**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      20-F**




(Mark
      One)






o
            **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, 2006**




**OR**




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




**For
      the transition period from** ________________
      to ___________________




**OR**




o
            **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






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
      29,
      2007 **,** 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.




oYes 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.




o**** 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 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.




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           o 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




o Item
      17    
xItem
      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).




o**** Yes          
      x No









**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 on 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 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 and include, among other things:




·
            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
                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;




·
            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.




2




These
      risks and uncertainties 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.




3




**Introduction**




This
      annual report on Form 20-F includes our audited consolidated financial
      statements as of December 31, 2005 and 2006, and for the period from August
      9,
      2004 to December 31, 2004 and the years ended December 31, 2005 and 2006,
      and the
      audited financial statements of Fuwei Films (Shandong) Co., Ltd. (the
“Predecessor Company”) as of December 31, 2003 and October 26, 2004 and for the
      periods from January 28, 2003 to December 31, 2003, and January 1, 2004 to
      October 26, 2004.




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.




**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
      selected financial data at December 31, 2005 and 2006 and the years ended
      December 31, 2005 and 2006 and for the period August 9, 2004 through December
      31, 2004 have been prepared in accordance with U. S. GAAP, derived from and
      should be read with our audited consolidated financial statements, including
      notes to the consolidated financial statements, included in this Annual Report
      beginning on page F-1. The following selected operations data as of December
      31,
      2003 and October 26, 2004 and for the period January 1, 2004 to October 26,
      2004
      and the period January 28, 2003 through December 31, 2003 have been derived
      from
      the audited financial statements of the Predecessor Company included
      in this Annual Report.




As
      described elsewhere in this Annual Report, on October 27, 2004, our wholly-owned
      subsidiary Fuwei Films (BVI) Co., Ltd. (“Fuwei (BVI)”) acquired all of the
      shares of Shandong Fuwei and Shandong Fuwei thereafter became a wholly-owned
      subsidiary of Fuwei (BVI). As a result of this transaction, our financial
      statements have been prepared with regard to Shandong Fuwei, as the predecessor
      company, for the period from January 28, 2003 until October 26, 2004 and with
      regard to the holding company for periods beginning on and after August 9,
      2004.
      The periods prior to 2003 are not presented as Shandong Fuwei was incorporated
      on January 28, 2003. 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.




4




Predecessor
                Company
            
            Fuwei
                Films (Holdings) Co., Ltd**January
                28**
              **(Date
                of**
              **Inception)
                through December 31,**
            
            **January
                1**
              **through**
              **October
                26,**
            
            **August
                9 through December 31,**
            
            **Year
                Ended**
              **December
                31,****2003**
            
            **2004**
            
            **2004**
            
            **2005**
            
            **2006**
            
            **2006**(in
                thousands, except per share data)
            
            **(RMB)**
            
            **(RMB)**
            
            **(RMB)**
            
            **(RMB)**
            
            **(RMB)**
            
            **(US$)****Statement
                of Operations Data:**Revenues
            
            
            95,070
            
            
            286,114
            
            
            81,364
            
            
            346,205
            
            
            436,884
            
            
            55,981Gross
                profit
            
            
            28,357
            
            
            78,950
            
            
            17,326
            
            
            87,115
            
            
            102,543
            
            
            13,140Operating
                income
            
            
            23,675
            
            
            68,326
            
            
            12,403
            
            
            65,999
            
            
            78,017
            
            
            9,997Interest
                expense
            
            
            (675
            )
            
            (7,291
            )
            
            (1,370
            )
            
            (13,747
            )
            
            (12,884
            )
            
            (1,651
            )Income
                before income taxes
            
            
            23,460
            
            
            61,557
            
            
            13,811
            
            
            57,069
            
            
            68,422
            
            
            8,767Net
                income
            
            
            23,001
            
            
            61,531
            
            
            14,099
            
            
            57,128
            
            
            67,665
            
            
            8,670Earnings
                per shareBasic
            
            
            
            
            
            
            
            
            18,287
            
            
            74,096
            
            
            61.46
            
            
            7.88Diluted
            
            
            
            
            
            
            
            
            18,287
            
            
            74,096
            
            
            61.37
            
            
            7.86Total
                cash dividend declared
            
            
            15,300
            
            
            41,766




Predecessor
                Company
            
            Fuwei
                Films (Holdings) Co., Ltd**As of**
              **December
                31,**
            
            **As
                of**
              **October
                26,**
            
            **As
                of**
              **December
                31,**
            
            **As of
                December 31,****2003**
            
            **2004**
            
            **2004**
            
            **2005**
            
            **2006**
            
            **2006**(in
              thousands)
            
            **(RMB)**
            
            **(RMB)**
            
            **(RMB)**
            
            **(RMB)**
            
            **(RMB)**
            
            **(US$)****Balance
                Sheet Data:**Cash
            
            
            16,089
            
            
            12,144
            
            
            5,903
            
            
            7,427
            
            
            249,939
            
            
            32,027Accounts
                receivable, net
            
            
            1,197
            
            
            39,542
            
            
            25,460
            
            
            46,129
            
            
            75,530
            
            
            9,678


Inventories
            
            
            26,533
            
            
            26,365
            
            
            18,032
            
            
            24,887
            
            
            23,783
            
            
            3,048Total
                current assets
            
            
            95,885
            
            
            163,446
            
            
            72,288
            
            
            93,349
            
            
            371,687
            
            
            47,627Property,
                plant and equipment, net
            
            
            177,814
            
            
            204,804
            
            
            304,600
            
            
            303,596
            
            
            317,690
            
            
            40,708Total
                assets
            
            
            289,283
            
            
            383,532
            
            
            407,005
            
            
            440,361
            
            
            738,082
            
            
            94,576Short-term
                bank loans
            
            
            156,000
            
            
            199,600
            
            
            200,590
            
            
            248,046
            
            
            239,678
            
            
            30,712Total
                current liabilities
            
            
            190,075
            
            
            264,533
            
            
            392,905
            
            
            367,401
            
            
            272,175
            
            
            34,876Total
                shareholders’ equity
            
            
            98,749
            
            
            118,514
            
            
            14,100
            
            
            72,960
            
            
            465,907
            
            
            59,700




5




If
      our
      subsidiary Shandong Fuwei was not entitled to a reduced enterprise income tax,
      or EIT, rate of 0% for the period/year ended December 31, 2003, 2004, 2005
      and
      2006, it would have had an EIT rate of 15%. Net income and basic and diluted
      earnings per share would be reduced by the following amounts:




**Jan.
                28 (Date**
              **of
                Inception) through**
              **December
                31,**
            
            **Jan.
                1**
              **through**
              **Oct. 26,**
            
            **Aug.
                9**
              **through**
              **December**
              **31,**
            
            **Year
                Ended****December
                31,****2003**
            
            **2004**
            
            **2004**
            
            **2005**
            
            **2006**
            
            **2006**(In
              thousands, except per share data)
            
            **(RMB)**
            
            **(RMB)**
            
            **(RMB)**
            
            **(RMB)**
            
            **(RMB)**
            
            **(US$)**Net
                income
            
            
            (3,060
            )
            
            (9,204
            )
            
            (3,098
            )
            
            (8,736
            )
            
            (10,453
            )
            
            (1,339
            )Earnings
                per share
              -basic
            
            
            
            
            
            
            
            
            (4,019
            )
            
            (11,331
            )
            
            (9.50
            )
            
            (1.22
            )-diluted
            
            
            
            
            
            
            
            
            (4,019
            )
            
            (11,331
            )
            
            (9.48
            )
            
            (1.21
            )




The
      2005
      and 2006 RMB amounts included in the above selected financial data have been
      translated into U.S. dollars at the rate of US $1.00 = RMB 7.8041, which was
      the
      noon buying rate for U.S. dollars in effect on December 29, 2006 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 29, 2006, 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. This
      change in policy resulted initially in an approximately 2.0% appreciation in
      the
      value of the Renminbi against the U.S. dollar and could result in further and
      more significant appreciations. Although the Company generates substantially
      all
      of its revenue in Renminbi which has become more valuable in U.S.
      dollars ,
      the
      Company’s 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 Reports 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 US$1.00 to RMB7.8041, which
      was the prevailing rate on December 29, 2006. 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 Chinese government imposes controls over its
      foreign currency reserves in part through direct regulation of the conversion
      of
      Renminbi into foreign exchange and though restrictions on foreign
      trade.




6




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
      periodic reports or any other information to be provided to you. The source
      of
      these rates is the Federal Reserve Bank of New York.




**Average**
            
            **High**
            
            **Low**
            
            **Period-end***(Rmb
                per U.S. $1.00)*2002
                (1)
            
            
            8.2770
            
            
            8.2800
            
            
            8.2669
            
            
            8.28002003
                (1)
            
            
            8.2770
            
            
            8.2800
            
            
            8.2765
            
            
            8.27692004
                (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
            
            
            7.8041October
                2006 (2)
            
            
            7.9018
            
            
            7.9168
            
            
            7.8728
            
            
            7.8041November
                2006 (2)
            
            
            7.8622
            
            
            7.8750
            
            
            7.8303
            
            
            7.8340December
                2006 (2)
            
            
            7.8220
            
            
            7.8350
            
            
            7.8041
            
            
            7.8041January
                2007 (2)
            
            
            7.7876
            
            
            7.8127
            
            
            7.7705
            
            
            7.7714February
                2007 (2)
            
            
            7.7502
            
            
            7.7632
            
            
            7.741
            
            
            7.741March
                2007 (2)(3)
            
            
            7.7376
            
            
            7.7454
            
            
            7.7728
            
            
            7.7728
                (3
            )




(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)
            Calculated
                through and including March 29,
                2007.




**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 this 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.




7




**(a)**  **Risks
      Associated with Our Business**




**Risks
      Related to Our Business**




***An
      increase in the prices of raw materials will lead to increased costs and may
      adversely affect our profit margins if we are unable to pass on such increases
      in costs to our customers***




The
      total
      cost of raw materials made up approximately 76.4%, 77.6% and 80.9%,
      respectively, of our cost of goods sold in 2004, 2005 and 2006. The main raw
      materials used in our production of BOPET film are polyethylene terephthalate
      (or PET) resin and additives, which respectively made up approximately 72.7%
      and
      27.3% of our total cost of raw materials in the past three years.




The
      PET
      resin is currently used as a raw material in China’s textile industry, and 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, due in large part to the conflict in Iraq and pricing increase agreed
      to
      among oil producing and consuming countries. However, the price of our major
      raw
      materials, PET resin, which are widely used in the textile industry in China,
      has not increased in line with the rising crude oil prices due to the dampened
      demand for PET resin from textile manufacturers in China as a result of the
      anti-dumping policy exerted by the US and European countries. There has been
      some increase in the cost of our raw materials as a result of significant crude
      oil price spikes, and 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. We currently have
      no hedging transactions in place with respect to PET resin or any other
      petroleum product.




If
      there
      is a significant increase in the cost of our raw materials and we are unable
      to
      pass on such increase to our customers on a timely basis or at all, our profit
      margins and results of operations will be adversely affected.




***Entry
      of new BOPET producers 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 and our past financial performance
      is
      attributable to our market position in the industry. Over time, there may be
      new
      entrants into our industry, whether as a result of increased access to the
      production technology of BOPET film or otherwise. 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 believe that our major competitors in the BOPET manufacturing market
      in the PRC are Dupont Hongji Films Foshan Co., Ltd, Shanghai Zidong Chemical
      Plastic Co., Ltd and Yihua Toray Polyester Film Co., Ltd. We may have to price
      our products in response to competitive market conditions and this may lead
      to a
      decline in our profit margins. 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 lifted its import restrictions, lowered import
      tariffs and relaxed foreign investment restrictions after its entry into the
      World Trade Organization in December 2001. This can 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 relating to the packaging of processed
      food***




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 packaging of
      processed food and to a lesser extent, packaging for pharmaceutical products,
      cosmetics, tobacco and alcohol. The demand for our BOPET film is therefore
      indirectly affected by the demand for processed food packaging.




Any
      decrease in the demand for our BOPET film will significantly affect our
      financial performance. Although demand for our BOPET film for packaging of
      pharmaceutical products, cosmetics, tobacco and alcohol has gradually been
      increasing, any significant fall in the consumption of processed food, in
      particular, whether as a result of contamination, food scares, health concerns
      or otherwise, could result in a decline in the sales of our products and
      adversely impact our financial condition, business and operation.




8




***We
      rely on key managerial and technical personnel and failure to attract or retain
      such personnel may compromise our ability 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, particularly Xiaoan He, our Chairman
      and
      Chief Executive Officer, Lin Tang, our Chief Finance Officer, Bin Sun, our
      General Manager, Xiaoming Wang, our Deputy General Manager for Production,
      and
      Xiuyong Zhang, our Deputy General Manager for Finance. We have entered into
      service agreements with these individuals. The service agreements have an
      initial term of three years. The loss of the services of Messrs. He, Tang,
      Sun,Wang, or Zhang, might impede the achievements of 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. He, we do not currently maintain any other key man insurance for our
      directors or officers.




After
      having worked on a part-time basis for our company for over six years, Dr
      Yongping Bai returned to full-time instruction at the Harbin Institute of
      Technology to continue his teaching and researching work in the university
      at
      the beginning of 2007. Now Dr. Wenxun Sun is responsible for our R&D
      department. Dr. Sun has experience in the BOPET film industry for over ten
      years
      and has been working in our R&D department for the past seven
      years.




***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 upon a complex technology, and requires
      significant time and expertise in order to meet industry standards and
      customers’ specifications. Although we have developed 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.




***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, written representations of the Company
      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. However, 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.




9




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




Our
      total
      outstanding indebtedness, entirely comprising of short-term loans, as at
      December 31, 2006 was RMB 239.7 million (US$30.7 million). We have pledged
      property, plant and equipment of RMB 180.6 million and lease prepayments of
      RMB
      52.6 million as security for RMB 233.2 million of outstanding indebtedness. Subsequently,
      we renegotiated substantially all of our outstanding indebtedness resulting
      in
      approximately RMB 152.6 million less of secured indebtedness. 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 flow
      from
      operations has 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.




***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***




We
      have
      applied for patents in respect of some of our processes, technologies and
      systems used in our business and by the end of 2006, we have received four
      patents from, and have three patent applications pending with, the PRC
      authorities. 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, technologies and systems. These
      proprietary processes, technologies and systems 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 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.




10




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.




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 capacities 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 to
      our
      shareholders. 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
      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.




***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 the United States, Japan
      and India. 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.




11




***Our
      primary source of funds of 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.
      Although dividends paid by foreign invested enterprises, such as wholly
      foreign-owned enterprises and sino-foreign joint ventures, are not subject
      to
      any PRC corporate withholding tax, 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.




***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, 2008, as required by Section 404 of the U.S.
      Sarbanes-Oxley Act of 2002***




We
      are
      subject to the reporting requirements of the U.S. Securities and Exchange
      Commission, or SEC. The SEC, as directed by Section 404 of the U.S.
      Sarbanes-Oxley Act of 2002,
      adopted rules requiring public companies, including us, to include a report
      of
      management of their internal control structure and procedures for financial
      reporting in their annual reports on Form 10-K or Form 20-F, as the case may
      be,
      that contain an assessment by management of the effectiveness of their internal
      controls over financial reporting for the fiscal year ending on December 31,
      2007. In addition, independent registered public accountants of these public
      companies must report on management’s assessment of as well as form its own
      opinion and report on the effectiveness of our internal controls over financial
      reporting. These requirements will first apply to our annual report on Form
      20-F
      for the fiscal year ending on December 31, 2008, although the independent public
      accountants’ report will not be required until the following year. Our
      management may not conclude that our internal controls over financial reporting
      are effective. Moreover, even if 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
      not concur with our management’s assessment or may not issue a report that is
      unqualified. 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.




During
      the audit of our consolidated financial statements for the years ended December
      31, 2005 and 2006, our independent auditors identified a significant deficiency,
      as defined in the Public Company Accounting Oversight Board’s Audit Standard No.
      2. The significant deficiency identified by our independent auditors is the
      lack
      of a consolidated manual for accounting policies and procedures relating to
      financial reporting under the Generally Accepted Accounting Principles of the
      United States (“US GAAP”), without which it would be difficult for our
      accounting and finance personnel to apply proper procedures and controls to
      transactions, and certain complex US GAAP matters may not be identified or
      resolved in a timely manner. We have implemented certain accounting policies
      and
      procedures relating to financial reporting under US GAAP; we are in the process
      of training of our financial personnel with US GAAP knowledge and experience
      as
      required to implement the relevant policies and procedures; and we have
      established an internal auditor and plan to implement our policies and
      procedures by the end of 2007. **** Furthermore,
      we have recently appointed Murrell, Hall, McIntosh & Co. PLLP (“MHM”, a
      public accounting firm registered with the PCAOB and based in Oklahoma City,
      Oklahoma) as our consultant for purposes of Sarbanes-Oxley Act Section 404
      compliance, which we expect to improve our internal control over financial
      reporting.




12




**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***




Historically,
      we derived substantially all of our revenues from a single market, mainland
      China. We anticipate that mainland China will continue to be our primary
      production and sales base in the near future and currently substantially all
      of
      our assets are located in China and all of our services are performed in China.
      In 2004, 2005 and 2006, sales to our customers in the PRC accounted for
      approximately 94%, 88% and 79% of our total revenue, respectively. 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.




***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%. However, we cannot assure you that Shandong Fuwei will not lose its “High
      Technology Enterprise” status, and even if Shandong Fuwei successfully maintains
      its “High Technology Enterprise” status, its preferential tax treatment may be
      discontinued by the tax authorities at their discretion or pursuant to any
      future changes in PRC tax laws, rules and regulations. If that were to occur,
      Shandong Fuwei would be subject to a 33% standard enterprise income tax rate
      under the current tax laws through 2007, and up to a 25% rate from January
      1,
      2008 under the new tax law described below, 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 will take effect as of
      January 1, 2008. In accordance with the new law, a unified enterprise income
      tax
      rate of 25% and unified tax deduction standards will be 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 shall, 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 are adopted. As a result, if Shandong
      Fuwei qualifies as a “Government Developing High Technology Enterprise”, it will
      continue to benefit from a preferential tax rate of 15%, subject to any
      transitional period rules implemented starting from January 1, 2008. Otherwise,
      Shandong Fuwei’s applicable tax rate may gradually increase from its existing
      rate of 15% to the unified tax rate of 25% by January 1, 2013 under the new
      tax
      law and in accordance with more detailed implementing rules to be adopted in
      the
      future. Any increase in our effective tax rate as a result of the above may
      adversely affect our operating results. However, details regarding
      implementation of this new law are expected to be provided in the form of one
      or
      more implementing regulations to be promulgated by the PRC government and the
      timing of the issuance of such implementing regulations is currently unclear.




13




***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 regulation in China may affect our ability to pay dividends
      in foreign currencies***




We
      currently receive all 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.




***Fluctuation
      in the value of Renminbi could adversely affect the value of, and dividends
      payable on, our shares in foreign currency terms***




The
      value
      of Renminbi is subject to changes in PRC government policies 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, 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.




14




***Outbreak
      of SARS 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 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 concerning foreign exchange regulations
      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 have
      completed the relevant SAFE registration procedures as currently
      required.




As
      it is
      uncertain how SAFE will interpret or implement its circular, 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 the Company to pay dividends
      on
      our ordinary shares.




15




**Item
      4.**  **Information
      on the Company**




**Overview**




We
      were
      formed as a Cayman Island 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 biaxial
      oriented stretch technique, otherwise known as BOPET film (biaxially oriented
      polyethylene terephthalate). The film is light-weight, non-toxic, odorless,
      transparent, glossy, 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
      masking film, 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.” Our customers include some of the
      world’s largest companies engaged in flexible packaging, including Alcan, Inc.
      of Canada. We also export our products to packaging customers and distributors
      in the US, Japan and Southeast Asia. The principal products we produce are
      namely:




·
            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;




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




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




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




Since
      our
      establishment, all of our revenues have been derived from the sales of BOPET
      film, particularly our printing film, stamping film and metallization film
      which
      combined accounted for approximately 52.6% of our net revenues for the year
      ended December 31, 2006, 68.8% of our net revenues in 2005 and 87.0% of our
      net
      revenues in 2004.




We
      currently operate two 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 began
      trial production of co-extruded BOPET or CBOPET in November 2003 and has an
      annual designed production capacity of 16,100 tons of BOPET/CBOPET film. CBOPET
      is a type of BOPET film comprising two outer co-polymer layers made from
      materials different from materials used for the core layer. As of December
      31,
      2006, our manufacturing operations had a total annual designed production
      capacity of 29,100 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 eastern region of China. Our top five customers over the
      three
      years ended December 31, 2006 were Pilcher Hamilton Corp., Gaoyou Secondary
      Planet Cigarette Material Co., Ltd., Jiangyin Teruida Packaging Technical
      Co.,Ltd, Sichuan Yibin Puguang Technology Co.,Ltd., and Wuxi Guotai Colour
      Printing Co.,Ltd. Sales to Pilcher Hamilton Corp. accounted for 1.9%, and 5.5%
      in 2005 and 2006, respectively, while none of our other 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 used by these
      industries are currently imported and are costly. We began marketing and selling
      our products overseas to customers and distributors mainly in the United States,
      Japan and Southeast Asia in the second half of 2004. In 2004, 2005 and 2006
      our
      sales to our overseas customers constituted approximately, 5.4%, 12.1% and
      21.0%, respectively, of our total revenue.




16




**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. In August 2003, we entered into a collaboration agreement with
      the Ha’rbin Institute of Technology, a leading university in the research of the
      polymer material field in China, to undertake joint initiatives for BOPET and
      other types of plastic films development. Under this collaboration agreement,
      the rights to any new product and technological developments belong to us.
      Our
      research and development team is headed by Dr.Wenxun Sun,, and comprises a
      total
      of eight technicians.




***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 the course of our business, we have
      improved on our own formulations, which we believe have resulted in quality
      products that meet our customers’ requirements. In the area of laser holographic
      film, for example, we believe that we had the largest share of that market
      in
      the PRC in 2006 and 2005, based upon publicly available
      information.




***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,
      contributing his knowledge and experience in the industry. He has also
      established strong relationships with our various customers and suppliers.
      He is
      assisted by our executive officers, Mr. Bin Sun and, Mr. Xiaoming Wang and
      who each have more than ten years of experience in industries related to the
      manufacturing and development of products in the PRC.




***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/CBOPET film. We believe that both of our
      production lines are state-of-the-art and enable us 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:




17




**Date**
            
            **Award/Certificate**
            
            **Issuing
                Authority**November
                2003
            
            High
                Technology Enterprise
              Certificate(1)
            
            Shandong
                Province Science and
              Technology
                CommitteeSeptember
                2004
            
            ISO
                9001:2000 Certificate(2)
            
            China
                Certification Center for Quality
              MarkJanuary
                2005
            
            Top
                50 Industrial Enterprises
              in
                2004(3)
            
            Weifang
                City local governmentJuly
                2006
            
            ISO
                14001
            
            International
                Organization for Standardization





(1)
            This
                certificate was awarded by the local government in the Shandong Province
                as recognition of our commitment to utilize new technology to provide
                products to our customers and also awarded us a 15% beneficial tax
                rate.




(2)
            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.




(3)
            This
                citation generates goodwill with the government officials in Weifang
                city.




***Business
      Prospects***




The
      PRC’s
      economy has been growing rapidly and is currently one of the world’s largest
      economies. Our directors believe that the PRC economy will continue to grow
      at
      largely the same pace for the foreseeable future, and in line therewith, the
      packaging industry in China. As BOPET film is a high-end flexible packaging
      material that is relatively newer than other forms of flexible packaging
      materials in the PRC, the uses, and therefore the market, for such material
      will
      continue to expand. As such we believe that the prospects for our industry
      continue to be good.




In
      addition, in line with the continued growth of the PRC economy, consumer
      affluence and spending in the most populous country in the world are expected
      to
      increase correspondingly and lead to the expansion of the consumer goods
      industry. As our products are used primarily in consumer-based industries such
      as the food, pharmaceutical, cosmetics, tobacco and alcohol industries, our
      directors believe the above factors will drive the growth in demand for our
      products in the PRC.




We
      have
      identified thick BOPET film (typically with a thickness of between 50 to 200
      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, they generally operate small-scale production facilities, and
      we
      believe that generally their product quality is not able to meet requirements
      for high-end usage such as that for the manufacture of TFT-LCD screens. As
      a
      result, manufacturers of TFT-LCD screens requiring thick BOPET film generally
      obtain their supply from overseas.




**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 to substitute more expensive imported products. We will
      also
      explore suitable opportunities to source for new customers and markets in the
      PRC and overseas.




Our
      future plans include:




***Investment
      in a new BOPET production line***




We
      have
      commenced construction of a new production line capable of producing BOPET
      film
      that is between 50 to 200 microns thick on our current premises at Weifang
      City,
      PRC. The BOPET film produced using this new production line is targeted at
      industrial use, for example, TFT-LCD screen films. We expect to penetrate into
      the electrical and electronics industry with such new product offerings. Such
      industries currently rely on expensive imports as PRC manufacturers do not
      currently possess such production capabilities. We expect our new BOPET film
      production line to begin commercial production by the first quarter of 2008.
      The
      total investment for this new production line is expected to be approximately
      RMB 240 million (US$30.8 million), which we intend to finance through a
      combination of a portion of the net proceeds from our recent initial public
      offering in the US and short-term secured debt.




18




***Rental
      of new production line***




We
      entered into an agreement for the rental of a BOPET production line with
      Shandong Weifang Legang Food Co., Ltd ( “Legang”) on March 5, 2007, This rental
      production line from Legang will also be used for BOPET film manufacturing,
      primarily for producing general thick film. Fuwei plans to enter a part of
      the
      thick film market in advance of the third production line’s completion by
      renting this production line. Fuwei commenced the trial operation of this rental
      line on April 1, 2007. If the operation goes smoothly, this rental production
      line is expected to increase production and sales by 5000 tons per
      annum.




***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 plan to
      leverage and expand our presence in overseas markets, particularly North
      America, Japan and Southeast Asia through trade fairs and seminars that have
      an
      international and overseas focus and also plan to engage in advertising where
      we
      believe it would be effective. With our low manufacturing and labor costs
      compared to overseas manufacturers, we believe that with high quality products
      and competitive pricing, we can capture market share in the overseas market.
      As
      we believe that the domestic market for BOPET products (in particular, CBOPET
      products) has significant potential for growth, we also intend to engage in
      promotional activities in this area. Such activities include participating
      in
      relevant seminars and exhibitions, advertising and further developing customer
      relationships.




***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 have commenced the construction of a small-scale
      production line for the purpose of conducting research and development. Such
      a
      production line may also be utilized for commercial production as and when
      the
      need arises. This new production line will be primarily used for research into
      the development of multiple-layer BOPET films. Using a dedicated production
      line
      of a smaller production scale will enable us to save 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.




On
      January 31, 2007, we obtained the first installment of a loan from the
      industrial development fund of our local government. In 2006, the Weifang
      government established the Hi & New Technology Project Industrial
      Development Fund for the purpose of enhancing the independent innovation and
      technical R&D ability of local enterprises, to support the development of
      local Hi & New Technology enterprises. This low interest loan has an
      interest rate that is 50% lower than the prevailing one-year interest rate
      of
      the People’s Bank of China. Our subsidiary, Shandong Fuwei, previously obtained
      this grant, which will be used for the construction of Fuwei technology center
      testing production line project mentioned above. It is believed that this
      testing line will enhance our ability to develop new products.




**Our
      Products and Services**




We
      are
      principally engaged in the manufacture and distribution of BOPET film. We began
      trial production of CBOPET film (a type of BOPET film which comprises three
      polymer layers) in or around November 2003. We currently produce BOPET films
      from our two production lines, with an aggregate annual designed production
      capacity of 29,100 tons with thicknesses varying between 8 - 125
      microns.




BOPET
      is
      a high quality plastic film manufactured using the biaxial 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 structure of CBOPET gives the film added properties which
      enables us to develop high quality BOPET products.




BOPET
      film has been widely used in the packaging, imaging (such as masking film,
      printing plates and microfilms), electronics and electrical (such as wire and
      cable wrap, capacitors and motor insulation) industries, as well as in magnetic
      products (such as audio and video tapes). Due to its unique qualities, it is
      suitable for application in
      the
      food, pharmaceutical, cosmetics, tobacco, and alcohol industries and has become
      a popular choice as a flexible packaging material in these industries in recent
      years.




19




We
      market
      our products under our brand name “Fuwei Films.” Our operations are based
      primarily in Shandong Province, the PRC, where we manufacture our products
      for
      sale to customers engaged in flexible packaging businesses in the PRC, in
      particular the eastern region. We also export our products to packaging
      customers and distributors mainly in the US, Japan and Southeast
      Asia.




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 2004, 2005 and 2006. For the convenience of the readers,
      we
      have combined the result for the period from January 1, 2004 to October 26,
      2004
      and the period from August 9, 2004 to December 31, 2004 into one time
      period.




**Category**
            
            **2004**
            
            **2005**
            
            **2006**Printing
                film
            
            
            40.7
            %
            
            29.9
            %
            
            21.8
            %Stamping
                foil film
            
            
            20.6
            %
            
            27.4
            %
            
            22.9
            %Metallization
                film
            
            
            25.7
            %
            
            11.5
            %
            
            8.0
            %Special
                film
            
            
            0.6
            %
            
            13.9
            %
            
            36.**7**
            %Base
                film for other
                applications
            
            
            12.4
            %
            
            17.3
            %
            
            10.7
            %




The
      above
      categorizes BOPET film products by application. Each of the above types of
      BOPET
      film products can be single-layer (manufactured using the Brückner or DMT
      production line) or three-layer (manufactured using the DMT production line).
      For example, matte film, a type of special film, can be single-layer or
      three-layer. A three-layer matt film typically has a non-matt side and may
      be
      used for other applications without further processing.




The
      significant increase in 2006 was largely attributable to the increased demand
      for special films, including the increase in 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.




***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.




***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:
  ·
                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.
  ·
                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 which is composed of
                    a
                    heat-sealable surface and a core layer consisting of a homopolymer
                    of
                    polyester. The heat-sealable film is primarily sold for use in
                    printing
                    and making heat sealable
                    bags.
  ***Base
          film for other applications***


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


20




**Production**




Our
      operating subsidiary, Shandong Fuwei, currently operates two 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 began trial production of CBOPET in November
      2003
      and has an annual designed production capacity of 16,100 tons of BOPET/CBOPET
      film. As of December 31, 2006, Shandong Fuwei has a total annual designed
      production capacity of 29,100 tons of BOPET/CBOPET 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:




***Dosing
      and Mixing***




PET
      resin
      is dosed and mixed with relevant additives to give it its desired
      characteristics. In the case of the production of our CBOPET 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 co-extruders to
      allow us to produce CBOPET 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.




21




***Inventory
      Management***




Our
      warehousing facilities are located in the Shandong Province, PRC. Our total
      warehousing area is approximately 5,279 sq m. Our warehouses are guarded by
      security personnel and loss of our inventory is covered under our insurance
      policies. As of December 31, 2006, our total inventories amounted to
      approximately RMB 23.8 million and our raw materials, work-in-progress, finished
      goods and consumables and spare parts made up approximately 44.3%, 8.5%, 45.7%
      and 1.5% 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 two
      weeks’ production. For our finished goods, we typically manufacture such goods
      upon our receipt of orders. We adopt a first-in-first-out method of inventory
      control.




Our
      inventory turnover periods (in days) for 2004, 2005 and 2006 were 30.0, 30.2
      and
      26.0, respectively. Inventory turnover is calculated as 365 days times 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 2005 and 2006.




**Manufacturing
      Facilities and Utilization Rates**




Our
      existing manufacturing facilities have an aggregate gross built-up area of
      approximately 26,400 sq m. As of December 31, 2006, we have the following
      production lines:




**Production
                Line**
            
            **Designed
                Production Capacity**
            
            **Estimated
                Remaining Life Span**Brückner
                Production Line
            
            13,000
                tons per annum
            
            Approximately
                10 yearsDMT
                Production Line
            
            16,100
                tons per annum
            
            Approximately
                17 years




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. As we typically produce 12 micron BOPET film, our operational
      production capacity (estimated by our management) for our Brückner production
      line and DMT production line are 13,300 tons per annum and 14,100 tons per
      annum
      respectively assuming 7,500 production hours per annum.




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 2004, 2005 and 2006, based on our estimated operational
      production capacities were as follows.




**Approximate Annual Production Volume**
              **(tons)**
            
            
            **Average Annual Utilization Rate**
              **(%)****Production
                Line**
            
            
            **2004**
            
            
            **2005**
            
            
            **2006**
            
            
            **2004**
            
            
            **2005**
            
            
            **2006**Brückner
                Production
                Line
            
            
            11,982
            
            
            12,018
            
            
            12,945
            
            
            90.1
            %
            
            90.4
            %
            
            99.6
            %DMT
                Production Line
            
            
            11,381
            
            
            11,689
            
            
            14,669
            
            
            80.7
            %
            
            82.9
            %
            
            91.1
            %







(1)
            lower
                utilization rate was recorded as we were largely carrying out trial
                production from November 2003 to the earlier part of 2004 for our
                DMT
                production line.




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, 2006, our product inspection and quality control department was
      comprised of 16 employees. We have one manager, one inspection supervisor,
      one
      quality control engineer, 12 end-product inspection technicians and one raw
      materials inspector. 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.




22




***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.




***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 40 days and this replacement process
      takes about 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 2006 (primarily for maintenance) was less than 1.5% of
      our
      monthly production time.




For
      2006,
      the rejection rates of our products were generally less than 2.0% of our total
      production volume. Defective or inferior products which 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***




By
      formulating our own blend of additives used in the production of BOPET film,
      we
      have introduced a variety of BOPET film products. The following are some of
      the
      new products for which commercial production has begun:




**Product**
            
            **Achievement**Laser
                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.Chemical
                pretreated film
            
            Our
                film is pretreated in-line and coated, which results in a strong
                adhesion
                to ink and aluminum.




23




**New
      Product Development**




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




**Product**
            
            **Objectives**
            
            **Commercialization
                Date**Electrical
                insulation base film
            
            This
                film is expected to retain a high insulating capacity and is suitable
                for
                use by the electrical insulation industry.
            
            April
                2007High
                barrier film
            
            We
                use nanotechnology to increase the film’s barrier properties. This film,
                when used in packaging, preserves the aroma of the
                products.
            
            May
                2007Heat-transferring
                holographic
              base
                film
            
            This
                film is expected to enable direct embossing and transfer of holographic
                images to other materials without coat and substrate.
            
            Second
                half of 2007




We
      have
      applied for patents in respect of some of our new processes, technologies and
      systems used in our business and, as of December 31, 2006, 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
      via
      our labor contracts with them and restricting access to our research and
      development center and access to technology know-how to authorized
      personnel.




Our
      expenditure on research and development, excluding staff salaries and related
      expenses, in 2004, 2005 and 2006 were as follows (000’s):




**Jan. 1**
              **through**
              **Oct. 26,**
              **2004**
            
            **Aug. 9**
              **through**
              **Dec. 31,**
              **2004**
            
            **Year**
              **Ended**
              **Dec. 31,**
              **2005**
            
            **Year**
              **Ended**
              **December 31,**
              **2006****RMB**
            
            **RMB**
            
            **RMB**
            
            **RMB**Research
                and Development
                Expenses
            
            
            781
            
            
            131
            
            
            1,157
            
            
            3,650




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 2004 to 2005, as we believe that higher investment 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, 2006, our sales and marketing department comprised 18 employees
      in
      the domestic sales division and three 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 Chairman and Chief Executive Officer,
      Mr. Xiaoan He is actively involved in overseeing and supervising our sales
      and marketing activities and often visits with our clients. We believe that
      Mr. He’s ability to leverage his many years of experience in the industry
      to attract new customers and contacts is valuable to our sales and marketing
      efforts.




***Customers
      and Markets***




Over
      the
      last two 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 eastern region of the
      PRC.
      Our overseas customers are mostly based in the US, Japan and Southeast Asia.
      In
      2005, sales from our domestic and overseas customers constituted approximately
      88% and 12%, respectively, of our annual revenue. In 2006, sales from our
      overseas customers increased to approximately 21% of our total revenue. Although
      we are continuing to expand to international markets, as substantially all
      of
      our business is currently conducted in mainland China, 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 41
      for an explanation of the extent to which our products are dependent on
      intellectual property protection.




24




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,
      2004,
      2005 and 2006:




**Percentage
                of******Total**********Revenue
                (%)********Name
                of Customer**
            
            **2004**
            
            **2005**
            
            **2006**Pilcher
                Hamilton Corp.
            
            
            0
            
            
            1.9
            
            
            5.5Gaoyou
                Secondary Planet Cigarette Material Co., Ltd.
            
            
            0.8
            
            
            1.4
            
            
            3.0Jiangyin
                Teruida Packaging Technical Co., Ltd
            
            
            1.2
            
            
            2.5
            
            
            2.9Sichuan
                Yibin Puguang Technology Co., Ltd.
            
            
            0.1
            
            
            3.1
            
            
            2.9Wuxi
                Guotai Colour Printing Co., Ltd.
            
            
            1.3
            
            
            4.2
            
            
            2.8




Except
      for Pilcher Hamilton Corp., none of our customers accounted for more than 5%
      of
      our total revenue in any of the previous three years.




None
      of
      our directors or principal shareholders or any of their affiliates have 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 17.6% of our total revenue during the year
      ended December 31, 2006.




***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. 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 45 days. Our international
      sales are settled via 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, 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.




***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
                leads; and




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




25




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.




**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, 2004, 2005 and
      2006:




**Percentage
                of total purchases (%)****Name
                of Supplier**
            
            **Supply**
            
            **2004**
            
            **2005**
            
            **2006**Sinopec
                Yizheng
            
            
            PET
                resin
            
            
            63.4
            
            
            66.6
            
            
            58.5Yizheng
                Tianbao Polyester Co., Ltd.
            
            
            Additives
            
            
            11.3
            
            
            16.7
            
            
            23.9Jiangyin
                Xingtai New Material Co., Ltd.
            
            
            PET
                resin
            
            
            -
            
            
            -
            
            
            6.7Zhuhai
                Yuhua Polyester Co., Ltd
            
            
            PET
                resin and additives
            
            
            17.3
            
            
            5.3
            
            
            2.1




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 from Sinopec Yizheng are on a cash basis. Our other suppliers usually
      grant us credit terms of up to approximately 90 days. While we believe that
      there is 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 have 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**
            
            **2005**
            
            **2006**
            
            **Country**PET
                resin
            
            
            75.7
            
            
            68.0
            
            
            PRCAdditives
            
            
            24.3
            
            
            27.1
            
            
            PRCPET
                resin
            
            
            -
            
            
            4.9
            
            
            Korea




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. Though the
      price of the crude significantly increased globally in 2006, the actual demands
      of PET resins of China’s textile industry decreased, thus resulting in a slight
      increase in prices of PET resin and additives during 2006.




26




As
      we are
      unable to accurately 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 two weeks. We may also adjust the prices of our end products,
      when appropriate, and pass such cost increase 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**
            
            **BOPA**Water
                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
      (approximately US$30 million) 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 and
      that these barriers to entry have enabled us to maintain our overall competitive
      position in the PRC BOPET film market.




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




·
            research
                and development capability;




·
            quality
                and reliability of products;




·
            technical/manufacturing
                capability; and




·
            industry
                reputation.




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




·
            Dupont
                Hongji Films Foshan Co., Ltd;




·
            Shanghai
                Zidong Chemical Plastic Co., Ltd;
                and




·
            Yihua
                Toray Polyester 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.




Based
      upon publicly available information regarding sales in 2004, 2005 and 2006,
      the
      following table sets forth the percentage of the PRC market that we have for
      each of our products as compared to that of our largest competitor:




27








Products
            
            
            Fuwei
            
            
            2004
              %
                of Market Dupont Hongji Films Foshan Co., Ltd
            
            
            Fuwei
            
            
            2005
              %
                of Market Dupont Hongji Films Foshan Co., Ltd
            
            
            Fuwei
            
            
            2006
              %
                of Market Dupont Hongji Films Foshan Co., LtdMetallization
                Film
            
            
            16
            
            
            12
            
            
            3
            
            
            8
            
            
            1
            
            
            6Printing
                Film
            
            
            16
            
            
            20
            
            
            9
            
            
            15
            
            
            8
            
            
            10Stamping
                Film
            
            
            16
            
            
            30
            
            
            20
            
            
            26
            
            
            35
            
            
            25Matte
                Base Film
            
            
            100
            
            
            0
            
            
            100
            
            
            0
            
            
            100
            
            
            0Holographic
                Film
            
            
            100
            
            
            0
            
            
            100
            
            
            0
            
            
            100
            
            
            0




***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
                Parent**Fuwei
                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. Our land use
      rights, buildings and facilities have been mortgaged to certain banks in the
      PRC
      for loans totaling RMB 235.9 million.




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 200 microns thick. The BOPET
      film
      produced using this new production line is targeted at industrial use, for
      example, TFT-LCD screen films. We have already begun construction of a new
      facility to house this new production line and we estimate that we have
      completed approximately 20% of the construction of this facility. We expect
      this
      new BOPET film production line to begin commercial production by the end of
      the
      first quarter of 2008. The total investment for this new production line is
      expected to be approximately RMB 240 million, which we intend to finance through
      the use of a portion of the net proceeds from this offering and short-term
      secured borrowings.




**Item
      4A. Unsolved Staff Comments**




None.




**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 audited predecessor financial
      statements and consolidated financial statements included in this Annual Report
      beginning on page F-1. The audited predecessor financial statements and
      consolidated financial statements have been prepared in accordance with U.S.
      GAAP. The fiscal year ended December 31, 2003 commenced on January 28, 2003,
      the
      date of incorporation of Shandong Fuwei. Data for such predecessor periods
      are
      not comparable with data subsequent to October 26, 2004 in light of, among
      other
      matters, the purchase accounting effects of the share transfer and the different
      capital structure of the company following the share transfer. The following
      discussion and analysis contain forward-looking statements that involve risks
      and uncertainties.*




28




**Overview**




We
      develop, manufacture and distribute high quality plastic film using the biaxial
      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 substantially all of our BOPET
      film products to customers in the flexible packaging industry located in the
      eastern region of China. We established an international sales division in
      June
      2004 and have been selling our products into overseas markets, most notably
      the
      US, Japan and Southeast Asia.




**Our
      Operating History and Corporate Structure**




The
      diagram below illustrates our corporate structure:




corporate structure graph




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 officers,
      served as executive officers 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 public auction.
      Following its successful bid at 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.




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, one of our directors, 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 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 this transfer, our financial statements have been prepared with regard
      to Shandong Fuwei, as the predecessor company, for the period from January
      28,
      2003 until October 26, 2004 and with regard to Fuwei Films (Holdings) Co.,
      Ltd
      and its subsidiaries for periods beginning on and after August 9, 2004. The
      acquisition was accounted for in accordance with the purchase method of
      accounting in our financial statements.




29




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 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 considered the arrangement to have the
      DMT production line acquired through Beijing Baorui through the first auction
      as
      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.




We
      have
      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 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.”*




**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 from January 1, 2004 through October 26, 2004, the period from August
      9, 2004 through December 31, 2004, and the years ended 2005 and 2006, the total
      cost of raw materials made up approximately 77.3%, 73.5%, 77.6% and 80.9% 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 72.7%, and 27.3% of our total cost of
      raw
      materials in 2006. 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.




Although
      we try to pass on any increase in our raw material costs to our customers,
      and
      have generally been able to pass substantially all increases in recent years
      on
      to them, we are occasionally constrained 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 entered into
      any other agreements or arrangements with respect to the supply of raw materials
      used in the production of BOPET film, nor have we 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, while their quality and
      service standards may not be the same as our existing supplier, there are
      sufficient alternative suppliers of PET resin if our existing supplier is 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. Our specialty products, such as our laser holographic
      based film, and our matte and high-gloss films, are not as affected by market
      conditions and thus we have more control over setting the prices for these
      products.




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, *inter* *alia* ,
      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.




30




***Demand
      for Our Products***




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 period from January 1, 2004 through
      October 26, 2004, the period from August 9, 2004 through December 31, 2004
      and
      the fiscal years ended December 31, 2005 and 2006, approximately 97.7%, 81.3%,
      87.9% and 79%, 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.




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.




***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
      entrants into our industry. We believe that our major competitors in the BOPET
      manufacturing market in the PRC are Dupont Hongji Films Foshan Co., Ltd,
      Shanghai Zidong Chemical Plastic Co., Ltd and Yihua Toray Polyester Film Co.,
      Ltd.




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 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.




31




***Cost
      of Goods Sold***




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




**Jan.
                1**
              **through**
              **Oct.
                26,**
              **2004**
            
            **Aug.
                9**
              **through**
              **Dec.
                31,**
              **2004**
            
            **Year
                Ended**
              **Dec.
                31,**
              **2005**
            
            **Year
                Ended**
              **Dec.
                31,**
              **2006**Materials
                costs
            
            
            77.9
            %
            
            86.3
            %
            
            77.6
            %
            
            80.9
            %Factory
                overhead
            
            
            18.4
            %
            
            10.8
            %
            
            18.8
            %
            
            15.9
            %Packaging
                materials
            
            
            2.9
            %
            
            2.3
            %
            
            2.8
            %
            
            2.6
            %Direct
                labor
            
            
            0.8
            %
            
            0.6
            %
            
            0.8
            %
            
            0.6
            %




***Material
      Costs***




As
      noted
      above, the raw materials used in our BOPET film production are PET resin and
      additives, which made up approximately 72.7% and 27.3%, respectively of our
      total materials costs in 2006.




***Factory
      Overhead***




For
      the
      periods prior to October 26, 2004, factory overhead comprises primarily of
      depreciation, operating lease expenses relating to our Brückner production line
      and subcontracting charges relating to our DMT production line, electricity
      and
      water charges, freight costs, and repair and maintenance of our machinery and
      equipment. The total freight costs related to the transporting of raw materials
      to our warehouse included in factory overhead amounted to RMB 90,000 for these
      periods.




For
      periods beginning on and after October 27, 2004, factory overhead comprises
      primarily of depreciation, electricity and water charges, freight costs, and
      repair and maintenance of our machinery and equipment. The total freight costs
      related to the transporting of raw materials to our warehouse included in
      factory overhead amounted to RMB **** 391,000
      for these periods.




***Packaging
      Materials***




Our
      packaging materials comprise, among others, 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.




***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 supply 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 are comprised of administrative expenses, distribution
      expenses and other operating expense.




Our
      administrative expenses are comprised 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 are comprised 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.




For
      the
      periods prior to October 26, 2004 and after October 27, 2004, we recorded
      outbound freight costs for distributing goods to customers of RMB5.3million
      and
      RMB 23.7 million, respectively, and such costs were recorded in distribution
      expenses. All inbound freight costs are recorded in cost of goods
      sold.




32




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 are comprised mainly of loss on disposal of property, plant
      and equipment and other miscellaneous expenses.




**F** **inance
      Costs**




Finance
      costs are comprised mainly of interest expense relating to our loans and
      interest paid on discounting outstanding accounts receivable.




**Income
      Tax Expense**




Shandong
      Fuwei has been granted preferential tax treatment 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 is taxed at a rate of 15%, as a “High
      Technology Enterprise.”




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 take effect as of
      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. As a result of the New Tax Law, even if Shandong Fuwei
      continues to maintain its high-tech enterprise status, Shandong Fuwei will
      be
      subject to the increased 25% unified enterprise income tax rate on January
      1,
      2013.




**Inflation**




Inflation
      in the PRC has not had any material impact on our business in 2004, 2005 and
      2006. According to the National Bureau of Statistics of China, the change in
      the
      consumer price index in China was 3.9%, 1.8% and 1.5% in 2004, 2005 and 2006,
      respectively.




**Critical
      Accounting Policies**




We
      prepare our financial statements in accordance with 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.




33




We
      had
      goodwill of RMB 10.3 million, as of December 31, 2004, 2005 and 2006. The
      estimated fair value of the reporting unit significantly exceeded its carrying
      value at December 31, 2006. 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 45 days. Our international sales are settled via
      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 balances.




As
      of
      December 31, 2006, our largest trade debtor was Jiangyin Teruida  Package
      Technology Co., Ltd,, a company based in the Jiangsu Province of PRC. The trade
      receivables from Jiangyin Teruida  Package
      Technology Co., Ltd amounted to approximately RMB2.4 million as of December
      31
      2006, all of which were within the credit term granted.




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 2004, 2005 and 2006 is as
      follows (000’s):




**Jan.
                1**
              **through**
              **Oct.
                26,**
              **2004**
            
            **Aug.
                9**
              **through**
              **Dec.
                31,**
              **2004**
            
            **Year
                Ended**
              **Dec.
                31,**
              **2005**
            
            **Year
                Ended**
              **Dec.
                31,**
              **2006**
            
            **Year
                Ended**
              **Dec.
                31,**
              **2006****RMB**
            
            **RMB**
            
            **RMB**
            
            **RMB**
            
            **US$**Balance
                at beginning of period/year
            
            
            —
            
            
            —
            
            
            1,008
            
            
            2,015
            
            
            258Bad
                debt expense/(recovery)
            
            
            —
            
            
            1,008
            
            
            1,007
            
            
            (1,143
            )
            
            (146
            )Write-offs
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Balance
                at end of period/year
            
            
            —
            
            
            1,008
            
            
            2,015
            
            
            872
            
            
            112




***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 have been no impairment charges recognized for the
      periods/year ended January 1, 2004 through October 26, 2004, August 9, 2004
      through December 31, 2004, December 31, 2005 and December 31, 2006.




34




**Results
      of Operations**




The
      following discussion of our results of operations is based upon our audited
      predecessor financial statements and audited consolidated financial statements
      beginning on page F-1 in this annual report. Data for Shandong Fuwei for the
      period ended October 26, 2004 have not been aggregated with the results for
      the
      Company for the period ended December 31, 2004 as such periods are not
      comparable in light of, among other matters, the purchase accounting effect
      of
      Shandong Fuwei on October 27, 2004. To illustrate, the fair value adjustment
      of
      inventories of RMB 4.9 million of Shandong Fuwei at the date of acquisition
      has
      lowered the gross profit for the period October 27, 2004, to December 31, 2004
      by an equivalent amount while the fair value adjustments of property, plant
      and
      equipment and lease prepayments at the date of acquisition have decreased the
      depreciation by RMB 157,000 (year ended December 31, 2005: RMB 941,000) and
      increased amortization by RMB 23,000 (year ended December 31, 2005: RMB 70,000)
      respectively for the period October 27, 2004, to December 31, 2004.




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




**Jan.
                1**
              **through**
              **Oct. 26,
                2004**
            
            
            **Aug. 9**
              **through**
              **Dec. 31,
                2004**
            
            
            **Year
                Ended**
              **Dec. 31,
                2005**
            
            
            **Year
                Ended**
              **Dec. 31,
                2006**(as
                a % of revenues)Gross
                Profit
            
            
            27.6
            
            
            21.3
            
            
            25.2
            
            
            23.5Operating
                expenses
            
            
            3.7
            
            
            6.1
            
            
            6.1
            
            
            5.6Other
                income/(expense)
            
            
            (2.4
            )
            
            1.7
            
            
            (2.6
            )
            
            (2.2
            )Income
                tax (expense)/benefit
            
            
            —
            
            
            0.4
            
            
            —
            
            
            (0.2
            )Net
                income
            
            
            21.5
            
            
            17.3
            
            
            16.5
            
            
            15.5




**December
      31, 2006 compared to December 31, 2005**




***Revenues***




Our
      revenue can be analyzed as follows:




**December
                31,**
              **2005**
              **(RMB
                in**
              **thousands)**
            
            **% of Total**
            
            **December
                31,**
              **2006**
              **(RMB
                in**
              **thousands)**
            
            **% of Total**Printing
                film
            
            
            103,682
            
            
            29.9
            
            
            95,315
            
            
            21.8Stamping
                film
            
            
            94,711
            
            
            27.4
            
            
            99,856
            
            
            22.9Metallization
                film
            
            
            39,647
            
            
            11.5
            
            
            34,772
            
            
            8.0Base
                film for other
                applications
            
            
            59,826
            
            
            17.3
            
            
            46,784
            
            
            10.7Special
                film
            
            
            48,339
            
            
            13.9
            
            
            160,157
            
            
            36.7346,205
            
            
            100.0
            
            
            436,884
            
            
            100




During
      the fiscal year ended December 31, 2006, our revenues were RMB 436.9 million,
      RMB 90.7 million or 26.2% higher than the same period for last year. In 2006,
      sales of special films were RMB 160.2 million and 36.7% of our total revenues
      as
      compared to RMB 48.3 million and 13.9% in 2005, RMB 111.9 million or 22.8%
      higher than last year. The significant increase was largely attributable to
      the
      increase in sales volume by over 22% and 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 the United States, Canada
      and Korea, which command a higher selling price as compared to other non-special
      films.  We expect that the sales of special film will continue to increase
      in the future.




***Cost
      of Goods Sold***




Our
      cost
      of goods sold amounted to RMB 334.3 million for the year ended December 31,
      2006, and was RMB 259.1 million or 29.0% higher than last year. The increase
      was
      generally in line with the increase in sales as a result of the increase in
      export sales.. In 2006, total export sales was RMB91.8 million and 21.0% of
      our
      total revenues as compared to RMB 41.8 million and 12.1% in 2005, RMB 50.0
      million or 119.6% higher than last year.




***Gross
      Profit***




Our
      gross
      profit during the year ended December 31, 2006 amounted to RMB 102.5 million
      representing a gross margin of 23.5%. Gross margin decreased from 25.2% for
      the
      year ended December 31, 2005 to 23.5% in 2006 mainly due to the increase in
      the
      price of raw materials in 2006 as a result of the increase in global oil prices,
      although we increased the price of our products by approximately 3.2% to
      offset a portion of the 5% increase in the price of raw materials.




35




***Operating
      Expenses***




Our
      operating expenses during the year ended December 31, 2006, amounted to RMB
      24.5
      million, RMB 3.4 million or 16.1% higher than last year. During the 2006 year,
      our operating expenses as a percentage of revenue was 5.6% which was comparable
      with that in the previous comparable period of 6.1%.




***Other
      Income/(Expense)***




Our
      other
      expenses during the year ended December 31, 2006, amounted to RMB 9.6 million,
      7.4% higher than previous comparable period. The increase was mainly due to
      the
      decrease of interest income by RMB 0.86 million, as compared to the previous
      year.




***Income
      Tax Expense***




The
      effective tax rate was 1.1% 2006 and (0.1)% in 2005. The low effective tax
      rates
      were primarily attributable to the fact that our operating subsidiary Shandong
      Fuwei enjoyed income tax exemption during both periods pursuant to the
      prevailing PRC income Tax Law.




**Fiscal
      Year Ended 2005**




***Revenues***




Our
      revenue can be analyzed as follows:




**2005**
            
            **% of Total**(RMB
                in thousands)Printing
                film
            
            
            103,682
            
            
            29.9Stamping
                film
            
            
            94,711
            
            
            27.4Metallization
                film
            
            
            39,647
            
            
            11.5Base
                film for other
                applications
            
            
            59,826
            
            
            17.3Special
                film
            
            
            48,339
            
            
            13.9346,205
            
            
            100.0




Our
      revenues were RMB 346.2 million in 2005. During 2005, we experienced a decline
      in the average selling price of our products by 4.2% as a result of the entry
      of
      new manufacturers and increased competition in the commercial BOPET market.
      The
      products experiencing the most significant price declines were printing film,
      stamping film and base film. We expect this pricing trend to continue as a
      result of increased competition in the market.




***Cost
      of Goods Sold***




Our
      cost
      of goods sold amounted to RMB 259.1 million in 2005. Our cost of goods sold
      are
      affected by the purchase price of our primary raw materials. While the prices
      of
      PET resin and additives are, to a certain extent, affected by the price
      movements of crude oil which generally increased globally in 2005, the actual
      demands of PET resins in China’s textile industry declined as a result of the
      implementation of a new quota system for exporting textiles to the United States
      and other European countries, thus resulting in a decline in prices of PET
      resin
      and additives by 4.8% during 2005 which led to cost of goods sold in 2005,
      as a
      percentage of revenue, being lower when compared to the preceding
      period.




***Gross
      Profit***




Our
      gross
      profit for 2005 was RMB 87.1 million, representing a gross margin of 25.2%.
      This
      gross margin was higher than in the preceding period mainly as a result of
      increased volume which was partially offset by the decline in average selling
      price in 2005. The sales of our commercial BOPET films contributed approximately
      86% of our total sales in 2005. In order to maintain our competitiveness in
      the
      industry, we lowered the selling price of our commercial products by
      approximately 4%. Based on anticipated increased levels of competition, we
      expect this trend to continue until the second half of 2007.




36




***Operating
      Expenses***




Our
      operating expenses were RMB 21.1 million in 2005. During 2005, our operating
      expenses as a percentage of revenue were slightly higher than in the preceding
      period as a result of our increased distribution costs due to our increase
      in
      export sales to markets outside of the PRC.




***Other
      Income/(Expense)***




Our
      other
      income/(expense) was RMB (8.9) million in 2005. Other income/(expenses) in
      2005
      included a full year of significantly higher interest costs due to our new
      capital structure following the acquisition of the
      DMT
      production line. Our total outstanding interest-bearing borrowings were
      approximately RMB 248.0 million at December 31, 2005.




***Income
      Tax Benefit***




Our
      income tax benefit was RMB 0.059 million in 2005. The effective tax rate was
      (0.1)% in 2005, primarily attributable to the fact that our operating
      subsidiary, Shandong Fuwei, enjoyed income tax exemption during 2005 pursuant
      to
      the prevailing PRC Income Tax Law.




**Period
      from August 9, 2004 through December 31, 2004**




***Revenues***




Our
      revenue can be analyzed as follows:




**Aug.
                9, 2004 through**
              **Dec.
                31, 2004**
            
            **% of Total**(RMB
                in thousands)Printing
                film
            
            
            25,154
            
            
            30.9Stamping
                film
            
            
            19,695
            
            
            24.2Metallization
                film
            
            
            17,666
            
            
            21.7Base
                film for other
                applications
            
            
            17,679
            
            
            21.8Special
                film
            
            
            1,170
            
            
            1.481,364
            
            
            100.0




During
      the period from August 9, 2004 through December 31, 2004, our revenues were
      RMB
      81.4 million. During this period, we experienced generally higher levels of
      volume of sales for each of our products, with minimal fluctuation in pricing
      for our products, as the increased competition that affected our pricing in
      2005
      had not yet become a significant factor in our markets.




***Cost
      of Goods Sold***




Our
      cost
      of goods sold amounted to RMB 64.0 million for the period from August 9, 2004
      through December 31, 2004. Increases in raw material prices due to crude oil
      price increases in 2004 led to generally higher levels of cost. The textile
      exporting quotas, which impacted the demand for PET resins in 2005, did not
      impact the prices we paid for raw materials during this period.




***Gross
      Profit***




Our
      gross
      for the period from August 9, 2004 through December 31, 2004 was RMB 17.3
      million, representing a gross margin of 21.3%. Our gross margin was
      significantly lower than in earlier periods due to the increases in raw material
      prices mentioned above. The sales of our commercial BOPET films contributed
      approximately 98.6% of our total revenues during this period.




***Operating
      Expenses***




Our
      operating expenses were RMB 4.9 million during the period from August 9, 2004
      through December 31, 2004, slightly higher as a percentage of revenue due to
      shipping costs associated with our commencement of exports to overseas
      markets.




***Income
      Tax Benefit***




Our
      income tax benefit was RMB 0.3 million during the period from August 9, 2004
      through December 31, 2004. The effective tax rate was (2.0)% during this period
      and this was primarily attributable to the fact that our operating subsidiary,
      Shandong Fuwei, enjoyed income tax exemption during 2004 pursuant to the
      prevailing PRC Income Tax Law.




37




**Predecessor**




**Period
      from January 1, 2004 through October 26, 2004**




***Revenues***




Our
      revenue can be analyzed as follows:




**Jan
                1, 2004 through**
              **Oct
                26, 2004**
            
            **% of Total**(RMB
                in thousands)Printing
                film
            
            
            124,405
            
            
            43.5Stamping
                film
            
            
            55,907
            
            
            19.5Metallization
                film
            
            
            76,697
            
            
            26.8Base
                film for other
                applications
            
            
            28,110
            
            
            9.8Special
                film
            
            
            995
            
            
            0.4286,114
            
            
            100.0




Our
      revenues during the period from January 1, 2004 through October 26, 2004 was
      RMB
      286.1 million. Contributing to these revenues were sales of RMB 6.6 million
      to
      overseas markets (principally United States of America. Japan and Europe)
      commenced in 2004. By the end of the year we had secured 11 overseas customers
      for our BOPET film products. Compared to the preceding period, our sales volume
      increased substantially by RMB 191.0 million while the pricing of our products
      declined as a result of increased competition in the market. The change in
      volume was the result of full operation of production line in 2004 as we
      commenced commercial production of BOPET film products in July 2003. The pricing
      of our products was mainly driven by market demand.




***Cost
      of Goods Sold***




Our
      cost
      of goods sold amounted to RMB 207.2 million during the period from January
      1,
      2004 through October 26, 2004. The increases in raw material prices due to
      crude
      oil price increases contributed to the higher levels of costs as a percentage
      of
      revenues, when compared with preceding period.




***Gross
      Profit***




Our
      gross
      profit was RMB 79.0 million during the period from January 1, 2004 through
      October 26, 2004. Our higher revenues contributed to these profits. Overall
      gross margin during this period was 27.6%. Our gross margin decreased during
      this period by 2.2% as a result of the increase in raw materials prices, and
      decline in the selling prices of our commercial products.




***Operating
      Expenses***




Our
      operating expenses were RMB 10.6 million during the period from January 1,
      2004
      through October 26, 2004. As a percentage of revenue, operating expenses
      decreased slightly in this period when compared with the preceding period,
      primarily due to our spreading out of our fixed costs as compared to the
      previous period.




***Other
      Income/(Expense)***




Our
      other
      income/(expense) was RMB (6.8) million during the period from January 1, 2004
      through October 26, 2004. This includes increased interest costs due to our
      new
      capital structure following the acquisition of the DMT production
      line.




***Income
      Tax Expense***




Our
      income tax was RMB 0.03 million during the period from January 1, 2004 through
      October 26, 2004. The effective tax rate was 0.04% during this period. The
      low
      effective tax rate was primarily attributable to the fact that our operating
      subsidiary, Shandong Fuwei, enjoyed income tax exemption during this period
      pursuant to the prevailing PRC Income Tax Law. The income tax expense of RMB
      0.03 million during this period was mainly attributable to the recognition
      of
      deferred tax liabilities resulting from the difference between the
      capitalization of interest under PRC tax law and US GAAP.




**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.




38




Our
      capital expenditures in 2006 have been primarily financed through short-term
      borrowings from financial institutions. The interest rates of short-term
      borrowings from financial institutions during the three year period from 2004
      to
      2006 ranged from 5.31% to 7.25%, and these borrowings may not be prepaid prior
      to maturity. We believe that our principal banker in Shandong Province had
      been
      granting shorter-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 incurred significant amounts of secured short-term financing
      to fund our acquisition of the Brückner and DMT production lines and for our
      working capital needs. At December 31, 2006, these borrowings totaled RMB 237.67
      million including seven different loan agreements with three different financial
      institutions in the PRC. Subsequently, we renegotiated substantially all of
      our
      outstanding indebtedness resulting in approximately RMB 152.6 million less
      of
      secured indebtedness. Management believes that the reduced debt will cut down
      our financial cost in 2007. 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.




We
      have
      also entered into a contract relating to a third production line and are in
      the
      process of determining our capital requirements in this regard. The total
      purchase price of our new thick BOPET film production line is estimated to
      be
      approximately RMB 240 million. According to the construction schedule of the
      third production line, management would be in the position to apply for new
      bank
      loans when extra capital are needed.




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 and planned capital expenditure
      requirements.




A
      summary
      of our cash flows for 2004 and 2005 and 2006 is as follows:




**Jan.
                1**
              **through**
              **Oct.
                26, 2004**
            
            
            **Aug.
                9**
              **through**
              **Dec.
                31, 2004**
            
            
            **Year
                Ended**
              **Dec.
                31, 2005**
            
            
            **Year
                Ended**
              **Dec.
                31, 2006**(RMB
                in thousands)Net
                cash generated from operating activities
            
            
            18,946
            
            
            60,877
            
            
            43,587
            
            
            58,492Net
                cash used in investing activities
            
            
            (66,491
            )
            
            (40,464
            )
            
            (31,479
            )
            
            (43,479
            )Net
                cash generated from/(used in) financing activities
            
            
            43,600
            
            
            (14,510
            )
            
            (10,583
            )
            
            227,499Effect
                of foreign exchange rate change
            
            
            —
            
            
            —
            
            
            (1
            )
            
            —Net
                (decrease) increase in cash and cash equivalents
            
            
            (3,945
            )
            
            5,903
            
            
            1,524
            
            
            242,512Cash
                and cash equivalents as at the beginning of the
                period/year
            
            
            16,089
            
            
            —
            
            
            5,903
            
            
            7,427Cash
                and cash equivalents as at the end of the period/year
            
            
            12,144
            
            
            5,903
            
            
            7,427
            
            
            249,939




***Operating
      Activities***




Net
      cash
      from operating activities was RMB 58.5 million for the year ended December
      31,
      2006 as compared to RMB 43.6 million for the year ended December 31, 2005.
      This
      increase is primarily attributable to improving stock turnover, together with
      sales volume outweighing production volume during the period. This was, however,
      partly offset by higher levels of accounts receivable resulting from increase
      in
      number of new customers obtained during the last quarter of 2006.




39




Our
      main
      source of operating cash was receipts from customers, with cash payments to
      acquire raw materials as our main use of operating cash. Both receipts from
      customers and payments to vendors increased during the year due to higher sales
      volumes compared to the previous period. During this period we experienced
      an
      increase in bills receivables of RMB29.5 million as a result of increase in
      new
      customers who are required to pay by bills with maturity period from one to
      six
      months.




Net
      cash
      from operating activities was RMB 43.6 million in 2005. Our main source of
      operating cash was receipts from customers, with cash payments to acquire raw
      materials as our main use of operating cash. Both receipts from customers and
      payments to vendors increased during the year due to higher sales volumes
      compared to the previous period. During this period we experienced (i) an
      increase in trade receivables as a result of longer credit period of 30 days
      granted to customers in order to maintain a long term business relationship;
      and
      (ii) an increase in inventories as a result of increase in finished goods level
      to meet anticipated sales orders in early 2006. In order to generate growth
      in
      sales, more inventories were accumulated towards the year end and a longer
      credit period was offered to creditworthy customers, thereby lowering cash
      flows
      from operating activities.




Net
      cash
      from operating activities was RMB 60.9 million in the period from August 9,
      2004
      through December 31, 2004. Our main source of operating cash was receipts
      from customers with cash payments to acquire raw materials as our main use
      of
      operating cash. During the period, we generally offered a credit of 7 days
      to
      our customers.




***Predecessor***




Net
      cash
      from operating activities was RMB 18.9 million in the period from January 1,
      2004 through October 26, 2004. Our main source of operating cash was
      receipts from customers, with cash payments to acquire raw materials as our
      main
      use of operating cash. While we experienced significant growth in sales when
      compared to the previous period, more cash was locked up in the accounts
      receivable due to longer credit period granted to customers during the
      period.




***Investing
      Activities***




Net
      cash
      used in investing activities was RMB(43.4 million) in 2006, and was generally
      higher as a result of an increase in purchases of property, plant and equipment.
      Our main acquisitions during the year included construction in progress of
      RMB33.3 million in connection with a new production line.




Net
      cash
      used in investing activities was RMB 31.5 million in 2005, and was generally
      lower as a result of a decrease in purchases of property, plant and equipment.
      Our main acquisitions during the year included construction in progress of
      RMB
      20.5 million in connection with a new production line. In addition, we made
      deposits of RMB 13.9 million for certain new production facilities to be
      delivered in future periods.




Net
      cash
      used in investing activities was RMB 40.5 million in the period from August
      9,
      2004 through December 31, 2004. We made a final payment of RMB 57.1 million
      to
      acquire the DMT production line during this period, the effect of which was
      partly offset by cash of RMB 12.1 million acquired from the purchase of Shandong
      Fuwei during the same period.




**Predecessor**




Net
      cash
      used in investing activities was RMB 66.5 million in the period from January
      1,
      2004 through October 26, 2004. We purchased plant and machinery of RMB 27.4
      million and made a deposit of RMB 25.9 million for the acquisition of DMT
      production line during the period.




***Financing
      Activities***




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




Net
      cash
      used in financing activities was RMB 10.6 million in 2005. This was attributable
      to the net proceeds received from new bank loans of RMB 47.5 million in 2005
      (excluding the bank loans of RMB 199.6 million assumed upon purchase of Shandong
      Fuwei in October 2004), which was used to finance the capital expenditure in
      relation to the new production line and was offset by the payment of a dividend
      of RMB 26.3 million in 2005 and repayment of advance from related parties of
      RMB
      30.0 million in 2005.




40




Net
      cash
      used in financing activities was RMB 14.5 million in the period from August
      9,
      2004 through December 31, 2004. This was mainly the result of RMB 15.5 million
      in dividends paid to our shareholders during the period.




***Predecessor***




Net
      cash
      generated from financing activities was RMB 43.6 million for the period from
      January 1, 2004 through October 26, 2004. This is attributable to proceeds
      from
      new short-term borrowings amounting to RMB 207.6 million to fund mainly the
      acquisition of the DMT production line, offset by the repayment of short-term
      bank loans of RMB 164 million during this period.




**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.




All
      of
      our revenue in 2003 was denominated in RMB. We began conducting part of our
      sales in foreign currency in 2004 with the commencement of our overseas sales
      business. In the periods from January 1, 2004 through October 26, 2004, August
      9, 2004 through December 31, 2004, during 2005 and 2006, approximately 97.7%,
      81.3%, 87.9%, and 79.0%, respectively, of our revenue was denominated in RMB
      and
      the remainder was in US dollars. As all of our supplies are procured within
      the
      PRC, all of our purchases are denominated in RMB. All of our operating expenses
      are also denominated in RMB.




Our
      foreign currency exchange risk arises mainly from this mismatch between the
      currency of our sales, purchases and operating expenses. To the extent that
      our
      sales, purchases and operating expenses are not matched in exactly the same
      currency, we may be susceptible to foreign exchange exposure.




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




Currently,
      we do not have a formal foreign currency hedging policy as our foreign exchange
      gains and losses in 2004, 2005 or 2006 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 2004, 2005 and 2006 were as follows:




**Jan.
                1**
              **through**
              **Oct. 26,
                2004**
            
            
            **Aug.
                9**
              **through**
              **Dec. 31,
                2004**
            
            
            **Year
                Ended**
              **Dec. 31,
                2005**
            
            
            **Year
                Ended Dec. 31,**
              **2006**(RMB
                in thousands)Buildings
            
            
            1,046
            
            
            —
            
            
            —
            
            
            —Plant
                and equipment
            
            
            27,381
            
            
            119,730
            
            
            1,412
            
            
            37,051Motor
                vehicles
            
            
            501
            
            
            —
            
            
            433
            
            
            —Assets
                under construction
            
            
            9,750
            
            
            81
            
            
            20,505
            
            
            —Others
                (computer and furniture fittings)
            
            
            180
            
            
            124
            
            
            61
            
            
            422Total
            
            
            38,858
            
            
            119,935
            
            
            22,411
            
            
            37,473




Our
      capital expenditures in the periods from January 1, 2004 to October 26, 2004
      and
      from August 9, 2004 through December 31, 2004 are mainly comprised of our
      acquisition of assets relating to the DMT production line from Shandong
      Neo-Luck. Our capital expenditures in 2005 mainly relate to our new production
      line.




41




The
      following table summarizes our contractual commitments as of December 31, 2006
      and the effect those commitments are expected to have on our liquidity and
      cash
      flow in future periods:




**Payments
                Due by Period****Contractual
                Commitments**
            
            **Total**
            
            **Less
                than**
              **1
                Year**
            
            **1-3
                Years**
            
            **3-5
                Years**
            
            **More
                than**
              **5
                Years**(RMB
                in thousands)Equipment
                Purchase Contract(i)
            
            
            189,279
            
            
            189,279
            
            
            —
            
            
            —
            
            
            —Related
                party loans
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Bank
                loans(ii)Principal
            
            
            239,678
            
            
            239,678
            
            
            —
            
            
            —
            
            
            —Interest
            
            
            30
            
            
            30
            
            
            —
            
            
            —
            
            
            —Operating
                leases(iii)
            
            
            1,330
            
            
            840
            
            
            490
            
            
            —
            
            
            ——
            
            
            —Total
            
            
            430,317
            
            
            429,827
            
            
            490
            
            
            —
            
            
            —







(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 and internally
                generated funds from operations.




(ii)
            We
                had short-term bank loans of RMB 237.67 million at December 31, 2006,
                that
                were due at various times in the in 2006 and early 2007. We renegotiated
                substantially all of our outstanding indebtedness resulting in
                approximately RMB 152.6 million less of secured indebtedness. 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 April 28, 2006 plus
                an
                estimated risk premium on borrowing.




****(iv)
            The
                operating leases mainly relate to our rental of 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 3.9%, 1.8% and 1.5% in 2004, 2005 and
      2006, 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
      Group’s 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. We do not expect the adoption of FIN 48 to have a
      material impact on our consolidated financial statements.




***SFAS
      No.157*** .
      In
      September 2006, the FASB issued SFAS No.157, “Fair Value Measurements”. SFAS
      No.157 defines fair value, establishes a framework for measuring fair value
      in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. SFAS No.157 applies under other accounting pronouncements
      that require or permit fair value measurements, the FASB having previously
      concluded in those accounting pronouncements that fair value is the relevant
      measurement attribute. Accordingly, SFAS No.157 does not require any new fair
      value measurements. Under SFAS No.157, fair value refers to the price that
      would
      be received to sell an asset or paid to transfer a liability in an orderly
      transaction between market participants in the market in which the reporting
      entity transacts. Under SFAS No.157, fair value measurements would be separately
      disclosed by level within the fair value hierarchy. SFAS No.157 is effective
      for
      financial statements issued by fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years, with early adoption permitted.
      We
      do not expect the adoption of SFAS No.157 to have a material impact on the
      consolidated financial statements.




42




***Staff
      Accounting Bulletin No. 108*** .
      In
      September 2006 the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin No. 108, “Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements” (“SAB 108”). SAB 108 provides interpretive guidance on how the
      effects of the carryover or reversal of prior year misstatements should be
      considered in quantifying a current year misstatement. The SEC staff believes
      that registrants should quantify errors using both a balance sheet and an income
      statement approach and evaluate whether either approach results in quantifying
      a
      misstatement that, when all relevant quantitative and qualitative factors are
      considered, is material. SAB 108 is effective for the Company’s fiscal year
      ending December 31, 2006. The initial adoption **** of
      SAB
      108 had no impact on the consolidated financial statements.




**Research
      and development, patents and licenses, etc.**




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, suppliers and distributors. Our senior employees
      and employees who work in our research and development department and other
      technical departments are required to sign 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 substantially all 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 three
      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. We previously sold our products under the brand name “Neo-Luck” for which
      we own the trademark. All the rights accruing to the Neo-Luck trademark were
      transferred from Shandong Neo-Luck to Shandong Fuwei for a consideration of
      RMB362,400 by a transfer agreement dated July 20, 2003.




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 be not
      necessarily indicative of future operating results or financial
      conditions.




**Item
      6.**  **Directors,
      Senior Management and Employees**




**A.**  **Directors
      and senior management.**




Our
      directors and executive officers and their present positions with our company,
      as at the date of this Annual Report, are as follows:




43




**Directors
      and Executive Officers**




**Name**
            
            **Age**
            
            **Position**Xiaoan
                He
            
            44
            
            Chairman
                and Chief Executive Officer and directorLin
                Tang
            
            35
            
            Director
                and Chief Financial OfficerTongju
                Zhou
            
            49
            
            DirectorMark
                E. Stulga
            
            50
            
            Independent
                DirectorChangrong
                Ji
            
            61
            
            Independent
                DirectorBin
                Sun
            
            51
            
            General
                ManagerXiaoming
                Wang
            
            46
            
            Deputy
                General Manager (Production)Xiuyong
                Zhang
            
            36
            
            Deputy
                General Manager (Finance)Bo
                Xu
            
            43
            
            Secretary




**Information
      about Directors and Officers**




Set
      forth
      below is certain information with respect to each director and officer as of
      December 31, 2006:




***Xiaoan***  ***He*** has been
      the Chairman 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 gained 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. Mr. He is also the Vice Chairman of the China Association of
      Manufacturers of Polyester Film (CANPEF).




***Lin
      Tang*** has been
      our Chief Financial Officer and a director since May 2006. Prior to joining
      us
      as the CFO, Mrs. Tang was a partner of the Beijing Yongtuo CPA Firm from
      August 2000 to April 2006, and from January 1998 to July 2000, she was the
      Audit
      Mgr./Supervisor of Shandong Zhengyuan Hexin CPAs, Shandong. Mrs. Tang
      obtained her MBA from the Chinese University of Hong Kong and Tsinghua
      University.




***Tongju
      Zhou*** has been
      director of our Company since April 2005. Prior to joining us as a Director
      in
      April, 2005, Mr. Zhou was the general manager of Weifang Neo-Luck (Group)
      Co., Ltd. during 2004 and prior to that he was the vice general manager from
      1995 to 2004. Weifang Neo-Luck (Group) Co., Ltd. is a state-owned corporation.
      Weifang Neo-Luck owned 59% of Shandong Neo-Luck. Mr. Zhou obtained his
      Bachelor degree in Administration from PRC Central Party Learning Institute
      in
      1995.




***Mark
      E. Stulga*** has been
      a director of our Company since June 2006. Mr. Stulga has a broad range of
      diverse global experience with industrial products and performance materials,
      including packaging materials, paint coatings and resins, software and
      industrial equipment. Since January 2005, he has been the Chief Operating
      Officer of RPM Industries, Inc., a portfolio company of The Hillman Company,
      an
      industrial motor manufacturing and supply company that distributes pumps for
      proprietary applications for use in construction and mining equipment.
      Mr. Stulga has served as Managing Director for Six Sigma Capital, a company
      he formed to serve the private equity community with advisory and interim
      management services, from 2003-2005. From 2001 to 2003, Mr. Stulga was the
      Chief Executive Officer of GE ISIM, a division of General Electric Capital
      Corporation which manufactured vehicle simulators that were used for training
      emergency responders. From 1998 to 2001, Mr. Stulga worked for NLG
      Plastics, Inc., an affiliate of one of the Neo-Luck Group companies. Earlier
      in
      his career Mr. Stulga held senior positions at GE plastics and Illinois
      Tool Works. Mr. Stulga received his Bachelor degree from University of
      Pittsburgh in Political Science in 1980 and in 1987, he received his MBA in
      Finance from Wayne State University.




***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. 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. H e
      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 .




44




***Bin
      Sun*** has been
      the General Manager of our Company since January 2007 and is responsible for
      the
      general management of our business operations. Mr. Sun has gained 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 degree in
      Economics from the Renmin University of China in 1994 and bachelor in
      Engineering from the Northwestern Polytechnical University in 1981.




***Xiaoming
      Wang*** has been
      our Deputy General Manager 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
      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.




***Xiuyong
      Zhang*** has been
      the Deputy General Manager of our Company since January 2005 and is responsible
      for the day-to-day management of our financial and taxation matters in the
      PRC.
      Prior to joining us as a director in July 2004, Mr. Zhang had accumulated
      more than 10 years of experience in accounting and financial work.
      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
      an
      accounting professional by the Ministry of Finance of the PRC in 1997. He
      graduated in Financial Accounting from the Shandong Television University in
      1996.




***Bo
      Xu*** joined
      the Company in October 2006 and was appointed as the 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 in finance from
      Weifang Staff and Worker’s University in 1989.




None
      of
      our directors or officers are related to each other; and 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 appointed an Audit Committee, Compensation Committee and a
      Corporate Governance and Nominating Committee, and adopted charters for each
      of
      these committees. We have appointed one independent director to each of our
      committees.




***Audit
      Committee***




Our
      audit
      committee consists of Mark Stulga, Lin Tang and Changrong Ji. 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;




·
            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.




45




***Compensation
      Committee***




Our
      compensation committee consists of Mark Stulga and 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 Mark Stulga and 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.




**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 as a group (8 persons) for the year ended December 31, 2006
      was approximately RMB 0.33 million. No executive officer is entitled to any
      severance benefits upon termination of his or her employment with our
      company.




**Employment
      and Service Agreements**




***Directors***




We
      have
      also entered into an additional Employment Agreement 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 agreement Mr. He’s annual basic
      salary will be RMB 960,000 and he will be eligible for a discretionary bonus.
      After the initial three year 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.




46




***Executive
      Officers***




Each
      of
      our executive officers, Bin Sun, Xiaoming Wang, Xiuyong Zhang and Xu Bo, have
      entered into service agreements (the “Service Agreements” and each a “Service
      Agreement”) with us. The term of service for the executive officers is also for
      an initial fixed period of three years (the “Initial Period”) commencing from
      March 1, 2006, or December 6, 2006 in the case of Mr. Xu, and we
      entered into a service agreement with Bin Sun from January 2007. We may only
      terminate the Service Agreement prior to the expiration of the Initial Period
      (save 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 term of service of each of our executive
      officers shall be renewed for successive periods of one year each after the
      expiration of the Initial Period. The Service Agreement can be terminated by
      not
      less than three months’ notice in writing served by either party to the Service
      Agreements (save that such notice of termination may not be given by the
      executive officers during the Initial Period). We shall 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, each of
      Xiaoming Wang, Xiuyong Zhang and Xu Bo is entitled to an annual basic salary
      of
      RMB 38,300, RMB 36,800 and RMB 30,000 respectively. 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.




**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 memorandum 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
      memorandum 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 which 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 shall consist of not less than
      two
      directors. Each director shall retire from office at least once every three
      years, but a director who is appointed by the board shall retire at the next
      annual general meeting of our Company following his appointment. A retiring
      director shall be eligible for re-election.




**D.**  **Employees.**




As
      of
      December 31, 2006, our total staff consisted of 216
      employees.




47




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.




**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 the date of this annual report 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 December 31, 2006.




**Shares
                Beneficially**
              **Owned****Number**
            
            **Percent****Executive
                Officers and
                Directors:**Xiaoan
                He
            
            —
            
            —Lin
                Tang
            
            —
            
            —Tongju
                Zhou(1)
            
            
            1,837,497
            
            
            14
            %Mark
                E. Stugla
            
            
            —
            
            
            —Changrong
                Ji
            
            
            —
            
            
            —Bin
                Sun
            
            
            —
            
            
            —Xiaoming
                Wang
            
            
            —
            
            
            —Xiuyong
                Zhang
            
            
            —
            
            
            —Bo
                Xu
            
            
            —
            
            
            —All
                directors and executive officersas
                a group (8 persons)
            
            
            1,837,497
            
            
            14
            %**5%
                Shareholders:**Apex
                Glory Holdings Limited(2)
            
            
            6,912,503
            
            
            53
            %Easebright
                Investments Limited(1)
            
            
            1,837,497
            
            
            14
            %









(1)
            Easebright
                Investments Limited is a wholly-owned subsidiary of Goodsuccess
                Enterprises Ltd. Mr. Tongju Zhou and Mr. Duo Wang each own 50%
                of Goodsuccess Enterprises Ltd.




(2)
            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.




Except
      as
      disclosed below, there were no related party transactions with major
      shareholders during the period Commencing January 1, 2004 and ending December
      31, 2006.




**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:




48




**(a)**  **Transactions
      with related parties**




**Shareholders’
      Loan Agreements**




For
      the
      purpose of financing the acquisition of Shandong Fuwei, our wholly-owned PRC
      operating subsidiary, in October 2004, we borrowed from each of our principal
      shareholders Apex Glory Holdings Limited (“Apex”) and Easebright Investments
      Limited (“Easebright”) HK$67,830,000 and HK$18,020,000, respectively. These
      borrowings did not bear any interest. We then loaned HK$85,850,000, interest
      free, to our wholly-owned subsidiary Fuwei (BVI) and Fuwei (BVI) entered into
      a
      sale and purchase agreement with Shenghong Group Co., Ltd. and Shandong Baorui
      Investment Co., Ltd (“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. Tongju Zhou, a
      director, and Duo Wang each indirectly own 50% of Easebright and are both also
      officers and directors of Shandong Baorui. Jun Yin, the indirect sole
      shareholder of Apex, and Duo Wang own 17.5% and 4.6%, respectively, of Shandong
      Baorui. Apex and Easebright converted all outstanding shareholder loans into
      an
      aggregate of 8,749,229 ordinary shares on November 23, 2006.




On
      October 28, 2005, Shandong Baorui guaranteed a one year loan to us by the
      Agricultural Bank of China in the principal amount of RMB 6,800,000. This loan
      bears interest at the rate of 7.254% per annum.




On
      October 27, 2004, Weifang Neo-Luck (Group) Co., Ltd. (“Weifang Neo-Luck”), an
      entity for which our director Tongju Zhou was the General Manager, collectively
      with two of its subsidiaries, guaranteed two one-year loans at 5.841% interest
      per annum from China Construction Bank and Agricultural Bank of China to the
      Shandong Fuwei totaling RMB 23,200,000. Also on October 27, 2004, Weifang Fuwah
      Hotel Co. Ltd. (“Fuwei Hotel”), an entity owned by Weifang Neo-Luck, guaranteed
      a one-year loan at 5.841% interest per annum to Shandong Fuwei from China
      Construction Bank totaling RMB 1,300,000.




**Acquisition
      of Assets**




In
      October of 2003, Shandong Fuwei acquired the assets relating to the Brückner
      production line through a public auction as a result of a default on several
      loans extended to affiliates of Shandong Neo-Luck Plastic Co., Ltd (“Shandong
      Neo-Luck”) by the Bank of China, Weifang city branch. Our current executive
      officers Xiamong Wang and Yongping Bai both acted as executive officers for
      Shandong Neo-Luck.




Due
      to
      ongoing financial difficulties, Shandong Neo-Luck was declared bankrupt by
      the
      Weifang Municipal People’s Court in the PRC in September 2004. The assets of
      Shandong Neo-Luck, consisting primarily of assets related to the DMT production
      line, were put up for public auction in accordance with the insolvency laws
      of
      the PRC on September 27, 2004. Beijing Baorui Guarantee Co., Ltd. (“Beijing
      Baorui”), purchased these assets for approximately RMB 34 million. Three months
      later, Beijing Baorui put these assets up for sale at public auction and
      Shandong Fuwei acquired them for approximately RMB 119 million. At the time
      of
      the acquisition by Beijing Baorui, Shandong Baorui held a 10% ownership in
      Shandong Fuwei and owned 80% of Beijing Baorui and at the time of the sale
      to
      Shandong Fuwei, Mr. Zhou and Mr. Wang indirectly controlled Shandong
      Fuwei through Easebright.




**Other
      Related Party Transactions**




During
      the periods/years ended 2004, 2005 and 2006, we respectively paid approximately
      RMB 231,000, RMB 201,000 and RMB 151,000 (US $19,000) to Fuhua Industrial
      Material Management Co., Ltd. as rental payments in connection with living
      quarters for our staff. Fuhua Material Management Co., Ltd. is an entity that
      is
      owned and controlled by Weifang Neo-Luck.




In
      2004,
      we paid RMB 400,000 as a deposit for expenses relating to a conference we hosted
      at the facilities of Fuwah Hotel. Weifang Neo-Luck is the owner of Fuwah
      Hotel.




Prior
      to
      the acquisition of the DMT production line through auction as described above,
      Shandong Fuwei paid Shandong Neo-Luck a sub-contracting fee at a rate of RMB
      871.46 per ton for the use of the DMT production line.




**C.**  **Interests
      of experts and counsel.**




Not
      Applicable.




**Item
                8.**
              **Financial
                  Information**




**A.**
            **Consolidated
                Statements and Other Financial
                Information.**




49




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, its capital requirements and financial condition
      and
      other relevant factors. We do not anticipate declaring or paying any dividends
      in the foreseeable future.




***Legal
      Proceedings***




In
      April
      2006, we received a request for arbitration and related papers in an arbitration
      proceeding between DMT S. A. (“DMT”) and Shandong Neoluck Plastics Co. Ltd.
      (“Neoluck”). The arbitration was filed in the ICC International Court of
      Arbitration and seeks monetary damages against Neoluck of approximately
      $1,250,000, plus interest. The claim relates to Neoluck’s purchase of certain
      equipment from DMT (the subject equipment is the DMT production line we acquired
      from Beijing Baroui in 2005 in Neoluck’s bankruptcy). We do not have any
      contract with DMT, written or otherwise, let alone one requiring we arbitrate
      before the ICC International Court of Arbitration. Despite our arguments to
      the
      Court of Arbitration that we are not subject to arbitration, in January 2007
      the
      ICC notified us that it would permit DMT’s claim to proceed against us (rather
      than Neoluck, which is bankrupt).  We have not yet answered the request for
      arbitration. Although we intend to vigorously oppose the claim, we may become
      obligated to pay damages if the three (3) arbitrators hearing the matter
      conclude that we (rather than Neoluck) should be responsible for Neoluck’s debt
      to DMT.




***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 each.
      As
      of March 30, 2007, 13,062,500 shares were issued and outstanding.




50




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




Ordinary
                Shares(Year
                Ending)
            
            High
            
            LowDecember
                31, 2006 (commencing December 19)
            
            $
            18.43
            
            $
            8.30




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
                Ending)
            
            High
            
            LowDecember
                31, 2006 (commencing December 19)
            
            $
            18.43
            
            $
            8.30March
                29, 2007
            
            $
            17.14
            
            $
            8.00




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




Ordinary
                Shares(Month
                Ending)
            
            High
            
            LowDecember
                31, 2006 (commencing December 19)
            
            $
            18.43
            
            $
            8.30January
                2007
            
            $
            17.14
            
            $
            11.67February
                2007
            
            $
            12.36
            
            $
            9.01March
                29, 2007
            
            $
            10.97
            
            $
            8.00




**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.




51




**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 this Annual Report.




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.




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.




52




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




53




·
            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.




54




**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.




55




**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 uncashed 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.




We
      have
      applied to NASDAQ to have our ordinary shares listed on the NASDAQ Global
      Market. Although we believe that, upon completion of this offering, our ordinary
      shares will trade on NASDAQ Global Market, we cannot guaranty that we will
      be
      able to satisfy the NASDAQ criteria for listing or that we will be able to
      satisfy the listing maintenance requirements, in which case our ordinary shares
      could be subject to delisting.




56




**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.




**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.




57




***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.




***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;




58




·
            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.




***Shareholders’
      Suits***




We
      are
      not aware of any reported class action or derivative action having been brought
      in a Cayman Islands court. 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, which 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.




59




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.




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.




***Shareho*** ***l*** ***der
      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.




60




***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 which 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.




***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.




***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.




61




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**




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 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 for U.S. federal
                income tax purposes) 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 subject to U.S. federal income tax 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 is described below under the heading
      “Non-U.S. Holders.”





This
      summary is based on the Internal Revenue Code of 1986, as amended, its
      legislative history, existing and proposed 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
      summary does not purport to be a comprehensive description of all of the tax
      considerations that may be relevant to each person’s decision to purchase
      ordinary shares. 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 ordinary shares as capital assets 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”;





·
            broker-dealers;




62




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





·
            tax-exempt
                entities;





·
            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 gift or estate tax,
      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 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.





BECAUSE
      OF THE COMPLEXITY OF THE TAX LAWS AND BECAUSE THE TAX CONSEQUENCES TO ANY
      PARTICULAR INVESTOR MAY BE AFFECTED BY MATTERS NOT DISCUSSED HEREIN, EACH
      PROSPECTIVE INVESTOR IS URGED TO CONSULT WITH ITS TAX ADVISOR WITH RESPECT
      TO
      THE SPECIFIC TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION
      OF
      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 distribution paid on our ordinary shares, 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 generally will constitute
      foreign source passive income for foreign tax credit purposes. Such dividend
      also 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.





With
      respect to noncorporate U.S. Holders for taxable years beginning before January
      1, 2011, dividends (to the extent paid out of our earnings and profits) may
      be
      taxed at the lower applicable long-term capital gains rate (see “Taxation of
      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, among
      others, 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.




63




Distributions
      of current or accumulated earnings and profits paid in foreign currency to
      a
      U.S. Holder generally will be includible in the income of a U.S. Holder in
      a
      U.S. dollar amount calculated by reference to the exchange rate on the date
      the
      distribution is included in income. A U.S. Holder that receives a foreign
      currency distribution and converts the foreign currency into U.S. dollars on
      such date generally will recognize no foreign currency exchange gain or loss.
      If
      the U.S. Holder converts the foreign currency to U.S. dollars on a date
      subsequent to such date, such U.S. Holder may have foreign currency exchange
      gain or loss based on any appreciation or depreciation in the value of the
      foreign currency against the U.S. dollar from the date of inclusion to the
      date
      of conversion, which will generally be U.S. source ordinary income or
      loss.





***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 generally will 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 shares.





Under
      current law, capital gains realized 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 realized by non-corporate U.S. Holders are 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 shares exceeds one year. The deductibility of capital losses is subject
      to limitations. Capital gain or loss realized by a U.S. Holder upon a
      disposition of shares generally will constitute income or loss from sources
      within the United States for foreign tax credit limitation
      purposes.





***Passive
      Foreign Investment Company Rules***




A
      foreign
      company is 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 company 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, 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.





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 a timely qualified electing fund (“QEF”)
      election 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 of its ordinary shares, and





·
            any
                excess distribution made to the U.S. Holder (generally, any distributions
                to such holder during a taxable year that are greater than 125% of
                the
                average annual distributions received by such 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).




64




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 excess distribution will be taxed as ordinary income,





·
            the
                amount allocated to each prior year, with certain exceptions, will
                be
                taxed at the highest tax rate in effect for that year, and




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





In
      general, a U.S. Holder may avoid the PFIC tax consequnces described above in
      respect to our ordinary shares by making a QEF election to include in income
      its
      pro rata share of our net capital gain (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, such holder generally will not be subject
      to
      the PFIC rules described above. Instead, in general, such 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 or on 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 the NASDAQ Global Market, 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.





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.





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.




65




**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 an income tax treaty applies, 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 an income tax treaty applies, 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 applicable, 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 United States 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 to or through a U.S. office of a broker by a
      non-corporate U.S. Holder. 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 such distributions made on our ordinary shares
      to a
      non-corporate U.S. Holder and the proceeds from such sales and other
      dispositions of shares by a non-corporate U.S. Holder 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.




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 the our ordinary shares. The
      following discussion is based upon laws and relevant interpretations there
      of in
      effect as of the date of this Annual Report, all of which are subject to
      change.




66




**China
      Taxation**




There
      are
      no material China tax consequences to holders of ordinary shares solely as
      a
      result of the purchase, ownership and disposition of such ordinary shares.
      There
      is an income tax treaty in effect between the United States and
      China.




**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.




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.




67




**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 China market.


Renminbi
      is our operating subsidiary, Shandong Fuwei’s functional currency while our
      financial 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. However, recently there has been increased political
      pressure on the Chinese government to decouple the Renminbi from the U.S.
      dollar.




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 Rmb 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.




**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 3.9%, 1.8% and 1.5% in 2004, 2005 and 2006
      respectively.




68




**Item
              12.**
            **Description
                of Securities Other than Equity
                Securities.**




Not
        Applicable.




69




**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 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
      use
      of the net proceeds in January and February of 2007 and our estimate of the
      future use of the remaining proceeds from the offering are as
      follows:




**Approximate**
                **Allocation
                  of**
                **Net
                  Proceeds**
              
              
              **Approximate**
                **Percentage of**
                **Net Proceeds****Net
                  proceeds from IPO**
              
              **$**
              **29,938,129**
              
              
              **100.00**
              **%**Proceeds
                  used in Jan and Feb of 2007
              
              $
              6,789,664
              
              
              22.68Investment
                  in new production line equipment
              
              
              1,602,067
              
              
              5.35Buildings
                  and property for new production line
              
              
              387,597
              
              
              1.30Sales
                  and marketing
              
              
              300,000
              
              
              1.00General
                  corporate purpose, including working capital
              
              
              4,500,000
              
              
              15.03**Net
                  proceeds remaining**
              
              **$**
              **23,148,465**
              
              
              **77.32**
              **%****Estimate
                  of future use**Investment
                  in new production line equipment
              
              $
              8,597,933
              
              
              28.72
              %Buildings
                  and property for new production line
              
              
              3,362,403
              
              
              11.23Affiliated
                  facilities
              
              
              4,000,000
              
              
              13.36Sales
                  and marketing
              
              
              1,700,000
              
              
              5.68Working
                  capital for the new line
              
              
              4,700,000
              
              
              15.70General
                  corporate purpose, including working capital
              
              
              788,129
              
              
              2.63**Total
                  estimate of the use of the proceeds from IPO**Investment
                  in new production line equipment
              
              $
              10,200,000
              
              
              34.07
              %Buildings
                  and property for new production line
              
              
              3,750,000
              
              
              12.53Affiliated
                  facilities
              
              
              4,000,000
              
              
              13.36Sales
                  and marketing
              
              
              2,000,000
              
              
              6.68Working
                  capital for the new line
              
              
              4,700,000
              
              
              15.70General
                  corporate purpose, including working capital
              
              $
              5,288,129
              
              
              17.66




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.




70




**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 the
      Company, 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.




Section
      404 of the Sarbanes-Oxley Act of 2002 will require us to include a management’s
      internal control report with our Annual Report on Form 20-F for the fiscal
      year
      ending December 31, 2007. The Company has started the exercise of evaluating,
      designing and implementing processes to improve our internal controls to comply
      with the requirements of the Sarbanes-Oxley Act of 2002 in the near future.
      Our
      management, including our chief executive officer and our chief financial
      officer will participate in this exercise.




**Item
              16A.**
            **Audit
                Committee Financial Expert**




The
      Board
      has nominated Mark Stulga, Lin Tang and Changrong
      Ji, as members of the Audit Committee, and Lin Tang as the 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 the Company’s Board of Directors and Officers was
      approved by the 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 of KPMG, our independent registered public accounting firm, in connection
      with our initial public offering and audit of annual financial statements for
      the fiscal years ended December 31, 2005 and 2006, amounted to RMB$5.1 million
      and RMB$2.0 million respectively.




**Audit-Related
      Fees**




The
      audit-related fee of KPMG, amounted to RMB$Nil and RMB$0.6 million for the
      fiscal years ended December 31, 2006 and 2005 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.




71




**Audit
      of Financial Statements**




KPMG
      is
      our principal independent registered public accounting firm.




**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 period from August 9,
      2004
      (date of incorporation) to December 31, 2004 and the years ended December 31,
      2005 and 2006.




Consolidated
      Balance Sheets as of December 31, 2005 and 2006.




Consolidated
      Statements of Cash Flows for the period from August 9, 2004 (date of
      incorporation) to December 31, 2004 and the years ended December 31, 2005 and
      2006.





Consolidated
      Statements of Shareholders’ Equity for the period from August 9, 2004 (date of
      incorporation) to December 31, 2004 and the years ended December 31, 2005 and
      2006.




Notes
      to
      Consolidated Financial Statements.




**Audited
      Financial Statements of Fuwei Films (Shandong) Co.,
      Ltd**





Report
      of
      Independent Registered Public Accounting Firm





Balance
      Sheets as of December 31, 2003 and October 26, 2004





Statements
      of Income for the periods from January 28, 2003 (date of incorporation) to
      December 31, 2003 and January 1, 2004 to October 26, 2004





Statements
      of Shareholders’ Equity for the periods from January 28, 2003 (date of
      incorporation) to December 31, 2003 and January 1, 2004 to October 26,
      2004





Statements
      of Cash Flows for the periods from January 28, 2003 (date of incorporation)
      to
      December 31, 2003 and January 1, 2004 to October 26, 2004





Notes
      to
      the Financial Statements December 31, 2003 and October 26, 2004




72




**Item
              19.**
            **Exhibits.**




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




**No.**
              
              **Description**1.1
              
              Form
                  of Underwriting Agreement. *3.1
              
              Form
                  of Amended Memorandum of Association of Fuwei Films (Holdings)
                  Co., Ltd.
                  **3.2
              
              Articles
                  of Association Fuwei Films (Holdings) Co., Ltd. ***10.1
              
              Loan
                  Agreement between Communication Bank of China and Fuwei Films (Holdings)
                  Co., Ltd. dated
                  December 20, 2005 **10.2
              
              Loan
                  Agreement between Communication Bank of China and Fuwei Films (Holdings)
                  Co., Ltd. dated
                  December 30, 2005 **10.3
              
              Loan
                  Agreement between Communication Bank of China of Fuwei Films (Holdings)
                  Co., Ltd. dated
                  April 27, 2005 **10.4
              
              Loan
                  Agreement between Construction Bank of China of Fuwei Films (Holdings)
                  Co., Ltd. dated September
                  16, 2005 **10.5
              
              Loan
                  Agreement between Construction Bank of China and Fuwei Films (Holdings)
                  Co., Ltd. dated March
                  31, 2006 **10.6
              
              Loan
                  Agreement between Agricultural Bank of China and Fuwei Films (Holdings)
                  Co., Ltd. dated October
                  17, 2005 **10.7
              
              Loan
                  Agreement between Agricultural Bank of China and Fuwei Films (Holdings)
                  Co., Ltd. datedSeptember
                  29, 2005 **10.8
              
              Loan
                  Agreement between Communication Bank of China of Fuwei Films (Shandong)
                  Co., Ltd. dated
                  January 15, 2007***10.9
              
              Loan
                  Agreement between Communication Bank of China of Fuwei Films (Shandong)
                  Co., Ltd. dated
                  January 15, 2007***10.10
              
              Asset
                  Purchase Agreement between Fuwei Plastics and Shandong Weifang
                  Auction
                  Firm dated October
                  9, 2003 **10.11
              
              Purchase
                  Agreement between Beijing Baorui and Weifang Jing Cheng Auction
                  Co., Ltd.
                  dated December
                  17, 2004 **10.12
              
              Service
                  Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiaoan
                  He**10.13
              
              Employment
                  Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiaoan He
                  **10.14
              
              Employment
                  Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiaoming
                  Wang
                  **10.15
              
              Employment
                  Agreement between Fuwei Films (Holdings) Co., Ltd. and Yongping
                  Bai
                  **10.16
              
              Employment
                  Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiuyong
                  Zhang
                  **10.17
              
              Equipment
                  Contract between Fuwei Films (Holdings) Co., Ltd. and Brükner dated as of
                  June 2005
                  **10.18
              
              Credit
                  Letter from Communication Bank of China dated May 8, 2006
                  **14.1
              
              Code
                  of Ethics for CEO and Senior Financial Officers. ***21.1
              
              List
                  of the company’s significant subsidiaries, their jurisdiction of
                  incorporation and the names under
                  which they operate business, if different from their name.
                  ***31.1
              
              Certification
                  of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley
                  Act of 2002.
                  ***31.2
              
              Certification
                  of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley
                  Act of 2002.
                  ***32.1
              
              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
                  herewith.




73




**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 sign **** this
      Annual Report on
      its
      behalf .




**Fuwei Films (Holdings) Co.,
              Ltd**By:
            /s/
              Xiaoan HeName:
              Xiaoan HeTitle:
              Chairman, Chief Executive
              Officer




By:
            /s/
                Lin TangName:
              Lin TangTitle:
              Chief Financial Officer





Dated:
      April 2, 2007




74




**INDEX
      TO FINANCIAL STATEMENTS**





**Page****Audited
                Consolidated Financial Statements of Fuwei Films (Holdings) Co.,
                Ltd. and
                subsidiaries**Report
                of Independent Registered Public Accounting Firm
            
            F-2Consolidated
                Balance Sheets as of December 31, 2005
                and 2006
            
            F-3Consolidated
                Statements of Income and Comprehensive Income for the period from
                August
                9, 2004 (date of incorporation) to December 31, 2004 and the
                years
                ended December 31, 2005 and 2006
            
            F-4Consolidated
                Statements of Shareholders’ Equity for the period from August 9, 2004
                (date of incorporation) to December 31, 2004 and the years
                ended December 31, 2005 and 2006
            
            F-5Consolidated
                Statements of Cash Flows for the period from August 9, 2004 (date
                of
                incorporation) to December 31, 2004 and the years
                ended December 31, 2005 and 2006
            
            F-6
                - F-7Notes
                to the Consolidated Financial Statements December 31, 2004,
                2005and 2006
            
            F-8
                - F-36**Audited
                Financial Statements of Fuwei Films (Shandong) Co.,
                Ltd**Report
                of Independent Registered Public Accounting Firm
            
            F-37Balance
                Sheets as of December 31, 2003 and October 26, 2004
            
            F-38Statements
                of Income for the periods from January 28, 2003 (date of incorporation)
                to
                December 31, 2003 and January 1, 2004 to October 26, 2004
            
            F-39Statements
                of Shareholders’ Equity for the periods from January 28, 2003 (date of
                incorporation) to December 31, 2003 and January 1, 2004 to October
                26,
                2004
            
            F-40Statements
                of Cash Flows for the periods from January 28, 2003 (date of
                incorporation) to December 31, 2003 and January 1, 2004 to October
                26,
                2004
            
            F-41Notes
                to the Financial Statements December 31, 2003 and October 26,
                2004
            
            F-42
                - F-58




F-1




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




The
      Board
      of Directors and Shareholders of


Fuwei
      Films (Holdings) Co., Ltd:






We
      have
      audited the accompanying consolidated balance sheets of Fuwei Films (Holdings)
      Co., Ltd (the “Company”) and its subsidiaries (collectively, the “Group”) as of
      December 31, 2005 and 2006, and the related consolidated statements of income
      and comprehensive income, shareholders’ equity and cash flows for the period
      from August 9, 2004 (date of incorporation) to December 31, 2004, and for the
      years ended December 31, 2005 and 2006, all expressed in Renminbi. 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 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 audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Fuwei Films (Holdings)
      Co.,
      Ltd and its subsidiaries as of December 31, 2005 and 2006, and the results
      of
      their operations and their cash flows for the period from August 9, 2004 to
      December 31, 2004, and for the years ended December 31, 2005 and 2006, in
      conformity with U.S. generally accepted accounting principles.




The
      accompanying consolidated financial statements as of and for the year ended
      December 31, 2006 have been translated into United States dollars solely for
      the
      convenience of the reader. We have audited the translation and, in our opinion,
      such financial statements expressed in Renminbi have been translated into United
      States dollars on the basis set forth in Note 3(b) to the consolidated financial
      statements.




/s/
      KPMG


Hong
      Kong, China




April
      2,
      2007




F-2


**FUWEI
      FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEETS**


As
      of
      December 31, 2005 and 2006


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




Note
            
            2005
            
            2006
            
            2006RMB
            
            RMB
            
            US$**Assets***Current
                assets*Cash
            
            
            
            
            
            7,427
            
            
            249,939
            
            
            32,027Restricted
                cash
            
            
            
            
            
            -
            
            
            3,311
            
            
            424Accounts
                receivable, net
            
            
            4
            
            
            46,129
            
            
            75,530
            
            
            9,678Inventories
            
            
            5
            
            
            24,887
            
            
            23,783
            
            
            3,048Prepayments
                and other receivables
            
            
            6
            
            
            12,977
            
            
            19,438
            
            
            2,490Deferred
                expenses
            
            
            7
            
            
            1,785
            
            
            -
            
            
            -Deferred
                income tax assets
            
            
            20
            
            
            144
            
            
            -
            
            
            -Total
                current assets
            
            
            
            
            
            93,349
            
            
            372,001
            
            
            47,667Property,
                plant and equipment, net
            
            
            8
            
            
            303,596
            
            
            317,690
            
            
            40,708Lease
                prepayments
            
            
            9
            
            
            17,590
            
            
            23,059
            
            
            2,954Deposits
                for purchase of property,plant
                and equipment
            
            
            
            
            
            13,900
            
            
            13,900
            
            
            1,782Intangible
                asset, net
            
            
            10
            
            
            181
            
            
            109
            
            
            14Goodwill
            
            
            11
            
            
            10,276
            
            
            10,276
            
            
            1,317Deferred
                income tax assets
            
            
            20
            
            
            1,469
            
            
            1,047
            
            
            134Total
                assets
            
            
            
            
            
            440,361
            
            
            738,082
            
            
            94,576**Liabilities***Current
                liabilities*Short-term
                bank loans
            
            
            12
            
            
            248,046
            
            
            239,678
            
            
            30,712Accounts
                payable
            
            
            
            
            
            10,613
            
            
            12,809
            
            
            1,641Accrued
                expenses and other payables
            
            
            14
            
            
            19,380
            
            
            19,497
            
            
            2,498Amounts
                due to related parties
            
            
            21(b
            )
            
            89,362
            
            
            -
            
            
            -Deferred
                income tax liabilities
            
            
            20
            
            
            -
            
            
            191
            
            
            25Total
                liabilities
            
            
            
            
            
            367,401
            
            
            272,175
            
            
            34,876**Shareholders’
                equity**
            
            
            15Ordinary
                shares of US$0.129752 par value; 20,000,000 shares authorized; 771
                and 13,062,500 issued and outstanding as of
              December
                31, 2005 and 2006, respectively
            
            
            
            
            
            1
            
            
            13,323
            
            
            1,707Additional
                paid-in capital
            
            
            
            
            
            -
            
            
            311,907
            
            
            39,967Accumulated
                other comprehensive income
            
            
            
            
            
            1,732
            
            
            1,785
            
            
            229Retained
                earnings
            
            
            
            
            
            71,227
            
            
            138,892
            
            
            17,797Total
                shareholders’ equity
            
            
            
            
            
            72,960
            
            
            465,907
            
            
            59,700Total
                liabilities and shareholders’ equity
            
            
            
            
            
            440,361
            
            
            738,082
            
            
            94,576




See
      accompanying notes to the consolidated financial statements.




F-3


**FUWEI
        FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
  **CONSOLIDATED
        STATEMENTS OF INCOME AND COMPREHENSIVE INCOME**
 For
        the
        period from August 9, 2004 (date of incorporation) to December 31, 2004
 and
        the
        years ended December 31, 2005 and 2006
 (amounts
        in thousands, except share and per share data)




Note
            
            2004
            
            2005
            
            2006
            
            2006RMB
            
            RMB
            
            RMB
            
            US$Revenues,
                net
            
            
            16
            
            
            81,364
            
            
            346,205
            
            
            436,884
            
            
            55,981Cost
                of goods sold
            
            
            17,
                18
            
            
            (64,038
            )
            
            (259,090
            )
            
            (334,341
            )
            
            (42,841
            )Gross
                profit
            
            
            
            
            
            17,326
            
            
            87,115
            
            
            102,543
            
            
            13,140Operating
                expenses-
                Distribution expenses
            
            
            17,
                18
            
            
            (2,593
            )
            
            (10,517
            )
            
            (16,483
            )
            
            (2,112
            )-
                Administrative expenses
            
            
            17
            
            
            (2,330
            )
            
            (10,599
            )
            
            (8,043
            )
            
            (1,031
            )Total
                operating expenses
            
            
            
            
            
            (4,923
            )
            
            (21,116
            )
            
            (24,526
            )
            
            (3,143
            )Operating
                income
            
            
            
            
            
            12,403
            
            
            65,999
            
            
            78,017
            
            
            9,997Other
                income/(expense)-
                Interest income
            
            
            
            
            
            179
            
            
            863
            
            
            43
            
            
            6-
                Interest expense
            
            
            19
            
            
            (1,370
            )
            
            (13,747
            )
            
            (12,884
            )
            
            (1,651
            )-
                Sales of scrap materials
            
            
            
            
            
            2,599
            
            
            3,596
            
            
            3,639
            
            
            466-
                Others, net
            
            
            
            
            
            -
            
            
            358
            
            
            (393
            )
            
            (51
            )Total
                other income/(expense)
            
            
            
            
            
            1,408
            
            
            (8,930
            )
            
            (9,595
            )
            
            (1,230
            )Income
                before income tax benefit/(expense)
            
            
            
            
            
            13,811
            
            
            57,069
            
            
            68,422
            
            
            8,767Income
                tax benefit/(expense)
            
            
            20
            
            
            288
            
            
            59
            
            
            (757
            )
            
            (97
            )Net
                income
            
            
            
            
            
            14,099
            
            
            57,128
            
            
            67,665
            
            
            8,670Other
                comprehensive income-
                Foreign currency translation adjustments
            
            
            
            
            
            -
            
            
            1,732
            
            
            53
            
            
            7Comprehensive
                income
            
            
            
            
            
            14,099
            
            
            58,860
            
            
            67,718
            
            
            8,677Earnings
                per share
            
            
            26-
                Basic
            
            
            
            
            
            18,287
            
            
            74,096
            
            
            61.46
            
            
            7.88-
                Diluted
            
            
            
            
            
            18,287
            
            
            74,096
            
            
            61.37
            
            
            7.86Weighted
                average number of ordinary shares
            
            
            26-
                Basic
            
            
            
            
            
            771
            
            
            771
            
            
            1,101,031
            
            
            1,101,031-
                Diluted
            
            
            
            
            
            771
            
            
            771
            
            
            1,102,488
            
            
            1,102,488




See
      accompanying notes to the consolidated financial statements.




F-4


**FUWEI
        FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS’ EQUITY**
 For
        the
        period from August 9, 2004 (date of incorporation) to December 31, 2004
 and
        the
        years ended December 31, 2005 and 2006
 (amounts
        in thousands, except share data)


Ordinary
                sharesNote
            
            Number
              of
                shares
            
            Amount
            
            Additional
              paid-in
              capital
            
            Accumulated
              other
              comprehensive
              income
            
            Retained
              earnings
            
            Total
              shareholders’
              equityRMB
            
            RMB
            
            RMB
            
            RMB
            
            RMBBalance
                  as of August 9, 2004
            
            
            15
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Issue
                of ordinary shares
            
            
            
            
            
            771
            
            
            1
            
            
            -
            
            
            -
            
            
            -
            
            
            1Net
                income
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            14,099
            
            
            14,099Balance
                      as of December 31, 2004
            
            
            
            
            
            771
            
            
            1
            
            
            -
            
            
            -
            
            
            14,099
            
            
            14,100Foreign
                    currency translation adjustment
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            1,732
            
            
            -
            
            
            1,732Net
                income
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            57,128
            
            
            57,128Balance
                    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 expenses
            
            
            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
            
            
            465,907Balance
                  as of December 31, 2006-
                US$
            
            
            
            
            
            13,062,500
            
            
            1,707
            
            
            39,967
            
            
            229
            
            
            17,797
            
            
            59,700




See
      accompanying notes to the consolidated financial statements.




F-5




**FUWEI
      FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


For
      the
      period from August 9, 2004 (date of incorporation) to December 31, 2004


and
      the
      years ended December 31, 2005 and 2006


(amounts
      in thousands)


2004
            
            2005
            
            2006
            
            2006RMB
            
            RMB
            
            RMB
            
            US$*Cash
                flow from operating activities*Net
                income
            
            
            14,099
            
            
            57,128
            
            
            67,665
            
            
            8,670Adjustments
                to reconcile net income to net cash(used
                in)/provided by operating activities-
                Loss/(gain) on disposal of property, plant and equipment
            
            
            18
            
            
            (32
            )
            
            -
            
            
            --
                Depreciation of property, plant and equipment
            
            
            2,574
            
            
            23,337
            
            
            23,425
            
            
            3,001-
                Amortization of intangible assets
            
            
            18
            
            
            73
            
            
            72
            
            
            9-
                Lease prepayments charged to expense
            
            
            97
            
            
            392
            
            
            724
            
            
            94-
                Deferred income taxes
            
            
            (288
            )
            
            (59
            )
            
            757
            
            
            97-
                Bad debt expense/(recovery)
            
            
            1,008
            
            
            1,007
            
            
            (1,143
            )
            
            (146
            )-
                Foreign currency exchange loss
            
            
            -
            
            
            1
            
            
            53
            
            
            8Changes
                in operating assets and liabilities, net ofeffect
                of purchase of Shandong Fuwei in 2004-
                Accounts receivable
            
            
            13,074
            
            
            (21,676
            )
            
            (28,258
            )
            
            (3,621
            )-
                Inventories
            
            
            13,294
            
            
            (6,855
            )
            
            1,104
            
            
            141-
                Prepaid expenses and other current assets
            
            
            (10,252
            )
            
            4,780
            
            
            (8,220
            )
            
            (1,053
            )-
                Accounts payable
            
            
            (1,578
            )
            
            (1,044
            )
            
            2,196
            
            
            280-
                Accrued expenses and other payables
            
            
            23,328
            
            
            (13,880
            )
            
            117
            
            
            15-
                Amounts due from related parties
            
            
            5,485
            
            
            415
            
            
            -
            
            
            -Net
                cash provided by operating activities
            
            
            60,877
            
            
            43,587
            
            
            58,492
            
            
            7,495*Cash
                flow from investing activities*Purchases
                of property, plant and equipment
            
            
            (57,081
            )
            
            (22,411
            )
            
            (37,526
            )
            
            (4,809
            )Restricted
                cash related to trade finance
            
            
            -
            
            
            -
            
            
            (3,311
            )
            
            (424
            )Payment
                of land use rights
            
            
            -
            
            
            -
            
            
            (2,649
            )
            
            (339
            )Cash
                acquired from purchase of Shandong Fuwei
            
            
            12,144
            
            
            -
            
            
            -
            
            
            -Deposits
                paid for purchase of property, plant and equipment
            
            
            -
            
            
            (13,900
            )
            
            -
            
            
            -Proceeds
                from sale of property, plant and equipment
            
            
            23
            
            
            111
            
            
            7
            
            
            1Collection
                of amounts due from related parties
            
            
            4,450
            
            
            4,721
            
            
            -
            
            
            -Net
                cash used in investing activities
            
            
            (40,464
            )
            
            (31,479
            )
            
            (43,479
            )
            
            (5,571
            )*Cash
                flow from financing activities*Net
                proceeds from issuance of share capital
            
            
            1
            
            
            -
            
            
            235,867
            
            
            30,223Principal
                payments of short-term bank loans
            
            
            -
            
            
            (252,600
            )
            
            (18,368
            )
            
            (2,354
            )Proceeds
                from short-term bank loans
            
            
            990
            
            
            300,056
            
            
            10,000
            
            
            1,282Repayments
                of loans payable to related parties
            
            
            -
            
            
            (29,989
            )
            
            -
            
            
            -Payments
                of expenses relating to the proposed offering
            
            
            -
            
            
            (1,785
            )
            
            -
            
            
            -Dividends
                paid
            
            
            (15,501
            )
            
            (26,265
            )
            
            -
            
            
            -Net
                cash (used in)/provided by financing activities
            
            
            (14,510
            )
            
            (10,583
            )
            
            227,499
            
            
            29,151Effect
                of foreign exchange rate changes
            
            
            -
            
            
            (1
            )
            
            **-**
            
            
            **-**Net
                increase in cash
            
            
            5,903
            
            
            1,524
            
            
            242,512
            
            
            31,075CashAt
                beginning of period/year
            
            
            -
            
            
            5,903
            
            
            7,427
            
            
            952At
                end of period/year
            
            
            5,903
            
            
            7,427
            
            
            249,939
            
            
            32,027




F-6




**FUWEI
      FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (CONTINUED)**


For
      the
      period from August 9, 2004 (date of incorporation) to December 31, 2004


and
      the
      years ended December 31, 2005 and 2006


(amounts
      in thousands)





2004
            
            2005
            
            2006
            
            2006RMB
            
            RMB
            
            RMB
            
            US$Supplemental
                disclosure of cash flow informationCash
                paid during the period/year for interest expense
            
            
            1,405
            
            
            14,899
            
            
            15,739
            
            
            2,017




Supplemental
      disclosure of non-cash investing and financing activities:






(a)  The
      acquisition of Shandong Fuwei on October 27, 2004, for RMB91,093 was financed
      entirely with loans from the related parties. In conjunction with this
      acquisition, assets were acquired and liabilities were assumed as
      follows:




RMBFair
                value of assets acquired, including cash of RMB12,144
            
            
            386,536Purchase
                consideration in the form of amounts due to related parties
            
            
            (91,093
            )Liabilities
                assumed
            
            
            295,443




(b) 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.




(c) In
        connection with the initial public offering (“IPO”) of the Company, there were
        non-cash expenses of RMB5,643 (US$723), 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
          period from August 9, 2004 (date of incorporation) to December 31, 2004
 and
          the
          years ended December 31, 2005 and 2006
 (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
      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 Fuwei Films (Shandong) Co., Ltd (“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 (US$30,223) were
      received.




F-8




**FUWEI
      FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**





**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**


For
      the
      period from August 9, 2004 (date of incorporation) to December 31,
      2004


and
      the
      years ended December 31, 2005 and 2006


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




**(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”).




Because
      the Company and Fuwei BVI were under common control, the Company’s acquisition
      of Fuwei BVI on August 20, 2004 has been accounted for in a manner similar
      to a
      pooling-of-interests. Consequently, the consolidated financial statements of
      the
      Company include the accounts of Fuwei BVI at their historical amounts.
      Furthermore, the consolidated financial statements recognize the
      recapitalization and acquisition retroactively, as if the acquisition occurred
      as of the beginning of the earliest period presented.




The
      acquisition of Shandong Fuwei by Fuwei BVI on October 27, 2004 has been
      accounted for as a purchase business combination. Consequently, the consolidated
      financial statements of the Company include the financial statements and results
      of the Shandong Fuwei from October 27, 2004.




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.




***(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.




F-9


**FUWEI
        FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
        the
        period from August 9, 2004 (date of incorporation) to December 31,
        2004
 and
        the
        years ended December 31, 2005 and 2006
 (amounts
        in thousands, except share and per share data)




**(3)**
            **Summary
                of Significant Accounting Policies and Practices
                (continued)**




***(b)***
            **Foreign
                Currency Transactions
                (continued)**




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. The exchange rate of the U.S. dollar against the RMB
      was
      adjusted from approximately RMB 8.28 per U.S. dollar on July 20, 2005 to RMB
      8.11 per U.S. dollar on July 21, 2005.




For
      the
      convenience of the readers, the 2006 RMB amounts included in the accompanying
      consolidated financial statements have been translated into U.S. dollars at
      the
      rate of US$1.00 = RMB 7.8041, being the noon buy rate for U.S. dollars in effect
      on December 29, 2006 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, 2006, 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, 2005 and 2006, there were restricted cash of RMBNil and RMB3,311
      (US$424) respectively for trade financing purposes. As of December 31, 2005
      and
      2006 there were no cash equivalents.




***(d)***
            ***Trade
                Accounts Receivable***




Trade
      accounts receivable are recorded at the invoiced amount after deduction of
      trade
      discounts, value added taxes 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.




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. The Group does not have any off-balance-sheet credit exposure related
      to
      its customers.




F-10


**FUWEI
        FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
        the
        period from August 9, 2004 (date of incorporation) to December 31,
        2004
 and
        the
        years ended December 31, 2005 and 2006
 (amounts
        in thousands, except share and per share data)


**(3)**
            **Summary
                of Significant Accounting Policies and Practices
                (continued)**




***(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:





**Years**Buildings
                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 period/year ended December 31,
      2004,
      2005 and 2006 was RMB2,574, RMB23,337 and RMB23,425 (US$3,002) respectively,
      of
      which 95%, 98% and 97% were recorded in cost of goods sold and 5%, 2% 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.




F-11


**FUWEI
        FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
        the
        period from August 9, 2004 (date of incorporation) to December 31,
        2004
 and
        the
        years ended December 31, 2005 and 2006
 (amounts
        in thousands, except share and per share data)




**(3)**
            **Summary
                of Significant Accounting Policies and Practices
                (continued)**




***(h)***
            ***Intangible
                Assets***




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.




***(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 2006 and determined that the fair value of Shandong Fuwei exceeded its net
      book value as of December 31, 2006. 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
      sales 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.




F-12




**FUWEI
      FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**





**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**


For
      the
      period from August 9, 2004 (date of incorporation) to December 31,
      2004


and
      the
      years ended December 31, 2005 and 2006


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




**(3)**
            **Summary
                of Significant Accounting Policies and Practices
                (continued)**




***(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.




For
      the
      period ended December 31, 2004, government grants of RMB544 were recognized
      to
      com p ensate
      interest on bank loans and were recorded in interest expense. For the year
      ended
      December 31, 2005, government grants of RMB160 were recognized to compensate
      research and development expenses incurred and RMB98 were received as incentive
      of high VAT payer and were recorded in administrative expenses. For the year
      ended December 31, 2006, government grants of RMB900 (US$115) were recognized
      to
      compensate research and development expenses incurred and were recorded in
      administrative expenses.




***(m)***
            ***Research
                and Development Costs***




Research
      and development costs are expensed as incurred. Research and development costs
      amounted to RMB131, RMB1,157 and RMB3,650 (US$468) for the period/year ended
      December 31, 2004, 2005 and 2006 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 carryforwards. 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.




***(p)***
            ***Stock
                Option Plan***




The
      fair value of stock options granted to Maxim
      Group LLC under the stock option plans is recoginzed 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 exercises 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.




F-13


**FUWEI
        FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
        the
        period from August 9, 2004 (date of incorporation) to December 31,
        2004
 and
        the
        years ended December 31, 2005 and 2006
 (amounts
        in thousands, except share and per share data)
 **(3)**
                **Summary
                    of Significant Accounting Policies and Practices
                    (continued)**
  ***(p)***
                  ***Stock
                      Option**Plan
                      (continued)***


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
            %




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, 2006, 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 (US$723).




The
      Company recognized share-based compensation expenses of RMB5,643 (US$723) 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, 2006, 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.




F-14


**FUWEI
        FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
        the
        period from August 9, 2004 (date of incorporation) to December 31,
        2004
 and
        the
        years ended December 31, 2005 and 2006
 (amounts
        in thousands, except share and per share data)


**(3)**
            **Summary
                of Significant Accounting Policies and Practices
                (continued)**




***(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.




***(u)***
            ***Recently
                Issued Accounting
                Standards***




FIN
      48




In
      July
      2006, the FASB issued FASB Interpretation No. 48, *Accounting
      for Uncertainties in Income* *Taxes*- *an
      interpretation of FASB Statement No. 109* (“FIN
      48”), which
      clarifies the accounting for uncertainty in income taxes recognized in the
      Group’s 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 does not expect the adoption of FIN 48 to
      have a material impact on the consolidated financial statements.


F-15




**FUWEI
      FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**





**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**


For
      the
      period from August 9, 2004 (date of incorporation) to December 31,
      2004


and
      the
      years ended December 31, 2005 and 2006


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




**(3)**
            **Summary
                of Significant Accounting Policies and Practices
                (continued)**




***(u)***
            ***Recently
                Issued Accounting Standards
                (continued)***




SFAS
      No.
      157




In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements*(“*SFAS No. 157*”) .
      SFAS
      No. 157 defines fair value, establishes a framework for measuring fair value
      in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. SFAS No. 157 applies under other accounting pronouncements
      that require or permit fair value measurements, the FASB having previously
      concluded in those accounting pronouncements that fair value is the relevant
      measurement attribute. Accordingly, SFAS No. 157 does not require any new fair
      value measurements. Under SFAS No. 157, fair value refers to price that would
      be
      received to sell an asset or paid to transfer a liability in an orderly
      transaction between market participants in the market in which the reporting
      entity transacts. SFAS No. 157 is effective for financial statements issued
      for
      fiscal years beginning after November 15, 2007, and interim periods within
      those
      fiscal years, with early adoption permitted. The Company does not expect the
      adoption of SFAS No. 157 to have a material impact on the consolidated financial
      statements.




SAB
      108




In
      September 2006 the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin No. 108, *Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements* (“SAB 108”). SAB 108 provide interpretive guidance on how the
      effects of the carryover or reversal of prior year misstatements should be
      considered in quantifying a current year misstatement. The SEC staff believes
      that registrants should quantify errors using both a balance sheet and an income
      statement approach and evaluate whether either approach results in quantifying
      a
      misstatement that, when all relevant quantitative and qualitative factors are
      considered, is material. SAB 108 is effective for the Company’s fiscal year
      ending December 31, 2006. The initial adoption of SAB 108 had no impact on
      the
      consolidated financial statements.




F-16


**FUWEI
        FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
        the
        period from August 9, 2004 (date of incorporation) to December 31,
        2004
 and
        the
        years ended December 31, 2005 and 2006
 (amounts
        in thousands, except share and per share data)


**(4)**
            **Accounts
                Receivable, net**




Accounts
      receivable at December 31, 2005 and 2006 consist of the following:




2005
            
            2006
            
            2006RMB
            
            RMB
            
            US$Accounts
                receivable
            
            
            40,300
            
            
            39,053
            
            
            5,004Less:
                Allowance for doubtful accounts
            
            
            (2,015
            )
            
            (872
            )
            
            (112
            )38,285
            
            
            38,181
            
            
            4,892Bills
                receivable
            
            
            7,844
            
            
            37,349
            
            
            4,78646,129
            
            
            75,530
            
            
            9,678




An
      analysis of the allowance for doubtful accounts for 2004, 2005 and 2006 is
      as
      follows:




2004
            
            2005
            
            2006
            
            2006RMB
            
            RMB
            
            RMB
            
            US$Balance
                at beginning of year
            
            
            -
            
            
            1,008
            
            
            2,015
            
            
            258Bad
                debt expense/(recovery)
            
            
            1,008
            
            
            1,007
            
            
            (1,143
            )
            
            (146
            )Write-offs
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance
                at end of year
            
            
            1,008
            
            
            2,015
            
            
            872
            
            
            112




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 60 days from the date of billing. Normally, the Group does
      not
      obtain collateral from customers.






**(5)**
            **Inventories**




Inventories
      at December 31, 2005 and 2006 consist of the following:




2005
            
            2006
            
            2006RMB
            
            RMB
            
            US$Raw
                materials
            
            
            9,228
            
            
            10,526
            
            
            1,349Work-in-progress
            
            
            865
            
            
            2,029
            
            
            260Finished
                goods
            
            
            14,468
            
            
            10,874
            
            
            1,394Consumables
                and spare parts
            
            
            326
            
            
            354
            
            
            4524,887
            
            
            23,783
            
            
            3,048




F-17




**FUWEI
      FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**





**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**


For
      the
      period from August 9, 2004 (date of incorporation) to December 31,
      2004


and
      the
      years ended December 31, 2005 and 2006


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




**(6)**
            **Prepayments
                and Other Receivables**




Prepayments
      and other receivables at December 31, 2005 and 2006 consist of the
      following:




2005
            
            2006
            
            2006RMB
            
            RMB
            
            US$Purchase
                deposits of raw materials
            
            
            5,982
            
            
            5,724
            
            
            733Prepayments
                (Note)
            
            
            5,097
            
            
            3,354
            
            
            430Other
                receivables
            
            
            1,898
            
            
            10,360
            
            
            1,32712,977
            
            
            19,438
            
            
            2,490




Note:  Prepayments
      at December 31, 2005 and 2006 include an amount of RMB392 and RMB767 (US$98),
      respectively, representing the current portion of lease prepayments of the
      Group
      (see Note 9).




**(7)**
            **Deferred
                Expenses**




Deferred
      expenses at December 31, 2005 represent an aggregate amount of RMB1,785, in
      connection with the preparation of the IPO of the Company, which were charged
      to
      additional paid-in capital after the Company listed on the Nasdaq Global Market
      on December 18, 2006.




**(8)**
            **Property,
                Plant and Equipment, net**




Property,
      plant and equipment consist of the following:




2005
            
            2006
            
            2006RMB
            
            RMB
            
            US$Buildings
            
            
            33,699
            
            
            33,699
            
            
            4,318Plant
                and equipment
            
            
            275,588
            
            
            276,328
            
            
            35,408Computer
                equipment
            
            
            938
            
            
            955
            
            
            122Furniture
                and fixtures
            
            
            1,457
            
            
            1,798
            
            
            230Motor
                vehicles
            
            
            1,390
            
            
            1,390
            
            
            179Construction-in-progress
            
            
            30,336
            
            
            66,753
            
            
            8,554343,408
            
            
            380,923
            
            
            48,811Less:
                accumulated depreciation
            
            
            (39,812
            )
            
            (63,233
            )
            
            (8,103
            )303,596
            
            
            317,690
            
            
            40,708




All
      of
      the Group’s buildings are located in the PRC. As of December 31, 2005 and 2006,
      property, plant and equipment with carrying value totaling RMB264,546 and
      RMB242,242 (US$31,040) respectively were pledged to banks as collateral for
      short-term bank loans of RMB183,270 and RMB178,270 (US$22,843) respectively
      (see
      Note 12).




F-18


**FUWEI
        FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
        the
        period from August 9, 2004 (date of incorporation) to December 31,
        2004
 and
        the
        years ended December 31, 2005 and 2006
 (amounts
        in thousands, except share and per share data)
  **(8)**
                **Property,
                    Plant and Equipment, net
                    (continued)**




Construction-in-progress
      represents capital expenditure in respect of the BOPET production line. Interest
      expense capitalized during the period/year ended December 31, 2004, 2005 and
      2006 was RMB35, RMB1,152 and RMB2,855 (US$366), respectively (see Note 19).




**(9)**
            **Lease
                Prepayments**




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




2005
            
            2006
            
            2006RMB
            
            RMB
            
            US$Non-current
                portion
            
            
            17,590
            
            
            23,059
            
            
            2,954Current
                portion - amount charged to expense next year
            
            
            392
            
            
            767
            
            
            9817,982
            
            
            23,826
            
            
            3,052




As
      of
      December 31, 2005 and 2006, prepaid land use rights were pledged to banks as
      collateral for short-term bank loans of RMB52,600 and RMB52,600 (US$6,740)
      respectively (Note 12).




Charges
      for the period/year ended December 31, 2004, 2005 and 2006 was RMB97, RMB392
      and
      RMB724 (US$94) respectively.




As
      of
      December 31, 2006, 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 RMB23,826. 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**




2005
            
            2006
            
            2006RMB
            
            RMB
            
            US$Trademark
            
            
            362
            
            
            362
            
            
            46Less:
                accumulated amortization
            
            
            (181
            )
            
            (253
            )
            
            (32
            )181
            
            
            109
            
            
            14




Intangible
      asset represents the trademark of “Neo-luck” acquired by Shandong Fuwei from
      Shandong Neo-Luck on 20 July 2003 (i.e. prior to the acquisition as described
      in
      Note 13). Amortization expense is recognized on a straight-line basis over
      the
      estimated useful life of 5 years. Amortization of intangible asset was RMB18,
      RMB73 and RMB72 (US$9) for the period/year ended December 31, 2004, 2005 and
      2006, respectively.




F-19




**FUWEI
        FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
        the
        period from August 9, 2004 (date of incorporation) to December 31,
        2004
 and
        the
        years ended December 31, 2005 and 2006
 (amounts
        in thousands, except share and per share data)








**(10)**
              **Intangible
                  Asset, net (continued)**
  The estimated amortization expense of intangible assets
        is as
        follows:


RMB2007
            
            
            722008
            
            
            37109




**(11)**
            **Goodwill**




Goodwill
      of RMB10,276 (US$1,317) at December 31, 2005 and 2006, 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)**
            **Short-term
                Bank Loans**




Interest
                rate
            
            2005
            
            2006
            
            2006Lender
            
            per
                annum
            
            RMB
            
            RMB
            
            US$Bank
                of Communications Co., Ltd.-
                December 30, 2005 to November 25, 2006
            
            
            6.696
            %
            
            52,600
            
            
            52,600
            
            
            6,740-
                December 20, 2005 to December 13, 2006
            
            
            6.696
            %
            
            52,900
            
            
            52,546
            
            
            6,734-
                April 27, 2005 to September 20, 2006
            
            
            5.760
            %
            
            100,000
            
            
            100,000
            
            
            12,814China
                Construction Bank Corporation-
                September 16, 2005 to January 20, 2006
            
            
            6.138
            %
            
            12,600
            
            
            -
            
            
            --
                March 31, 2006 to January 20, 2007
            
            
            5.841
            %
            
            -
            
            
            8,934
            
            
            1,145Agricultural
                Bank of China Co., Ltd.-
                September 30, 2005 to September 9, 2006
            
            
            7.254
            %
            
            9,770
            
            
            8,790
            
            
            1,126-
                October 17, 2005 to October 16, 2006
            
            
            7.254
            %
            
            8,000
            
            
            8,000
            
            
            1,024-
                October 28, 2005 to October 27, 2006
            
            
            7.254
            %
            
            6,800
            
            
            6,800
            
            
            872Discounted
                bills (Note 25(c))
            
            
            6.86%-7.00
            %
            
            5,376
            
            
            2,008
            
            
            257248,046
            
            
            239,678
            
            
            30,712




Notes:




During
      the years ended December 31, 2005 and 2006, the Company entered into various
      loan agreements with commercial banks with terms ranging from three months
      to
      one year to finance its working capital. 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, 2005 and 2006
      were
      6.34% and 6.32% per annum, respectively.




The
      Company has received a confirmation from Bank of Communications Co., Ltd to
      extend current funding commitments of RMB205,146 as of December 31, 2006 through
      December 31, 2007.




F-20


**FUWEI
        FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
        the
        period from August 9, 2004 (date of incorporation) to December 31,
        2004
 and
        the
        years ended December 31, 2005 and 2006
 (amounts
        in thousands, except share and per share data)




**(12)**
              **Short-term
                  Bank Loans (continued)**


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




Following
      the maturity of the short-term loans of RMB52,546 and RMB100,000 from Bank
      of
      Communications Co., Ltd on December 13, 2006 and September 20, 2006,
      respectively, the Company obtained from Bank of Communications Co., Ltd. new
      short terms loans of RMB52,590 and RMB100,000 on January 15, 2007, with the
      maturity date on January 15, 2008, and interest charged at 6.732% per
      annum.




All
      of
      the short-term loans from Agricultural Bank of China Co., Ltd., totaling
      RMB23,590 (US$3,022), and a short-term loan from Bank of Communications Co.,
      Ltd. of RMB 52,600 (US$6,740), were fully repaid in January 2007 and February
      2007, respectively.




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




2005
            
            2006
            
            2006RMB
            
            RMB
            
            US$Secured
                by:-
                property, plant and equipment
            
            
            183,270
            
            
            178,270
            
            
            22,843-
                lease prepayments
            
            
            52,600
            
            
            52,600
            
            
            6,740-
                bills receivable
            
            
            5,376
            
            
            2,008
            
            
            257Guaranteed
                by related parties (Note 21(a))
            
            
            6,800
            
            
            6,800
            
            
            872248,046
            
            
            239,678
            
            
            30,712




**(13)**
            **Acquisition**




On
      October 27, 2004, Fuwei (BVI) entered into a sale and purchase agreement with
      Shenhong Group Co., Ltd and Shandong Baorui Investment Co., Ltd (“Shandong
      Baorui”), the then shareholders of Shandong Fuwei, to acquire their respective
      equity interest of 90% and 10% in Shandong Fuwei for an aggregate consideration
      of RMB91,093. Shandong Baorui is 22.1% owned by the Group Founders. With the
      acquisition of Shandong Fuwei, the Company entered into the market of production
      and distribution of BOPET film and obtained the necessary production facilities.
      As a result of the acquisition, the results of operations of Shandong Fuwei
      are
      consolidated and included in the financial statements of the Company from
      October 27, 2004. This purchase transaction was financed entirely by loans
      from
      two of the Company’s shareholders.




***Effect
      of acquisition of Shandong Fuwei***




The
      following table summarizes the estimated fair value of the assets acquired
      and
      liabilities assumed at the date of acquisition.




RMBCash
            
            
            12,144Property,
                plant and equipment
            
            
            187,245Intangible
                assets
            
            
            272Lease
                prepayments
            
            
            18,079Deferred
                tax assets
            
            
            2,187Inventories
            
            
            31,326Accounts
                receivable
            
            
            39,542Prepayment
                and other receivables
            
            
            7,505Amounts
                due from related parties
            
            
            77,960Goodwill
                on acquisition
            
            
            10,276Total
                assets acquired
            
            
            386,536Short-term
                bank loans
            
            
            (199,600
            )Accounts
                payables
            
            
            (13,235
            )Accrued
                expenses and other payables
            
            
            (9,932
            )Amount
                due to related parties
            
            
            (29,989
            )Dividends
                payable
            
            
            (41,766
            )Deferred
                tax liabilities
            
            
            (921
            )Total
                liabilities assumed
            
            
            (295,443
            )Net
                assets acquired
            
            
            91,093




F-21


**FUWEI
        FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
        the
        period from August 9, 2004 (date of incorporation) to December 31,
        2004
 and
        the
        years ended December 31, 2005 and 2006
 (amounts
        in thousands, except share and per share data)


**(13)**
              **Acquisition
                  (continued)**


The
      results of operations for the period ended December 31, 2004 as though the
      acquisition of Shandong Fuwei had been completed on August 9, 2004 are set
      out
      below:




2004RMB*(Unaudited)*Revenues
            
            
            172,089Cost
                of goods sold
            
            
            (131,157
            )Total
                operating expenses
            
            
            (8,870
            )Operating
                income
            
            
            32,062Other
                income/(expenses)
            
            
            (641
            )Income
                before income tax expense
            
            
            31,421Income
                tax expense
            
            
            (34
            )Net
                income
            
            
            31,387Earnings
                per share (basic and diluted)
            
            
            314




**(14)**
            **Accrued
                Expenses and Other
                Payables**




Accrued
      expenses and other payables at December 31, 2005 and 2006 consist of the
      following:




2005
            
            2006
            
            2006RMB
            
            RMB
            
            US$Payables
                to contractors
            
            
            8,677
            
            
            8,677
            
            
            1,112Receipts
                in advance from customers
            
            
            7,277
            
            
            3,929
            
            
            503VAT
                payable
            
            
            2,077
            
            
            893
            
            
            114Audit
                fee
            
            
            -
            
            
            1,990
            
            
            255IPO
                expenses
            
            
            -
            
            
            1,923
            
            
            246Others
            
            
            1,349
            
            
            2,085
            
            
            26819,380
            
            
            19,497
            
            
            2,498






F-22




**FUWEI
          FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
          TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
          the
          period from August 9, 2004 (date of incorporation) to December 31,
          2004
 and
          the
          years ended December 31, 2005 and 2006
 (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:




2004
            
            2005
            
            2006
            
            2006RMB
            
            RMB
            
            RMB
            
            US$The
                PRC
            
            
            66,115
            
            
            304,421
            
            
            345,122
            
            
            44,223Overseas
                countries (principally UnitedStates
                of America, Japan and India)
            
            
            15,249
            
            
            41,784
            
            
            91,762
            
            
            11,75881,364
            
            
            346,205
            
            
            436,884
            
            
            55,981




The
      Group’s revenue by significant types of films for 2004, 2005 and 2006 is as
      follows:




2004
            
            2005
            
            2006
            
            2006RMB
            
            RMB
            
            RMB
            
            US$Printing
                film
            
            
            25,154
            
            
            103,682
            
            
            95,315
            
            
            12,213Stamping
                film
            
            
            19,695
            
            
            94,711
            
            
            99,856
            
            
            12,795Metallization
                film
            
            
            17,666
            
            
            39,647
            
            
            34,772
            
            
            4,456Base
                film for other application
            
            
            17,679
            
            
            59,826
            
            
            46,784
            
            
            5,995Special
                film
            
            
            1,170
            
            
            48,339
            
            
            160,157
            
            
            20,52281,364
            
            
            346,205
            
            
            436,884
            
            
            55,981






F-23


**FUWEI
            FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
            TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
            the
            period from August 9, 2004 (date of incorporation) to December 31,
            2004
 and
            the
            years ended December 31, 2005 and 2006
 (amounts
            in thousands, except share and per share data)


**(16)**
              **Revenues
                  (continued)**


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:




2004
            
            2005
            
            2006
            
            2006RMB
            
            RMB
            
            RMB
            
            US$Revenues
                from external customers(Note
                (a))
            
            
            80,359
            
            
            342,085
            
            
            429,354
            
            
            55,016Segment
                income
            
            
            20,656
            
            
            58,240
            
            
            65,620
            
            
            8,408Reconciling
                items (Note (b))
            
            
            (6,845
            )
            
            (1,171
            )
            
            2,802
            
            
            359Income
                before income taxes
            
            
            13,811
            
            
            57,069
            
            
            68,422
            
            
            8,767Depreciation
                and amortization
            
            
            2,689
            
            
            23,802
            
            
            24,221
            
            
            3,104Segment
                assets (Note (c))
            
            
            
            
            
            437,318
            
            
            496,334
            
            
            63,599Expenditures
                for long-lived assets
            
            
            
            
            
            22,411
            
            
            40,175
            
            
            5,148






(a)
            Reconciliation
                of total segment revenue to consolidated
                revenue




2004
            
            2005
            
            2006
            
            2006RMB
            
            RMB
            
            RMB
            
            US$Total
                segment revenues underPRC
                GAAP
            
            
            80,359
            
            
            342,085
            
            
            429,354
            
            
            55,016Reconciliation
                from PRC GAAP toUS
                GAAP:-
                Freight and other operating expenses
            
            
            1,005
            
            
            4,120
            
            
            7,530
            
            
            965Consolidated
                revenues under US GAAP
            
            
            81,364
            
            
            346,205
            
            
            436,884
            
            
            55,981








F-24




**FUWEI
        FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
        the
        period from August 9, 2004 (date of incorporation) to December 31,
        2004
 and
        the
        years ended December 31, 2005 and 2006
 (amounts
        in thousands, except share and per share data)


**(16)**
              **Revenues
                  (continued)**


(b)
            Reconciliation
                of total segment income to consolidated operating
                income




2004
            
            2005
            
            2006
            
            2006RMB
            
            RMB
            
            RMB
            
            US$Total
                segment income under PRC GAAP
            
            
            20,656
            
            
            58,240
            
            
            65,620
            
            
            8,408-
                Fair value adjustment on inventoryarising
                on acquisition of ShandongFuwei
            
            
            (4,961
            )
            
            -
            
            
            -
            
            
            --
                Depreciation on property, plantand
                equipment
            
            
            134
            
            
            871
            
            
            871
            
            
            112-
                Capitalization of interest expense
            
            
            35
            
            
            1,152
            
            
            2,855
            
            
            366-
                Other adjustments
            
            
            (1,977
            )
            
            (806
            )
            
            1,214
            
            
            155(6,769
            )
            
            1,217
            
            
            4,940
            
            
            633Total
                segment income under US GAAP
            
            
            13,887
            
            
            59,457
            
            
            70,560
            
            
            9,041Interest
                income of holding companies
            
            
            -
            
            
            -
            
            
            14
            
            
            2Administrative
                expenses of holdingcompanies
            
            
            (76
            )
            
            (2,388
            )
            
            (2,152
            )
            
            (276
            )Consolidated
                income beforeincome
                taxes
            
            
            13,811
            
            
            57,069
            
            
            68,422
            
            
            8,767






(c)
            Reconciliation
                of total segment assets to consolidated total
                assets




2005
            
            2006
            
            2006RMB
            
            RMB
            
            US$Total
                assets for reportable segment under PRC GAAP
            
            
            437,318
            
            
            496,334
            
            
            63,599Reconciliation
                from PRC GAAP to US GAAP:--
                Property, plant and equipment
            
            
            (14,582
            )
            
            (25,201
            )
            
            (3,229
            )-
                Lease prepayments
            
            
            3,046
            
            
            2,754
            
            
            352-
                Deferred tax assets
            
            
            1,613
            
            
            1,047
            
            
            134-
                Goodwill
            
            
            10,276
            
            
            10,276
            
            
            1,317-
                Accounts receivable, net
            
            
            5,153
            
            
            3,088
            
            
            396-
                Prepayments and other receivables
            
            
            (4,729
            )
            
            (1,171
            )
            
            (150
            )Total
                segment assets under US GAAP
            
            
            438,095
            
            
            487,127
            
            
            62,419Cash
                held by the Company
            
            
            16
            
            
            240,978
            
            
            30,878Others
                (Note)
            
            
            2,250
            
            
            9,977
            
            
            1,279Consolidated
                total assets
            
            
            440,361
            
            
            738,082
            
            
            94,576




Note:
      The
      2006 balance primarily includes other receivables of the Company.




F-25




**FUWEI
          FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
          TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
          the
          period from August 9, 2004 (date of incorporation) to December 31,
          2004
 and
          the
          years ended December 31, 2005 and 2006
 (amounts
          in thousands, except share and per share
          data)


**(17)**
            **Depreciation
                and Amortization**




Depreciation
      of property, plant and equipment and amortization of intangible asset is
      included in the following captions:




2004
            
            2005
            
            2006
            
            2006RMB
            
            RMB
            
            RMB
            
            US$Cost
                of goods sold
            
            
            2,451
            
            
            22,737
            
            
            22,721
            
            
            2,911Distribution
                expenses
            
            
            2
            
            
            12
            
            
            10
            
            
            1Administrative
                expenses
            
            
            139
            
            
            661
            
            
            766
            
            
            992,592
            
            
            23,410
            
            
            23,497
            
            
            3,011




**(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 period/year ended December 31, 2004, 2005 and
      2006, freight costs included in cost of goods sold were RMB28, RMB186 and RMB177
      (US$23), respectively, and RMB2,262, RMB7,913 and RMB13,170 (US$1,688) 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
      period/year ended December 31, 2004, 2005 and 2006:





2004
            
            2005
            
            2006
            
            2006RMB
            
            RMB
            
            RMB
            
            US$Interest
                cost capitalized
            
            
            35
            
            
            1,152
            
            
            2,855
            
            
            366Interest
                cost charged to expense
            
            
            1,370
            
            
            13,747
            
            
            12,884
            
            
            1,6511,405
            
            
            14,899
            
            
            15,739
            
            
            2,017




**(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%.




F-26


**FUWEI
          FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
          TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
          the
          period from August 9, 2004 (date of incorporation) to December 31,
          2004
 and
          the
          years ended December 31, 2005 and 2006
 (amounts
          in thousands, except share and per share data)


**(20)**
              **Income
                  Taxes (continued)**


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.




If
      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, it would
      have
      had an EIT rate of 15%. Net income and basic and diluted earnings per share
      would be reduced by the following amounts:





2004
            
            2005
            
            2006
            
            2006RMB
            
            RMB
            
            RMB
            
            US$Net
                income
            
            
            (3,098
            )
            
            (8,736
            )
            
            (10,453
            )
            
            (1,339
            )Earnings
                per share-
                Basic
            
            
            (4,019
            )
            
            (11,331
            )
            
            (9.50
            )
            
            (1.22
            )-
                Diluted
            
            
            (4,019
            )
            
            (11,331
            )
            
            (9.48
            )
            
            (1.21
            )




The
      Group
      had minimal operations in jurisdictions other than the PRC. (Loss)/income before
      income taxes consists of:




2004
            
            2005
            
            2006
            
            2006RMB
            
            RMB
            
            RMB
            
            US$Cayman
                Islands
            
            
            (66
            )
            
            (60
            )
            
            (2,117
            )
            
            (271
            )British
                Virgin Islands
            
            
            (10
            )
            
            (2,328
            )
            
            (21
            )
            
            (3
            )PRC
            
            
            13,887
            
            
            59,457
            
            
            70,560
            
            
            9,04113,811
            
            
            57,069
            
            
            68,422
            
            
            8,767




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. The New Tax Law
      was adopted on March 16, 2007. Under the New Tax Law, which will become
      effective on January 1, 2008, 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.
      As
      a result of the New Tax Law, even if Shandong Fuwei continues to maintain its
      high-tech enterprise status, Shandong Fuwei will be subject to the increased
      25%
      unified enterprise income tax rate on January 1, 2013.




F-27


**FUWEI
        FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
        the
        period from August 9, 2004 (date of incorporation) to December 31,
        2004
 and
        the
        years ended December 31, 2005 and 2006
 (amounts
        in thousands, except share and per share data)


**(20)**
              **Income
                  Taxes (continued)**


Income
      tax benefit consists of:




PRC
                Income tax
            
            Current
            
            Deferred
            
            TotalRMB
            
            RMB
            
            RMBPeriod
                ended December 31, 2004
            
            
            -
            
            
            288
            
            
            288Year
                ended December 31, 2005
            
            
            -
            
            
            59
            
            
            59Year
                ended December 31, 2006
            
            
            -
            
            
            (757
            )
            
            (757
            )Year
                ended December 31, 2006 (US$)
            
            
            -
            
            
            (97
            )
            
            (97
            )




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
      period/year ended December 31, 2004, 2005 and 2006 for the following reasons:




2004
            
            2005
            
            2006
            
            2006RMB
            
            RMB
            
            RMB
            
            US$Income
                before income taxes
            
            
            13,811
            
            
            57,069
            
            
            68,422
            
            
            8,767Computed
                “expected” tax expense
            
            
            (2,072
            )
            
            (8,560
            )
            
            (10,263
            )
            
            (1,315
            )Non-deductible
                expenses
            
            
            (14
            )
            
            (419
            )
            
            (377
            )
            
            (48
            )Non-taxable
                income
            
            
            -
            
            
            -
            
            
            2
            
            
            1Tax
                holiday
            
            
            2,372
            
            
            8,978
            
            
            9,827
            
            
            1,258Tax
                rate differential of other taxjurisdictions
            
            
            2
            
            
            60
            
            
            54
            
            
            7Actual
                income tax benefit/(expenses)
            
            
            288
            
            
            59
            
            
            (757
            )
            
            (97
            )




Tax
      effects of temporary differences that give rise to significant portions of
      the
      deferred tax assets/(liabilities) as of December 31, 2005 and 2006, are
      presented below.




2005
            
            2006
            
            2006RMB
            
            RMB
            
            US$Deferred
                income tax assets/(liabilities) :CurrentAccounts
                receivable
            
            
            151
            
            
            (162
            )
            
            (21
            )Other
                receivables
            
            
            (7
            )
            
            (29
            )
            
            (4
            )144
            
            
            (191
            )
            
            (25
            )Non-currentProperty,
                plant and equipment, principally due to differencesin
                depreciation and capitalized interest
            
            
            2,199
            
            
            2,205
            
            
            283Construction
                in progress, principally due to capitalized interest
            
            
            (294
            )
            
            (722
            )
            
            (93
            )Lease
                prepayments, principally due to differences in charges
            
            
            (436
            )
            
            (436
            )
            
            (56
            )1,469
            
            
            1,047
            
            
            134Net
                deferred income tax assets
            
            
            1,613
            
            
            856
            
            
            109




F-28




**FUWEI
        FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
        the
        period from August 9, 2004 (date of incorporation) to December 31,
        2004
 and
        the
        years ended December 31, 2005 and 2006
 (amounts
        in thousands, except share and per share data)


**(20)**
              **Income
                  Taxes (continued)**


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, 2006. The
      profit before taxation for Shandong Fuwei for the year ended December 31, 2004,
      2005 and 2006 was RMB80,271, RMB58,586 and RMB69,933 (US$8,961) respectively.
      Based upon the level of historical performance of Shandong Fuwei, management
      believes the deferred tax assets are realizable.




**(21)**
            **Related****Party Transactions**




*Name
                of party*
            
            *Relationship*Shandong
                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.Weifang
                Fuwah Hotel Co. Ltd (“Fuwah Hotel”)
            
            Investment
                owned by Weifang Neo-Luck Group.






F-29




**FUWEI
          FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
          TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
          the
          period from August 9, 2004 (date of incorporation) to December 31,
          2004
 and
          the
          years ended December 31, 2005 and 2006
 (amounts
          in thousands, except share and per share data)




**(21)**
            **Related****Party Transactions
                (continued)**




(a)
            The
                principal related party transactions during the period/year ended
                December
                31, 2004, 2005 and 2006 are as follows:




Note
            
            2004
            
            2005
            
            2006
            
            2006RMB
            
            RMB
            
            RMB
            
            US$Acquisition
                of production lines
            
            
            (i)
            
            
            119,280
            
            
            -
            
            
            -
            
            
            -Guarantee
                of bank loans
            
            
            (ii)
            
            
            24,500
            
            
            6,800
            
            
            6,800
            
            
            872Rentals
                for staff quarters
            
            
            (iii)
            
            
            39
            
            
            201
            
            
            151
            
            
            19Interest
                income
            
            
            (iv)
            
            
            -
            
            
            838
            
            
            -
            
            
            -




Notes:




(i)
            Shandong
                Neo-Luck was declared bankrupt by the Weifang Municipal People’s Court in
                the PRC on September 24, 2004. The bankruptcy liquidation commission
                of
                Shandong Neo-Luck entrusted an auction company, Weifang Jing Cheng
                Auction
                Co., Ltd, to auction the assets of Shandong Neo-Luck relating mainly
                to
                the DMT production line. On September 27, 2004, the assets of Shandong
                Neo-Luck (with an appraised valued of RMB52,886 on a force-sale basis)
                were auctioned by way of public auction by Weifang Jing Cheng Auction
                Co.,
                Ltd to Beijing Baorui Guarantee Co., Ltd (“Beijing Baorui”) for RMB33,848
                (the “First Auction”). Beijing Baorui subsequently entrusted Shandong
                Yinxing Auction Company to auction the assets acquired through the
                First
                Auction. Shandong Baorui owns an 80% equity interest in Beijing Baorui.
                On
                December 25, 2004, the Group acquired the assets through a second
                auction
                for RMB119,280.




(ii)
            During
                the year ended December 31, 2005 and 2006, a bank loan of RMB6,800
                (US$872) was guaranteed by Shandong
                Baorui.




During
      the period ended December 31, 2004, bank loans totaling RMB23,200 (US$2,973)
      and
      RMB1,300 (US$167) were guaranteed by Weifang Neo-Luck Group (collectively with
      two of its subsidiaries) and Fuwah Hotel respectively.




(iii)
            During
                the period/year ended December 31, 2004, 2005 and 2006, the Group
                paid the
                rental expenses to Fuhua Management for renting an apartment for
                the
                purpose of staff quarters.




(iv)
            During
                the year ended December 31, 2005, interest income of RMB838 (US$107)
                was
                received from Weifang Neo-Luck Groupin
                respect of a loan receivable carried at an interest rate of 5.49%
                per
                annum.




F-30


**FUWEI
        FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
        the
        period from August 9, 2004 (date of incorporation) to December 31,
        2004
 and
        the
        years ended December 31, 2005 and 2006
 (amounts
        in thousands, except share and per share data)




**(21)**
            **Related
                Party Transactions
                (continued)**




(b)
            Amounts
                due to related parties as of December 31, 2005 and 2006 are as
                follows:




2005
            
            2006
            
            2006RMB
            
            RMB
            
            US$Due
                to related parties*-
                current liabilities*Apex
                Glory Holdings
            
            
            (70,596
            )
            
            -
            
            
            -Easebright
                Investments
            
            
            (18,766
            )
            
            -
            
            
            -(89,362
            )
            
            -
            
            
            -




Amoun t s
      due to
      related parties comprise the
      loans from Apex Glory Holdings and Easebright Investments to the Company for
      financing the acquisition of Shandong Fuwei. Those loans are non-interest
      bearing and do not have fixed terms of repayment. On November 23, 2006, the
      outstanding loans were converted into 6,911,895 and 1,837,334 ordinary shares
      of
      the Company, respectively.




**(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 employee s ’
      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 RMB93, RMB527 and
      RMB456 (US$58) for the period/year ended December 31, 2004, 2005 and 2006,
      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.




**(23)**
            **Fair
                Value of Financial Instruments******




The
      carrying amount of cash and cash equivalents, trade accounts receivable,
      prepayments and other receivab l es,
      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 period/year ended December 31, 2004, 2005 and
                2006.




There
      were no amounts due from customers representing more than 10% of the outstanding
      accounts receivable at December 31, 2005 and 2006.





(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 period/year ended December 31,
                2004, 2005 and 2006. 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.






F-31


**FUWEI
          FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
          TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
          the
          period from August 9, 2004 (date of incorporation) to December 31,
          2004
 and
          the
          years ended December 31, 2005 and 2006
 (amounts
          in thousands, except share and per share data)


**(24)**
              **Business
                  and Credit Concentrations
                  (continued)**


The
      following are the vendors that supplied 5% or more of our raw materials for
      each
      of the period/year ended December 31, 2004, 2005 and 2006:




**Name
                of Vendor**
            
            **Supply**
            
            **Percentage
                of total purchases (%)****2004**
            
            **2005**
            
            **2006**Sinopec
                Yizheng
            
            
            PET
                resin
            
            
            68.0
            
            
            66.6
            
            
            58.5Yizheng
                Tianbao Polyester Co., Ltd
            
            
            Additives
            
            
            7.9
            
            
            16.7
            
            
            23.9Jiangyin
                Xingtai New Material Co., Ltd
            
            
            PET
                resin
            
            
            -
            
            
            -
            
            
            6.7Zhuhai
                Yubua Polyester Co., Ltd.
            
            
            PET
                resin and additives
            
            
            16.8
            
            
            5.3
            
            
            2.1




**(25)**
            **Commitments
                and Contingencies**





**(a)**
            **Operating
                lease commitments**




Future
      minimum lease payments under non-cancelable operating leases as of December
      31,
      2006 are as follows:




RMB2007
            
            
            8402008
            
            
            4901,330




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.




For
      the
      period/year ended December 31, 2004, 2005 and 2006, total rental expenses for
      non-cancelable operating leases were RMB253, RMB321 and RMB309 (US$40),
      respectively.




**(b)**
            **Capital
                commitments**




Capital
      commitments for purchase of property, plant and equipment as of December 31,
      2006 were RMB189,279 (US$24,254).




F-32


**FUWEI
        FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
        the
        period from August 9, 2004 (date of incorporation) to December 31,
        2004
 and
        the
        years ended December 31, 2005 and 2006
 (amounts
        in thousands, except share and per share data)


**(25)**
            **Commitments
                and Contingencies
                (continued)**




**(c)**
            **Outstanding
                bills receivable
                discounted**




As
      of
      December 31, 2006, the Company had retained a recourse obligation of RMB2,008
      (US$257) in respect of bills receivable discounted with and sold to banks.
      The
      recourse obligation represents the amount the Company will be obligated to
      repay
      to the extent that the issuing banks who have guaranteed payment do not honor
      the bills receivable upon maturity. For the period/year presented, the Company
      did not experience any losses on bills receivable discounted. The discounted
      bills at December 31, 2005 and 2006 were RMB5,376 and RMB2,008 (US$257),
      respectively and were disclosed as secured short-term loans (see Note
      12).




**(d)**
            **Legal
                proceedings**




In
      2006,
      Shandong Fuwei received a correspondence relating to an arbitration proceeding
      initiated by DMT S. A. (“DMT”) against Shandong Neo-Luck in the ICC
      International Court of Arbitration and DMT is seeking 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 Baroui in 2005.  Based on an external legal opinion, the Company
      believes that no liability with respect to such proceeding should arise with
      regard to Shandong Fuwei, due to the lack of any contract or direct obligation
      between Shandong Fuwei and DMT. Shandong Fuwei intends to vigorously contest
      any
      claims in respect of obligations of Shandong Neo-Luck.




**(26)**
            **Earnings
                per Share**




Basic
      and
      diluted earnings per share for the period/year ended December 31, 2004, 2005
      and
      2006 have been calculated as follows:




2004
            
            2005
            
            2006
            
            2006RMB
            
            RMB
            
            RMB
            
            US$Net
                income available to ordinary shareholders
            
            
            14,099
            
            
            57,128
            
            
            67,665
            
            
            8,670Denominator
                for basic net income available toordinary
                shareholders:Weighted
                average number of ordinary sharesoutstanding
            
            
            771
            
            
            771
            
            
            1,101,031
            
            
            1,101,031Basic
                earnings per share
            
            
            18,287
            
            
            74,096
            
            
            61.46
            
            
            7.88Net
                income available to ordinary shareholders
            
            
            14,099
            
            
            57,128
            
            
            67,665
            
            
            8,670Denominator
                for diluted net income available toordinary
                shareholders:Weighted
                average number of ordinary sharesoutstanding
            
            
            771
            
            
            771
            
            
            1,101,031
            
            
            1,101,031Weighted
                average number of share options
            
            
            -
            
            
            -
            
            
            1,457
            
            
            1,457771
            
            
            771
            
            
            1,102,488
            
            
            1,102,488Diluted
                earnings per share
            
            
            18,287
            
            
            74,096
            
            
            61.37
            
            
            7.86






F-33




**FUWEI
          FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
          TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
          the
          period from August 9, 2004 (date of incorporation) to December 31,
          2004
 and
          the
          years ended December 31, 2005 and 2006
 (amounts
          in thousands, except share and per share data)




**(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, 2006,
      additional transfers of RMB11,558 (US$1,481) 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, 2006, RMB22,627 and RMB11,314 have been appropriated from retained earnings
      and set aside for statutory general reserve and public welfare fund,
      respectively by Shandong Fuwei.




As
      of
      December 31, 2006, 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 33% 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.




The
      following presents condensed unconsolidated financial information of the Parent
      Company only.




**Condensed
      Balance Sheet as of December 31, 2005 and 2006**




2005
            
            2006
            
            2006RMB
            
            RMB
            
            US$Cash
                and cash equivalents
            
            
            16
            
            
            240,978
            
            
            30,878Other
                current assets
            
            
            89,362
            
            
            96,045
            
            
            12,307Investments
                in subsidiaries
            
            
            73,085
            
            
            147,762
            
            
            18,934Total
                assets
            
            
            162,463
            
            
            484,785
            
            
            62,119Current
                liabilities
            
            
            89,503
            
            
            18,878
            
            
            2,419Total
                shareholders’ equity
            
            
            72,960
            
            
            465,907
            
            
            59,700Total
                liabilities and shareholders’ equity
            
            
            162,463
            
            
            484,785
            
            
            62,119






F-34




**FUWEI
          FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
          TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
          the
          period from August 9, 2004 (date of incorporation) to December 31,
          2004
 and
          the
          years ended December 31, 2005 and 2006
 (amounts
          in thousands, except share and per share data)




**(27)**
            **Fuwei
                Films (Holdings) Co., Ltd (Parent Company)
                (continued)**




**Condensed
      Statements of Operations (For the period/year ended December 31, 2004, 2005
      and
      2006)**




2004
            
            2005
            
            2006
            
            2006RMB
            
            RMB
            
            RMB
            
            US$Interest
                income
            
            
            -
            
            
            -
            
            
            14
            
            
            2General
                and administrative expenses
            
            
            (66
            )
            
            (60
            )
            
            (2,131
            )
            
            (273
            )Loss
                before equity in undistributedearnings
                of subsidiaries
            
            
            (66
            )
            
            (60
            )
            
            (2,117
            )
            
            (271
            )Equity
                in earnings of subsidiaries
            
            
            14,165
            
            
            57,188
            
            
            69,782
            
            
            8,941Net
                income
            
            
            14,099
            
            
            57,128
            
            
            67,665
            
            
            8,670




**Condensed
      Statement of Cash Flows  (For the period/year ended December 31, 2004, 2005
      and 2006)**




2004
            
            2005
            
            2006
            
            2006RMB
            
            RMB
            
            RMB
            
            US$**Cash
                flow from operating activities**Net
                income
            
            
            14,099
            
            
            57,128
            
            
            67,665
            
            
            8,670Adjustment
                to reconcile net incometo
                net cash from operating activities:-
                Equity in earnings of subsidiaries
            
            
            (14,165
            )
            
            (57,188
            )
            
            (69,782
            )
            
            (8,941
            )-
                Foreign exchange gain
            
            
            -
            
            
            -
            
            
            (1,473
            )
            
            (189
            )Changes
                in operating assets andliabilities:-
                Other current assets
            
            
            (39
            )
            
            (89,323
            )
            
            (9,974
            )
            
            (1,278
            )-
                Other current liabilities
            
            
            107
            
            
            89,396
            
            
            18,659
            
            
            2,391Net
                cash provided by operating activities
            
            
            2
            
            
            13
            
            
            5,095
            
            
            653**Cash
                flow from financing activities**Issuance
                of share capital
            
            
            1
            
            
            -
            
            
            235,867
            
            
            30,223Net
                cash provided by financing activities
            
            
            1
            
            
            -
            
            
            235,867
            
            
            30,223Net
                increase in cash
            
            
            3
            
            
            13
            
            
            240,962
            
            
            30,876Cash:At
                beginning of year
            
            
            -
            
            
            3
            
            
            16
            
            
            2At
                end of year
            
            
            3
            
            
            16
            
            
            240,978
            
            
            30,878






F-35


**FUWEI
        FILMS (HOLDINGS) CO., LTD and SUBSIDIARIES**
 
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 For
        the
        period from August 9, 2004 (date of incorporation) to December 31,
        2004
 and
        the
        years ended December 31, 2005 and 2006
 (amounts
        in thousands, except share and per share data)




**(28)**
            **Subsequent
                Events**




(a)
            The
                short-term loan of RMB8,934 (US$1,145) from China Construction Bank
                Corporation, with maturity date on January 20,2007,
                was fully repaid in January 2007.




(b)
            In
                connection with the legal proceedings as mentioned in note 25(d)
                to these
                financial statements, the Company filed arbitration against DMT in
                Weifang
                Intermediate People’s Court on February 26,2007, relating to the damage of
                the Company’s reputation by DMT.




F-36


**Report
      of Independent Registered Public Accounting Firm**




The
      Board
      of Directors and Shareholders of


Fuwei
      Films (Shandong) Co., Ltd:




We
      have
      audited the accompanying balance sheets of Fuwei Films (Shandong) Co., Ltd
      as of
      December 31, 2003, and October 26, 2004, and the related statements of income,
      shareholders’ equity and cash flows for the periods from January 28, 2003 (date
      of incorporation) to December 31, 2003, and January 1, 2004, to October 26,
      2004, all expressed in Renminbi. These consolidated financial statements are
      the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our 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 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 audits provide 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 (Shandong) Co., Ltd
      as
      of December 31, 2003, and October 26, 2004, and the results of their operations
      and their cash flows for the each of the periods from January 28, 2003 (date
      of
      incorporation) to December 31, 2003, and January 1, 2004, to October 26, 2004,
      in conformity with U.S. generally accepted accounting principles.




As
      described in Note 24, the Company was acquired by Fuwei (BVI) Co., Ltd on
      October 27, 2004. The accompanying financial statements do not include any
      adjustments to the reported amounts that might be required as a result of the
      application of purchase accounting by the acquirer.






/s/
      KPMG


Hong
      Kong, China




June
      28,
      2006




F-37




**FUWEI
      FILMS (SHANDONG) CO., LTD**


**BALANCE
      SHEETS**


As
      of
      December 31, 2003 and October 26, 2004


(amounts
      in thousands RMB)




Note
            
            2003
            
            2004Assets*Current
                assets*Cash
            
            
            
            
            
            16,089
            
            
            12,144Accounts
                receivable
            
            
            4
            
            
            1,197
            
            
            39,542Inventories
            
            
            5
            
            
            26,533
            
            
            26,365Prepayments
                and other receivables
            
            
            6
            
            
            6,575
            
            
            7,435Amounts
                due from related parties
            
            
            19(b
            )
            
            45,491
            
            
            77,960Total
                current assets
            
            
            
            
            
            95,885
            
            
            163,446Property,
                plant and equipment, net
            
            
            7
            
            
            177,814
            
            
            204,804Lease
                prepayments
            
            
            8
            
            
            15,258
            
            
            15,010Intangible
                asset, net
            
            
            9
            
            
            326
            
            
            272Total
                assets
            
            
            
            
            
            289,283
            
            
            383,532Liabilities*Current
                liabilities*Short-term
                bank loans
            
            
            10
            
            
            156,000
            
            
            199,600Accounts
                payable
            
            
            
            
            
            4,785
            
            
            13,235Accrued
                expenses and otherpayables
            
            
            11
            
            
            29,105
            
            
            9,932Amounts
                due to related parties
            
            
            19(b
            )
            
            185
            
            
            -Income
                tax payableDividend
                payable
            
            
            
            
            
            -
            
            
            41,766Total
                current liabilities
            
            
            
            
            
            190,075
            
            
            264,533Deferred
                tax liabilities
            
            
            12
            
            
            459
            
            
            485Total
                liabilities
            
            
            
            
            
            190,534
            
            
            265,018Shareholders’
                equity
            
            
            13Share
                capital
            
            
            
            
            
            91,000
            
            
            91,000Capital
                reserve
            
            
            
            
            
            48
            
            
            48Statutory
                reserves
            
            
            
            
            
            3,060
            
            
            12,264Retained
                earnings
            
            
            
            
            
            4,641
            
            
            15,202Total
                shareholders’ equity
            
            
            
            
            
            98,749
            
            
            118,514Total
                liabilities and shareholders’equity
            
            
            
            
            
            289,283
            
            
            383,532




S ee
      accompanying notes to the financial statements.




F-38




**FUWEI
      FILMS (SHANDONG) CO., LTD**


**STATEMENTS
      OF INCOME**


For
      the
      periods from January 28, 2003 (date of incorporation) to December 31, 2003


and
      January 1, 2004 to October 26, 2004


(amounts
      in thousands RMB)




Note
            
            2003
            
            2004Revenues
            
            
            14
            
            
            95,070
            
            
            286,114Cost
                of goods sold
            
            
            15,
                16
            
            
            (66,713
            )
            
            (207,164
            )Gross
                profit
            
            
            
            
            
            28,357
            
            
            78,950Operating
                expenses-
                Distribution expenses
            
            
            15,
                16
            
            
            (1,473
            )
            
            (5,224
            )-
                Administrative expenses
            
            
            15
            
            
            (3,209
            )
            
            (5,400
            )Total
                operating expenses
            
            
            
            
            
            (4,682
            )
            
            (10,624
            )Operating
                income
            
            
            
            
            
            23,675
            
            
            68,326Other
                income/(expense)-
                Interest income
            
            
            
            
            
            32
            
            
            101-
                Interest expense
            
            
            
            
            
            (675
            )
            
            (7,291
            )-
                Foreign currency exchange loss
            
            
            
            
            
            -
            
            
            (40
            )-
                Sale of scrap materials
            
            
            
            
            
            427
            
            
            452-
                Other income
            
            
            
            
            
            1
            
            
            9Other
                expense, net
            
            
            
            
            
            (215
            )
            
            (6,769
            )Income
                before income tax expense
            
            
            
            
            
            23,460
            
            
            61,557Income
                tax expense
            
            
            12
            
            
            (459
            )
            
            (26
            )Net
                income
            
            
            
            
            
            23,001
            
            
            61,531




See
        accompanying notes to the financial statements.


F-39




**FUWEI
      FILMS (SHANDONG) CO., LTD**


**STATEMENTS
      OF SHAREHOLDERS’ EQUITY**


For
      the
      periods from January 28, 2003 (date of incorporation) to December 31, 2003


and
      January 1, 2004 to October 26, 2004


(amounts
      in thousands RMB)





TotalRegistered
            
            Capital
            
            Statutory
            
            Retained
            
            shareholders’Note
            
            capital
            
            reserve
            
            reserves
            
            earnings
            
            equityBalance
                as of January 28, 2003(date
                of incorporation)
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Capital
                injected upon incorporation
            
            
            1
            
            
            91,000
            
            
            48
            
            
            -
            
            
            -
            
            
            91,048Net
                income
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            23,001
            
            
            23,001Appropriation
                to statutory reserves
            
            
            13
            
            
            -
            
            
            -
            
            
            3,060
            
            
            (3,060
            )
            
            -Dividends
                approved during the period
            
            
            18
            
            
            -
            
            
            -
            
            
            -
            
            
            (15,300
            )
            
            (15,300
            )Balance
                as of December 31, 2003
            
            
            
            
            
            91,000
            
            
            48
            
            
            3,060
            
            
            4,641
            
            
            98,749Net
                income
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            61,531
            
            
            61,531Appropriation
                to statutory reserves
            
            
            13
            
            
            -
            
            
            -
            
            
            9,204
            
            
            (9,204
            )
            
            -Dividends
                approved during the period
            
            
            18
            
            
            -
            
            
            -
            
            
            -
            
            
            (41,766
            )
            
            (41,766
            )Balance
                as of October 26, 2004
            
            
            
            
            
            91,000
            
            
            48
            
            
            12,264
            
            
            15,202
            
            
            118,514




See
      accompanying notes to the financial statements.




F-40




**FUWEI
      FILMS (SHANDONG) CO., LTD**


**STATEMENTS
      OF CASH FLOWS**


For
      the
      periods from January 28, 2003 (date of incorporation) to December 31, 2003,


and
      January 1, 2004 to October 26, 2004


(amounts
      in thousands RMB)




2003
            
            2004Cash
                flow from operating activitiesNet
                income
            
            
            23,001
            
            
            61,531Adjustments
                to reconcile net income to net cashused
                in operating activities-
                Loss on disposal of property, plant and equipment
            
            
            3
            
            
            --
                Depreciation of property, plant and equipment
            
            
            2,141
            
            
            11,867-
                Amortization of lease prepayments andintangible
                assets
            
            
            116
            
            
            302-
                Deferred income tax expense
            
            
            459
            
            
            26Changes
                in operating assets and liabilities-
                Accounts receivable
            
            
            (1,197
            )
            
            (38,345
            )-
                Inventories
            
            
            (26,533
            )
            
            168-
                Prepaid expenses and other current assets
            
            
            (6,253
            )
            
            876-
                Accounts payable
            
            
            4,785
            
            
            8,450-
                Accrued expenses and other payables
            
            
            29,105
            
            
            (19,173
            )-
                Amounts due to related parties
            
            
            (8,315
            )
            
            (6,756
            )Net
                cash provided by operating activities
            
            
            17,312
            
            
            18,946Cash
                flow from investing activitiesPurchases
                of property, plant and equipment
            
            
            (179,958
            )
            
            (38,857
            )Deposits
                paid for purchase of property, plant and equipment
            
            
            (36,991
            )
            
            (27,634
            )Payment
                for land use rights
            
            
            (15,660
            )
            
            -Purchase
                of intangible asset
            
            
            (362
            )
            
            -Net
                cash used in investing activities
            
            
            (232,971
            )
            
            (66,491
            )Cash
                flow from financing activitiesContribution
                from shareholders
            
            
            91,048
            
            
            -Principal
                payments of short-term bank loans
            
            
            -
            
            
            (164,000
            )Proceeds
                from short-term bank loans
            
            
            156,000
            
            
            207,600Dividends
                paid
            
            
            (15,300
            )
            
            -Net
                cash provided by financing activities
            
            
            231,748
            
            
            43,600Net
                increase/(decrease) in cash
            
            
            16,089
            
            
            (3,945
            )CashAt
                beginning of period
            
            
            -
            
            
            16,089At
                end of period
            
            
            16,089
            
            
            12,144Supplemental
                Disclosure of Cash Flow InformationCash
                paid during the period for:Interest
                expense
            
            
            1,366
            
            
            7,399




See
      accompanying notes to the financial statements




F-41




**FUWEI
      FILMS (SHANDONG) CO., LTD**


**NOTES
      TO THE FINANCIAL STATEMENTS**


December
      31, 2003 and October 26, 2004


(amounts
      in thousands RMB)




**(1)**
            **Principal
                Activities**




Fuwei
      Films (Shandong) Co., Ltd (the “Company”) is principally engaged in the
      production and distribution of BOPET film, a high quality plastic film widely
      used in the packaging, imaging, electronics and electrical as well as magnetic
      products in the People’s Republic of China (the “PRC”).




On
      January 28, 2003, Beijing Changfu Investment Co., Ltd (“Changfu Investment”) and
      Jimswood Group, Ltd (“Jimswood Group”) established the Company in the PRC as a
      limited liability company with a registered capital of US$11,000. As of June
      16,
      2003, Changfu Investment and Jimswood Group contributed cash of US$5,610
      (RMB46,409) and US$1,800 (RMB 14,940) into the Company respectively. On July
      29,
      2003, the Economic Development Bureau of Weifang High and New Technology
      Development Zone approved the extension for the contribution of the Company
      to
      be paid up to before December 31, 2004. In July 2003, the Company commenced
      the
      production of BOPET film, by initially renting relevant property, plant and
      equipment (“Brückner production line”) from Shandong Neo-Luck Plastics Co., Ltd
      (“Shandong Neo-Luck”), a company which was previously engaged in the business of
      BOPET film production and was 59% owned by the Weifang Neo-Luck (Group) Co.,
      Ltd
      (“Weifang Neo-Luck Group”), a state-owned enterprise. Shandong Neo-Luck’s
      property, plant and equipment and lease prepayments had been pledged to banks
      to
      secure certain bank loans. Shandong Neo-Luck defaulted on such loans, and the
      creditor banks exercised their rights to assume ownership of these assets.
      On
      October 9, 2003, the Company acquired these assets through public auction for
      a
      purchase consideration of RMB156,000.




Subsequently
      on November 21, 2003, Changfu Investment and Jimswood Group entered into a
      share
      transfer agreement with Shenghong Group Co., Ltd (“Shenghong Group”) and
      Shandong Baorui Investment Co., Ltd (“Shandong Baorui”) to transfer their
      shareholdings in the Company to Shenghong Group and Shandong Baorui, which
      then
      owned 90% and 10% of the equity interest in the Company, respectively. Shandong
      Baorui was established by certain former members of the management team and
      former employees (the “Group Founders”) of Shandong Neo-Luck. As of December 31,
      2003, Shenghong Group and Shandong Baorui contributed cash of US$2,490
      (RMB20,599) and US$1,100 (RMB9,100) into the Company respectively.




**(2)**
            **Basis
                of Presentation**




The
      Company’s 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 the Company 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 financial statements reflect necessary
      adjustments not recorded in the books of account of the Company to present
      them
      in conformity with US GAAP.




F-42




**FUWEI
      FILMS (SHANDONG) CO., LTD**


**NOTES
      TO THE FINANCIAL STATEMENTS (CONTINUED)**


December
      31, 2003 and October 26, 2004


(amounts
      in thousands RMB)




**(3)**
            **Summary
                of Significant Accounting Policies and
                Practices**




(a)
            **Foreign
                Currency Transactions**




The
      Company’s functional and reporting currency is the Renminbi
      (“RMB”).




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 foreign currency exchange
      gains and losses are reported as a component of other income (expense) 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. The exchange rate of the U.S. dollar against the RMB
      was
      adjusted from approximately RMB8.28 per U.S. dollar on July 20, 2005 to RMB8.11
      per U.S. dollar on July 21, 2005.




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.




(b)
            **Cash**




None
      of
      the Company’s cash is restricted as to withdrawal. For the periods presented the
      Company had no cash equivalents.




(c)
            **Trade
                Accounts Receivable**




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




The
      Company 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. The Company does not have any off-balance-sheet credit
      exposure related to its customers. At December 31, 2003 and October 26, 2004
      there was no allowance for doubtful accounts because the Company expects to
      collect all receivable amounts.




(d)
            **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 allocation proportion
      of production overheads based on normal operating capacity.


F-43




**FUWEI
      FILMS (SHANDONG) CO., LTD**


**NOTES
      TO THE FINANCIAL STATEMENTS (CONTINUED)**


December
      31, 2003 and October 26, 2004


(amounts
      in thousands RMB)




**(3)**
            **Summary
                of Significant Accounting Policies and Practices
                (continued)**




(e)
            **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
      each of the periods ended December 31, 2003, and October 26, 2004 was RMB2,141
      and RMB11,867 respectively, of which 94% and 97% was recorded in cost of goods
      sold and 6% and 3% were recorded in administrative expenses,
      respectively.




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




(f)
            ***Lease
                Prepayments***




Lease
      prepayments represent the acquisition cost of land use rights in the PRC. Land
      use rights are carried at cost and amortized 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.




(g)
            ***Intangible
                Assets***




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




(h)
            ***Impairment
                of Long-Lived Assets***




Long-lived
      assets, 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.


F-44


**FUWEI
      FILMS (SHANDONG) CO., LTD**


**NOTES
      TO THE FINANCIAL STATEMENTS (CONTINUED)**


December
      31, 2003 and October 26, 2004


(amounts
      in thousands RMB)




**(3)**
            **Summary
                of Significant Accounting Policies and Practices
                (continued)**




(h)
              ***Impairment
                  of Long-Lived Assets
                  (continued)***


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 by which
      the
      carrying amount of the asset exceeds the fair value of the asset.




(i)
            ***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 Company 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 Company within
      7 days and 30 days of receipt for sales to customers in the PRC and overseas
      respectively. The Company 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
      sales 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 a revenue of the Company;
      instead, the amount is recorded as a liability on the balance sheet until such
      VAT is paid to the authorities.




(j)
            ***Government
                Grants***




Government
      grants are recognized in the balance sheet initially as deferred income when
      they have been received. Grants that compensate the Company for expenses
      incurred are recognized as a reduction of expenses in the statement of income
      in
      the same period in which the related expenses are incurred. There were no grants
      recognized for each of the periods ended December 31, 2003 and October 26,
      2004.




(k)
            ***Research
                and Development Costs***




Research
      and development costs are expensed as incurred. Research and development costs
      amounted to RMB251 and RMB781 for the periods ended December 31, 2003, and
      October 26, 2004 and such costs were recorded in administrative
      expenses.




(l)
            ***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.




(m)
            ***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 carryforwards. 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.




F-45




**FUWEI
      FILMS (SHANDONG) CO., LTD**


**NOTES
      TO THE FINANCIAL STATEMENTS (CONTINUED)**


December
      31, 2003 and October 26, 2004


(amounts
      in thousands RMB)




**(3)**
            **Summary
                of Significant Accounting Policies and Practices
                (continued)**




(n)
            ***Use
                of Estimates***




The
      preparation of the financial statements in accordance with US GAAP requires
      management of the Company 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 financial statements and
      the reported amounts of revenue and expenses during the reporting periods.
      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.




(o)
            ***Segment
                Reporting***




The
      Company uses the “management approach” in determining reportable operating
      segments. The management approach considers the internal organization and
      reporting used by the Company’s chief operating decision maker for making
      operating decisions and assessing performance as the source for determining
      the
      Company’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
      the Company and, as such, management has determined that the Company has no
      operating segment as defined by Statement of Financial Accounting Standard
      No.
      131, *Disclosures
      about Segments of an Enterprise and Related Information* .




(p)
            ***Contingencies***




In
      the
      normal course of business, the Company 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 Company records
      accruals for such contingency based upon the assessment of the probability
      of
      occurrence and, where determinable, an estimate of the liability. The Company
      may consider many factors in making these assessments including past history
      and
      the specifics of each matter. As the Company has not become aware of any product
      liability claim since operations commenced, the Company has not recognized
      a
      liability for product liability claims.




**(4)**
            **Accounts
                Receivable**




Accounts
      receivable at December 31, 2003 and October 26, 2004 consist of the
      following:




2003
            
            2004Accounts
                receivable
            
            
            -
            
            
            34,023Less:
                Allowance for doubtful accounts
            
            
            -
            
            
            --
            
            
            34,023Bills
                receivable
            
            
            1,197
            
            
            5,5191,197
            
            
            39,542




F-46




**FUWEI
      FILMS (SHANDONG) CO., LTD**


**NOTES
      TO THE FINANCIAL STATEMENTS (CONTINUED)**


December
      31, 2003 and October 26, 2004


(amounts
      in thousands RMB)




**(4)**
            **Accounts
                Receivable (continued)**




The
      Company 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 60
      days from the date of billing. Normally, the Company does not obtain collateral
      from customers.




**(5)**
            **Inventories**




Inventories
      at December 31, 2003 and October 26, 2004 consist of the following:




2003
            
            2004Raw
                materials
            
            
            18,022
            
            
            12,143Work-in-progress
            
            
            1,096
            
            
            2,302Finished
                goods
            
            
            7,263
            
            
            11,637Consumables
                and spare parts
            
            
            152
            
            
            28326,533
            
            
            26,365




**(6)**
            **Prepayments
                and Other Receivables**




Prepayments
      and other receivables at December 31, 2003 and October 26, 2004 consist of
      the
      following:




2003
            
            2004Purchase
                deposits of rawmaterials
            
            
            5,241
            
            
            3,167Prepayments
                (notes (a) and (b))
            
            
            1,145
            
            
            3,482Other
                receivables
            
            
            189
            
            
            7866,575
            
            
            7,435




(a)
        Prepayments at December 31, 2003 and October 26, 2004 include an
      amount of RMB322 and RMB322, respectively, representing the current portion
      of
      lease prepayments of the Company (see Note 8).




(b) 
       Prepayments at October 26, 2004 also include a deposit of RMB1,736 in
      respect of purchase of a machine to be installed in the new production
      line.




F-47




**FUWEI
      FILMS (SHANDONG) CO., LTD**


**NOTES
      TO THE FINANCIAL STATEMENTS (CONTINUED)**


December
      31, 2003 and October 26, 2004


(amounts
      in thousands RMB)




**(7)**
            **Property,
                Plant and Equipment, net**




Property,
      plant and equipment consist of the following:




2003
            
            2004Buildings
            
            
            37,343
            
            
            38,389Plant
                and equipment
            
            
            139,934
            
            
            167,315Computer
                equipment
            
            
            616
            
            
            758Furniture
                and fixtures
            
            
            1,414
            
            
            1,450Motor
                vehicles
            
            
            648
            
            
            1,149Construction-in-progress
            
            
            -
            
            
            9,750179,955
            
            
            218,811Less:
                accumulated depreciation
            
            
            (2,141
            )
            
            (14,007
            )177,814
            
            
            204,804




All
      of
      the Company’s buildings are located in the PRC. As of December 31, 2003 and
      October 26, 2004, property, plant and equipment with carrying value totaling
      RMB136,268 and RMB151,415 respectively were pledged to banks as collateral
      for
      short-term bank loans of RMB90,000 and RMB109,100 respectively (see Note
      10).




Construction-in-progress
      represents capital expenditures in respect of BOPET production line. Interest
      expenses capitalized for each of the periods ended December 31, 2003 and October
      26, 2004 were RMB777 and RMB203, respectively (see Note 17).




**(8)**
            **Lease
                Prepayments**




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




2003
            
            2004Prepaid
                land use rights
            
            
            15,660
            
            
            15,660Accumulated
                amortization
            
            
            (80
            )
            
            (328
            )15,580
            
            
            15,332The
                balance is classified as follows:Non-current
                portion
            
            
            15,258
            
            
            15,010Current
                portion - amount to be amortized next year
            
            
            322
            
            
            32215,580
            
            
            15,332




As
      of
      December 31, 2003 and October 26, 2004, prepaid land use rights were pledged
      to
      banks as collateral for short-term bank loans of RMB66,000 and RMB66,000
      respectively (Note 10).




Amortization
      expense for each of the periods ended
      December 31, 2003 and October 26, 2004 was RMB80 and RMB248
      respectively.


F-48




**FUWEI
      FILMS (SHANDONG) CO., LTD**


**NOTES
      TO THE FINANCIAL STATEMENTS (CONTINUED)**


December
      31, 2003 and October 26, 2004


(amounts
      in thousands RMB)






**(9)**
            **Intangible
                Asset, net**




2003
            
            2004Trademark
            
            
            362
            
            
            362Less:
                accumulated amortization
            
            
            (36
            )
            
            (90
            )326
            
            
            272




Intangible
      asset represents trademark of “Neo-Luck” acquired by Shandong Fuwei at a
      consideration of RMB362 from Shandong Neo-Luck Plastic on 20 July 2003 (i.e.
      prior to the acquisition as described in Note 1). Amortization expense is
      recognized on a straight-line basis over the estimated useful life of 5 years.
      Amortization of intangible asset was RMB36 and RMB54 for each of the periods
      ended December 31, 2003 and October 26, 2004 respectively.




**(10)**
            **Short-term
                Bank Loans**




Lender
            
            Interest
                rate
              per
                annum
            
            2003
            
            2004Bank
                of Communications Co., Ltd.-
                November 7, 2003 to November 7, 2004
            
            
            5.310
            %
            
            66,000
            
            
            66,000-
                October 13, 2003 to October 13, 2004
            
            
            5.310
            %
            
            60,000
            
            
            --
                September 29, 2003 to September 29, 2004
            
            
            5.310
            %
            
            30,000
            
            
            --
                September 20, 2004 to September 20, 2005
            
            
            5.310
            %
            
            -
            
            
            60,000-
                September 29, 2004 to September 20, 2005
            
            
            5.310
            %
            
            -
            
            
            30,000China
                Construction Bank Corporation-
                February 16, 2004 to February 16, 2005
            
            
            5.841
            %
            
            -
            
            
            1,300-
                January 14, 2004 to January 14, 2005
            
            
            5.841
            %
            
            -
            
            
            15,000Agricultural
                Bank of China Co., Ltd.-
                September 22, 2004 to September 5, 2005
            
            
            5.841
            %
            
            -
            
            
            8,200-
                September 22, 2004 to September 5, 2005
            
            
            5.841
            %
            
            -
            
            
            19,100156,000
            
            
            199,600




Notes:




During
      each of the periods ended December 31, 2003 and October 26, 2004, the Company
      entered into various loan agreements with commercial banks in the PRC with
      terms
      no more than one year to finance its working capital. 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,
      2003 and October 26, 2004 were 5.31% and 5.42% per annum,
      respectively.




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


F-49




**FUWEI
        FILMS (SHANDONG) CO., LTD**
 **NOTES
        TO THE FINANCIAL STATEMENTS (CONTINUED)**
 December
        31, 2003 and October 26, 2004
 (amounts
        in thousands RMB)


**(10)**
            **Short-term
                Bank Loans (continued)**




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




2003
            
            2004Secured
                by:-
                property, plant and equipment
            
            
            90,000
            
            
            109,100-
                lease prepayments
            
            
            66,000
            
            
            66,000Guaranteed
                by related parties (Note 19(a))
            
            
            -
            
            
            24,500156,000
            
            
            199,600




**(11)**
            **Accrued
                Expenses and Other
                Payables**




Accrued
      expenses and other payables at December 31, 2003 and October 26, 2004 consist
      of
      the following:




2003
            
            2004Payables
                for contractors
            
            
            2,695
            
            
            2,510Receipts
                in advance from customers
            
            
            24,263
            
            
            4,217Value-Added
                Tax (“VAT”) payable
            
            
            1,486
            
            
            1,759Others
            
            
            661
            
            
            1,44629,105
            
            
            9,932




**(12)**
            **Income
                Tax**




The
      Company, being a Hi-Tech Enterprise in the Weifang Hi-Tech Industrial Zone
      in
      Shandong, the PRC, has been granted preferential tax treatment by the Tax Bureau
      of the PRC. According to the PRC Income Tax Law and various approval documents
      issued by the Tax Bureau, the Company’s profit is taxed at a rate of
      15%.




However,
      the Company has been granted certain tax relief under which it is exempted
      from
      PRC income tax for the period from 28 January 2003 to 31 December 2004.




Income
      tax expense consists of:


Current
            
            Deferred
            
            TotalPRC
                Income taxPeriod
                ended December 31, 2003
            
            
            -
            
            
            459
            
            
            459Period
                ended October 26, 2004
            
            
            -
            
            
            26
            
            
            26


F-50


**FUWEI
      FILMS (SHANDONG) CO., LTD**


**NOTES
      TO THE FINANCIAL STATEMENTS (CONTINUED)**


December
      31, 2003 and October 26, 2004


(amounts
      in thousands RMB)




**(12)**
            **Income
                Tax (continued)**




Income
      tax expense reported in the statement of income differs from the amount computed
      by applying the PRC income tax rate of 15% (the statutory tax rate of the
      Company) for each of the periods ended December 31, 2003 and October 26, 2004
      for the following reasons:




2003
            
            2004Income
                before income taxes
            
            
            23,460
            
            
            61,557Computed
                “expected” tax expense
            
            
            3,519
            
            
            9,234Tax
                holiday
            
            
            (3,060
            )
            
            (9,208
            )Actual
                income tax expense
            
            
            459
            
            
            26




Tax
      effects of temporary differences that give rise to significant portions of
      the
      deferred tax liability as of December 31, 2003 and October 26, 2004 are
      presented below.




2003
            
            2004Construction
                in progress, principally due to capitalized interest
            
            
            -
            
            
            31Property,
                plant and equipment, principally due to differences in depreciation
                and
                capitalized interest
            
            
            116
            
            
            111Other
                receivables
            
            
            343
            
            
            343Total
                deferred tax liability
            
            
            459
            
            
            485




**(13)**
            **Shareholders’
                Equity**




***Registered
      capital***




The
      Company’s registered capital was US$11,000 (RMB91,000). Capital contribution in
      excess of the registered capital was credited to contributed
      surplus.




***Paid-in
      capital***




The
      Company’s paid-in capital as of December 31, 2003 and October 26, 2004 was
      RMB91,000.




***Statutory
      reserves***




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
      Company and were approved by the board of directors of the
      Company.


F-51


**FUWEI
      FILMS (SHANDONG) CO., LTD**


**NOTES
      TO THE FINANCIAL STATEMENTS (CONTINUED)**


December
      31, 2003 and October 26, 2004


(amounts
      in thousands RMB)




**(14)**
            **Revenues**




The
      Company derives revenues from the production and distribution of plastic
      flexible packaging materials.




The
      following table shows the distribution of the Company’s revenue by the
      geographical location of customers, whereas all the Company’s assets are located
      in the PRC:




2003
            
            2004The
                PRC
            
            
            95,070
            
            
            279,495Overseas
                countries (principally United States of America, Japan and
                Europe)
            
            
            -
            
            
            6,61995,070
            
            
            286,114




The
      Company’s revenue by significant types of films for 2003 and 2004 is as
      follows:




2003
            
            2004Printing
                film
            
            
            38,856
            
            
            124,405Stamping
                film
            
            
            15,847
            
            
            55,907Metallization
                film
            
            
            30,926
            
            
            76,697Base
                film for other applications
            
            
            9,441
            
            
            28,110Special
                film
            
            
            -
            
            
            99595,070
            
            
            286,114




**(15)**
            **Depreciation
                and Amortization**




Depreciation
      of property, plant and equipment and amortization of intangible asset and lease
      prepayments are included in the following captions:




2003
            
            2004Cost
                of goods sold
            
            
            2,005
            
            
            11,507Distribution
                expenses
            
            
            3
            
            
            7Administrative
                expenses
            
            
            249
            
            
            6552,257
            
            
            12,169




F-52
 
 **FUWEI
          FILMS (SHANDONG) CO., LTD**
 **NOTES
          TO THE FINANCIAL STATEMENTS (CONTINUED)**
 December
          31, 2003 and October 26, 2004
 (amounts
          in thousands RMB)


**(16)**
            **Freight
                Costs**




The
      Company records freight costs related to the transporting of the raw materials
      to the Company's warehouse in cost of goods and all other outbound freight
      costs
      in distribution expenses. For the periods ended December 31, 2003 and October
      26, 2004, freight costs included in cost of goods sold were RMB14 and RMB76,
      respectively, and RMB955 and RMB4,363 were included in distribution expenses.




**(17)**
            **Interest
                Expense**




The
      Company capitalizes interest expense as a component of the cost of construction
      in progress. The following is a summary of interest cost incurred during each
      of
      the periods ended December 31, 2003 and October 26, 2004:




2003
            
            2004Interest
                cost capitalized
            
            
            777
            
            
            203Interest
                cost charged to expense
            
            
            675
            
            
            7,2911,452
            
            
            7,494




**(18)**
            **Dividends**




Pursuant
      to resolutions passed at the Directors’ meeting of the Company held in November,
      2003 and October, 2004, interim dividends of RMB15,300 and RMB41,766 in respect
      of the statutory years 2003 and 2004 were declared during each of the periods
      ended December 31, 2003 and October 26, 2004 respectively.




**(19)**
            **Related
                Party Transactions**




Name
                of party
            
            RelationshipShandong
                Baorui Investment Co., Ltd (“Shandong Baorui”)
            
            Shareholder
                (10%) of Shandong Fuwei.Shenghong
                Group Co., Ltd
              (“Shenghong
                Group”)
            
            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.Fuhua
                Industrial Material Management Co., Ltd. (“Fuhua
                Management”)
            
            Investment
                owned by Weifang Neo-Luck Group.Weifang
                Fuwah Hotel Co. Ltd
              (“Fuwah
                Hotel”)
            
            Investment
                owned by Weifang Neo-Luck Group.






F-53


**FUWEI
      FILMS (SHANDONG) CO., LTD**


**NOTES
      TO THE FINANCIAL STATEMENTS (CONTINUED)**


December
      31, 2003 and October 26, 2004


(amounts
      in thousands RMB)




**(19)**
            **Related
                Party Transactions
                (continued)**




**(a)**
            **The
                principal related party transactions during the periods ended December
                31,
                2003 and October 26, 2004 are as follows:******




Note
            
            2003
            
            2004Operating
                lease charge in respect of property, plant and equipment
            
            
            (i
            )
            
            4,400
            
            
            -Acquisition
                of Brückner production line
            
            
            (ii
            )
            
            156,000
            
            
            -Sub-contracting
                fee
            
            
            (iii
            )
            
            782
            
            
            5,454Guarantee
                of bank loans
            
            
            (iv
            )
            
            -
            
            
            24,500Rentals
                for staff quarters
            
            
            (v
            )
            
            113
            
            
            192




Notes:


(i)  Prior
      to
      the acquisition of the Brückner production line through auction as described in
      (ii) below, the Company paid a monthly rental of approximately RMB1,500 to
      Shandong Neo-Luck for the use of the Brückner production line for the period
      from July 2003 to September 2003.




(ii)  The
      Brückner production line was originally owned by Shandong Neo-Luck and was
      mortgaged (the “Mortgaged Assets”) to the Bank of China, Weifang City branch
      (the “Mortgagee Bank”) as security for several loans extended to Shandong
      Neo-Luck’s affiliates. When the borrowers defaulted on repayment of the loans,
      the Mortgagee Bank brought a series of law suits against the borrowers and
      the
      guarantors, including Shandong Neo-Luck as co-defendants. The aforesaid cases
      were heard by the Weifang Municipal People’s Court in the PRC and judgment was
      awarded to the Mortgagee Bank. To enforce the judgment, the Mortgagee Bank
      instructed Shandong Weifang Auction Company to auction off the Mortgaged Assets
      to recover monies for the repayment of the loans. On October 9, 2003, Shandong
      Fuwei acquired the Mortgaged Assets through public auction (with an appraised
      value of RMB168,752) for a consideration of RMB156,000.




(iii)  With
      effect from November 2003, the Company paid a sub-contracting fee to Shandong
      Neo-Luck at a pre-determined rate of RMB0.87146 per tonne for the use of the
      DMT
      production line.




(iv)  At
      October 26, 2004, bank loans totalling RMB23,200 and RMB1,300 were guaranteed
      by
      Weifang Neo-Luck Group (collectively with two of its subsidiaries) and Fuwah
      Hotel respectively.




(v)  During
      each of the periods ended December 31, 2003 and October 26, 2004, the Group
      paid
      the rental expenses to Fuhua Management for renting an apartment for the purpose
      of staff quarters.


F-54


**FUWEI
      FILMS (SHANDONG) CO., LTD**


**NOTES
      TO THE FINANCIAL STATEMENTS (CONTINUED)**


December
      31, 2003 and October 26, 2004


(amounts
      in thousands RMB)




**(19)**
              **Related
                  Party Transactions
                  (continued)**


**(b)**
            **Amounts
                due from/(to) related
                parties**




Note
            
            2003
            
            2004Due
                from related parties-
                current assetsShandong
                Neo-Luck
            
            
            (i
            )
            
            36,991
            
            
            62,889Weifang
                Neo-Luck Group
            
            
            (ii
            )
            
            8,500
            
            
            9,171Shandong
                Baorui
            
            
            (iii
            )
            
            -
            
            
            500Shenghong
                Group
            
            
            (iii
            )
            
            -
            
            
            5,000Fuwah
                Hotel
            
            
            (iv
            )
            
            -
            
            
            40045,491
            
            
            77,960Due
                to related parties-
                current liabilitiesFuwah
                Hotel
            
            
            (iv
            )
            
            (185
            )
            
            -




Amounts
      due from/(to) related parties comprise mainly:




(i)  The
      balances represent the prepayments made by the Company to Shandong Neo-Luck
      for
      the acquisition of DMT production line from Shandong Neo-Luck. Subsequently,
      the
      Company purchased the DMT production line from Shandong Neo-Luck through public
      auction on December 25, 2004 for RMB119,280 with the prepayments of RMB 62,889
      applied to the purchase.




(ii)  The
      balance represents a loan advance to Weifang Neo-Luck Group, which carried
      interest at 5.49% per annum.




(iii)  The
      balances represent the current accounts between the Company and Shandong Baorui
      and Shenghong Group, which are interest free and with no fixed terms of
      repayment.




(iv)  The
      balance in 2003 represents the conference expenses payable to Fuwah
      Hotel.




The
      2004
      balance represents the deposits paid for expenses for Company’s conference held
      in Fuwah Hotel .




F-55





**FUWEI
        FILMS (SHANDONG) CO., LTD**
 **NOTES
        TO THE FINANCIAL STATEMENTS (CONTINUED)**
 December
        31, 2003 and October 26, 2004
 (amounts
        in thousands RMB)


**(20)**
            **Pension
                and Other Postretirement
                Benefits**




Pursuant
      to the relevant PRC regulations, the Company 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 Company’s employees in the PRC. The total amount of
      contributions of RMB145 and RMB378 for each of the periods ended December 31,
      2003 and October 26, 2004, respectively, was charged to administrative expenses
      in the accompanying statements of income. The Company has no other obligations
      to make payments in respect of retirement benefits of the
      employees.




**(21)**
            **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.




**(22)**
            **Business
                and Credit Concentrations**




(a)
                All
                    of the Company’s customers are located in the PRC. The following are the
                    customers that individually comprise 10% or more of gross revenue
                    for the
                    periods ended December 31, 2003 and October 26,
                    2004:




2003
            
            %
            
            2004
            
            %DareGlobal
                Technologies Danyang Advanced Packaging Material Branch
            
            
            10,157
            
            
            11
            
            
            15,733
            
            
            5




At
      December 31, 2003 and October 26, 2004, approximately Nil and 11% respectively,
      was due from this customer. As a result, a termination of the relationship
      or a
      reduction in orders from this customer would have a material impact on the
      Company’s results of operations and financial condition. The Company performs
      ongoing evaluations of its customers’ financial condition and, generally,
      requires no collateral from its customers.




The
      gross
      accounts receivable and bills receivable due from major customer, DareGlobal
      Technologies Danyang Advanced Packing Material Branch at December 31, 2003
      and
      October 26, 2004, were as follows:




2003
            
            %
            
            2004
            
            %DareGlobal
                Technologies Danyang Advanced Packing Material Branch
            
            
            -
            
            
            -
            
            
            4,420
            
            
            11


F-56


**FUWEI
        FILMS (SHANDONG) CO., LTD**
 **NOTES
        TO THE FINANCIAL STATEMENTS (CONTINUED)**
 December
        31, 2003 and October 26, 2004
 (amounts
        in thousands RMB)


**(22)**
                    **Business
                        and Credit Concentrations
                        (continued)**




(b)
            The
                Company 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 periods ended December 31, 2003 and
                October 26, 2004. The Company believes that there is a limited number
                of
                suppliers in the PRC with the ability to consistently supply PET
                resin
                that meets the Company’s quality standards and requirements. The Company
                has an annual supply agreement with Sinopec Yizheng pursuant to which
                Sinopec Yizheng has agreed to supply fixed quantities of PET resin
                to the
                Company on a monthly basis at the prevailing market prices. The terms
                of
                such supply agreement are reviewed annually. Although the Company
                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
                Company
                under normal commercial terms as and when needed. In the event that
                these
                major suppliers ceased to sell to the Company and the Company could
                not
                secure other sources of supply, the Company’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 periods ended December 31, 2003 and October 26, 2004:




Name
                of Vendor
            
            Supply
            
            Percentage
                of total purchases (%)2003
            
            2004Sinopec
                Yizheng
            
            
            Pet
                resin
            
            
            74.1
            
            
            62.2Yizheng
                Tianbao PolyesterCo.,
                Ltd.
            
            
            Additives
            
            
            9.7
            
            
            12.1Zhuhai
                Yuhua PolyesterCo.,
                Ltd.
            
            
            Pet
                resin and additives
            
            
            9.4
            
            
            17.4




**(23)**
            **Commitments
                and Contingencies**




**(a)**
            **Operating
                lease commitments**




Future
      minimum lease payments under non-cancelable operating leases as of October
      26,
      2004 are as follows:




20042004
            
            
            522005
            
            
            2772006
            
            
            2312007
            
            
            2312008
            
            
            2211,012




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 with all terms are renegotiated.
      None
      of the leases includes contingent rentals.




F-57


**FUWEI
        FILMS (SHANDONG) CO., LTD**
 **NOTES
        TO THE FINANCIAL STATEMENTS (CONTINUED)**
 December
        31, 2003 and October 26, 2004
 (amounts
        in thousands RMB)
  **(23)**
                **Commitments
                    and Contingencies
                    (continued)**


**(a)**
            **Operating
                lease commitments
                (continued)**




For
      each
      of the periods ended December 31, 2003 and October 26, 2004, total rental
      expenses for non-cancelable operating leases were RMB5,063 and RMB261,
      respectively.




The
      Company initially entered into an operating lease agreement with Shandong
      Neo-Luck at monthly rental of RMB 1,500 for the period from July 1, 2003 to
      June
      30, 2005 for the use of the Brückner production line. During the period from
      July 2003 to September 2003, total rental of RMB 4,400 was paid by the Company
      to Shandong Neo-Luck for the use of the Brückner production line and such
      expenses were charged to cost of goods sold in the statements of income.




**(b)**
            **Capital
                commitments**




Capital
      commitments for purchase of property, plant and equipment as of October 26,
      2004
      was RMB141,646.




**(24)**
            **Subsequent
                Event**




On
      October 27, 2004, the Company was acquired for an aggregate consideration of
      RMB91,093 by Fuwei (BVI) Co., Ltd.




F-58