576
                                                )
                                                
                                                
                                                (45,728
                                                )
                                                
                                                
                                                (6,672
                                                )Operating
      income
                                                
                                                
                                                
                                                
                                                
                                                
                                                78,017
                                                
                                                
                                                
                                                64,266
                                                
                                                
                                                
                                                24,604
                                                
                                                
                                                
                                                3,590Other
      income/(expense)-
      Interest income
                                                
                                                
                                                
                                                
                                                
                                                43
                                                
                                                
                                                
                                                589
                                                
                                                
                                                
                                                688
                                                
                                                
                                                
                                                100-
      Interest expense
                                                
                                                
                                                19
                                                
                                                
                                                
                                                (12,884
                                                )
                                                
                                                
                                                (13,233
                                                )
                                                
                                                
                                                (3,995
                                                )
                                                
                                                
                                                (583
                                                )-
      Sales of scrap materials
                                                
                                                
                                                
                                                
                                                
                                                3,639-
      Others, net
                                                
                                                
                                                
                                                
                                                
                                                
                                                (393
                                                )
                                                
                                                
                                                319
                                                
                                                
                                                
                                                (174
                                                )
                                                
                                                
                                                (25
                                                )Total
      other income/(expense)
                                                
                                                
                                                
                                                
                                                
                                                
                                                (9,595
                                                )
                                                
                                                
                                                (12,325
                                                )
                                                
                                                
                                                (3,481
                                                )
                                                
                                                
                                                (508
                                                )Income
      before income tax
                                                
                                                
                                                
                                                
                                                
                                                
                                                68,422
                                                
                                                
                                                
                                                51,941
                                                
                                                
                                                
                                                21,123
                                                
                                                
                                                
                                                3,082Income
      tax
                                                
                                                
                                                20
                                                
                                                
                                                
                                                (757
                                                )
                                                
                                                
                                                (4,681
                                                )
                                                
                                                
                                                (2,966
                                                )
                                                
                                                
                                                (433
                                                )Net
      income
                                                
                                                
                                                
                                                
                                                
                                                67,665
                                                
                                                
                                                
                                                47,260
                                                
                                                
                                                
                                                18,157
                                                
                                                
                                                
                                                2,649Other
      comprehensive income-
      Foreign currency translation adjustments
                                                
                                                
                                                
                                                
                                                
                                                
                                                53
                                                
                                                
                                                
                                                (637
                                                )
                                                
                                                
                                                (87
                                                )
                                                
                                                
                                                (13
                                                )Comprehensive
      income
                                                
                                                
                                                
                                                
                                                
                                                
                                                67,718
                                                
                                                
                                                
                                                46,623
                                                
                                                
                                                
                                                18,070
                                                
                                                
                                                
                                                2,636Earnings
      per share
                                                
                                                
                                                26-
      Basic
                                                
                                                
                                                
                                                
                                                
                                                61.46
                                                
                                                
                                                
                                                3.62
                                                
                                                
                                                
                                                1.39
                                                
                                                
                                                
                                                0.20-
      Diluted
                                                
                                                
                                                
                                                
                                                
                                                
                                                61.37
                                                
                                                
                                                
                                                3.62
                                                
                                                
                                                
                                                1.39
                                                
                                                
                                                
                                                0.20Weighted
      average number of ordinary shares
                                                
                                                
                                                26-
      Basic
                                                
                                                
                                                
                                                
                                                
                                                1,101,031
                                                
                                                
                                                
                                                13,062,500
                                                
                                                
                                                
                                                13,062,500
                                                
                                                
                                                
                                                13,062,500-
      Diluted
                                                
                                                
                                                
                                                
                                                
                                                
                                                1,102,488
                                                
                                                
                                                
                                                13,062,500
                                                
                                                
                                                
                                                13,062,500
                                                
                                                
                                                
                                                13,062,500




See
accompanying notes to the consolidated financial statements.


F-5


FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY


For
      the years ended December 31, 2006, 2007 and
2008


(amounts
      in thousands, except share data)





Ordinary
      shares
                
                
                Additional
                  Paid-In
                
                
                Accumulated
                  other
                  Comprehensive
                
                
                Retained
                
                
                Total
                  Shareholders’Number
      of
                
                
                Amount
                
                
                Capital
                
                
                Income
                
                
                Earnings
                
                
                EquityNote
                
                
                Shares
                
                
                RMB
                
                
                RMB
                
                
                RMB
                
                
                RMB
                
                
                RMBBalance
      as of December 31, 2005
                
                
                
                
                
                771
                
                
                
                1
                
                
                
                -
                
                
                
                1,732
                
                
                
                71,227
                
                
                
                72,960Conversion
      of shareholders’ loans
                
                15(a)
                
                
                
                8,749,229
                
                
                
                8,936
                
                
                
                80,426
                
                
                
                -
                
                
                
                -
                
                
                
                89,362Issue
      of ordinary shares, net of
                
                1
                
                
                
                4,312,500
                
                
                
                4,386
                
                
                
                225,838
                
                
                
                -
                
                
                
                -
                
                
                
                230,224Share-based
      payment transactions
                
                3(p)
                
                
                
                -
                
                
                
                -
                
                
                
                5,643
                
                
                
                -
                
                
                
                -
                
                
                
                5,643Foreign
      currency translation adjustment
                
                
                
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                53
                
                
                
                -
                
                
                
                53Net
      income
                
                
                
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                67,665
                
                
                
                67,665Balance
      as of December 31, 2006
                
                
                
                
                
                
                13,062,500
                
                
                
                13,323
                
                
                
                311,907
                
                
                
                1,785
                
                
                
                138,892
                
                
                
                465,907Net
      income
                
                
                
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                47,260
                
                
                
                47,260Foreign
      currency translation adjustment
                
                
                
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (637
                )
                
                
                -
                
                
                
                (637
                )Balance
      as of December 31, 2007
                
                
                
                
                
                
                13,062,500
                
                
                
                13,323
                
                
                
                311,907
                
                
                
                1,148
                
                
                
                186,152
                
                
                
                512,530Net
      income
                
                
                
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                18,157
                
                
                
                18,157Foreign
      currency translation adjustment
                
                
                
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (87
                )
                
                
                -
                
                
                
                (87
                )Balance
      as of December 31, 2008
                
                
                
                
                
                
                13,062,500
                
                
                
                13,323
                
                
                
                311,907
                
                
                
                1,061
                
                
                
                204,309
                
                
                
                530,599Balance
      as of December 31, 2008US$
                
                
                
                
                
                
                13,062,500
                
                
                
                1,944
                
                
                
                45,506
                
                
                
                155
                
                
                
                29,808
                
                
                
                77,412




See
accompanying notes to the consolidated financial statements.


F-6


FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


For
      the years ended December 31, 2006, 2007 and
2008


(amounts
      in thousands)





2006
                    
                    
                    2007
                    
                    
                    2008RMB
                    
                    
                    RMB
                    
                    
                    RMB
                    
                    
                    US$Cash
      flow from operating activitiesNet
      income
                    
                    
                    67,665
                    
                    
                    
                    47,260
                    
                    
                    
                    18,157
                    
                    
                    
                    2,649Adjustments
      to reconcile net income to net cash(used in)/provided by operating
      activities-
      Depreciation of property, plant and equipment
                    
                    
                    23,425
                    
                    
                    
                    23,217
                    
                    
                    
                    25,168
                    
                    
                    
                    3,672-
      Amortization of intangible assets
                    
                    
                    72
                    
                    
                    
                    73
                    
                    
                    
                    490
                    
                    
                    
                    71-
      Lease prepayments charged to expense
                    
                    
                    724
                    
                    
                    
                    741
                    
                    
                    
                    -
                    
                    
                    
                    --
      Deferred income taxes
                    
                    
                    757
                    
                    
                    
                    152
                    
                    
                    
                    -
                    
                    
                    
                    —-
      Bad debt expense/(recovery)
                    
                    
                    (1,143
                    )
                    
                    
                    1,772
                    
                    
                    
                    4,818
                    
                    
                    
                    703-
      Foreign currency exchange loss
                    
                    
                    53
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Changes
      in operating assets and liabilities-
      Accounts receivable
                    
                    
                    (28,258
                    )
                    
                    
                    17,335
                    
                    
                    
                    18,186
                    
                    
                    
                    2,653-
      Inventories
                    
                    
                    1,104
                    
                    
                    
                    (19,659
                    )
                    
                    
                    11,080
                    
                    
                    
                    1,617-
      Advance to suppliers
                    
                    -
                    
                    
                    
                    
                    
                    
                    2,384
                    
                    
                    
                    348-
      Prepaid expenses and other current assets
                    
                    
                    (8,220
                    )
                    
                    
                    6,698
                    
                    
                    
                    220
                    
                    
                    
                    32-
      Accounts payable
                    
                    
                    2,196
                    
                    
                    
                    6,824
                    
                    
                    
                    3,691
                    
                    
                    
                    539-
      Accrued expenses and other payables
                    
                    
                    117
                    
                    
                    
                    (1,557
                    )
                    
                    
                    (2,163
                    )
                    
                    
                    (316
                    )-
      Advance from customers
                    
                    -
                    
                    
                    -
                    
                    
                    
                    (2,176
                    )
                    
                    
                    (317
                    )-
      Tax payable
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    172
                    
                    
                    
                    25Net
      cash provided by operating activities
                    
                    
                    58,492
                    
                    
                    
                    82,856
                    
                    
                    
                    80,027
                    
                    
                    
                    11,675Cash
      flow from investing activitiesPurchases
      of property, plant and equipment
                    
                    
                    (37,526
                    )
                    
                    
                    (590
                    )
                    
                    
                    (56,093
                    )
                    
                    
                    (8,184
                    )Restricted
      cash related to trade finance
                    
                    
                    (3,311
                    )
                    
                    
                    (61,598
                    )
                    
                    
                    54,498
                    
                    
                    
                    7,951Payment
      of land use rights
                    
                    
                    (2,649
                    )
                    
                    
                    (184,600
                    )
                    
                    
                    (54,155
                    )
                    
                    
                    (7,901
                    )Deposits
      for purchase
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (21,000
                    )
                    
                    
                    (3,064
                    )Proceeds
      from sale of property, plant and equipment
                    
                    
                    7
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      cash used in investing activities
                    
                    
                    (43,479
                    )
                    
                    
                    (246,787
                    )
                    
                    
                    (76,750
                    )
                    
                    
                    (11,198
                    )Cash
      flow from financing activitiesNet
      proceeds from issuance of share capital
                    
                    
                    235,867
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Principal
      payments of short-term bank loans
                    
                    
                    (18,368
                    )
                    
                    
                    (51,650
                    )
                    
                    
                    (23,262
                    )
                    
                    
                    (3,394
                    )Proceeds
      from short-term bank loans
                    
                    
                    10,000
                    
                    
                    
                    -
                    
                    
                    
                    5,000
                    
                    
                    
                    729Net
      cash (used in)/provided by financing activities
                    
                    
                    (227,499
                    )
                    
                    
                    (51,650
                    )
                    
                    
                    (18,262
                    )
                    
                    
                    (2,664
                    )Effect
      of foreign exchange rate changes
                    
                    
                    -
                    
                    
                    
                    (3,448
                    )
                    
                    
                    (104
                    )
                    
                    
                    (15
                    )Net
      increase/ (decrease) in cash
                    
                    
                    242,512
                    
                    
                    
                    (219,029
                    )
                    
                    
                    (15,086
                    )
                    
                    
                    (2,201
                    )CashAt
      beginning of the year
                    
                    
                    7,427
                    
                    
                    
                    249,939
                    
                    
                    
                    30,909
                    
                    
                    
                    4,509At
      end of the year
                    
                    
                    249,939
                    
                    
                    
                    30,909
                    
                    
                    
                    15,823
                    
                    
                    
                    2,308Supplemental
      disclosure of cash flow informationCash
      paid during the year for interest expense
                    
                    
                    15,739
                    
                    
                    
                    12,921
                    
                    
                    
                    11,705
                    
                    
                    
                    1,708Cash
      paid during the year for income tax paid
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,996
                    
                    
                    
                    433




Supplemental
disclosure of non-cash investing and financing activities:




(a)
            On
      November 23, 2006, the outstanding loans from Apex Glory Holdings Limited
      of RMB70,596 and Easebright Investments Limited of RMB18,766 were
      converted into 6,911,895 and 1,837,334 ordinary shares of the Company,
      respectively.




(b)
            In
      connection with the initial public offering (“IPO”) of the Company, there
      were non-cash expenses of RMB5,643, representing the fair value of stock
      options granted to Maxim Group LLC on December 18, 2006, deducted from the
      IPO proceeds and recorded in additional paid-in
  capital.


F-7




FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES




NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


For the
years ended December 31, 2006, 2007 and 2008


(amounts
in thousands, except share and per share data)




(1)
Principal Activities and Reorganization




Fuwei
Films (Holdings) Co., Ltd (the “Company”) and its subsidiaries (the “Group”) are
principally engaged in the production and distribution of BOPET film, a high
quality plastic film widely used in packaging, imaging, electronics, electrical
and magnetic products in the People’s Republic of China (the “PRC”). The Company
is a holding company incorporated in the Cayman Islands, established on August
9, 2004 under the Cayman Islands Companies Law as an exempted company with
limited liability. The Company was established for the purpose of acquiring
shares in Fuwei (BVI) Co., Ltd (“Fuwei (BVI)”), an intermediate holding company
established for the purpose of acquiring all of the ownership interest in Fuwei
Films (Shandong) Co., Ltd (“Shandong Fuwei”).




On August
20, 2004, the Company was allotted and issued one ordinary share of US$1.00 in
Fuwei (BVI) (being the entire issued share capital of Fuwei (BVI)), thereby
establishing Fuwei (BVI) as the intermediate investment holding company of the
Group.




The Group
was established by certain members of the former management team and employees
(the “Group Founders”) of Shandong Neo-Luck Plastics Co., Ltd (“Shandong
Neo-Luck”), a company owned 59% by a PRC state-owned enterprise. Prior to filing
for bankruptcy protection on September 24, 2004, Shandong Neo-Luck was engaged
in the business of BOPET film production. Certain production-related assets of
Shandong Neo-Luck which had previously been mortgaged to the Bank of China,
Weifang City branch (the “Mortgagee Bank”) as security for several loans
extended to Shandong Neo-Luck’s affiliates were acquired through public auction
by Shandong Fuwei on October 9, 2003 for RMB156,000 as a result of the borrowers
default on various bank loans. Shandong Fuwei, established in the PRC on January
28, 2003 as a limited liability company, commenced its operations in July 2003.
The principal activities of Shandong Fuwei are those relating to the design,
production and distribution of plastic flexible packaging materials. Shandong
Neo-Luck was subsequently declared bankrupt by the Weifang Municipal People’s
Court in the PRC on September 24, 2004.




Through
its intermediate holding company, Fuwei (BVI), the Company acquired a 100%
ownership interest in Shandong Fuwei on October 27, 2004 for a purchase price of
RMB91,093. Shandong Fuwei thereafter became a wholly-owned subsidiary of Fuwei
(BVI) effective October 27, 2004. On December 25, 2004, Shandong Fuwei acquired
additional production-related assets through public auction that were formerly
owned by Shandong Neo-Luck for RMB119,280. Shandong Fuwei was converted into a
wholly-foreign owned enterprise in the PRC on January 5, 2005, with a registered
capital of US$11,000.




On
December 18, 2006, the Company was successfully listed on the NASDAQ Global
Market and offered 3,750,000 ordinary shares, at an IPO price of US$8.28 per
ordinary share. On December 18, 2006, an additional 562,500 ordinary shares were
sold at the IPO price of US$8.28 per ordinary share pursuant to the
underwriter’s exercise of its over-allotment option.




In
connection with the IPO of the Company, net proceeds, after deduction of the
related expenses, with aggregate amount of RMB235,867 were
received.




(2)
Basis of Presentation




The
Group’s consolidated financial statements are presented in accordance with
accounting principles generally accepted in the United States of America (“US
GAAP”).




This
basis of accounting differs in certain material respects from that used in the
preparation of the books of account of Shandong Fuwei, the Company’s principal
subsidiary, which are prepared in accordance with the accounting principles and
the relevant financial regulations applicable to enterprises limited by shares
as established by the Ministry of Finance of the PRC (“PRC GAAP”), the
accounting standards used in the country of its domicile. The accompanying
consolidated financial statements reflect necessary adjustments not recorded in
the books of account of the Company’s subsidiaries to present them in conformity
with US GAAP.


F-8




FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES




NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


For the
years ended December 31, 2006, 2007 and 2008


(amounts
in thousands, except share and per share data)




(3)
Summary of Significant Accounting Policies and Practices




(a)
Principles of Consolidation




The
consolidated financial statements include the financial statements of the
Company and its two subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.




(b)
Foreign Currency Transactions




The
Group’s reporting currency is the Renminbi (“RMB”).




The
Company and Fuwei (BVI) operate in Hong Kong as investment holding companies and
their financial records are maintained in Hong Kong dollars, being the
functional currency of these two entities. Assets and liabilities are translated
into RMB at the exchange rates at the balance sheet date, equity accounts are
translated at historical exchange rates and income, expenses, and cash flow
items are translated using the average rate for the period. The translation
adjustments are recorded in accumulated other comprehensive income in the
statements of shareholders’ equity and comprehensive income.




Transactions
denominated in currencies other than RMB are translated into RMB at the exchange
rates quoted by the People’s Bank of China (the “PBOC”) prevailing at the dates
of transactions. Monetary assets and liabilities denominated in foreign
currencies are translated into RMB using the applicable exchange rates quoted by
the PBOC at the balance sheet dates. The resulting exchange differences are
recorded in the statements of income.




Commencing
from July 21, 2005, the PRC government moved the RMB into a managed floating
exchange rate regime based on market supply and demand with reference to a
basket of currencies.




For the
convenience of the readers, the 2008 RMB amounts included in the accompanying
consolidated balance sheet has been translated into U.S. dollars at the rate of
US$1.00 = RMB 6.8542, being the noon buy rate for U.S. dollars in effect on
December 31, 2008 in the City of New York for cable transfer in RMB per U.S.
dollar as certified for custom purposes by the Federal Reserve Bank. No
representation is made that the RMB amounts could have been, or could be,
converted into U.S. dollar at that rate or at any other certain rate on December
31, 2008, or at any other date.




RMB is
not fully convertible into foreign currencies. All foreign exchange transactions
involving RMB must take place either through the PBOC or other institutions
authorized to buy and sell foreign currency. The exchange rate adopted for the
foreign exchange transactions are the rates of exchange quoted by the PBOC which
are determined largely by supply and demand.




(c)
Cash and Restricted Cash




As of
December 31, 2007 and 2008, there were restricted cash of RMB64,909 and RMB
10,411 (US$ 1,519), respectively, for trade financing purposes.




(d)
Trade Accounts Receivable




Trade
accounts receivable are recorded at the invoiced amount after deduction of trade
discounts and allowances, if any, and do not bear interest. The allowance for
doubtful accounts is the Group’s best estimate of the amount of probable credit
losses in the Group’s existing accounts receivable. The Group determines the
allowance based on historical write-off experience, customer specific facts and
economic conditions.


F-9




FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES




NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


For the
years ended December 31, 2006, 2007 and 2008


(amounts
in thousands, except share and per share data)




The Group
reviews its allowance for doubtful accounts monthly. Past due balances over 90
days and over a specified amount are reviewed individually for collectibility.
All other balances are reviewed on a pooled basis by aging of such balances.
Account balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered
remote.




(e)
Inventories




Inventories
are stated at the lower of cost or market value. Cost is determined using
first-in, first-out basis method. Cost of work in progress and finished goods
comprises direct material, direct production cost and an allocated portion of
production overheads based on normal operating capacity.




(f)
Property, Plant and Equipment




Property,
plant and equipment are stated at cost less accumulated depreciation and
impairment.




Depreciation
on property, plant and equipment is calculated on the straight-line method
(after taking into account their respective estimated residual values) over the
estimated useful lives of the assets as follows:




YearsBuildings
      and improvements
              25
      – 30Plant
      and equipment
              10
      – 15Computer
      equipment
              5Furniture
      and fixtures
              5Motor
      vehicles
              5




Depreciation
of property, plant and equipment attributable to manufacturing activities is
capitalized as part of inventory, and expensed to cost of goods sold when
inventory is sold. Depreciation related to abnormal amounts from idle capacity
is charged to cost of goods sold for the period incurred. Total depreciation for
the year ended December 31, 2006, 2007, and 2008 was RMB23,425, RMB23,217, and
RMB25,168 (US$3,672) respectively, of which 97%, 93% and 97% were recorded in
cost of goods sold and 3%, 7% and 3% was recorded in administrative expenses,
respectively.




Construction
in progress represented capital expenditure in respect of the BOPET productions
line. No depreciation is provided in respect of construction in
progress.




(g)
Lease Prepayments




Lease
prepayments represent the costs of land use rights in the PRC. Land use rights
are carried at cost and charged to expense on a straight-line basis over the
respective periods of rights of 30 years. The current portion of lease
prepayments has been included in prepayments and other receivables in the
balance sheet.




(h)
Intangible Assets




The Group
acquired a trademark for use in the production and distribution of plastic
flexible packaging materials. The trademark is carried at cost less accumulated
amortization. Amortization expense is recognized on the straight-line basis over
the estimated useful life of 5 years of the trademark.




Given the
environment in which the Group currently operates, it is reasonably possible
that the estimated economic useful life of the asset or the Group’s estimate
that it will recover its carrying amount from future operations could change in
the future.


F-10




FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES




NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


For the
years ended December 31, 2006, 2007 and 2008


(amounts
in thousands, except share and per share data)




(i)
Goodwill




Goodwill
represents the excess of purchased cost over fair value of net assets of the
Shandong Fuwei business acquired. Goodwill is evaluated for impairment at least
annually. Management has determined that Shandong Fuwei is the reporting unit
for testing goodwill impairment. The first step of the test for impairment
compares the book value of Shandong Fuwei to its estimated fair value. The
second step of the goodwill impairment test, which is only required when the net
book value of the reporting unit exceeds the fair value, compares the implied
fair value of goodwill to its book value to determine if an impairment is
required.




The fair
value of Shandong Fuwei was determined based on the expected discounted future
cash flows methodology. The use of discounted cash flow methodology requires
significant judgments including estimation of future revenues and costs,
industry economic factors, future profitability, determination of Shandong
Fuwei’s weighted average cost of capital and other variables. Although the
Company based its fair value estimate on assumptions it believes to be
reasonable, those assumptions are inherently unpredictable and
uncertain.




Management
performed step one of its annual goodwill impairment test in the fourth quarter
of 2008 and determined that the fair value of Shandong Fuwei exceeded its net
book value as of December 31, 2008. Therefore, step two was not
required.




(j)
Impairment of Long-lived Assets




Long-lived
assets, other than goodwill, including property, plant, and equipment and
intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.




Recoverability
of assets to be held and used is measured by a comparison of the carrying amount
of an asset to the estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount in which the
carrying amount of the asset exceeds the fair value of the asset.




(k)
Revenue Recognition




Sales of
plastic flexible packaging materials are reported, net of value added taxes
(“VAT”), sales returns, trade discounts and allowances. The standard terms and
conditions under which the Group generally delivers allow a customer the right
to return product for refund only if the product does not conform to product
specifications; the non-conforming product is identified by the customer; and
the customer rejects the non-conforming product and notifies the Group within 7
days and 30 days of receipt for sales to customers in the PRC and overseas
respectively. The Group recognizes revenue when products are delivered and the
customer takes ownership and assumes risk of loss, collection of the relevant
receivable is probable, persuasive evidence of an arrangement exists and the
sale price is fixed or determinable.




In the
PRC, VAT of 17% on invoice amount is collected in respect of the sales of goods
on behalf of tax authorities. The VAT collected is not revenue of the Group;
instead, the amount is recorded as a liability on the consolidated balance sheet
until such VAT is paid to the authorities.




(l)
Government Grants




Government
grants are recognized in the consolidated balance sheet initially as deferred
income when they have been received. Grants that compensate the Group for
expenses incurred are recognized as a reduction of expenses in the consolidated
statement of income in the same period in which the related expenses are
incurred.


F-11




FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES




NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


For the
years ended December 31, 2006, 2007 and 2008


(amounts
in thousands, except share and per share data)




For the
year ended December 31, 2006 government grants of RMB900 was recognized to
compensate research and development expenses incurred and were recorded in
administrative expenses, respectively.




(m)
Research and Development Costs




Research
and development costs are expensed as incurred. Research and development costs
amounted to, RMB3,650, RMB420 and RMB737 (US$108) for the year ended December
31, 2006, 2007 and 2008 and such costs were recorded in administrative
expenses.




(n)
Retirement and Other Postretirement Benefits




Contributions
to retirement schemes (which are defined contribution plans) are charged to
expense as and when the related employee service is provided.




(o)
Income Taxes




Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. 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.




In July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an
Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 seeks to reduce the
diversity in practice associated with certain aspects of measuring and
recognition in accounting for income taxes. The Company adopted FIN 48 beginning
on January 1, 2007. The initial adoption of FIN 48 had no impact on the
Company’s financial statements. The Company has elected to classify interest and
penalties related to unrecognized tax benefits, if and when required, as part of
interest expenses and administrative expenses in the statements of income,
respectively. The additional disclosures required under FIN 48 are included in
Note 19.




(p)
Stock Option Plan




The fair
value of stock options granted to Maxim Group LLC under the stock option plans
is recognized as listing expenses deducted from IPO proceeds and recorded in
additional paid-in capital.




On
December 18, 2006, the Company granted 187,500 stock options to Maxim Group LLC
as part of the compensation for the provision of services relating to the IPO of
the Company. The stock option is exercisable at an exercise price equal to
US$10.35 per ordinary share commencing six months from December 18, 2006 and
expiring five years from December 18, 2006. The stock option and ordinary shares
underlying the stock option may not be sold, transferred, assigned, pledged or
hypothecated, or be the subject of any hedging, short sale, derivative, put or
call transaction that would result in the effective disposition thereof by any
person for a period of six months.




The fair
value of each option award is estimated on the date of grant using the
Black-Scholes pricing model based on the following assumptions:


Fair
      value of shares on measurement date
                      
                      US$
      8.28 per shareExpected
      volatility
                      
                      
                      57.26
                      %Expected
      dividends
                      
                      
                      0.00
                      %Expected
      term (in years)
                      
                      
                      5Risk-free
      rate
                      
                      
                      4.56
                      %


F-12




FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES




NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


For the
years ended December 31, 2006, 2007 and 2008


(amounts
in thousands, except share and per share data)




The fair
value of the Company’s shares was estimated based on the IPO price of US$8.28
per share. The expected volatility is estimated by reference to the historical
volatility of comparable companies listed on the NASDAQ Global Market. The
risk-free rate for periods within the contractual life of the options is based
on the U.S. government bond in effect at the time of grant. Expected dividend
yields are based on historical dividends. Changes in these subjective input
assumptions could materially affect the fair value estimates.




All the
stock options granted during the year ended December 31, 2006, were outstanding
as of December 31, 2008, with a weighted-average remaining contractual term of 5
years. The grant-date fair value of options granted during the year ended
December 31, 2006 is RMB5,643.




The
Company recognized share-based compensation expenses of RMB5,643 for the year
ended December 31, 2006, as listing expense deducted from IPO proceeds and
recorded in additional paid-in capital. As of December 31, 2008, there was no
unrecognized compensation costs related to unvested stock options.




(q)
Earnings per Share




Basic
earnings per share is computed by dividing net earnings by the weighted average
number of ordinary shares outstanding during the year. Diluted earnings per
share is calculated by dividing net earnings by the weighted average number of
ordinary and dilutive potential ordinary shares outstanding during the year.
Diluted potential ordinary shares consist of shares issuable pursuant to stock
option plan.




(r)
Use of Estimates




The
preparation of the consolidated financial statements in accordance with US GAAP
requires management of the Group to make a number of estimates and assumptions
relating to the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. On an ongoing basis,
management reviews its estimates and assumptions including those related to the
recoverability of the carrying amount and the estimated useful lives of
long-lived assets, valuation allowances for accounts receivable and realizable
values for inventories. Changes in facts and circumstances may result in revised
estimates.




(s)
Segment Reporting




The Group
uses the “management approach” in determining reportable operating segments. The
management approach considers the internal organization and reporting used by
the Group’s chief operating decision maker for making operating decisions and
assessing performance as the source for determining the Group’s reportable
segments. Management, including the chief operating decision maker, reviews
operating results solely by monthly revenue of BOPET film (but not by
sub-product type or geographic area) and operating results of Shandong Fuwei,
the operating subsidiary in the PRC. As such, the Group has determined that the
Group has a single operating segment as defined by Statement of Financial
Accounting Standard No. 131, Disclosures about Segments of an Enterprise and
Related Information.




(t)
Contingencies




In the
normal course of business, the Group is subject to contingencies, including
legal proceedings and claims arising out of the business that relate to a wide
range of matters, including among others, product liability. The Group
recognizes a liability for such contingency if it determines it is probable that
a loss has occurred and a reasonable estimate of the loss can be made. The Group
may consider many factors in making these assessments including past history and
the specifics of each matter. As the Group has not become aware of any product
liability claim since operations commenced, the Group has not recognized a
liability for any product liability claims.


F-13




FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES




NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


For the
years ended December 31, 2006, 2007 and 2008


(amounts
in thousands, except share and per share data)




(u)
Recently Issued Accounting Standards




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”. This Statement amends ARB 51 to establish
accounting and reporting standards for the noncontrolling (minority) interest in
a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 160 is effective for the Company’s fiscal year
beginning October 1, 2009. Management is currently evaluating the effect of this
pronouncement on financial statements.




In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This
Statement replaces SFAS No. 141, Business Combinations. This Statement retains
the fundamental requirements in Statement 141 that the acquisition method of
accounting (which Statement 141 called the purchase method) be used for all
business combinations and for an acquirer to be identified for each business
combination. This Statement also establishes principles and requirements for how
the acquire: a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquire; b) recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase and c) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS No. 141(R)
will apply prospectively to business combinations for which the acquisition date
is on or after Company’s fiscal year beginning January 1, 2009. While the
Company has not yet evaluated this statement for the impact, if any, that SFAS
No. 141(R) will have on its consolidated financial statements, the Company will
be required to expense costs related to any acquisitions after September 30,
2009.




On March
19, 2008, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 161, Disclosures about Derivative Instruments and Hedging Activities. The
new standard is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity’s financial position,
financial performance, and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. “Use and complexity of derivative instruments
and hedging activities have increased significantly over the past several years.
This has led to concerns among investors that the existing disclosure
requirements in FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, do not provide enough information about how these
instruments and activities affect the entity’s financial position and
performance,” explained Kevin Stoklosa, project manager. “By requiring
additional information about how and why derivative instruments are being used,
the new standard gives investors better information upon which to base their
decisions.” The new standard also improves transparency about the location and
amounts of derivative instruments in an entity’s financial statements; how
derivative instruments and related hedged items are accounted for under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows. FASB Statement
No. 161 achieves these improvements by requiring disclosure of the fair values
of derivative instruments and their gains and losses in a tabular format. It
also provides more information about an entity’s liquidity by requiring
disclosure of derivative features that are credit risk-related. Finally, it
requires cross-referencing within footnotes to enable financial statement users
to locate important information about derivative instruments. Management is
currently evaluating the effect of this pronouncement on financial
statements.




In May of
2008, FASB issued SFASB No.162, “The Hierarchy of Generally Accepted Accounting
Principles”. The pronouncement mandates that the GAAP hierarchy reside in the
accounting literature as opposed to the audit literature. This has the practical
impact of elevating FASB Statements of Financial Accounting Concepts in the GAAP
hierarchy. This pronouncement will become effective 60 days following SEC
approval. The Company does not believe this pronouncement will impact its
financial statements.




F-14




FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES




NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


For the
years ended December 31, 2006, 2007 and 2008


(amounts
in thousands, except share and per share data)




In May of
2008, FASB issued SFASB No. 163, “Accounting for Financial Guarantee Insurance
Contracts-an interpretation of FASB Statement No. 60”. The scope of the
statement is limited to financial guarantee insurance (and reinsurance)
contracts. The pronouncement is effective for fiscal years beginning after
December 31, 2008. The Company does not believe this pronouncement will impact
its financial statements.




On
December 30, 2008 FASB issued FIN 48-3, “Effective Date of FASB Interpretation
No. 48 for Certain Nonpublic Enterprises”. This FSP defers the effective date of
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, for
certain non-public enterprises as defined in paragraph 289, as amended, of FASB
Statement No. 109, Accounting for Income Taxes, including non-public
not-for-profit organizations. However, non-public consolidated entities of
public enterprises that apply U.S. GAAP are not eligible for the deferral.
Nonpublic enterprises that have applied the recognition, measurement, and
disclosure provisions of Interpretation 48 in a full set of annual financial
statements issued prior to the issuance of this FSP also are not eligible for
the deferral. This FSP will be effective upon issuance. The Company does not
believe this pronouncement will impact its financial statements.




On
January 12, 2009 FASB issued FSP EITF 99-20-01, “Amendment to the Impairment
Guidance of EITF Issue No. 99-20”. This FSP amends the impairment guidance in
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to be Held
by a Transferor in Securitized Financial Assets,” to achieve more consistent
determination of whether an other-than-temporary impairment has occurred. The
FSP also retains and emphasizes the objective of an other-than-temporary
impairment assessment and the related disclosure requirements in FASB Statement
No. 115, Accounting for Certain Investments in Debt and Equity Securities, and
other related guidance. The FSP will be effective for interim and annual
reporting periods ending after December 15, 2008, and will be applied
prospectively. Retrospective application to a prior interim or annual
reporting period is not permitted. The Company does not believe this
pronouncement will impact its financial statements.




(4)
Unaudited Quarterly Data




Quarter
      Ended
                
                M ar. 31
                
                
                Jun. 30
                
                
                Sept. 30
                
                
                Dec. 31
                
                
                TotalFiscal
      year
                  2008
                
                RMB
                
                
                US$
                
                
                RMB
                
                
                US$
                
                
                RMB
                
                
                US$
                
                
                RMB
                
                
                US$
                
                
                RMB
                
                
                US$Revenue
                
                
                104,034
                
                
                
                14,530
                
                
                
                124,747
                
                
                
                17,932
                
                
                
                119,849
                
                
                
                17,489
                
                
                
                98,626
                
                
                
                14,389
                
                
                
                447,255
                
                
                
                65,253Gross
      profit
                
                
                21,625
                
                
                
                3,020
                
                
                
                21,948
                
                
                
                3,155
                
                
                
                14,552
                
                
                
                2,124
                
                
                
                12,207
                
                
                
                1,781
                
                
                
                70,332
                
                
                
                10,261Net
      income
                
                
                7,937
                
                
                
                1,109
                
                
                
                9,655
                
                
                
                1,388
                
                
                
                7,110
                
                
                
                1,037
                
                
                
                (6,544
                )
                
                
                (955
                )
                
                
                18,157
                
                
                
                2,649Basic earnings
      per share
                
                
                0.61
                
                
                
                0.09
                
                
                
                0.74
                
                
                
                0.11
                
                
                
                0.54
                
                
                
                0.08
                
                
                
                (0.50
                )
                
                
                (0.07
                )
                
                
                1.39
                
                
                
                0.20Diluted earnings
      per share
                
                
                0.61
                
                
                
                0.09
                
                
                
                0.74
                
                
                
                0.11
                
                
                
                0.54
                
                
                
                0.08
                
                
                
                (0.50
                )
                
                
                (0.07
                )
                
                
                1.39
                
                
                
                0.20




F-15


FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 For the
years ended December 31, 2006, 2007 and 2008
 (amounts
in thousands, except share and per share data)




(5)
Accounts Receivable, net




Accounts
receivable at December 31, 2007 and 2008 consist of the following:


12-31-2008
                      
                      
                      12-31-2007RMB
                      
                      
                      US$
                      
                      
                      RMBAccounts
      receivable
                      
                      
                      41,245
                      
                      
                      
                      6,017
                      
                      
                      
                      35,893Less:
      Allowance for doubtful accounts
                      
                      
                      (4,074
                      )
                      
                      
                      (594
                      )
                      
                      
                      (2,644
                      )37,171
                      
                      
                      
                      5,423
                      
                      
                      
                      33,249Bills
      receivable
                      
                      
                      1,408
                      
                      
                      
                      205
                      
                      
                      
                      24,94638,579
                      
                      
                      
                      5,628
                      
                      
                      
                      58,195




An
analysis of the allowance for doubtful accounts for 2006, 2007 and 2008 is as
follows:


2006
                  
                  
                  2007
                  
                  
                  2008RMB
                  
                  
                  RMB
                  
                  
                  RMB
                  
                  
                  US$Balance
      at beginning of year
                  
                  
                  2,015
                  
                  
                  
                  872
                  
                  
                  
                  2,644
                  
                  
                  
                  386Bad
      debt expense/(recovery)
                  
                  
                  (1,143
                  )
                  
                  
                  1,772
                  
                  
                  
                  1,430
                  
                  
                  
                  209Write-offs
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Balance
      at end of year
                  
                  
                  872
                  
                  
                  
                  2,644
                  
                  
                  
                  4,074
                  
                  
                  
                  594




The Group
has a credit policy in place and the exposure to credit risk is monitored on an
ongoing basis. Credit evaluations are performed on all customers requiring
credit over a certain amount. These receivables are due within 7 to 90 days from
the date of billing. Normally, the Group does not obtain collateral from
customers.




(6)
Inventories




Inventories
at December 31, 2007 and 2008 consist of the following:




12-31-2008
                  
                  
                  12-31-2007RMB
                  
                  
                  US$
                  
                  
                  RMBRaw
      materials
                  
                  
                  11,239
                  
                  
                  
                  1,640
                  
                  
                  
                  14,944Work-in-progress
                  
                  
                  1,527
                  
                  
                  
                  223
                  
                  
                  
                  956Finished
      goods
                  
                  
                  17,285
                  
                  
                  
                  2,522
                  
                  
                  
                  25,321Consumables
      and spare parts
                  
                  
                  539
                  
                  
                  
                  79
                  
                  
                  
                  44930,589
                  
                  
                  
                  4,463
                  
                  
                  
                  41,670




F-16


FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 For the
years ended December 31, 2006, 2007 and 2008
 (amounts
in thousands, except share and per share data)


(7)
Prepayments and Other Receivables




Prepayments
and other receivables at December 31, 2007 and 2008 consist of the
following:


2007
                  
                  
                  2008RMB
                  
                  
                  RMB
                  
                  
                  US$Purchase
      deposits of raw materials
                  
                  
                  13,538
                  
                  
                  
                  6,846
                  
                  
                  
                  999Prepayments
      (Note)
                  
                  
                  774
                  
                  
                  
                  741
                  
                  
                  
                  108Other
      receivables
                  
                  
                  1,848
                  
                  
                  
                  1,116
                  
                  
                  
                  16316,160
                  
                  
                  
                  8,703
                  
                  
                  
                  1,270




Note:
Prepayments at December 31, 2007 and 2008 include an amount of RMB741 and RMB741
(US$108), respectively, representing the current portion of lease prepayments of
the Group (see Note 9).




(8)
Property, Plant and Equipment




Property,
plant and equipment consist of the following:




31-Dec-08
                  
                  
                  Dec-31-07RMB
                  
                  
                  US$
                  
                  
                  RMBBuildings
                  
                  
                  34,807
                  
                  
                  
                  5,078
                  
                  
                  
                  33,699Plant
      and equipment
                  
                  
                  330,106
                  
                  
                  
                  48,161
                  
                  
                  
                  276,942Computer
      equipment
                  
                  
                  1,387
                  
                  
                  
                  202
                  
                  
                  
                  1,007Furniture
      and fixtures
                  
                  
                  5,799
                  
                  
                  
                  846
                  
                  
                  
                  1,844Motor
      vehicles
                  
                  
                  1,739
                  
                  
                  
                  254
                  
                  
                  
                  1,273373,838
                  
                  
                  
                  54,542
                  
                  
                  
                  314,765Less:
      accumulated depreciation
                  
                  
                  (114,604
                  )
                  
                  
                  (16,720
                  )
                  
                  
                  (86,456
                  )259,235
                  
                  
                  
                  37,821
                  
                  
                  
                  228,309




All of
the Group’s buildings are located in the PRC. As of December 31, 2007 and 2008,
property, plant and equipment with carrying value totaling RMB360,003 and
RMB326,243 (US$47,598) respectively were pledged to banks as collateral for
short-term bank loans of RMB152,590 and RMB162,580(US$23,720)and long-term bank
loans of RMB 5,000 (US$ 729) respectively (see Note 13).




Construction-in-progress
represents capital expenditure in respect of the BOPET production line. Interest
expense capitalized during the year ended December 31, 2006, 2007 and 2008 was
RMB2,855, RMB170 and RMB7,710 (US$ 1,125), respectively (see Note
19).


F-17


FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 For the
years ended December 31, 2006, 2007 and 2008
 (amounts
in thousands, except share and per share data)




(9)
Lease Prepayments




The
balance represents the land use rights of the Group as follows:




2007
                  
                  
                  2008RMB
                  
                  
                  RMB
                  
                  
                  US$Non-current
      portion
                  
                  
                  22,290
                  
                  
                  
                  22,507
                  
                  
                  
                  3,284Current
      portion - amount charged to expense next year
                  
                  
                  774
                  
                  
                  
                  741
                  
                  
                  
                  10823,064
                  
                  
                  
                  23,248
                  
                  
                  
                  3,392




As of
December 31, 2007 and 2008, prepaid land use rights were pledged to banks as
collateral for short-term bank loans of RMB0  and RMB26,880 (US$3,922)
respectively (Note 13).




Charges
for the year ended December 31, 2006, 2007 and 2008 was RMB724, RMB741, and
RMB741(US$108).




As of
December 31, 2008, prepaid land use rights of the Group included certain parcels
of land located in Weifang City, Shandong Province, the PRC, with a net book
value of RMB22,507(US$3,284). The land use rights for land with area of
approximately 43,878 square meters, 5,279 square meters and 25,094 square meters
will expire in November 2050, May 2053 and February 2055,
respectively.




(10)
Intangible Asset, net





2007
                  
                  
                  2008RMB
                  
                  
                  RMB
                  
                  
                  US$Trademark
                  
                  
                  362
                  
                  
                  
                  362
                  
                  
                  
                  53Less:
      accumulated amortization
                  
                  
                  (326
                  )
                  
                  362
                  
                  
                  5336
                  
                  
                  
                  -
                  
                  
                  
                  -




Intangible
asset represents the trademark of “Neo-luck” acquired by Shandong Fuwei from
Shandong Neo-Luck on July 20, 2003. Amortization expense is recognized on a
straight-line basis over the estimated useful life of 5 years. Amortization of
intangible asset was RMB72, RMB73 and RMB72 (US$11) for the year ended December
31, 2006, 2007 and 2008, respectively.




(11)
Goodwill




Goodwill
of RMB10,276 (US$1,499) at December 31, 2007 and 2008, which is not
deductible for tax purposes, pertains solely to the Company’s acquisition of
Shandong Fuwei in October 2004. The goodwill is attributable to the development
potential of business acquired.




(12)  DEPOSIT





On
January 20, 2008, Shandong Fuwei signed a “Letter of Intent of Joyinn Capital
Increase and Share Expansion”(“LOI”) with Joyinn Hotel Investment &
Management Co., Ltd. (“Joyinn”) and the Shareholder of Joyinn. Joyinn is a legal
company of limited liability that registered on May 19, 2006 in Beijing, with
registered capital of RMB 50,000. In order to grow, Joyinn plans to increase its
registered capital by RMB 52,000 to a total of RMB 102,000, and plans to accept
Shandong Fuwei as a new shareholder to invest and buy its shares.




According
to the LOI, Shandong Fuwei deposited RMB 26,000 (half of the would-be added
register capital of RMB 52,000), to Joyinn as the prepayment as of March 31,
2008. The prepayment to Joyinn will be regarded as investment payment after all
parties enter into the final capital increase and shares expansion agreement
during the effective term of this LOI. A share pledging agreement was entered
into subsequently on April 9, 2008 between Shandong Fuwei and Shandong Xinmeng
Investment Co., Ltd (“Pledger”), which holds 97.6% shares of Joyinn. The Pledger
agreed to pledge its 52% interest in Joyinn, as a guarantee to the prepayment on
the newly increased register capital made by Shandong Fuwei to Joyinn. Based on
the mutual supplementary agreement signed on June 2008, the prepayment has
decreased by RMB 5,000 and returned to the Company on June 18, 2008. As of
December 31, 2008, the actual total amount of the deposit paid to Joyinn was RMB
21,000 (US$3,064).


F-18




FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 For the
years ended December 31, 2006, 2007 and 2008
 (amounts
in thousands, except share and per share data)




(13)
Short-term and Long-term Bank Loans


Interestrate
      per
                                                      
                                                      
                                                      31-Dec-08
                                                      
                                                      
                                                      Dec-31-2007Lender
                                                      
                                                      annum
                                                      
                                                      
                                                      RMB
                                                      
                                                      
                                                      US$
                                                      
                                                      
                                                      RMBBank of Communications Co.,
      Ltd.-
      January 15, 2007 to January 15, 2008
                                                      
                                                      
                                                      6.73
                                                      %
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      100,000-
      February 6, 2007 to January 15, 2008
                                                      
                                                      
                                                      6.73
                                                      %
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      52,590-
      January 29, 2008 to July 19, 2008
                                                      
                                                      
                                                      7.23
                                                      %
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      --
      July 30, 2007 to July 30, 2008
                                                      
                                                      
                                                      8.22
                                                      %
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      --
      July 16, 2008 to June 10, 2009
                                                      
                                                      
                                                      5.64
                                                      %
                                                      
                                                      
                                                      82,580
                                                      
                                                      
                                                      
                                                      12,047
                                                      
                                                      
                                                      
                                                      --
      July 18, 2008 to June 23, 2009
                                                      
                                                      
                                                      5.64
                                                      %
                                                      
                                                      
                                                      60,000
                                                      
                                                      
                                                      
                                                      8,754
                                                      
                                                      
                                                      
                                                      -Weifang Commercial Bank-
      January 31, 2007 to January 30, 2008
                                                      
                                                      
                                                      3.06
                                                      %
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      16,500-
      October 30, 2007 to January 24, 2008
                                                      
                                                      
                                                      0.00
                                                      %
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      3,500-
      January 24, 2008 to January 12, 2009
                                                      
                                                      
                                                      0.00
                                                      %
                                                      
                                                      
                                                      10,000
                                                      
                                                      
                                                      
                                                      1,459-
      January 30, 2008 to January 18, 2009
                                                      
                                                      
                                                      0.00
                                                      %
                                                      
                                                      
                                                      10,000
                                                      
                                                      
                                                      
                                                      1,459-
      December 2, 2008 to December 2, 2011
                                                      
                                                      
                                                      0.00
                                                      %
                                                      
                                                      
                                                      5,000
                                                      
                                                      
                                                      
                                                      729Bank of China-
      August 25, 2007 to August 24, 2008
                                                      
                                                      
                                                      6.02
                                                      %
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      4,826-
      August 13, 2007 to August 12, 2008
                                                      
                                                      
                                                      6.03
                                                      %
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      3,399-
      August 31, 2007 to August 30, 2008
                                                      
                                                      
                                                      6.01
                                                      %
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      2,252-
      August 31, 2007 to August 30, 2008
                                                      
                                                      
                                                      6.01
                                                      %
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      3,100-
      November 14, 2007 to November 14, 2008
                                                      
                                                      
                                                      5.66
                                                      %
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      1,860-
      March 13, 2008 to March 13, 2009
                                                      
                                                      
                                                      5.45
                                                      %
                                                      
                                                      
                                                      2,184
                                                      
                                                      
                                                      
                                                      319
                                                      
                                                      
                                                      
                                                      -169,764
                                                      
                                                      
                                                      
                                                      24,767
                                                      
                                                      
                                                      
                                                      188,027




Notes:




During
the years ended December 31, 2007 and 2008, the Company entered into several
loan agreements with commercial banks with terms ranging from one year to three
years to finance its working capital, R&D investment and construction, and
foreign trade. None of the loan agreements requires the Company to comply with
financial covenants. The weighted average interest rate of short-term bank loans
outstanding as of December 31, 2007and 2008 were 6.32% and 5.64% per annum,
respectively.




The
principal amounts of the above short-term loans are repayable at the end of the
loan period.


F-19




FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 For the
years ended December 31, 2006, 2007 and 2008
 (amounts
in thousands, except share and per share data)




Following
the maturity of the short-term loans of RMB88,580 and RMB60,000 from Bank of
Communications Co., Ltd with maturity date on July 19, 2008 and July 30, 2008,
respectively.  Subsequently, the Company obtained new short-term loans
on July 16, 2008 and July 18, 2008 with RMB 82,580 and RMB60,000,
respectively.  The maturity date is on June 10 and June 23 of 2009
separately.  The annul interest rate is up by 10% compared the fixed
benchmark interest rate announced by the People’s Bank of China. As of December
31, 2008, the interest rate in effect is 5.632%.




The
Company obtained from Weifang Commercial Bank new free-interest loans of
RMB10,000 (US$1,459) separately on January 24 and January 30, 2008, all of which
are totaled RMB20,000(US$2,918), with the maturity date of January 12 and
January 18, 2009. The Company obtained from Weifang Commercial Bank a new loan
of RMB5,000 (US$729) on December 2, 2008, with the maturity date on December 24,
2011 and interest charged at 0.00% per annum. All the loans above are
interest-free loans from the local government who entrust the Weifang Commercial
Bank to provide to enterprises which is called the industrial development fund
loan administrated by the local government of Shandong Province, for the local
high-and –new tech enterprises, with the purpose of enhancing their independent
ability of innovation and technical research and development so as to support
their development. RMB 20,000 (US$2,918) proceeded from this loan has been
invested in the construction of the trial production line for the R&D
center.




From
August 2007 to March 2008, Shandong Fuwei recommended a foreign currency
portfolio from Bank of China Weifang branch, with expectation to reduce the cost
of foreign exchange for Shandong Fuwei importing raw materials. The portfolio
transactions are guaranteed by RMB 18,245  security deposit for
one-year foreign currency loan of US$2,434. Loan contract is signed between two
parties when L/C is opened and stated that the covering term is one year with a
lower interest rate than the fixed benchmark rate announced by the People’s Bank
of China (the “PBOC”), so that Shandong Fuwei could purchase dollars at a lower
exchange rate. The Company obtained from Bank of China new short-term one-year
loans totaling to RMB2,344 from the borrowing dates, which will expire from
August 2008 to March 2009  with an interest rates charged from 5.66%
to 6.03%.   Among which US$2,116 is guaranteed by RMB15, 981 has
been settled in different date between August and November, 2008. The
outstanding US$319 has be matured on March 13, 2009.




Short-term
loans outstanding, which are all denominated in Renminbi, are secured and
guaranteed as follows:


2007
                            
                            
                            2008RMB
                            
                            
                            RMB
                            
                            
                            US$Secured
      by:-
      property, plant and equipment
                            
                            
                            152,590
                            
                            
                            
                            107,580
                            
                            
                            
                            15,695-
      lease prepayments
                            
                            
                            -
                            
                            
                            
                            60,000
                            
                            
                            
                            8,754-
      bills receivable
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Guaranteed
      by related parties (Note 20(a))
                            
                            
                            20,000
                            
                            
                            
                            -
                            
                            
                            
                            -Restricted
      cash
                            
                            
                            15,437
                            
                            
                            
                            2,184
                            
                            
                            
                            319188,027
                            
                            
                            
                            169,764
                            
                            
                            
                            24,768




(14)
Accrued Expenses Advanced from Customers and Other
Payables




Accrued
expenses and other payables at December 31, 2007 and 2008 consist of the
following:


2007
                      
                      
                      2008RMB
                      
                      
                      RMB
                      
                      
                      US$Payables
      to contractors
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Receipts
      in advance from customers
                      
                      
                      10,957
                      
                      
                      
                      8,781
                      
                      
                      
                      1,281VAT
      payable and other taxes payable
                      
                      
                      3,709
                      
                      
                      
                      6,970
                      
                      
                      
                      1,017Audit
      fee
                      
                      
                      84
                      
                      
                      
                      75
                      
                      
                      
                      11Others
                      
                      
                      3,794
                      
                      
                      
                      -
                      
                      
                      
                      -18,544
                      
                      
                      
                      15,825
                      
                      
                      
                      2,309




F-20




FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 For the
years ended December 31, 2006, 2007 and 2008
 (amounts
in thousands, except share and per share data)




(15)
Shareholders’ Equity




(a) On
the date of incorporation on August 9, 2004, the authorized share capital was
US$50 comprising 50,000 ordinary shares of US$1.00 each. On October 6, 2004, the
Company issued 100 ordinary shares of US$1 each.




On
November 23, 2006, the Company:




(i)
Increased the authorized share capital from US$50 comprised of 50,000 ordinary
shares of US$1.00 per share to US$2,595 comprised of 2,595,040 shares of US$1.00
per share.




(ii)
Declared a 7.707-for-one ordinary share split. Further to the share split, the
authorized share capital is divided into 20,000,000 ordinary shares of a par
value of US$0.129752 each. All share and per share amounts presented in the
consolidated financial statements and related notes have been revised to reflect
the share split retroactively.




On
November 23, 2006, further to the resolutions adopted on May 8, 2006, the
outstanding shareholders’ loans from Apex Glory Holdings and Easebright
Investments of RMB70,596 and RMB18,766 respectively, were converted into
6,911,895 and 1,837,334 ordinary shares of the Company
respectively.




During
the year ended December 31, 2006, the Company issued 4,312,500 new ordinary
shares through an IPO. See Note 1 to the consolidated financial statements for
details of the IPO.




(b)
Transfers from retained earnings to statutory reserves were made in accordance
with the relevant PRC rules and regulations and the articles of association of
the Shandong Fuwei and were approved by the board of directors of Shandong
Fuwei.




(16)
Revenues




The
Group’s revenue is primarily derived from the manufacture and sale of plastic
flexible packaging materials.




The
following table shows the distribution of the Group’s revenue by the
geographical location of customers, whereas all the Group’s assets are located
in the PRC:


2006
                      
                      
                      2007
                      
                      
                      2008RMB
                      
                      
                      RMB
                      
                      
                      RMB
                      
                      
                      US$The
      PRC
                      
                      
                      345,122
                      
                      
                      
                      335,213
                      
                      
                      
                      388,823
                      
                      
                      
                      56,728Overseas
      countries (principally Korea, United States of America and
      Europe)
                      
                      
                      91,762
                      
                      
                      
                      114,160
                      
                      
                      
                      58,432
                      
                      
                      
                      8,525436,884
                      
                      
                      
                      449,373
                      
                      
                      
                      447,255
                      
                      
                      
                      65,253




The
Group’s revenue by significant types of films for 2006, 2007 and 2008 is as
follows:


2006
                    
                    
                    2007
                    
                    
                    2008RMB
                    
                    
                    RMB
                    
                    
                    RMB
                    
                    
                    US$Printing
      film
                    
                    
                    95,315
                    
                    
                    
                    83,453
                    
                    
                    
                    56,607
                    
                    
                    
                    8,259Stamping
      film
                    
                    
                    99,856
                    
                    
                    
                    94,366
                    
                    
                    
                    139,571
                    
                    
                    
                    20,363Metallization
      film
                    
                    
                    34,772
                    
                    
                    
                    30,668
                    
                    
                    
                    45,148
                    
                    
                    
                    6,587Base
      film for other application
                    
                    
                    46,784
                    
                    
                    
                    70,925
                    
                    
                    
                    98,526
                    
                    
                    
                    14,375Special
      film
                    
                    
                    160,157
                    
                    
                    
                    169,961
                    
                    
                    
                    107,404
                    
                    
                    
                    15,670436,884
                    
                    
                    
                    449,373
                    
                    
                    
                    447,255
                    
                    
                    
                    65,253




F-21


FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 For the
years ended December 31, 2006, 2007 and 2008
 (amounts
in thousands, except share and per share data)




The Group
operates and manages its business in one single operating segment - Shandong
Fuwei, the operating subsidiary in the PRC. The results of Shandong Fuwei used
by management to evaluate business performance are prepared based on PRC GAAP.
Segment information is set out below:





2006
                                
                                
                                2007
                                
                                
                                2008RMB
                                
                                
                                RMB
                                
                                
                                RMB
                                
                                
                                US$Revenues
      from external customers(Note
      (a))
                                
                                
                                429,354
                                
                                
                                
                                450,946
                                
                                
                                
                                445,978
                                
                                
                                
                                65,066Segment
      income
                                
                                
                                65,620
                                
                                
                                
                                54,823
                                
                                
                                
                                30,714
                                
                                
                                
                                4,481Reconciling
      items (Note (b))
                                
                                
                                2,802
                                
                                
                                
                                2,788
                                
                                
                                
                                (9,592
                                )
                                
                                
                                (1,399
                                )Income
      before income taxes
                                
                                
                                68,422
                                
                                
                                
                                51,941
                                
                                
                                
                                21,123
                                
                                
                                
                                3,082Depreciation
      and amortization
                                
                                
                                24,221
                                
                                
                                
                                23,290
                                
                                
                                
                                25,909
                                
                                
                                
                                3,780Segment
      assets (Note (c))
                                
                                
                                496,334
                                
                                
                                
                                753,863
                                
                                
                                
                                744,923
                                
                                
                                
                                108,681Expenditures
      for long-lived assets
                                
                                
                                40,175
                                
                                
                                
                                185,190
                                
                                
                                
                                56,093
                                
                                
                                
                                8,184




(a)
            Reconciliation of total segment
      revenue to consolidated revenue.




2006
                        
                        
                        2007
                        
                        
                        2008RMB
                        
                        
                        RMB
                        
                        
                        RMB
                        
                        
                        US$Total
      segment revenues under429,354
                        
                        
                        
                        450,946
                        
                        
                        
                        445,978
                        
                        
                        
                        65,066Reconciliation
      from PRC GAAP to-
      Freight and other operating expenses
                        
                        
                        7,530
                        
                        
                        
                        1,573
                        
                        
                        
                        1,278
                        
                        
                        
                        186Consolidated
      revenues under US GAAP
                        
                        
                        436,884
                        
                        
                        
                        449,373
                        
                        
                        
                        447,255
                        
                        
                        
                        65,253




F-22




FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 For the
years ended December 31, 2006, 2007 and 2008
 (amounts
in thousands, except share and per share data)




(b)
Reconciliation of total segment income to consolidated operating
income




2006
                        
                        
                        2007
                        
                        
                        2008RMB
                        
                        
                        RMB
                        
                        
                        RMB
                        
                        
                        US$Total
      segment income under PRC GAAP
                        
                        
                        65,620
                        
                        
                        
                        54,823
                        
                        
                        
                        30,714
                        
                        
                        
                        4,481-
      Depreciation on property, plant and equipment
                        
                        
                        871
                        
                        
                        
                        907
                        
                        
                        
                        871
                        
                        
                        
                        127-
      Capitalization of interest expense
                        
                        
                        2,855
                        
                        
                        
                        1,170
                        
                        
                        
                        7,710
                        
                        
                        
                        1,125-
      Other adjustments
                        
                        
                        1,214
                        
                        
                        
                        1,963
                        
                        
                        
                        -
                        
                        
                        
                        -4,940
                        
                        
                        
                        3,040
                        
                        
                        
                        8,581
                        
                        
                        
                        1,252Total
      segment income under US GAAP
                        
                        
                        70,560
                        
                        
                        
                        57,863
                        
                        
                        
                        39,295
                        
                        
                        
                        5,733Interest
      income of holding companies
                        
                        
                        14
                        
                        
                        
                        91
                        
                        
                        
                        15
                        
                        
                        
                        2Administrative
      expenses of holding companies
                        
                        
                        (2,152
                        )
                        
                        
                        (5,831
                        )
                        
                        
                        (10,251
                        )
                        
                        
                        (1,496
                        )Consolidated
      income before income taxes
                        
                        
                        68,422
                        
                        
                        
                        51,941
                        
                        
                        
                        21,123
                        
                        
                        
                        3,082




(c)
Reconciliation of total segment assets to consolidated total assets




2007
                                
                                
                                2008RMB
                                
                                
                                RMB
                                
                                
                                US$Total
      assets for reportable segment under PRC GAAP
                                
                                
                                753,863
                                
                                
                                
                                744,923
                                
                                
                                
                                108,681Reconciliation from PRC GAAP to
      US GAAP:-
      Property, plant and equipment
                                
                                
                                (15,453
                                )
                                
                                
                                (13,638
                                )
                                
                                
                                (1,990
                                )-
      Lease prepayments
                                
                                
                                -
                                
                                
                                
                                2,836
                                
                                
                                
                                414-
      Deferred tax assets
                                
                                
                                1,047
                                
                                
                                
                                838
                                
                                
                                
                                122-
      Goodwill
                                
                                
                                10,276
                                
                                
                                
                                10,276
                                
                                
                                
                                1,499-
      Accounts receivable, net
                                
                                
                                (2,946
                                )
                                
                                
                                (6,003
                                )
                                
                                
                                (876
                                )-
      Prepayments and other receivables
                                
                                
                                (7,796
                                )
                                
                                
                                (23,473
                                )
                                
                                
                                (3,425
                                )Total
      segment assets under US GAAP
                                
                                
                                738,991
                                
                                
                                
                                727,766
                                
                                
                                
                                106,178Cash
      held by the Company
                                
                                
                                131
                                
                                
                                
                                14
                                
                                
                                
                                2Others
      (Note)
                                
                                
                                (147
                                )
                                
                                
                                12,124
                                
                                
                                
                                1,769Consolidated
      total assets
                                
                                
                                738,975
                                
                                
                                
                                739,904
                                
                                
                                
                                107,949




Note: The
2007 and 2008 balance primarily includes other payables of third
parties.




(17)
Depreciation and Amortization




Depreciation
of property, plant and equipment and amortization of intangible asset is
included in the following captions:


2006
                  
                  
                  2007
                  
                  
                  2008RMB
                  
                  
                  RMB
                  
                  
                  RMB
                  
                  
                  US$Cost
      of goods sold
                  
                  
                  22,721
                  
                  
                  
                  22,557
                  
                  
                  
                  25,362
                  
                  
                  
                  3,700Distribution
      expenses
                  
                  
                  10
                  
                  
                  
                  14
                  
                  
                  
                  42
                  
                  
                  
                  6Administrative
      expenses
                  
                  
                  766
                  
                  
                  
                  719
                  
                  
                  
                  614
                  
                  
                  
                  9023,497
                  
                  
                  
                  23,290
                  
                  
                  
                  26,018
                  
                  
                  
                  3,796




F-23




FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 For the
years ended December 31, 2006, 2007 and 2008
 (amounts
in thousands, except share and per share data)




(18)
Freight Costs




The Group
records freight costs related to the transporting of the raw materials to the
Group’s warehouse in cost of goods sold and all other outbound freight costs in
distribution expenses. For the year ended December 31, 2006, 2007 and 2008,
freight costs included in cost of goods sold were RMB177, RMB3,030 and
RMB3,302(US$482), respectively, and RMB13,170, RMB10,843 and RMB8,154(US$1,190),
respectively, were included in distribution expenses.




(19)
Interest Expense




The Group
capitalizes interest expense as a component of the cost of construction in
progress. The following is a summary of interest cost incurred during the year
ended December 31, 2006, 2007 and 2008:


2006
                    
                    
                    2007
                    
                    
                    2008RMB
                    
                    
                    RMB
                    
                    
                    RMB
                    
                    
                    US$Interest
      cost capitalized
                    
                    
                    2,855
                    
                    
                    
                    170
                    
                    
                    
                    7,710
                    
                    
                    
                    1,125Interest
      cost charged to expense
                    
                    
                    12,884
                    
                    
                    
                    13,233
                    
                    
                    
                    3,995
                    
                    
                    
                    58315,739
                    
                    
                    
                    12,975
                    
                    
                    
                    11,705
                    
                    
                    
                    1,708




(20)
Income Taxes




Cayman
Islands Tax




Under the
current Cayman Island laws, the Company is not subject to tax on income or
capital gain. In addition, upon payments of dividends by the Company to its
shareholders, no Cayman Islands withholding tax is imposed.




PRC
Tax




Shandong
Fuwei, being a Hi-Tech Enterprise in the Weifang Hi-Tech Industrial Zone in
Shandong, the PRC, has been granted preferential tax treatments by the Tax
Bureau of the PRC. According to the PRC Income Tax Law and various approval
documents issued by the Tax Bureau, Shandong Fuwei’s profit was taxed at a rate
of 15%.




In
addition, Shandong Fuwei has been granted certain tax relief under which it is
exempted from PRC income tax for the period from January 28, 2003 to December
31, 2006, and 50% reduction in tax rate for the year ended December 31,
2007.




If our
subsidiary Shandong Fuwei was not entitled to a reduced enterprise income tax,
or EIT, rate of 0% for the year ended December 31, 2006, and rate of 7.5% for
the year ended December 31, 2007, it would have had an EIT rate of 15%. Shandong
Fuwei is entitled to an income rate of 15% for the year ended December 31, 2008.
Net income and basic and diluted earnings per share would be reduced by the
following amounts:




2006
                  
                  
                  2007
                  
                  
                  2008RMB
                  
                  
                  RMB
                  
                  
                  RMB
                  
                  
                  US$Net
      income
                  
                  
                  (10,453
                  )
                  
                  
                  (4,340
                  )
                  
                  
                  (2,966
                  )
                  
                  
                  (433
                  )Earnings
      per share-
      Basic
                  
                  
                  (9.50
                  )
                  
                  
                  (0.33
                  )
                  
                  
                  (0.23
                  )
                  
                  
                  (0.03
                  )-
      Diluted
                  
                  
                  (9.48
                  )
                  
                  
                  (0.33
                  )
                  
                  
                  (0.23
                  )
                  
                  
                  (0.03
                  )




F-24


FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 For the
years ended December 31, 2006, 2007 and 2008
 (amounts
in thousands, except share and per share data)




The Group
had minimal operations in jurisdictions other than the PRC. (Loss)/income before
income taxes consists of:


2006
                  
                  
                  2007
                  
                  
                  2008RMB
                  
                  
                  RMB
                  
                  
                  RMB
                  
                  
                  US$Cayman
      Islands
                  
                  
                  (2,117
                  )
                  
                  
                  (5,893
                  )
                  
                  
                  (11,419
                  )
                  
                  
                  (1,666
                  )British
      Virgin Islands
                  
                  
                  (21
                  )
                  
                  
                  55
                  
                  
                  
                  (1
                  )
                  
                  
                  (0.1
                  )PRC
                  
                  
                  70,560
                  
                  
                  
                  57,863
                  
                  
                  
                  31,668
                  
                  
                  
                  4, 62068,422
                  
                  
                  
                  52,025
                  
                  
                  
                  20,248
                  
                  
                  
                  2,954




The
Company has no material unrecognized tax benefit which would favorably affect
the income taxes in future periods and do not believe there will be any
significant increases or decreases within the next twelve month. No Interest or
penalties have been accrued at the date of adoption.




Pursuant
to the acquisition by Fuwei (BVI), Shandong Fuwei became a wholly foreign-owned
enterprise under the laws of the PRC on January 5, 2005. Accordingly, Shandong
Fuwei is entitled to a new 2-year-exemption-3-year-50%-reduction Foreign
Enterprise Income Tax holiday whereby the profit for the first two financial
years beginning with the first profit-making year (after setting off tax losses
carried forward from prior years) is exempted from income tax in the PRC and the
profit for each of the subsequent three financial years is taxed at 50% of the
prevailing tax rates set by the relevant tax authorities. The tax holiday of
Shandong Fuwei commenced in 2005.




On
December 29, 2006, the Standing Committee of the Tenth National People’s
Congress (“NPC”) passed a resolution to submit the draft Enterprises Income Tax
Law (“New Tax Law”) to the Tenth NPC plenary session for voting. On March 16,
2007, the National People’s Congress of the PRC passed the Enterprise Income Tax
Law of the People’s Republic of China, which law will take effect as of January
1, 2008. Further, on December 6, 2007, the State Council Released the
Implementation Rules to the Corporate Income Tax Law (“the Implementation
Rules”).




According
to the New Tax Law, from January 1, 2008, the standard corporate income tax
rates for enterprises in the PRC will be reduced from 33% to 25%. However, an
“encouraged hi-tech enterprise” will continue to be entitled a reduced corporate
income tax rate of 15%.




Under the
New Tax Law being effective from January 1, 2008, and in accordance with
“Notification of the State Council on carrying out the Transitional Preferential
Policies concerning Enterprise Income Tax”(Guo Fa [2007] No.39) promulgated by
the State Council on December 26, 2007, an entity established before March 16,
2007 that was entitled to preferential tax treatment prior to the New Tax Law
will be subject to transitional tax rate beginning in period 2008 (“
Transitional Tax rate”) before the new corporate income tax rate of 25% applies.
For company currently enjoying a reduced tax rate of 15%, the Transitional Tax
Rate is 18%, 20%, 22%, 24% and 25% in 2008, 2009, 2010, 2011and 2012 on wards
respectively. The tax rate will transit to the standard tax rate of 25% for
entities with current rate of 24% effective from January 1, 2008.




Shandong
Fuwei was redesignated as a High-and-New Tech Enterprise in December 2008 and
enjoy the favorable income tax rate pursuant to the income law Enterprise Income
Tax Law.  Accordingly, the deferred taxes as of December 31, 2008,
have been calculated employing the statutory rate of the Shandong Fuwei of
18%.




Income
tax benefit/ (expense) consists of:


Current
                        
                        
                        Deferred
                        
                        
                        TotalPRC
      income tax
                        
                        RMB
                        
                        
                        RMB
                        
                        
                        RMBYear
      ended December 31, 2006
                        
                        
                        -
                        
                        
                        
                        (757
                        )
                        
                        
                        (757
                        )Year
      ended December 31, 2007
                        
                        
                        (4,529
                        )
                        
                        
                        (152
                        )
                        
                        
                        (4,681
                        )Year
      ended December 31, 2008
                        
                        
                        (4,715
                        )
                        
                        
                        1,748
                        
                        
                        
                        (2,966
                        )Year
      ended December 31, 2008 (US$)
                        
                        
                        (688
                        )
                        
                        
                        255
                        
                        
                        
                        (433
                        )




F-25


FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 For the
years ended December 31, 2006, 2007 and 2008
 (amounts
in thousands, except share and per share data)




Income
tax benefit reported in the consolidated statements of income differs from the
income tax expense amount computed by applying the PRC income tax rate of 15%
(the statutory tax rate of the Company’s principal subsidiary) for the year
ended December 31, 2006, 2007 and 2008 for the following reasons:


2006
                  
                  
                  2007
                  
                  
                  2008RMB
                  
                  
                  RMB
                  
                  
                  RMB
                  
                  
                  US$Income
      before income taxes
                  
                  
                  68,422
                  
                  
                  
                  51,941
                  
                  
                  
                  21,123
                  
                  
                  
                  3,082Computed
      “expected” tax expense
                  
                  
                  (10,263
                  )
                  
                  
                  (7,791
                  )
                  
                  
                  (5,280
                  )
                  
                  
                  (770
                  )Non-deductible
      expenses
                  
                  
                  (377
                  )
                  
                  
                  (900
                  )
                  
                  
                  (3,031
                  )
                  
                  
                  (442
                  )Non-taxable
      income
                  
                  
                  2
                  
                  
                  
                  24
                  
                  
                  
                  1,022
                  
                  
                  
                  149Tax
      holiday
                  
                  
                  9,827
                  
                  
                  
                  3,986
                  
                  
                  
                  3,385
                  
                  
                  
                  494Tax
      rate differential of other tax jurisdictions
                  
                  
                  54
                  
                  
                  
                  -
                  
                  
                  
                  937
                  
                  
                  
                  137Actual
      income tax expenses
                  
                  
                  (757
                  )
                  
                  
                  (4,681
                  )
                  
                  
                  (2,966
                  )
                  
                  
                  (433
                  )




Tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets/(liabilities) as of December 31, 2007 and 2008, are
presented below.




Deferred
income tax assets/(liabilities):




2007
                            
                            
                            2008RMB
                            
                            
                            RMB
                            
                            
                            US$CurrentAccounts
      receivable
                            
                            
                            (265
                            )
                            
                            
                            (80
                            )
                            
                            
                            (12
                            )Other
      receivables
                            
                            
                            –
                            
                            
                            
                            538
                            
                            
                            
                            4(265
                            )
                            
                            
                            457
                            
                            
                            
                            67Non-currentProperty,
      plant and equipment, principally due to differences in depreciation and
      capitalized interest
                            
                            
                            2,666
                            
                            
                            
                            1,993
                            
                            
                            
                            291Construction
      in progress, principally due to capitalized interest
                            
                            
                            (1,150
                            )
                            
                            
                            422
                            
                            
                            
                            62Lease
      prepayments, principally due to differences in charges
                            
                            
                            (547
                            )
                            
                            
                            (420
                            )
                            
                            
                            (61
                            )969
                            
                            
                            
                            1,995
                            
                            
                            
                            291Net
      deferred income tax assets
                            
                            
                            704
                            
                            
                            
                            2,452
                            
                            
                            
                            358




In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. In order to fully realize
the deferred tax asset, Shandong Fuwei will need to generate future taxable
income of approximately RMB12,544 prior to 2031. Shandong Fuwei was under tax
concession period for the period from January 28, 2003 to December 31, 2008. The
profit before taxation for Shandong Fuwei for the year ended December 31, 2006,
2007 and 2008 was RMB69,933 and RMB51,941 and RMB21,124 (US$3,082) respectively.
Based upon the level of historical performance of Shandong Fuwei, management
believes the deferred tax assets are realizable.


F-26




FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 For the
years ended December 31, 2006, 2007 and 2008
 (amounts
in thousands, except share and per share data)




(21)
Related Party Transactions


Name
      of party
                
                RelationshipShandong
      Baorui Investment Co., Ltd (“Shandong Baorui”)
                
                Former
      shareholder (10%) of Shandong Fuwei. Shandong Baorui is 22.1% owned by the
      Group Founders.Shenghong Group Co., Ltd
      (“Shenghong Group”)
                
                Former shareholder (90%) of
      Shandong Fuwei.Shandong
      Neo-Luck Plastic Co., Ltd (“Shandong Neo-Luck”)
                
                The
      Group Founders’ former employer, previously engaged in the business of
      BOPET film production.Weifang
      Neo-Luck (Group) Co., Ltd (“Weifang Neo-Luck Group”)
                
                Major
      shareholder (59%) of Shandong Neo-Luck. One of the directors of the
      Company was the general manager of Weifang Neo-Luck Group prior to joining
      the Company in April 2005.Easebright
      Investments Limited (“Easebright Investments”)
                
                Shareholder
      (21%) of the CompanyApex
      Glory Holdings Limited (“Apex Glory Holdings”)
                
                Shareholder
      (79%) of the CompanyFuhua
      Industrial Material Management Co., Ltd. (“Fuhua
    Management”)
                
                Investment
      owned by Weifang Neo-Luck
Group.




(a)
            The
      principal related party transactions during the year ended December 31,
      2006, 2007 and 2008 are as follows:


Note
                            
                            2006
                            
                            
                            2007
                            
                            
                            2008RMB
                            
                            
                            RMB
                            
                            
                            RMB
                            
                            
                            US$Guarantee
      of bank loans
                            (i)
                            
                            
                            6,800
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Rentals
      for staff quarters
                            (ii)
                            
                            
                            151
                            
                            
                            
                            160
                            
                            
                            
                            183
                            
                            
                            
                            27Interest
      income
                            (iii)
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -




Notes:




(i)
During the year ended December 31, 2006 and 2007, a bank loan of RMB6,800 was
guaranteed by Shandong Baorui.




(ii)
During the year ended December 31, 2006, 2007 and 2008, the Group paid the
rental expenses to Fuhua Management for renting an apartment for the purpose of
staff quarters.




(22)
Pension and Other Postretirement Benefits




Pursuant
to the relevant PRC regulations, the Group is required to make contributions at
a rate of 20% of employees’ salaries and wages to a defined contribution
retirement scheme organized by the local Social Bureau in respect of the
retirement benefits for the Group’s employees in the PRC. The total amount of
contributions of RMB456, RMB433 and RMB710 (US$104) for the year ended December
31, 2006, 2007 and 2008, respectively, was charged to administrative expenses in
the accompanying consolidated statements of income. The Group has no other
obligation to make payments in respect of retirement benefits of the
employees.


F-27




FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 For the
years ended December 31, 2006, 2007 and 2008
 (amounts
in thousands, except share and per share data)




(23)
Fair Value of Financial Instruments




The
carrying amount of cash and cash equivalents, trade accounts receivable,
prepayments and other receivables, amounts due from related parties, amounts due
to related parties, and accrued liabilities and other payables, approximate
their fair values because of the short maturity of these
instruments.




The
carrying amount of bank loans approximate the fair value based on the borrowing
rates currently available for bank loans with similar terms and
maturity.




(24)
Business and Credit Concentrations




(a)
Almost all of the Group’s customers are located in the PRC. There is no
individual customer with gross revenue more than 10% of total gross revenue
during the year ended December 31, 2006, 2007 and 2008.




There
were no amounts due from customers representing more than 10% of the outstanding
accounts receivable at December 31, 2007 and 2008.




(b) The
Group purchased a significant portion of PET resin required for the production
of BOPET film from Sinopec Yizheng Chemical Fibre Company Limited (“Sinopec
Yizheng”) during the year ended December 31, 2006 , 2007 and 2008. The Group
believes that there are a limited number of suppliers in the PRC with the
ability to consistently supply PET resin that meets the Group’s quality
standards and requirements. Currently, the Group has an annual supply agreement
with Sinopec Yizheng pursuant to which Sinopec Yizheng has agreed to supply
fixed quantities of PET resin to the Group on a monthly basis at the prevailing
market prices. The terms of such supply agreement are reviewed annually.
Although the Group believes that it maintains a good relationship with its major
suppliers, there can be no assurance that Sinopec Yizheng will continue to sell
to the Group under normal commercial terms as and when needed. In the event that
these major suppliers ceased to sell to the Group and the Group could not secure
other sources of supply, the Group’s turnover and profitability might be
adversely affected.




The
following are the vendors that supplied 5% or more of our raw materials for each
of the year ended December 31, 2006, 2007 and 2008:





Percentage
      of total purchases (%)Name
      of Vender
                        Supply
                        
                        2006
                        
                        
                        2007
                        
                        
                        2008Sinopec
      Yizheng
                        PET
      resin
                        
                        
                        58.5
                        
                        
                        
                        46.4
                        
                        
                        
                        44.8Hyosung
      Corporation
                        PET
      resin
                        
                        
                        2.1
                        
                        
                        
                        18.0
                        
                        
                        
                        5.0Yizheng
      Tianbao Polyester Co., Ltd.
                        Additives
                        
                        
                        23.9
                        
                        
                        
                        16.6
                        
                        
                        
                        10.3Jiangyin
      Xingtai New Material Co., Ltd.
                        PET
      resin
                        
                        
                        6.7
                        
                        
                        
                        12.3
                        
                        
                        
                        9.7




(25)
Commitments and Contingencies




(a)
Operating lease commitments




Future
minimum lease payments under non-cancelable operating leases as of December 31,
2008 are as follows:


RMB2009
                  
                  
                  4,448




The
Company leases warehouses and staff quarters under operating leases. The leases
typically run for an initial period of between one and five years, with an
option to renew the lease after that date at which time all terms are
renegotiated. None of the leases includes contingent rentals.


F-28


FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 For the
years ended December 31, 2006, 2007 and 2008
 (amounts
in thousands, except share and per share data)




For the
year ended December 31, 2006, 2007 and 2008, total rental expenses for
non-cancelable operating leases were RMB309, RMB2,792 and RMB3,448 (US$503),
respectively.




(b)
Capital commitments




Capital
commitments for purchase of property, plant and equipment as of December 31,
2008 were RMB155,058 (US$22,622).




(c)
Outstanding bills receivable discounted




As of
December 31, 2008, the Company had not retained any recourse obligation in
respect of bills receivable discounted with and sold to banks.




(d)
Legal proceedings




In 2006,
Shandong Fuwei received correspondence relating to an arbitration proceeding
initiated by DMT S. A. (“DMT”) against Shandong Neo-Luck in the ICC
International Court of Arbitration (the “ICC”) in which DMT sought monetary
damages against Shandong Neo-Luck of approximately US $1,250 plus interest
relating to a claim of partial non-payment for the DMT production line Shandong
Fuwei acquired from Beijing Baorui in 2005. In early 2007, the ICC determined
that despite arguments made to the ICC that Company should not be a party to the
proceeding, the arbitration should proceed with Shandong Fuwei as the respondent
pending adjudication of issues relating to jurisdiction and
liability.




A hearing
was held by the ICC in November 2007. Subsequent to the hearing, at the
invitation of Weifang Neoluck (Group) Co., Ltd (“Neoluck Group”), the original
majority shareholder of Shandong Neo-Luck, the Neoluck Group and DMT engaged in
efforts to achieve a settlement of the pending arbitration on January 18, 2008.
Shandong Fuwei joined these discussions later as an interested party and in
order to support a resolution of the pending dispute and to achieve resolution
of certain outstanding service and spare part issues.




After
several weeks of negotiations among the parties, in March 2008, the parties
entered into two agreements, a Service and Technical Assistance Agreement (the
“Service Agreement”), between DMT and Shandong Fuwei, and a Settlement Agreement
(the “Settlement Agreement”) between DMT and the Neoluck Group. Under the
Service Agreement, Shandong Fuwei would pay an amount of US$180 in two
installments with respect to service and spare parts. The Company made its first
payment in April 2008.  As of March 30, 2009, US$90 was still left
unpaid.




Under the
Settlement Agreement, the Neoluck Group was obligated to pay an amount equal to
US$900 in RMB by delivery of a bank draft to DMT. In late April, the Neoluck
Group had not performed its obligation under the Settlement Agreement, and, the
Neoluck Group and DMT entered into a Supplemental Agreement pursuant to which
the Neoluck Group would pay the amount owed to DMT in two installments. The
Neoluck Group paid the first installment equal to US$ 450 in April 2008. As
agreed between Neoluck Group and DMT, the remaining US$450 will be paid in
installments by the end of December 2008. As of March 30, 2009, Neoluck Group
has paid US$ 250 and still has US$200 outstanding to DMT.




In the
event the arbitration proceedings continue as a result of non-performance of the
payment obligation, it is possible for the arbitral tribunal for the ICC
International Court of Arbitration to rule in favor of DMT, which might result
in a liability for Fuwei for the amount claimed plus interest. However, any
possible liability regarding DMT’s claim should be reduced by the amount
previously paid to DMT in connection with the above-described settlement. It
should be noted further in such event that Fuwei might have sustainable claims
for damages as against the Neoluck Group for its failure to perform its
obligations under the Settlement Agreement.


F-29


FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 For the
years ended December 31, 2006, 2007 and 2008
 (amounts
in thousands, except share and per share data)




HKG
Arbitration




At
December 31, 2007, Hampden Kent Group LLC had threatened the Company with
an arbitration, seeking a penalty fee in the amount of US$ 3,800, relating to
services allegedly performed by HKG in attempting to provide financing to Fuwei
pursuant to an August 19, 2006 letter agreement (the "Letter
Agreement") between the parties.  Pursuant to the Letter Agreement,
any dispute between the parties would be arbitrated by the American Arbitration
Association (“AAA”) in accordance with its Commercial Arbitration Rules.
Pursuant to these rules, a demand for arbitration must be filed with the AAA
regional office together with a filing fee by the claimant, in this case,
HKG.




In
December 2007, HKG filed a demand for arbitration with the International Centre
for Dispute Resolution of the AAA (“AAA/ICDR”). On January 28, 2008, the
AAA/ICDR informed us that an arbitration process would commence in
accordance with its rules.  On February 18, 2008, HKG submitted an
Amended Demand for Arbitration and Statement of Claim.




On March
14, 2008, the Company submitted its answering statement and counterclaim in
response to HKG's Amended Demand for Arbitration and Statement of Claim. The
Company denied HKG's claims for breach of contract and breach of the covenant of
good faith and fair dealing as legally and factually without merit and asserted
various defenses. The Company also asserted a counterclaim against HKG for
breach of the Letter Agreement, seeking to recover the over US$300 in fees and
costs paid to HKG and other consequential damages.




On March
27, 2008, HKG submitted a letter in reply to the Company's counterclaim,
generally denying the allegations and claims made by the Company.




At the
request of HKG, the Company had agreed to attempt to resolve this dispute
through mediation. A neutral mediator was been appointed by the AAA/ICDR. On
April 24, 2008, HKG unilaterally cancelled the mediation and sought to proceed
with the arbitration. A panel of threearbitrators (the
“Panel”) was appointed, and a hearing on the parties’ respective
claims was scheduled to commence on September 22, 2008.   By orders
dated September 9 and 15, 2008, the Panel suspended the hearing pending receipt
of a full deposit of the outstanding fees.  On November 7, 2008, the
Panel advised that if payment of the outstanding fees was not remitted on or
before February 6, 2009, the case would be terminated for nonpayment on that
date.  This deadline has been twice extended.





By order
dated February 23, 2009, the Panel directed that if payment of the full deposit
was not remitted to the ICDR on or before March 23, 2009, the case would be
terminated for nonpayment, and no further extensions would be contemplated
by the Panel.




On March
27,2009, the Panel issued an order that this arbitration proceeding was
terminated for nonpayment of the deposits due in accordance with Sections R-52
and R-54 of the Commercial Arbitration Rules of the American Arbitration
Association.




Class
Action




On
October 19, 2007, the Company became aware that a class action lawsuit had been
filed in the United States District Court for the Southern District of New York,
on behalf of all purchasers of the Company’s stock from the date of the
Company’s IPO on December 19, 2006 through October 16, 2007. The complaint
alleged that the Company and certain of its present and former officers,
directors and shareholders (collectively, the “defendants”) violated the
Securities Act of 1933.




On
November 21, 2007, the Company was given notice that a second class action
lawsuit had been filed in the United States District Court for the Southern
District of New York, commenced on behalf of all purchasers of the Company’s
stock pursuant or traceable to the Registration Statement and Prospectus issued
in connection with the Company’s IPO on December 19, 2006 through November 12,
2007. The complaint alleged that the Company, its underwriters and certain of
its executives (collectively, the “Defendants”) violated Sections 11, 12(2) and
15 of the Securities Act of 1933. The complaint also alleged that the Defendants
misrepresented or omitted material information regarding the Company and its
business operation.


F-30




FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 For the
years ended December 31, 2006, 2007 and 2008
 (amounts
in thousands, except share and per share data)




On
January 24, 2008, the Court consolidated into a single action the putative
securities class actions pending against the Company and certain of its
officers, directors, and shareholders.  The Court also appointed
Ninyat Tonyaz as lead plaintiff, appointed the Rosen Law Firm, P.A. as lead
counsel, and granted plaintiffs leave to file a consolidated amended class
action complaint.  The consolidated action is styled In re Fuwei
Films Securities Litigation, Case No. 07-CV-9416
(RJS).




On March
14, 2008, plaintiffs filed a consolidated amended class action
complaint  (the "Amended Complaint") naming as defendants the
Company, Xianoan He, Mark Stulga, Jun Yin, Tongju Zhou, Duo Wang, and the
Company's IPO underwriters — Maxim Group LLC, WR Hambrecht + Co. and
Chardan Capital Markets, LLC.  The Amended Complaint asserts
claims for violation of Sections 11, 12(a)(2), and 15 of the Securities Act of
1933.  The Company, Messrs. He and Stulga, and the Underwriter Defendants
were served with the Amended Complaint and, as described below, have moved to
dismiss the claims asserted against them. Pursuant to a scheduling order entered
by the Court on February 19, 2008, the parties named as defendants in the
consolidated class action were required to answer or otherwise respond to
the Amended Complaint on or before April 30, 2008.  The
Court subsequently extended defendants’ time to respond to the Amended
Complaint to May 14, 2008.




The
Company and Messrs. He and Stulga filed a motion to dismiss the Amended
Complaint in its entirety.  The Underwriter Defendants separately
moved to dismiss the Amended Complaint.  Both motions have been fully
briefed, and the parties await the Court's
decision.




The
Company’s management believes that the allegations are without merit. The
Company intends to defend itself vigorously against the claims and has engaged a
law firm in this regard. However, the
Company's management is currently unable to reasonably estimate
the amount or range of possible losses that will result from the ultimate
resolution of this matter.  As of December 31, 2008, the Company
has not accrued any liability in connection with these litigations except for
the defense expenses.




On
November 3, 2008, Plaintiffs filed proofs of service with the Court, indicating
that Messrs. Yin, Wang and Zhou were served with the Amended Complaint on or
about August 14, 2008, and that they had 90 days after such date to serve an
answer to the Amended Complaint or a motion pursuant to Rule 12 of the Federal
Rules of Civil Procedure.




By letter
dated March 17, 2009, Plaintiffs apprised the Court of Fuwei’s March 10, 2009
Press Release disclosing the initial verdict against Messrs. Yin, Wang, and
Zhou.  Plaintiffs requested that the Court to take judicial notice of
Fuwei’s March 10, 2009 Press Release (as filed with the Company’s March 13, 2009
Form 6-K) in adjudicating the pending motions to dismiss.


The Court
has not ruled on the pending motions to dismiss to date.  All
discoveries are stayed pending such ruling.





The
Company’s management believes that the allegations are without merit. The
Company intends to defend itself vigorously against the claims and has engaged a
law firm in this regard. However, the
Company’s management is currently unable to reasonably estimate
the amount or range of possible losses that will result from the ultimate
resolution of this matter.  As of March 30, 2009, the Company has
not accrued any liability in connection with these litigations except for the
defense expenses.


F-31


FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 For the
years ended December 31, 2006, 2007 and 2008
 (amounts
in thousands, except share and per share data)




(26)
Earnings per Share




Basic
and diluted earnings per share for the period/year ended December 31, 2006, 2007
and 2008 have been calculated as follows:


2006
                                  
                                  
                                  2007
                                  
                                  
                                  2008RMB
                                  
                                  
                                  RMB
                                  
                                  
                                  RMB
                                  
                                  
                                  US$Net
      income available to ordinary shareholders
                                  
                                  
                                  67,665
                                  
                                  
                                  
                                  47,260
                                  
                                  
                                  
                                  18,157
                                  
                                  
                                  
                                  2,649Denominator
      for basic net income available to ordinary
      shareholders:Weighted
      average number of ordinary sharesOutstanding
                                  
                                  
                                  1,101,031
                                  
                                  
                                  
                                  13,062,500
                                  
                                  
                                  
                                  13,062,500
                                  
                                  
                                  
                                  13,062,500Basic
      earnings per share
                                  
                                  
                                  61.46
                                  
                                  
                                  
                                  3.62
                                  
                                  
                                  
                                  1.39
                                  
                                  
                                  
                                  0.20Net
      income available to ordinary shareholders
                                  
                                  
                                  67,665
                                  
                                  
                                  
                                  47,260
                                  
                                  
                                  
                                  18,157
                                  
                                  
                                  
                                  2,649Denominator
      for diluted net income available to ordinary shareholders:Weighted
      average number of ordinary sharesOutstanding
                                  
                                  
                                  1,101,031
                                  
                                  
                                  
                                  13,062,500
                                  
                                  
                                  
                                  13,062,500
                                  
                                  
                                  
                                  13,062,500Weighted
      average number of share options
                                  
                                  
                                  1,457
                                  
                                  
                                  
                                  -1,102,488
                                  
                                  
                                  
                                  13,062,500
                                  
                                  
                                  
                                  13,062,500
                                  
                                  
                                  
                                  13,062,500Diluted
      earnings per share
                                  
                                  
                                  61.37
                                  
                                  
                                  
                                  3.62
                                  
                                  
                                  
                                  1.39
                                  
                                  
                                  
                                  0.20




(27) Fuwei Films (Holdings) Co., Ltd
(Parent Company)




Under PRC
regulations, the Company’s operating subsidiary, Shandong Fuwei may pay
dividends only out of its accumulated profits, if any, determined in accordance
with the accounting standards and regulations prevailing in the PRC (“PRC
GAAP”). In addition, Shandong Fuwei is required to set aside at least 10% of its
accumulated profits each year, if any, to fund the statutory general reserve
until the balance of the reserve reaches 50% of its registered capital. The
statutory general reserve is not distributable in the form of cash dividends to
the Company and can be used to make up cumulative prior year losses, if any, and
may be converted into share capital by the issue of new shares to shareholders
in proportion to their existing shareholdings, or by increasing the par value of
the shares currently held by them, provided that the reserve balance after such
issue is not less than 25% of the registered capital. As of December 31, 2008,
additional transfers of RMB2,414 (US$352) are required before the statutory
general reserve reaches 50% of the registered capital of Shandong Fuwei.
Further, Shandong Fuwei is also required to allocate 5% of the profit after tax,
determined in accordance with PRC GAAP, to the statutory public welfare fund
which is restricted to be used for capital expenditures for staff welfare
facilities owned by the Company. The statutory public welfare fund is not
available for distribution to equity owners (except in liquidation) and may not
be transferred in the form of loans, advances, or cash dividends. As of December
31, 2008, an aggregate amount of RMB 41,602 (US$6,070) has been appropriated
from retained earnings and set aside for statutory general reserve and public
welfare fund, by Shandong Fuwei.




As of
December 31, 2008, the amount of restricted net assets of Shandong Fuwei, which
may not be transferred to the Company in the form of loans, advances or cash
dividends by the subsidiaries without the consent of a third party, was
approximately 70% of the Company’s consolidated net assets as discussed above.
In addition, the current foreign exchange control policies applicable in the PRC
also restrict the transfer of assets or dividends outside the
PRC.


F-32


FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 For the
years ended December 31, 2006, 2007 and 2008
 (amounts
in thousands, except share and per share data)




The
following presents condensed unaudited unconsolidated financial information of
the Parent Company only.




Condensed
unaudited Balance Sheet as of December 31, 2007 and 2008


2007
                            
                            
                            2008RMB
                            
                            
                            RMB
                            
                            
                            US$Cash
      and cash equivalents
                            
                            
                            74
                            
                            
                            
                            12
                            
                            
                            
                            2Other
      current assets
                            
                            
                            311,835
                            
                            
                            
                            146,739
                            
                            
                            
                            21,409Investments
      in subsidiaries
                            
                            
                            147,762
                            
                            
                            
                            147,762
                            
                            
                            
                            21,558Total
      assets
                            
                            
                            459,671
                            
                            
                            
                            294,513
                            
                            
                            
                            42,968Current
      liabilities
                            
                            
                            21,194
                            
                            
                            
                            31,205
                            
                            
                            
                            4,553Total
      shareholders’ equity
                            
                            
                            438,477
                            
                            
                            
                            263,307
                            
                            
                            
                            38,415Total
      liabilities and shareholders’ equity
                            
                            
                            459,671
                            
                            
                            
                            294,513
                            
                            
                            
                            42,968




Condensed
unaudited Statements of Operations (For the year ended December 31, 2006, 2007
and 2008)


2006
                            
                            
                            2007
                            
                            
                            2008RMB
                            
                            
                            RMB
                            
                            
                            RMB
                            
                            
                            US$Interest
      income/ (expenses)
                            
                            
                            14
                            
                            
                            
                            91
                            
                            
                            
                            (15
                            )
                            
                            
                            (2
                            )General
      and administrative expenses
                            
                            
                            (2,131
                            )
                            
                            
                            (5,984
                            )
                            
                            
                            (11,404
                            )
                            
                            
                            (1,664
                            )Loss
      before equity in undistributedearnings of
      subsidiaries
                            
                            
                            (2,117
                            )
                            
                            
                            -
                            
                            
                            
                            (11,419
                            )
                            
                            
                            (1,666
                            )Equity
      in earnings of subsidiaries
                            
                            
                            69,782
                            
                            
                            
                            -
                            
                            
                            
                            31,668
                            
                            
                            
                            4,620Net
      income
                            
                            
                            67,665
                            
                            
                            
                            (5,983
                            )
                            
                            
                            20,248
                            
                            
                            
                            2,954




Condensed
unaudited Statement of Cash Flows (For the year ended December 31, 2006, 2007
and 2008)


2006
                                                    
                                                    
                                                    2007
                                                    
                                                    
                                                    2008RMB
                                                    
                                                    
                                                    RMB
                                                    
                                                    
                                                    RMB
                                                    
                                                    
                                                    US$Cash
      flow from operating activitiesNet
      income
                                                    
                                                    
                                                    67,665
                                                    
                                                    
                                                    
                                                    (5,893
                                                    )
                                                    
                                                    
                                                    18,157
                                                    
                                                    
                                                    
                                                    2,649Adjustment to reconcile net
      income to net cash from operating activities:-
      Equity in earnings of subsidiaries
                                                    
                                                    
                                                    (69,782
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (29,576
                                                    )
                                                    
                                                    
                                                    (4,315
                                                    )-
      Foreign exchange gain
                                                    
                                                    
                                                    (1,473
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Changes
      in operating assets and liabilities:-
      Other current assets
                                                    
                                                    
                                                    (9,974
                                                    )
                                                    
                                                    
                                                    9,631
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    --
      Other current liabilities
                                                    
                                                    
                                                    18,659
                                                    
                                                    
                                                    
                                                    (3,713
                                                    )
                                                    
                                                    
                                                    1,144
                                                    
                                                    
                                                    
                                                    167Net
      cash provided by operating activities
                                                    
                                                    
                                                    5,095
                                                    
                                                    
                                                    
                                                    25
                                                    
                                                    
                                                    
                                                    (10,275
                                                    )
                                                    
                                                    
                                                    (1,499
                                                    )Cash
      flow from financing activitiesPayments
      to related parties
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (232,656
                                                    )
                                                    
                                                    
                                                    10,113
                                                    
                                                    
                                                    
                                                    1,475




F-33




FUWEI
FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 For the
years ended December 31, 2006, 2007 and 2008
 (amounts
in thousands, except share and per share data)






2006
                                          
                                          
                                          2007
                                          
                                          
                                          2008RMB
                                          
                                          
                                          RMB
                                          
                                          
                                          RMB
                                          
                                          
                                          US$Issuance
      of share capital
                                          
                                          
                                          235,867
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Effect
      of exchange
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (8,273
                                          )
                                          
                                          
                                          100
                                          
                                          
                                          
                                          15Net
      cash provided by/(used in) financing activities
                                          
                                          
                                          235,867
                                          
                                          
                                          
                                          (240,929
                                          )
                                          
                                          
                                          10,213
                                          
                                          
                                          
                                          1,490Net
      increase/(decrease) in cash
                                          
                                          
                                          240,962
                                          
                                          
                                          
                                          (240,904
                                          )
                                          
                                          
                                          62
                                          
                                          
                                          
                                          9Cash:At
      beginning of year
                                          
                                          
                                          16
                                          
                                          
                                          
                                          240,978
                                          
                                          
                                          
                                          74
                                          
                                          
                                          
                                          11At
      end of year
                                          
                                          
                                          240,978
                                          
                                          
                                          
                                          74
                                          
                                          
                                          
                                          12
                                          
                                          
                                          
                                          2




(27) Subsequent Events




Regarding
the DMT Aribitration, under the Service Agreement between DMT and Shandong
Fuwei, Shandong Fuwei would pay an amount of US$180 in two installments with
respect to service and spare parts. The Company made its first payment in April
2008. it will pay the remaining US$90 after DMT begins their service to Shandong
Fuwei.  Under the Settlement Agreement and Supplemental Agreement
between the Neoluck Group and DMT, the Neoluck Group was obligated to pay an
amount equal to US$900. As of March 30, 2009, Neoluck Group has paid US$ 700 and
still has US$200 outstanding to DMT.





Regarding
the Class Action, by letter dated March 17, 2009, Plaintiffs apprised the Court
of the Company’s March 10, 2009 Press Release disclosing the initial verdict
against Messrs. Yin, Wang, and Zhou.  Plaintiffs requested that the
Court to take judicial notice of Fuwei’s March 10, 2009 Press Release (as filed
with the Company’s March 13, 2009 Form 6-K) in adjudicating the pending motions
to dismiss.  The Court has not ruled on the pending motions to dismiss
to date.  All discovery is stayed pending such
ruling.




Regarding
the HKG Arbitration, on November 7, 2008, the Panel of Arbitrators advised that
if payment of the outstanding fees was not remitted to the ICDR on or before
February 6, 2009, the case would be terminated for nonpayment on that
date.  This deadline has been twice extended. By order dated February
23, 2009, the Panel directed that if payment of the full deposit is not remitted
to the ICDR on or before March 23, 2009, the case will be
terminated.  On March 27, 2009, the Panel issued an oder that this
arbitration proceeding was terminated for nonpayment of the deposits due in
accordance with Sections R-52 and R-54 of the Commercial Arbitration Rules of
the American Arbitration Association. As of March 27, 2009, the HKG case has
been dismissed, and the Company has not been ordered to pay any amount to
HKG.




At March
10, 2009, we announced the Company became aware of the initial verdict issued by
the Jinan Intermediate People's Court in the city of Jinan, Shandong Province,
concerning the Company's three major shareholders, Mr. Jun Yin, Mr. Tongju Zhou
and Mr. Duo Wang. The verdict finds the three major shareholders guilty of the
crime of misappropriation of state-owned assets relating to tens of millions of
RMBs' worth of assets during the reorganization of Shandong Neoluck Plastics
Co., Ltd. The court sentenced Mr. Yin to death, with a stay of execution for two
years. The other two defendants, Mr. Zhou and Mr. Wang, each received life
imprisonment. All of the personal property of the three individuals will be
confiscated. None of these individuals is currently involved in Fuwei's
day-to-day operations.


F-34