**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, 2007**




**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


(Jurisdiction
      of incorporation or organization)




No.
      387
      Dongming Road


Weifang
      Shandong


People’s
      Republic of China, Postal Code: 261061


(Address
      of principal executive offices)







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




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




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




None(Title
                of Class)









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




None(Title
                of Class)




As
      of
      April 11, 2008, 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.




o
      Yesx 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
      YesxNo




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
      Yeso 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 oAccelerated filer
oNon-accelerated filer x




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




o
      Item 17x Item
      18




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




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.




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, 2006, and 2007 and for the years ended
      December 31, 2005, 2006 and 2007. ****




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, 2006 and 2007 and the years ended
      December 31, 2005, 2006 and 2007 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. ****




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.




**Year
                Ended****December
                31,****2005**
            
            **2006**
            
            **2007**(in
                thousands, except per share data)
            
            **(RMB)**
            
            **(RMB)**
            
            **(RMB)**
            
            **(US$)****Statement
                of Operations Data:**Revenues
            
            
            346,205
            
            
            436,884
            
            
            449,373
            
            
            59,083Gross
                profit
            
            
            87,115
            
            
            102,543
            
            
            99,842
            
            
            13,127Operating
                income
            
            
            65,999
            
            
            78,017
            
            
            64,266
            
            
            8,450Interest
                expense
            
            
            (13,747
            )
            
            (12,884
            )
            
            (12,643
            )
            
            (1,662
            )Income
                before income taxes
            
            
            57,069
            
            
            68,422
            
            
            51,941
            
            
            6,829Net
                income
            
            
            57,128
            
            
            67,665
            
            
            47,260
            
            
            6,214Earnings
                per shareBasic
            
            
            74,096
            
            
            61.46
            
            
            3.62
            
            
            0.48Diluted
            
            
            74,096
            
            
            61.37
            
            
            3.62
            
            
            0.48




4





**As of
                December 31,****2005**
            
            **2006**
            
            **2007**(in
                thousands)
            
            **(RMB)**
            
            **(RMB)**
            
            **(RMB)**
            
            **(US$)****Balance
                Sheet Data:**Cash
            
            
            7,427
            
            
            249,939
            
            
            30,909
            
            
            4,237Accounts
                receivable, net
            
            
            46,129
            
            
            75,530
            
            
            58,195
            
            
            7,978Inventories
            
            
            24,887
            
            
            23,783
            
            
            41,670
            
            
            5,712Total
                current assets
            
            
            93,349
            
            
            371,687
            
            
            211,842
            
            
            29,041Property,
                plant and equipment, net
            
            
            303,596
            
            
            317,690
            
            
            493,562
            
            
            67,661Total
                assets
            
            
            440,361
            
            
            738,082
            
            
            738,975
            
            
            101,304Short-term
                bank loans
            
            
            248,046
            
            
            239,678
            
            
            188,027
            
            
            25,776Total
                current liabilities
            
            
            367,401
            
            
            272,175
            
            
            226,445
            
            
            31,043Total
                shareholders’ equity
            
            
            72,960
            
            
            465,907
            
            
            512,530
            
            
            70,262




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, 2005 and 2006, and
      rate of 7.5% for the year ended December 2007, 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:




**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**
            
            **2007****(RMB)**
            
            **(RMB)**
            
            **(RMB)**
            
            **(US$)**Net
                income
            
            
            (8,736
            )
            
            (10,453
            )
            
            (4,340
            )
            
            (571
            )Earnings
                per sharebasic
            
            
            (11,331
            )
            
            (9.50
            )
            
            (0.33
            )
            
            (0.04
            )diluted
            
            
            (11,331
            )
            
            (9.48
            )
            
            (0.33
            )
            
            (0.04
            )




The
      2007
      RMB amounts included in the above selected financial data have been translated
      into U.S. dollars at the rate of US $1.00 = RMB 7.2946, 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 31, 2007, or at any other date.




**Exchange
      Rate Information**




On
      July
      21, 2005 the Chinese government changed its policy of pegging the value of
      the
      Renminbi to the U.S. dollar. This revaluation of the Renminbi was based on
      a
      conversion of Renminbi into United States dollars at an exchange rate of
      US$1.00=RMB8.11. Under the new policy, the Renminbi will be permitted to
      fluctuate within a band against a basket of certain foreign currencies. In
      2007
      this change in policy resulted initially in an approximately 11.0% appreciation
      in the value of the Renminbi against the U.S. dollar compared to 2005 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.




5




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,
          The
          2007 RMB amounts included in the accompanying consolidated balance sheet
          has
          been translated into U.S. dollars at the rate of US$1.00 = RMB 7.2946,
          being the
          noon buy rate for U.S. dollars in effect on December 31, 2007 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. The Company used average exchange rate of
          US$1=RMB **** 7.6058 to
          translate the consolidated statement of operations and statement of cash
          flow
          for the year ended December 31, 2007 and historical rate for the statement
          of
          stockholders’ equity for the year ended December 31, 2007. 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. ****




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)8
            
            
            7.9723
            
            
            8.0702
            
            
            7.8041
            
            
            7.80412007(1)
            
            
            7.6038
            
            
            7.7881
            
            
            7.2946
            
            
            7.2946October
                2007(2)
            
            
            7.5019
            
            
            7.5158
            
            
            7.4682
            
            
            7.4682November
                2007(2)
            
            
            7.4209
            
            
            7.4582
            
            
            7.3850
            
            
            7.3850December
                2007(2)
            
            
            7.3672
            
            
            7.4070
            
            
            7.2946
            
            
            7.2946January
                2008(2)
            
            
            7.2429
            
            
            7.2946
            
            
            7.1965
            
            
            7.1965February
                2008(2)
            
            
            7.1639
            
            
            7.1973
            
            
            7.1110
            
            
            7.1110March
                2008(2)
            
            
            7.07224
            
            
            7.111
            
            
            7.012
            
            
            7.012




(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.




**B.**  **Capitalization
      and indebtedness.**




Not
      Applicable.




**C.**  **Reasons
      for the offer and use of proceeds.**




Not
      Applicable.




6




**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.




**(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 77.6%, 80.9% and 76.0% respectively,
      of our cost of goods sold in 2005, 2006 and 2007. The main raw materials used
      in
      our production of BOPET film are polyethylene terephthalate (or PET) resin
      and
      additives, which respectively made up approximately 78.5% and 21.5% 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 unstable situation in Middle East 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 from 2006 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, 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 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***




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




7




Any
      decrease in the demand for our BOPET film will significantly affect our
      financial performance. Although demand for our BOPET film for packaging of
      processed food, pharmaceutical products, cosmetics, tobacco and alcohol has
      gradually been increasing, any significant fall in the consumption of the
      above-mentioned usages, could result in a decline in the sales of our products
      and adversely impact our financial condition, business and
      operation.




***We
      rely on key managerial and technical personnel and failure to attract or retain
      such personnel may compromise our ability to 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, Bin Sun, our President, Xiaoming Wang, our Vice
      President for Production, and Xiuyong Zhang, our Vice President for Finance.
      We
      have entered into service agreements with these individuals. The loss of the
      services of Messrs. He, 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.




Dr.
      Wenxun Sun, vice director of our R&D department, has been responsible for
      our R&D department since 2007. 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. In January 2008, we appointed Mr. Hanyong Lee as a vice
      president for Research & Development. If they didn’t effectively lead the
      R&D team to research and develop new products and facilitate the marketing
      process, or the Company is unable to receive their services continuously, or
      the
      Company is unable to recruit outstanding R&D personnel as a replacement,
      this may have adverse affect on our ability and progress on new products
      R&D, and may adversely affect our business results and market competitive
      capability.




***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.




8




On
      June
      25, 2007, we announced the investigation of three controlling shareholders,
      Mr.
      Jun Yin, Mr. Duo Wang, and Mr. Tongju Zhou, and on September 28, 2007, the
      three
      shareholders have been arrested, relating to the suspicion of the Crime of
      Irregularities for Favoritism and to sell state-owned assets at low prices.
      Mr.
      Jun Yin is a 52.9% shareholder of us, and Mr. Tongju Zhou, a director of Fuwei
      Films, together with Mr. Duo Wang, indirectly own 12.5% of us.




***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, 2007 was RMB 188.0 million (US$25.8 million). We have pledged
      property, plant and equipment and lease prepayments of RMB152.6 million as
      security for RMB 152.6 million of outstanding indebtedness. Subsequently, we
      renegotiated substantially all of our outstanding indebtedness resulting in
      approximately RMB 148.6 million of secured
      indebtedness of the total outstanding. 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 2007, 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.




9




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




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




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




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




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




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




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




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.




10




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 Korea, the United States
      and Europe, etc. However, we have limited experience in operating outside
      mainland China, have limited experience with foreign regulatory environments
      and
      market practices, and cannot guarantee that we will be able to penetrate any
      overseas market. In connection with our initial efforts to expand overseas,
      we
      have encountered many obstacles, including cultural and linguistic differences,
      difficulties in keeping abreast of market, business and technical developments
      in foreign jurisdictions, and political and social disturbances. Failure in
      the
      development of overseas markets may have an adverse effect on our business
      growth in the future.




***We
      have encountered anti-dumping investigations in Korea and US. If we do not
      get
      approvals of the comparatively low anti-dumping tax rate in the final
      anti-dumping arbitration judgment, our overseas expansion strategy in our future
      business growth may be adversely affected.***




The
      Korean Trading Committee has rendered a preparatory decision on dumping
      practices and their industrial injuries on March 26, 2008. The final judgment
      will be issued within 75 days after the initial judgment announced. At the
      end
      of March, we received the initial anti-dumping judgment from Korean Trading
      Committee. Fuwei has been provided with a comparatively low anti-dumping rate
      of
      6.13%, which is far lower than that of the other Companies that have been
      investigated. US Department of Commerce has also officially initiated an
      anti-dumping case on October 18, 2007 to investigate the PET film imported
      from
      China. During the investigation, we have put forward application for the
      separate tax rate - which is the weighted-average tax rate on the companies
      that
      have been chosen to response to the claim compulsively, and submitted the
      questionnaire.




On
      December 26, 2007, US Department of Commerce has announced sample result and
      Chinese enterprise - Dupont Hongji and Jiangsu Jinzhongda has elected as
      enterprise forcefully defend against the case. Later, Jiangsu Jinzhongda has
      withdrawal from such investigation. By now, Dupont Hongji is the only enterprise
      forcefully defends against the case.




It
      is
      anticipated by US Department of Commerce that the initial judgment will be
      announced on April 25, 2008. According to documents we submitted, we expect
      that
      we could succeed in getting the separate tax rate if there is no very special
      condition occurred. However, if US Department of Commerce will not continue
      the
      sample investigation, the enterprises that ask for separate tax rate - like
      Fuwei Films - will get the same tax rate as Dupont Hongji.




***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.




11




***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***




As
      a
      public Company, we are required by section 404 of the Sarbanes-Oxley Act 2002
      to
      include a report of management on the Company’s internal controls over financial
      reporting that contains our management’s assessment of the effectiveness of the
      Company’s internal controls for the fiscal year ended December 31, 2007 and an
      auditor’s attestation report on our internal control over financial reporting in
      our annual report on Form 20-F for the fiscal year ending December 31, 2008.
      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.




In
      2007,
      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 implemented our
      policies and procedures by the end of 2007. Furthermore, on April 25 2007,
      we
      have appointed Tullius Taylor Sartain & Sartain (“TTS&S”, a public
      accounting firm registered with the PCAOB and based in Tulsa 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. In 2007,
      with TTS&S’s assistance, we have evaluated, tested and will report on the
      effectiveness of our internal controls over financial reporting during the
      year
      ending December 31, 2007. We have documented, tested, and evaluated our internal
      controls as required.





Despite
      of this, some deficiencies were identified during our evaluation. During our
      year end audit it is possible that our external auditor will identify
      significant adjustments to our financial statements. If this happens, we will
      have to re-consider the controls that failed to prevent or detect the
      misstatements identified by the auditor. It is possible that we will identify
      a
      significant deficiency or material weakness in our internal controls over
      financial reporting at that time.





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




**Risks
      Relating to Business Operations in China**




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




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 2005, 2006 and 2007, sales to our customers in the PRC accounted for
      approximately 88%, 79% and 75.5% 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.




12




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




Since
      2007, the Chinese government has adjusted its macroeconomic-policies, and has
      increased bank loan interest rates and bank deposit reserve rates, to control
      the excess rapid investment growth, which results in the increase on financial
      costs, and creates a decrease in loan availability from bank. Furthermore,
      these
      changes may slow down the growth of domestic market reliance on BOPET film,
      and
      increase intense market competition, and bring adverse effect on the corporate
      financial result.




***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 25% standard enterprise income tax rate under the current tax
      laws
      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%. Otherwise, Shandong
      Fuwei’s applicable tax rate may increase from its existing rate of 15% to the
      unified tax rate of 25% 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.




***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.




13




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




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




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




In
      October 2005, SAFE issued a circular 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.




**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 Korea, the US, and Europe, etc. The principal products we produce are
      namely:




·
            Printing
                base film used in printing and
                lamination;




15




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




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




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




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




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




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




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




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




We
      currently operate three production lines. The first 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. The third is a
      leased production line that we leased in April 2007 with annual designed
      production capacity of 8,000 tons. As of December 31, 2007, our manufacturing
      operations had a total annual designed production capacity of 37,100 metric
      tons
      of BOPET/CBOPET film based upon 7,200 production hours per annum.




We
      sell
      most of our BOPET film products to customers in the flexible packaging industry
      in the PRC in the eastern region of China. Our top five customers over the
      three
      years ended December 31, 2007 were Woo Sung Multi-film Co., Ltd., Kurz Stamping
      Technology (Hefei) Co., Ltd., F&D Overseas Co., Ltd. Dare Technical Co.,
      Ltd. Danyang Advance Packaging Material Subsidiary Company, Taileng Vacuum
      Technology (Wuxi) Inc. Sales to Woo Sung Multi-film Co., Ltd. accounted for
      0%,
      0.9% and 8.5% in 2005, 2006 and 2007 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 for high-end and special usage used by these industries are currently
      imported and are costly. We began marketing and selling our products overseas
      to
      customers and distributors mainly in Korea, the United States and Europe, etc.
      in the second half of 2004. In 2005, 2006 and 2007 our sales to our overseas
      customers constituted approximately 12.1%, 21.0% and 24.5%, respectively, of
      our
      total revenue.




**Competitive
      Strengths**




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




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




We
      believe that our experience in the industry and personnel will enable us to
      continue to provide new BOPET film products required by customers. While other
      companies in our industry have also made significant advances in BOPET
      technology and production, we have introduced a variety of BOPET film products
      by developing and formulating our own blend of additives used in the production
      of BOPET film. 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 was headed by Dr. Wenxun Sun before the end of
      2007, and comprised a total of thirteen technicians. In the beginning of 2008,
      we have recruited Mr. Hanyong Lee as Vice President of Research and Development,
      who has rich experience in R&D on film products and management.




***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.




16




***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 2007 and 2006, 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 who each has many years
      of experience in industries related to the manufacturing and development of
      products in the PRC.




Dr.
      Wenxun Sun, vice director of our R&D department, has been responsible for
      our R&D department since 2007. 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. Dr. Sun mainly focuses on R&D and experiments of new
      products. In January 2008, we appointed Mr. Hanyong Lee as a vice president
      for
      Research & Development. Mr. Lee will analyze the BOPET specialty-film market
      and develop the Company's R&D strategy to meet the demands of the market.




***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:




**Date**
            
            **Award/Certificate**
            
            **Issuing
                Authority**November
                2003(1)
            
            High
                Technology Enterprise Certificate
            
            Shandong
                Province Science and Technology CommitteeSeptember
                2004(2)
            
            ISO
                9001:2000 Certificate
            
            China
                Certification Center for Quality MarkJanuary
                2005(3)
            
            Top
                50 Industrial Enterprises in 2004
            
            Weifang
                City local governmentJuly
                2006(4)
            
            ISO
                14001
            
            International
                Organization for StandardizationDecember
                2007(5)
            
            National
                high-and -new tech enterprise
            
            Ministry
                of Science and TechnologyJanuary
                2008(6)
            
            ·2007
                Technology & Science
                Advanced Enterprises in Weifang High and New Technology Industrial
                Development Zone;
              
              ·Advanced
                Enterprise of Foreign Export;
              
              ·Advanced
                Enterprise in Promoting Foreign Investment;
              
              ·Advanced
                Enterprise for Tax Payment
              
              ·2007
                Advanced Enterprise in Safety
            
            Management
                Committee of Weifang High-and-new technological and industrial development
                zone




(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.




17




(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)&
                (6)
            This
                citation generates goodwill with the government officials in Weifang
                city.




(4)
            After
                strict examination and approval by China Environment United (Beijing)
                Certification Center Co., Ltd (Environment Conformity Assessment
                Center of
                State Environment Protection Bureau), Fuwei Films (Shandong) Co.,
                Ltd. has
                successfully passed the ISO14001 Environmental Administration System
                in
                July 2006




(5)
            Fuwei
                Films (Shandong) Co., Ltd. is originally regarded as High-and -new
                Tech
                Enterprise of Shandong Province and was awarded as National High-and
                -new
                Tech Enterprise in December 2007.




***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.




18




Our
      future plans include:




***Continue
      construction of the new BOPET production line***




We
      have
      commenced construction of a new production line capable of producing BOPET
      film
      that is between 50 to 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 for high-end and special usage currently rely on expensive imports
      as
      PRC manufacturers do not currently possess such production capabilities. The
      construction of the new BOPET production line has been postponed resulted from
      the shortage of funds, we expect the construction of our new BOPET film
      production line to be completed by the end of 2008. The total investment for
      this new production line is expected to be approximately US$35 million.




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




We
      believe that the overseas markets hold significant potential for future growth.
      We believe that our venture into the overseas markets which began in 2004 has
      been successful. Although we are not focused on any particular overseas market,
      we have identified North America as an area of potential growth. We 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. 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 completed 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 and
      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. Our subsidiary, Shandong Fuwei,
      previously obtained this grant, which will be used for the construction of
      Fuwei
      technology center trial production line project mentioned above.




**Our
      Products and Services**




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




BOPET
      is
      a high quality plastic film manufactured using the 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.




19




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.




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 Korea, the US, and Europe,
      etc.




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 2005, 2006 and 2007.




**Category**
            
            2005
            
            2006
            
            2007Printing
                film
            
            
            29.9
            %
            
            21.8
            %
            
            18.6
            %Stamping
                foil film
            
            
            27.4
            %
            
            22.9
            %
            
            21.0
            %Metallization
                film
            
            
            11.5
            %
            
            8.0
            %
            
            6.8
            %Special
                film
            
            
            13.9
            %
            
            36.7
            %
            
            37.8
            %Base
                film for other applications
            
            
            17.3
            %
            
            10.7
            %
            
            15.8
            %




The
      above
      categorizes BOPET film products by application.




Printing
      film




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




***Stamping
      foil film***




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




***Metallization
      film***




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




***Special
      film***




We
      mainly
      produce the following types of special film:




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




·
            Heat-sealable
                film: Film with a three layer structure 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.




·
            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.




20




***Base
      film for other applications***




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




**Production**




Our
      operating subsidiary, Shandong Fuwei, currently operates three production lines.
      The first is a Brückner 6.3 m (in width) production line with an annual designed
      production capacity of 13,000 tons of BOPET film. The second is a DMT 6.7 m
      (in
      width) production line, which began trial production of CBOPET in November
      2003
      and has an annual designed production capacity of 16,100 tons of BOPET/CBOPET
      film. In addition, we have leased a production line in April 2007 with annual
      designed production capacity of 8,000 tons. As of December 31, 2007, Shandong
      Fuwei has a total annual designed production capacity of 37,100 metric 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.




21




***Slitter***




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




***Inventory
      Management***




Our
      warehousing facilities are located in the Shandong Province, PRC. Our warehouses
      are guarded by security personnel and loss of our inventory is covered under
      our
      insurance policies. As of December 31, 2007, our total inventories amounted
      to
      approximately RMB 41.7 million and our raw materials, work-in-progress, finished
      goods and consumables and spare parts made up approximately 22.8%, 2.3%, 60.8%
      and 14.1% of our inventories, respectively.




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




Our
      inventory turnover periods (in days) for 2005, 2006 and 2007 were 30.2, 26.0
      and
      34.2, 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 2006 and 2007.




**Manufacturing
      Facilities and Utilization Rates**




As
      of
      December 31, 2007, we have the following production lines:





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




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




Our
      approximate annual production volumes and the average annual utilization rates
      for our facilities for 2005, 2006 and 2007, based on our estimated operational
      production capacities were as follows.




**Approximate
                Annual Production Volume (tons)**
            
            **Average
                Annual Utilization Rate (%)****Production
                Line**
            
            **2005**
            
            **2006**
            
            **2007**
            
            **2005**
            
            **2006**
            
            **2007**Brückner
                Production Line
            
            
            12,018
            
            
            12,945
            
            
            12,299
            
            
            90.4
            %
            
            99.6
            %
            
            94.6
            %DMT
                Production Line
            
            
            11,689
            
            
            14,669
            
            
            12,378
            
            
            32.9
            %
            
            91.1
            %
            
            76.9
            %Leased
                Production Line
            
            
            N/A
            
            
            N/A
            
            
            2,849
            
            
            N/A
            
            
            N/A
            
            
            35.6
            %




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.




22




As
      of
      December 31, 2007, our product inspection and quality control department was
      comprised of 17 employees. We have one manager, one deputy 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.




***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 2007 (primarily for maintenance) was less than 1.5% of
      our
      monthly production time.




For
      2007,
      the rejection rates of our products were generally less than 0.66% 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.




23




***New
      Products***




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




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




**New
      Product Development**




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




**Product**
            
            **Objectives**
            
            **Commercialization
                Date**In-line
                coating film for aluminized.
            
            Give
                improved adhesion to aluminized layer. Used for barrier bag packaging
                tomato paste, chili sauce, etc.
            
            October
                2008White
                film
            
            used
                for print, composite, coating, etc. such as  advertising
                lamphouse, release film, reflector film.
            
            December
                2008DFR
                base film.
            
            Used
                for dry film photo resist.
            
            August
                2008Soft
                embossable film for holographic anti-fake
            
            Can
                be embossed before aluminized, used in holographic anti fake
                area.
            
            December.
                2008




24




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, 2007, 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 2005, 2006 and 2007 were as follows (000’s):




**Year
                Ended****Dec.
                31,**
              **2005**
            
            **Year
                Ended Dec****.
                31, 2006**
            
            **Year
                Ended****Dec.
                31,**
              **2007****RMB**Research
                and Development Expenses
            
            
            1,157
            
            
            3,650
            
            
            1,596
            (1)




(1)
            In
                addition to the above-mentioned Expenses in 2007 of RMB 1,596 million,
                the
                R&D capital expenditure is RMB 48.77 million.




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 2005 to 2007, as we believe that higher investment in the equipment of
      our
      R&D center and in the development of new products and upgrading of existing
      products will enhance our ability to compete.




**Sales,
      Marketing and Key Customers**




As
      of
      December 31, 2007, our sales and marketing department comprised 18 employees
      in
      the domestic sales division and 5 employees in the international sales division.
      Our sales and marketing department is responsible for our market penetration,
      such as cultivating new customers and businesses, and market development such
      as
      developing existing accounts through better service support and customer
      relationship. In addition, we also conduct market research of the flexible
      packaging industry. Our management is actively involved in overseeing and
      supervising our sales and marketing activities and often visit with our clients.
      They have established and maintained close business relationship with our key
      customers.




***Customers
      and Markets***




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




The
      majority of our domestic customers are located in the eastern region of the
      PRC.
      Our overseas customers are mostly based in Korea, the US and Europe, etc. In
      2006, sales from our domestic and overseas customers constituted approximately
      79% and 21%, respectively, of our annual revenue. In 2007, sales from our
      overseas customers increased to approximately 24.5% 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 43
      for an explanation of the extent to which our products are dependent on
      intellectual property protection **.**




The
      following are our top five customers and their respective percentages of
      contribution to our total revenue for each of the years ended December 31,
      2005,
      2006 and 2007:




**Percentage
                of Total Revenue (%)****Name
                of Customer**
            
            **2005**
            
            **2006**
            
            **200****7**Woo
                Sung Multi -film Co. Ltd.
            
            
            0.004
            
            
            0.9
            
            
            8.5Kurz
                Stamping Technology (Hefei) Co., Ltd.
            
            
            0.01
            
            
            1.3
            
            
            3.7F&D
                Overseas Co,.Ltd.
            
            
            ó
            
            
            2.1
            
            
            3.2Dare
                Technical Co., Ltd. Danyang Advance Packaging Material Subsidiary
                Company
            
            
            3.6
            
            
            2.4
            
            
            3.1Taileng
                Vacum Technology (Wuxi) Inc.
            
            
            0.3
            
            
            0.6
            
            
            3.1




25




Except
      for Woo Sung Multi -film Co. Ltd., 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 has any
      interest, direct or indirect, in any of our customers listed above.




Since
      the
      second half of 2004, we have begun the sale of specialized BOPET products.
      These
      products represented approximately 37.8% of our total revenue during the year
      ended December 31, 2007.




***Sales***




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




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




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




***Customer
      Service***




We
      place
      great emphasis on good, fast and effective pre-sales and after-sales customer
      support services. As such, all our sales personnel have undergone stringent
      training and have sufficient knowledge and understanding of our products. Our
      sales personnel are responsible for coordinating and providing after-sales
      services which include following through with our customers’ orders, maintaining
      relationships with our customers, handling complaints effectively, ensuring
      that
      our customers’ needs are met and understanding the future needs of our
      customers. In the second half of 2007, we have established the Japanese
      Marketing office to provide better service to the Japanese
      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
                opportunities; and




26




·
            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.




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, 2005, 2006 and
      2007:




**Percentage
                of total purchases (%)****Name
                of Supplier**
            
            **Supply**
            
            2005
            
            2006
            
            2007Sinopec
                Yizheng
            
            
            PET
                resin
            
            
            66.6
            
            
            58.5
            
            
            46.4Hyosung
                Corporation
            
            
            PET
                resin
            
            
            -
            
            
            2.5
            
            
            18.0Yizheng
                Tianbao Polyester Co., Ltd.
            
            
            Additives
            
            
            16.7
            
            
            23.9
            
            
            16.6Jiangyin
                Xingtai New Material Co., Ltd.
            
            
            PET
                resin
            
            
            -
            
            
            6.7
            
            
            12.3




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




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




27




***Raw
      Materials***




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





**Percentage
                of Total Purchases (%****)****Raw
                Material**
            
            **2005**
            
            **2006**
            
            **2007**
            
            **Country**PET
                resin
            
            
            75.7
            
            
            68.0
            
            
            59.8
            %
            
            PRCAdditives
            
            
            24.3
            
            
            27.1
            
            
            22.1
            %
            
            PRCPET
                resin
            
            
            -
            
            
            4.9
            
            
            18.2
            %
            
            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. Even though
      the price of the crude significantly increased globally in 2007, there is only
      a
      slight increase in prices of PET resin and additives during 2007.




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




**Competition**




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




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




**Comparison
      of BOPP Film, BOPET Film and BOPA Film** **1**





**Features**
            
            **BOPP**
            
            **BOPET**
            
            **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




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.







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.




28




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;




·
            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.




**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. Most of our
      land use rights, office buildings and two facilities in operation have been
      mortgaged to a bank in the PRC for loans totaling RMB 152.6 million.
      Additionally, the workshop area of the leased production line is 9,310 square
      meters (including warehouse).




We
      are in
      the process of constructing our new production line located in Weifang Hi &
New Technology Development Zone. We anticipate that this new production line
      will produce BOPET film that is between 50 to 200 microns thick. The BOPET
      film
      produced using this new production line is targeted at industrial use, for
      example, TFT-LCD screen films. We expect the construction of this new BOPET
      film
      production line will be completed by the end of 2008, if the fund raising for
      the shortage of investment for this project will be available in first half
      of
      2008.




**Item
      4 A. Unsolved Staff Comments**




None.




29




**Item
      5.**  **Operating
      and Financial Review and Prospects**




**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**  **OF
      FINANCIAL CONDITION AND RESULTS OF OPERATIONS**




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




**Overview**




We
      develop, manufacture and distribute high quality plastic film using the 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 most of our BOPET film products
      to
      domestic customers in the flexible packaging industry. We established an
      international sales division in June 2004 and have been selling our products
      into overseas markets, most notably Korea the US, and Europe, etc.




**Our
      Operating History and Corporate Structure**




The
      diagram below illustrates our corporate structure:









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




Shandong
      Fuwei subsequently acquired these fixed assets through two auction proceedings,
      the first in October of 2003 and the second in December 2004. At the first
      auction proceeding in October 2003, Shandong Fuwei acquired assets related
      to
      the Brückner production line that it had been renting from Shandong Neo-Luck.
      This line had been previously mortgaged by Shandong Neo-Luck to the Bank of
      China, Weifang city branch as security for several loans extended to Shandong
      Neo-Luck’s affiliates. When these loans went into default, the Bank of China
      brought a series of legal actions in Weifang Municipal People’s Court that
      resulted in the assets securing the loans being sold at 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, a former director of the Company, and Duo Wang each
      indirectly own 50% of Easebright Investments Limited (“Easebright”), one of our
      principal shareholders, and are both officers and directors of Shandong Baorui.
      Jun Yin and Duo Wang own 17.5% and 4.6%, respectively, of Shandong Baorui.
      In
      2004, Messrs. Zhou and Wang, along with Jun Yin established several offshore
      holding 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.




30




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




The
      pledged DMT production line was put up for public auction by the Shandong
      Neo-Luck liquidation committee on October 22, 2004. In view of the above
      complexities, the auction was deemed to be tremendously risky at that time,
      and
      therefore, our PRC operating subsidiary did not directly participate in the
      first auction, which began with a bid price of approximately RMB 53 million
      by
      reference to an independent valuation performed on a forced sale basis. However,
      due to the potential tremendous risk involved, the auction had been withdrawn
      twice and the starting bid price had been further reduced to approximately
      RMB
      34 million and was finally purchased by Beijing Baorui, a company indirectly
      controlled by Shandong Baorui. When the DMT production line was put for public
      auction by Beijing Baorui three months later, our PRC operating subsidiary
      purchased it for approximately RMB 119 million, which was supported by an
      independent valuation performed on a going concern basis. We 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 the years ended 2005, 2006 and 2007, the total cost of raw
      materials made up approximately 77.6%, 80.9% and 76.0% 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 78.5%, and 21.5% of our total cost of raw materials in 2007.
      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 limited certain 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 engaged in
      any
      hedging transactions to limit our exposure to fluctuations in the market prices
      of these raw materials or their components. We believe that, there are
      sufficient alternative suppliers of PET resin if our existing suppliers are
      unable to supply us PET resin in the amounts or in the time frame we may
      require.




***Prices
      of Our Products***




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




31




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.




***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 fiscal years ended December 31, 2005,
      2006 and 2007, approximately 87.9%, 79% and 75.5%, 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, 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.




32




***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:




**Year
                Ended**
            
            **Year
                Ended**
            
            **Year
                Ended****Dec.
                31,**
            
            **Dec.
                31,**
            
            **Dec.
                31,****2005**
            
            **2006**
            
            **2007**Materials
                costs
            
            
            77.6
            %
            
            80.9
            %
            
            80.9
            %Factory
                overhead
            
            
            18.8
            %
            
            15.9
            %
            
            15.5
            %Packaging
                materials
            
            
            2.8
            %
            
            2.6
            %
            
            2.7
            %Direct
                labor
            
            
            0.8
            %
            
            0.6
            %
            
            0.9
            %




***Material
      Costs***




As
      noted
      above, the raw materials used in our BOPET film production are PET resin and
      additives, which made up approximately 78.5% and 21.5%, respectively of our
      total materials costs in 2007.




***Factory
      Overhead***




For
      periods as of December 31, 2007, factory overhead comprises primarily of
      depreciation, electricity and water charges, and repair and maintenance of
      our
      machinery and equipment. In 2007, the repair and maintenance of our machinery
      and equipment are RMB 3.77 million, accounting for 1.1% of Cost of Goods Sold. ****




***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.




33




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.




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.




**Finance
      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 7.5%.




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. According to the New Tax Law, if Shandong Fuwei continues
      to
      maintain its high-tech enterprise status, Shandong Fuwei will be subject to
      enjoy the same preferential tax rate of 15%, otherwise, Shandong Fuwei will
      be
      subject to the increased 25% unified enterprise income tax rate..




**Inflation**




Inflation
      in the PRC has not had any material impact on our business in 2005, 2006 and
      2007. But since 2007, the increase in raw materials and energy in China has
      resulted in the increase of our costs, e.g. raw materials costs, the freight
      costs and packaging costs, meanwhile, Chinese government has required increasing
      salaries of the employees to a certain level, resulting in the increase of
      our
      labor costs in 2007 to a certain level. According to the National Bureau of
      Statistics of China, the change in the consumer price index in China was 1.8%
      and 1.5%, 4.8% in 2005, 2006 and 2007, 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.




34




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




We
      had
      goodwill of RMB 10.3 million, as of December 31, 2005, 2006 and 2007. The
      estimated fair value of the reporting unit significantly exceeded its carrying
      value at December 31, 2007. Consequently, no goodwill impairment has been
      recognized.




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




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




As
      of
      December 31, 2007, our largest trade debtor was Woo Sung Multi-film Co., Ltd,,
      a
      company based in Korea. The trade receivables from Woo Sung Multi-film Co.,
      Ltd,
      amounted to approximately RMB3.9 million as of December 31 2007, 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 2005, 2006 and 2007 is as
      follows (000’s):




2005
            
            2006
            
            2007
            
            2007RMB
            
            RMB
            
            RMB
            
            US$Balance
                at beginning of year
            
            
            1,008
            
            
            2,015
            
            
            872
            
            
            120Bad
                debt expense/(recovery)
            
            
            1,007
            
            
            (1,143
            )
            
            1,772
            
            
            242Write-offs
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance
                at end of year
            
            
            2,015
            
            
            872
            
            
            2,644
            
            
            363




35




***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 through December 31, 2005, December 31, 2006 and December 31,
      2007.




**Results
      of Operations**




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




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




**Year
                Ended**
            
            **Year
                Ended**
            
            **Year
                Ended****Dec.
                31,**
            
            **Dec.
                31,**
            
            **Dec.
                31,****2005**
            
            **2006**
            
            **2007****(%
                of Total Revenue)**Gross
                Profit
            
            
            25.2
            
            
            23.5
            
            
            22.2Operating
                expenses
            
            
            6.1
            
            
            5.6
            
            
            7.9Other
                income/(expense)
            
            
            (2.6
            )
            
            (2.2
            )
            
            (2.7
            )Income
                tax (expense)/benefit
            
            
            -
            
            
            (0.2
            )
            
            (1.0
            )Net
                income
            
            
            16.5
            
            
            15.5
            
            
            10.6




**Fiscal
      year ended 2007 compared to fiscal year ended 2006**




***Revenues***




Our
      revenue can be analyzed as follows:




**December
                31, 2006 (RMB in thousands)**
            
            **%
                of Total**
            
            **December
                31, 2007 (RMB in thousands)**
            
            **%
                of Total**Printing
                film
            
            
            95,315
            
            
            21.8
            
            
            83,453
            
            
            18.6Stamping
                film
            
            
            99,856
            
            
            22.9
            
            
            94,366
            
            
            21.0Metallization
                film
            
            
            34,772
            
            
            8.0
            
            
            30,668
            
            
            6.8Base
                film for other applications
            
            
            46,784
            
            
            10.7
            
            
            70,925
            
            
            15.8Special
                film
            
            
            160,157
            
            
            36.6
            
            
            169,961
            
            
            37.8436,884
            
            
            100
            
            
            449,373
            
            
            100




36




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




***Cost
      of Goods Sold***




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




***Gross
      Profit***




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




***Operating
      Expenses***




Our
      operating expenses during the year ended December 31, 2007, amounted to RMB
      35.6
      million, RMB 11.1 million or 45.1% higher than last year, which is mainly a
      result of increases in: 1) the costs of professional service fees related to
      being as a public company; and 2) administrative expenses, such as wage
      increases. During the 2007 year, our operating expenses as a percentage of
      revenue was 7.9% which was comparable with that in the previous comparable
      period of 5.6%.




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




Our
      other
      expenses during the year ended December 31, 2007, amounted to RMB 12.3 million,
      28.1% higher than previous comparable period mainly due to the decrease of
      other
      income by RMB 2.8 million.




***Income
      Tax Expense***




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




**Fiscal
      Year Ended 2006**




***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
            
            
            36.6346,205
            
            
            100.0
            
            
            436,884
            
            
            100




37




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 36.6% of our total revenues
      as
      compared to RMB 48.3 million and 13.9% in 2005, RMB 111.8 million or 231.3%
      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.




***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:




**December
                31, 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




38




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 costs 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.




***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.




***Liquidity
      and Capital Resources***




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




Our
      capital expenditures in 2007 have been primarily financed through short-term
      borrowings from financial institutions and IPO funds. The interest rates of
      short-term borrowings from financial institutions during the three year period
      from 2005 to 2007 ranged from 5.76% to 6.73%, and these borrowings may not
      be
      prepaid prior to maturity. We believe that our principal banker in Shandong
      Province had been granting short-term loans to its customers as a result of
      the
      efforts of the bank branch to reduce the level of its long-term
      loans.




39




Since
      our
      inception, we have utilized significant amounts of secured short-term financing
      to fund our acquisition of the Brückner and DMT production lines and for our
      working capital needs. At December 31, 2007, we have borrowings of RMB 188.0
      million including several different loan agreements with three financial
      institutions in the PRC. Subsequently, we renegotiated substantially all of
      our
      outstanding indebtedness resulting in approximately RMB 148.6
      million of
      secured indebtedness of the
      total outstanding. During 2007, we had received an interest-free loan of RMB
      20
      million from the Weifang City Commercial Bank entrusted by the Weifang City
      Hi
& New Technology Project Industrial Development Fund. Each of the related
      loan agreements contains provisions regarding collateral, covenants prohibiting
      us from engaging in certain activities (including selling, mortgaging or
      otherwise disposing of or encumbering all or substantially all of our assets
      or
      before any merger, acquisition, spin-off, or other transaction resulting in
      a
      change in our corporate structure) without the lenders consent and acceleration
      (and setoff) provisions in the event of default in payment or failure to comply
      with such covenants. Because of appreciation of the exchange rate of RMB vs.
      US
      dollars, the estimated purchase price of the new thick BOPET film production
      line has been adjusted to USD$ 35 million range, resulting in an available
      fund
      shortage of USD$15-20 million. Management is seeking sources of financing in
      order to recommence this project soon.




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




A
      summary
      of our cash flows for 2005, 2006 and 2007 is as follows:




**Year
                Ended**
              **Dec.
                31,**
              **2005**
            
            **Year
                Ended**
              **Dec.
                31,**
              **2006**
            
            **Year
                Ended**
              **Dec.
                31,**
              **2007**(RMB
                in thousands)Net
                cash generated from operating activities
            
            
            43,587
            
            
            58,492
            
            
            82,856Net
                cash used in investing activities
            
            
            (31,479
            )
            
            (43,479
            )
            
            (246,787
            )Net
                cash (used in)/generated from financing activities
            
            
            (10,583
            )
            
            227,499
            
            
            (51,651
            )Effect
                of foreign exchange rate change
            
            
            (1
            )
            
            —
            
            
            (3,448
            )Net
                increase/(decrease) in cash and cash equivalents
            
            
            1,524
            
            
            242,512
            
            
            (219,030
            )Cash
                and cash equivalents as at the beginning of the year
            
            
            5,903
            
            
            7,427
            
            
            249,939Cash
                and cash equivalents as at the end of the year
            
            
            7,427
            
            
            249,939
            
            
            30,909




***Operating
      Activities***




Net
      cash
      from operating activities was RMB 82.9 million for the year ended December
      31,
      2007 as compared to RMB 58.5 million for the year ended December 31, 2006.
      This
      increase is primarily attributable to the decrease in accounts receivable and
      prepaid expenses and other current assets which is partial offset by the
      increase in inventories.




During
      the year ended December 31, 2007, we implemented better controls over the
      collection of accounts receivable from customers and resulted in a smaller
      balance of accounts receivable as of December 31,2007. We anticipated there
      would be increase in sales in 2008. As such, we purchase more inventories near
      the year end date of 2007.




Net
      cash
      from operating activities was RMB 58.5 million for the year ended December
      31,
      2006. During this period we experienced an increase in bills receivables of
      RMB29.5million 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. 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.




***Investing
      Activities***




Net
      cash
      used in investing activities was RMB (246.8 million) in 2007, and was generally
      higher as a result of an increase in purchases of property, plant and equipment
      in connection with the Production Line 3 and Trial Production Line.




40




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.




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.




***Financing
      Activities***




Net
      cash
      generated from financing activities was RMB (51.7 million) in the year ended
      December 31, 2007 as compared to RMB 227.5 million used in financing activities
      during the year ended December 31, 2006. In 2007, the Company repaid short-term
      loans to banks.




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.




**Foreign
      Exchange Exposure**




***Translations***




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




***Transactions***




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




We
      began
      conducting part of our sales in foreign currency in 2004 with the commencement
      of our overseas sales business. During 2005, 2006 and 2007, approximately 87.9%,
      79.0% and 75.5%, respectively, of our revenue was denominated in RMB and the
      remainder was in US dollars. As most of our supplies are procured within the
      PRC, most of our purchases are 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 fully matched in exactly the
      same currency, we may be susceptible to foreign exchange exposure.




In
      addition, we also maintain US dollars accounts with financial institutions
      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 2005, 2006 or 2007 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.




41




**Capital
      Expenditures and Contractual Commitments**




***Capital
      Expenditures***




Our
      capital expenditures in 2005, 2006 and 2007 were as follows:




**Year
                Ended**
              **Dec.
                31,**
              **2005**
            
            **Year
                Ended**
              **Dec.
                31,**
              **2006**
            
            **Year
                Ended**
              **Dec.
                31,**
              **2007****(RMB
                in thousands)**Buildings
            
            
            —
            
            
            —
            
            
            —Plant
                and equipment
            
            
            1,412
            
            
            37,051
            
            
            1,685Motor
                vehicles
            
            
            433
            
            
            —
            
            
            184Assets
                under construction
            
            
            20,505
            
            
            —
            
            
            181,308Others
                (computer and furniture fittings)
            
            
            61
            
            
            422
            
            
            114Total
            
            
            22,411
            
            
            37,473
            
            
            183,291




The
      following table summarizes our contractual commitments as of December 31, 2007
      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 Total Year**
            
            **1-3
                Years**
            
            **3-5
                Years**
            
            **More
                than 5 Years**(RMB
                in thousands)Equipment
                Purchase Contract(i)
            
            
            155,058
            
            
            155,058
            
            
            —
            
            
            —
            
            
            —Related
                party loans
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Bank
                loans(ii)Principal
            
            
            188,027
            
            
            188,027
            
            
            —
            
            
            —
            
            
            —Interest(iii)
            
            
            11,915
            
            
            11,915
            
            
            —
            
            
            —
            
            
            —Operating
                leases(iv)
            
            
            6,800
            
            
            3,555
            
            
            3,245
            
            
            —
            
            
            —Total
            
            
            361,800
            
            
            358,555
            
            
            3,245
            
            
            —
            
            
            —




(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 188.0 million at December 31, 2007,
                that
                are due at various times in 2008 We renegotiated substantially all
                of our
                outstanding indebtedness resulting in approximately RMB 148.6 million
                of
                secured indebtedness of the total outstanding. Our obligations under
                our
                existing loans have been mainly met through the cash flow from our
                operations and our financing activities. In the past, cash flow from
                operations has been sufficient to meet payment obligations and/or
                we have
                been able to extend our borrowings. In the event that our cash flows
                are
                insufficient to satisfy these obligations, we may consider additional
                bank
                loans, issuing bonds, or other forms of financing to satisfy our
                capital
                requirements.




(iii)
            The
                interest expenses are estimated based on the interest rate of short-term
                borrowings adopted by People Bank of China on December 31, 2007 plus
                an
                estimated risk premium on
                borrowing.




42




(iv)
            The
                operating leases mainly relate to our rental of production line,
                warehouse
                and staff quarters, etc. 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.




43




**Off-Balance
      Sheet Arrangements and Contingent Liabilities**




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




**Inflation**




Inflation
      in China has not had a material impact on our results of operations in recent
      years. According to the National Bureau of Statistics of China, the change
      in
      the consumer price index in China was 1.8%, 1.5% and 4.8%in 2005, 2006 and
      2007
      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. The Company has no material unrecognized tax benefit
      which would favorably affect the effective income tax rate in future periods
      and
      do not believe there will be any significant increases or decreases within
      the
      next twelve month. The Company has elected to classify interest and penalties
      related to unrecognized tax benefits, if and when required, as part of interest
      expenses and administrative expenses in the statements of income, respectively.
      No Interest or penalties have been accrued at the date of adoption.




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




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





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




44





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


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




**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 most of our business is currently conducted in mainland
      China, we have not taken any action outside mainland China to protect our
      intellectual property.




As
      of the
      date of this annual report, we have received four patents from, and have 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. 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 March 31, 2008, are as follows:




**Directors
      and Executive Officers**




**Name**
            
            **Age**
            
            **Position**Xiaoan
                He
            
            45
            
            Chairman
                and Chief Executive OfficerCindy
                Lu(1)
            
            37
            
            Director
                and Chief Financial OfficerXiuyong
                Zhang(2)
            
            37
            
            DirectorTee
                Chuang Khoo
            
            61
            
            Independent
                DirectorChangrong
                Ji
            
            61
            
            Independent
                DirectorYudong
                Huang
            
            42
            
            Independent
                DirectorBo
                Xu
            
            44
            
            SecretaryZhibing
                Qian
            
            42
            
            Senior
                Vice PresidentBin
                Sun
            
            52
            
            President
                of Shandong FuweiXiaoming
                Wang
            
            47
            
            Vice
                President (Production) of Shandong FuweiHanyong
                Lee(3)
            
            51
            
            Vice
                President (Research & Development) of Shandong
                Fuwei




(1)
            Ms.
                Lu resigned as a director and Chief Financial Officer of the Company,
                effective March 31, 2008.




45




(2)
            Mr.
                Zhang was appointed to serve as Chief Financial Officer of the Company
                on
                April 11, 2008.




(3)
            Mr.
                Hanyong Lee has been the Vice President of Research and Development
                of
                Shandong Fuwei since January 8,
                2008.




**Information
      about Directors and Officers**




Set
      forth
      below is certain information with respect to each director and officer as of
      December 31, 2007:




***Xiaoan***  ***He*** has
      been
      the Chairman of the Board of Directors and Chief Executive Officer of our
      Company since 2005 and is responsible for the formulation and implementation
      of
      our business strategies and management of our business operations. Mr. He
      has 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.




***Cindy
      Lu*** was our
      Chief Financial Officer and Director from June 1, 2007 until March 31, 2008.
      Prior to joining the Company, Ms. Lu served as the Secretary of the Board of
      Directors of Tiens Biotech Group (USA) from 2004 to early 2007. From 1999 to
      2001, Ms. Lu worked as an associate at GE Capital Asia Pacific. Ms. Lu was
      a
      Financial Analyst for Sargent & Lundy LLP (Chicago) from 1997 to 1999. Ms.
      Lu has expertise in equity finance, corporate finance, mergers and acquisitions,
      and corporate risk management. Ms. Lu obtained her MBA in 1996 from Southeastern
      University, Washington DC and her Bachelor Degree in Economics in 1993 from
      Shandong University.


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




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




46




***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. He joined
      the State Administration of Foreign Exchange, Weifang branch as its deputy
      director from 1989 to 1997 and was appointed as the director of the State
      Administration of Foreign Exchange, Weihai branch from 1999 to 2001. Mr. Ji
      was
      the director of the State Administration of Foreign Exchange, Weifang branch
      from 2001 to 2004. Mr. Ji obtained his Master’s degree in Economics in 1999 from
      Shanghai Fudan University and his bachelor’s degree in international economics
      in 1993 from East China Normal University.




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




***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.




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




***Bin
      Sun*** has been
      the President of Shandong Fuwei since January 2007, and is responsible for
      the
      general management of our business operations. Mr. Sun has 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
      Vice President (Production) of Shandong Fuwei since January 2005 and is
      responsible for the management of our production facilities. Prior to joining
      us, Mr. Wang was the vice manager of Weifang Engine Manufacturing Co. from
      1986 to 1998 and the deputy general manager of Shandong Neo-Luck from 1998
      to
      2003. Mr. Wang was certified as a professional economist by the Shandong
      Province Human Resources Committee in 2001 and obtained a certificate in
      Economics Management awarded by the PRC Central Party Learning Institute and
      obtained a certificate in Business Enterprises Operational Management from
      the
      Shandong Television University in 1986.




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




47




None
      of
      our directors or officers is 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 independent directors to each of our
      committees.




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




***Audit
      Committee***




Our
      Audit
      Committee currently consists of Tee Chuang Khoo, Changrong Ji and Yudong Huang.
      On November 21, 2007, Tee Chuang Khoo was appointed as the Chairman of our
      Audit
      Committee. On December 16, 2007, Cindy Lu resigned as a member of the Audit
      Committee. On December 16, 2007, Yudong Huang was appointed a member of the
      Audit Committee . 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.




***Compensation
      Committee***




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




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




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




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




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




48




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




***Corporate
      Governance and Nominating Committee***




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




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




·
            making
                appointments to fill any vacancy on our
                board;




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




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




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




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




**Duties
      of Directors**




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




**B.**  **Compensation.**




**Compensation
      of Directors and Executive Officers**




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




The
      aggregate cash compensation and benefits that we paid to our directors and
      executive officers, a group of nine persons for the year ended
      December 31, 2007 was approximately RMB 2.8 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 500,000 and he will be eligible for a discretionary bonus. Our
      directors and officers, Cindy Lu and Xiuyong Zhang have entered into service
      agreements (the “Service Agreements” and each a “Service Agreement”) with us.
      The term of service for the executive officers is for an initial fixed period
      of
      two years in case of Cindy Lu commencing from March 26, 2007 and three years
      commencing from March 1, 2006 in the case of Xiuyong Zhang. Under the terms
      of
      their respective Service Agreements, each of Cindy Lu and Xiuyong Zhang is
      entitled to an annual basic salary of RMB 500,000 and RMB 300,000. After the
      initial period, either party can terminate the Employment Agreement upon three
      months prior written notice or by paying the other party a sum equal to three
      months salary in lieu of such notice. The agreement may also be terminated
      by
      either party without prior notice or payment pursuant to the applicable
      provisions of the China Labor Law. Effective March 31, 2008, Ms. Lu resigned
      as
      a director and Chief Financial Officer of the Company.




49




***Executive
      Officers***




Each
      of
      our executive officers, Bo Xu, Zhibing Qian, Bin Sun, Xiaoming Wang, and Hanyong
      Lee have entered into service agreements (the “Service Agreements” and each a
“Service Agreement”) with us. The term of service for the executive officers
      commenced from March 1, 2006 in the case of Xiaoming Wang, December 6, 2006
      in
      the case of Mr. Xu, and we entered into a service agreement with Bin Sun from
      January 2007, in case of Zhibing Qian commencing from April 2, 2007 and in
      case
      of Hanyong Lee commencing from January 8, 2008. 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. 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 Bo Xu, Zhibing Qian, Bin Sun, Xiaoming Wang, and
      Hanyong Lee are entitled to an annual basic salary of RMB 1.9 million totally.
      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 articles of
      association may provide for indemnification of officers and directors, except
      to
      the extent any such provision may be held by the Cayman Islands courts to be
      contrary to public policy, such as to provide indemnification against civil
      fraud or the consequences of committing a crime. Pursuant to our memorandum
      and
      articles of association, our directors and officers, as well as any liquidator
      or trustee for the time being acting in relation to our affairs, will be
      indemnified and secured harmless out of our assets and profits from and against
      all actions, costs, charges, losses, damages and expenses that any of them
      or
      any of their heirs, executors or administrators may incur or sustain by reason
      of any act done, concurred in or omitted in or about the execution of their
      duties in their respective offices or trusts. Accordingly, none of these
      indemnified persons will be answerable for the acts, receipts, neglects or
      defaults of each other; neither will they be answerable for joining in any
      receipts for the sake of conformity, or for any bankers or other persons with
      whom any moneys or effects belonging to us may have been lodged or deposited
      for
      safe custody, or for insufficiency or deficiency of any security upon which
      any
      moneys of or belonging to us may be placed out or invested, or for any other
      loss, misfortune or damage which may happen in the execution of their respective
      offices or trusts. This indemnity will not, however, extend to any fraud or
      dishonesty 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.




50




**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, 2007 **,** our
      total
      staff consisted of 330 employees.




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




**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
            
            
            —
            
            
            —Cindy
                Lu(1)
            
            
            —
            
            
            —Xiuyong
                Zhang(2)
            
            
            —
            
            
            —Tee
                Chuang Khoo
            
            
            —
            
            
            —Changrong
                Ji
            
            
            —
            
            
            —Yudong
                Huang
            
            
            —
            
            
            —Bin
                Sun
            
            
            —
            
            
            —Xiaoming
                Wang
            
            
            —
            
            
            —Hanyong
                Lee(3)
            
            
            —
            
            
            —All
                directors and executive officers as a group (9persons)
            
            
            —
            
            
            —**5%
                Shareholders:**Apex
                Glory Holdings Limited(4)
            
            
            6,912,503
            
            
            52.9
            %Easebright
                Investments Limited(5)
            
            
            1,637,497
            
            
            12.5
            %




(1)
            Ms.
                Lu resigned as a director and Chief Financial Officer of the Company,
                effective March 31, 2008.




51




(2)
            Mr.
                Zhang was appointed to serve as Chief Financial Officer of the Company
                on
                April 11, 2008.




(3)
            Mr.
                Hanyong Lee has been Vice President of Research and Development of
                Shandong Fuwei since January 8,
                2008.




(4)
            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.




(5)
            Easebright
                Investments Limited is a wholly-owned subsidiary of Goodsuccess
                Enterprises Ltd. Mr. Tongju Zhou and Mr. Duo Wang each indirectly
                own 50%
                of Goodsuccess Enterprises Ltd.




Except
      as
      disclosed below, there were no related party transactions with major
      shareholders during the period commencing January 1, 2004 and ending December
      31, 2007.




**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:




**(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.




52




**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 2005, 2006 and 2007, we respectively paid approximately
      RMB 201,000, RMB 151,000 and RMB 143,047 (USD$ 18,807) to Fuhua Industrial
      Material Management Co., Ltd. as rental payments in connection with living
      quarters for our staff. Fuhua Industrial Material Management Co., Ltd. is an
      entity that is owned and controlled by Weifang Neo-Luck.




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 Fuhua
      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.**




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***




**DMT
      Arbitration**




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 pursuant to a November 20, 2001 Contract, and seeks to
      recover the remaining purchase price due under the Contract and payment for
      certain spare parts. (The subject equipment is the DMT production line we
      acquired from Beijing Baroui in 2005 in Neoluck’s bankruptcy).




At
      the
      invitation of Weifang Neoluck (Group) Co., Ltd (“Neoluck Group”), the original
      majority shareholder of Neoluck, the Neoluck Group and DMT engaged in efforts
      to
      achieve a settlement of the pending arbitration on January 18, 2008. Fuwei
      joined these discussions later as an interested party and in order to support
      a
      resolution of the pending dispute and to achieve resolution of certain
      outstanding service and spare part issues.




53




After
      several weeks of negotiations among the parties, we entered into a Service
      and
      Technical Assistance Agreement (the “Service Agreement”), dated March 5, 2008,
      providing for the payment of $180,000 in two installments in order to commence
      receiving service and spare parts with respect to the equipment that had been
      originally sold by DMT. On March 12, 2008, the Neoluck Group entered into a
      Settlement Agreement (the “Settlement Agreement”) with DMT, pursuant to which
      Neoluck Group will make a payment of $900,000 through an irrevocable bank draft
      delivered to DMT to be drawn upon within sixty days. In accordance with the
      provisions of the Settlement Agreement, upon DMT’s collection of moneys to be
      paid under the Settlement Agreement and the Service Agreement, the pending
      dispute in arbitration will be withdrawn and DMT will release the Neoluck Group
      and Fuwei from any claims relating to the original sale of the
      equipment.




In
      accordance with the Settlement Agreement, a letter, signed by counsel to DMT
      and
      Fuwei, has been transmitted to the ICC International Court of Arbitration
      requesting a suspension of any further proceeding pending the performance of
      the
      payment obligations under the Settlement Agreement and the Service Agreement.
      Once such payment obligations are performed, the arbitration proceeding will
      be
      withdrawn as settled between the parties.




**HKG
      Arbitration**




At
        December 31, 2007, this matter was a threatened arbitration by Hampden Kent
        Group LLC. for the amount of USD 3,800,000, relating to a claim for a penalty
        fee in connection with services allegedly performed by HKG in connection
        with
        attempting to provide financing to Fuwei pursuant to a service agreement
        between
        the parties.
  As
        regarding by the service agreement, any dispute between the parties would
        be
        arbitrated by the American Arbitration Association (“AAA”) in accordance with
        its rules. Pursuant to these rules, a demand for arbitration must be filed
        with
        the AAA regional office together with a filing fee by the claiming party,
        in
        this case, HKG.
  In
        December 2007, HKG filed a demand for arbitration with the International
        Dispute
        Center of the AAA, but without paying the requisite filing fee. As a result,
        the
        AAA advised us that it did not view the demand as being filed since the
        requisite fee was not paid. We confirmed that status as of December 31,
        2007.
  On
        January 28, 2008, the AAA informed us that HKG’s filing fee had been paid and
        that an arbitration process would commence in accordance with its rules.




On
      February 18, 2008, HKG submitted an Amended Demand for Arbitration and Statement
      of Claim, correcting certain clerical errors in its original
      demand.




On
      March
      14, 2008, the Company submitted its answering statement and counterclaim in
      response to HKG's Amended Demand for Arbitration and Statement of Claim. 
The Company denied HKG's claims for breach of contract and breach of the
      covenant of good faith and fair dealing as legally and factually without merit
      and asserted various defenses.  The Company also asserted a counterclaim
      against HKG for breach of the August 19, 2006 Letter Agreement, seeking to
      recover the over $300,000 in fees and costs paid to HKG and other
      consequential damages.




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




At
      the
      request of HKG, the Company has agreed to attempt to resolve this dispute
      through mediation.  A neutral mediator has been appointed by the AAA's
      International Centre for Dispute Resolution; however, the mediation has not
      yet
      been scheduled.




**Class
      Action**


On
        October 19, 2007, the Company became aware that a class action lawsuit had
        been
        filed on behalf of all purchasers of the Company’s stock (collectively, the
“Plaintiffs”) from the date of the Company’s Initial Public Offering on December
        19,2006 through October 16, 2007. The case is pending in the United States
        District Court for the Southern District of New York. The Complaint alleges
        that
        the Company and certain of its present and former officers, directors and
        control persons (collectively, the “Defendants”) violated the Securities Act of
        1933.
  On
        November 21, 2007, the Company was given notice that a class action lawsuit
        had
        been filed on behalf of all purchasers of the Company’s stock (collectively, the
“Plaintiffs”) pursuant or traceable to the Registration Statement and Prospectus
        issued in connection with the Company’s Initial Public Offering on December
        19,2006 through November 12,2007. The case is pending in the United States
        District Court for the Southern District of New York. The Complaint alleges
        that
        the Company, its underwriters and certain of its executives (collectively,
        the
“Defendants”) violated Sections 11,12(2) and 15 of the Securities Act of 1933.
        They also complaint alleges that the Defendants misrepresented or omitted
        material information regarding the Company and its business
        operations.




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




On
      March
      14, 2008, plaintiffs filed a consolidated amended class action complaint naming
      as defendants the Company, Xianoan He, Mark Stulga, Jun Yin, Tongju Zhou, Duo
      Wang, and the Company's IPO underwriters — Maxim Group LLC, WR
      Hambrecht + Co. and Chardan Capital Markets, LLC.  The consolidated amended
      class action complaint asserts claims for violation of Sections 11, 12(a)(2),
      and 15 of the Securities Act of 1933.  At this point, we believe that only
      the Company, Mr. Stulga, and the Underwriter Defendants have been properly
      served with the consolidated amended class action complaint.




Pursuant
      to a scheduling order entered by the Court on February 19, 2008, the parties
      named as defendants in the consolidated class action are required to answer
      or
      otherwise respond to the consolidated complaint on or before April 30,
      2008.




***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 28, 2008, 13,062,500 ordinary shares were issued and
      outstanding.




54




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
            
            $
            8.30December
                31, 2007
            
            $
            17.14
            
            $
            2.12




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
            
            $
            8.00June
                31, 2007
            
            $
            6.37
            
            $
            6.20September
                28, 2007
            
            $
            9.00
            
            $
            8.32December
                31, 2007
            
            $
            6.34
            
            $
            5.81




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
            
            LowJuly
                2007
            
            $
            9.09
            
            $
            6.16August
                2007
            
            $
            7.80
            
            $
            5.63September
                2007
            
            $
            10.38
            
            $
            6.50October
                2007
            
            $
            10.75
            
            $
            6.20November
                2007
            
            $
            7.14
            
            $
            2.12December
                2007
            
            $
            7.78
            
            $
            3.54




**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.




55




**F.**  ***Expenses
      of the issue.***




Not
      Applicable.




**Item
      10.**  **Additional
      Information.**




**A.**  **Share
      capital.**




Not
      Applicable.




**B.** **Memorandum
          and articles of association.**




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




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




**Ordinary
      Shares**




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




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




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




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




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




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




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




**Protection
      of Minority Shareholders**




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




Any
      shareholder may petition the Grand Court of the Cayman Islands which may make
      a
      winding up order, if the court is of the opinion that it is just and equitable
      that we should be wound up.




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




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




·
            an
                act which is ultra vires or
                illegal;




56




·
            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




·
            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.




57




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.




**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.




58




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.




**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.




59




**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.




**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.




60




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




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




***Interested
      Directors***




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




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




***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.




61




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




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




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




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




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




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




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




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




***Shareholders’
      Suits***




Derivative
      actions have been brought under Cayman Islands law but were unsuccessful for
      technical reasons. In principle, we will normally be the proper plaintiff and
      a
      derivative action may not be brought by a minority shareholder. However, based
      on English authorities, 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.




62




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




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




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




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




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




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




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




***Inspection
      of Corporate Records***




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




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




***Shareholder
      Proposals***




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




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




63




***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.




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.




64




**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;




·
            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




65




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.




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.




66




***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).




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 consequences 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.




67




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.




**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.




68




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.




**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.




69




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




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




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




We
      conduct substantially all of our operations through Shandong Fuwei, and its
      financial performance and position are measured in terms of Renminbi. Any
      appreciation of the 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 was1.8% and 1.5% and 4.8% in 2005, 2006 and 2007
      respectively.




**Credit
      and liquidity risks**




We
      adopt
      a risk assessment model to our customer credit management system, and we offer
      different credit terms to our customers based on criteria such as working
      relationship, payment history, creditworthiness and their financial position.
      All credit terms are 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 believe that there would not material impact risk to the Company’s
      operation in our credit and liquidity risk from sales and customers and other
      relevant market risks.


**Item
        12.**  **Description
        of Securities Other than Equity Securities**
  Not
        Applicable.


70




**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 during the year ended of December 31, 2007 and estimated
      remaining net proceeds as of December 31, 2007 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**
            **%**Investment
                in new production line equipment
            
            
            15,502,482
            
            
            51.78Buildings
                and property for new production line
            
            
            8,997,711
            
            
            30.05Sales
                and marketing
            
            
            300,000
            
            
            1.00General
                corporate purpose, including working capital
            
            
            4,500,000
            
            
            15.03**Net
                proceeds remaining**
            
            **$**
            **637,935**
            
            
            **2.13**
            **%**




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




**Item
      15.**  **Controls
      and Procedures**




Under
      the
      supervision and with the participation of our management, including the
      principal executive officer and the principal accounting officer, we conducted
      an evaluation of the effectiveness of the design and operation of our disclosure
      controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
      the
      Securities Exchange Act of 1934, as of the end of the period covered by this
      report (the “Evaluation Date”). Based on this evaluation, our principal
      executive officer and principal accounting officer concluded as of the
      Evaluation Date that our disclosure controls and procedures were effective
      such
      that the material information required to be included in our Securities and
      Exchange Commission (“SEC”) reports is accumulated and communicated to
      management (including such officers) as appropriate to allow timely decisions
      regarding required disclosure and recorded, processed, summarized and reported
      within the time periods specified in SEC rules and forms relating to 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.




71




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




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




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





The
      Board
      has nominated Tee Chuang Khoo, Changrong Ji, and Yudong Huang as members of
      the
      Audit Committee, and Tee Chuang Khoo 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 paid to KPMG in 2007, our prior independent registered public accounting
      firm, in connection with our 2006 annual audit is HK$ 2 million. The audit
      fees
      paid to MHM, our prior independent registered public accounting firm, in
      connection with quarterly review in 2007 was USD$30,000. The audit fees of
      Kabani, our independent registered public accounting firm, in connection with
      2007 Q3 review and our audit of annual financial statements for the fiscal
      years
      ended December 31, 2007, amounted to USD$
      27,500 and USD$ 115,000 respectively.




**Audit-Related
      Fees**




The
      audit-related fee of MHM, amounted to USD$ 7,683.75 for the fiscal year ended
      December 31, 2007. The
      audit-related fee of Kabani amounted to USD $
      847.84
      for the fiscal year ended December 31, 2007.




**All
      Other Fees**




Not
      Applicable




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




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




**Audit
      of Financial Statements**




KPMG
      was
      our principal independent registered public accounting firm for annual audit
      financial statements of the years ended December 31, 2006 and 2005. MHM was
      our
      independent auditor from April 1, 2007 till November 1, 2007, responsible for
      quarterly review of 2007 Q1 and Q2. Kabani is our independent auditor since
      Oct
      22, 2007, responsible for Q3 review and annual audit financial statements of
      the
      fiscal year of 2007.




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




Not
      applicable.




72




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




None.




**Item
      17.**  **Financial
      Statements**




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




**Item
      18.**  **Financial
      Statements**




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




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




Report
      of
      Independent Registered Public Accounting Firm.




Consolidated
      Statements of Income and Comprehensive Income for the year ended December 31,
      2005, 2006 and 2007.




Consolidated
      Balance Sheets as of December 31, 2006 and 2007




Consolidated
      Statements of Cash Flows for the year ended December 31, 2005, 2006
      and 2007




Consolidated
      Statements of Shareholders’ Equity for the year ended December 31,
      2005, 2006 and 2007




Notes
      to
      Consolidated Financial Statements.




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




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




No.
            
            Description1.1
            
            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 of Fuwei Films (Shandong)
                Co., Ltd. dated January 15, 2007***10.2
            
            Loan
                Agreement between Communication Bank of China of Fuwei Films (Shandong)
                Co., Ltd. dated January 15, 2007***10.3
            
            Asset
                Purchase Agreement between Fuwei Plastics and Shandong Weifang Auction
                Firm dated October 9, 2003 **10.4
            
            Purchase
                Agreement between Beijing Baorui and Weifang Jing Cheng Auction Co.,
                Ltd.
                dated December 17, 2004 **10.5
            
            Service
                Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiaoan
                He**10.6
            
            Employment
                Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiaoan He
                **10.7
            
            Employment
                Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiaoming Wang
                **10.8
            
            Employment
                Agreement between Fuwei Films (Holdings) Co., Ltd. and Xiuyong Zhang
                **




73




10.9
            
            Equipment
                Contract between Fuwei Films (Holdings) Co., Ltd. and Brükner dated as of
                June 2005 **10.10
            
            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
      with the Company’s Annual Report on Form 20-F for the year ended December 31,
      2006 filed with the SEC on April 2, 2007.




****
      Filed herewith.




74




**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 He
              Name:
                Xiaoan HeTitle:
                Chairman, Chief Executive OfficerBy:
            /s/
                Xiuyong Zhang
              Name:
                Xiuyong ZhangTitle:
                Chief Financial Officer




Dated:
      April 14, 2008




75






**INDEX
      TO FINANCIAL STATEMENTS**





**Audited
                Consolidated Financial Statements of Fuwei Films (Holdings) Co.,
                Ltd. and
                subsidiaries**
            
            **Page**Report
                of Independent Registered Public Accounting Firm —
                Kabani
                & Company, Inc.
            
            
            F-2Report
              of Independent Registered Public Accounting Firm — KPMG
            
            
            F-3Consolidated
                Balance Sheets as of December 31, 2006 and 2007
            
            
            F-4Consolidated
                Statements of Income and Comprehensive Income for the years ended
                December
                31, 2005, 2006 and 2007
            
            
            F-5Consolidated
                Statements of Shareholders’ Equity for the years ended December 31, 2005,
                2006 and 2007
            
            
            F-6Consolidated
                Statements of Cash Flows for the years ended December 31, 2005, 2006
                and
                2007
            
            
            F-7
                - F-8Notes
                to the Consolidated Financial Statements for the years ended December
                31, 2005, 2006 and 2007
            
            
            F-9
                - F-38




F-1




**Report
      of Independent Registered Public Accounting Firm**





Board
      of
      Directors and Stockholders of


Fuwei
      Films (Holdings) Co., Ltd. and Subsidiaries





We
      have
      audited the accompanying consolidated balance sheet of Fuwei Films (Holdings)
      Co., Ltd. and Subsidiaries as of December 31, 2007, and the related consolidated
      statement of income and comprehensive income, stockholders' equity, and cash
      flow for the year ended December 31, 2007. These consolidated financial
      statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements. An audit also includes assessing the
      accounting principles used and significant estimates made by management, as
      well
      as evaluating the overall consolidated financial statement presentation. We
      believe that our audit provides a reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Fuwei
      Films (Holdings) Co., Ltd. and Subsidiaries as of
      December 31, 2007, and the consolidated income statement and their consolidated
      cash flow for the year ended December 31, 2007, in conformity with U.S.
      generally accepted accounting principles.




Kabani
      & Company, Inc.





March
      20,
      2008


F-2




**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 sheet of Fuwei Films (Holdings)
        Co., Ltd (the “Company”) and its subsidiaries (collectively, the “Group”) as of
        December 31, 2006, and the related consolidated statements of income and
        comprehensive income, shareholders’ equity and cash flows for the years ended
        December 31, 2006 and 2005. 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, 2006, and the results of their
        operations and their cash flows for the years ended December 31, 2006 and
        2005,
        in conformity with U.S. generally accepted accounting principles.
  /s/
        KPMG
 Hong
        Kong, China
  April
        2,
        2007





F-3




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


**CONSOLIDATED
      BALANCE SHEETS**


As
      of
      December 31, 2006 and 2007


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




Note
              
              2006
              
              2007RMB
              
              RMB
              
              US$**Assets***Current
                  assets*Cash
              
              
              
              
              
              249,939
              
              
              30,909
              
              
              4,237Restricted
                  cash
              
              
              
              
              
              3,311
              
              
              64,909
              
              
              8,898Accounts
                  receivable, net
              
              
              5
              
              
              75,530
              
              
              58,195
              
              
              7,978Inventories
              
              
              6
              
              
              23,783
              
              
              41,670
              
              
              5,712Prepayments
                  and other receivables
              
              
              7
              
              
              19,438
              
              
              16,160
              
              
              2,215Total
                  current assets
              
              
              
              
              
              372,001
              
              
              211,842
              
              
              29,041Property,
                  plant and equipment, net
              
              
              8
              
              
              317,690
              
              
              493,562
              
              
              67,661Lease
                  prepayments
              
              
              9
              
              
              23,059
              
              
              22,290
              
              
              3,056Deposits
                  for purchase of property,plant
                  and equipment
              
              
              
              
              
              13,900
              
              
              -
              
              
              -Intangible
                  asset, net
              
              
              10
              
              
              109
              
              
              36
              
              
              5Goodwill
              
              
              11
              
              
              10,276
              
              
              10,276
              
              
              1,409Deferred
                  income tax assets
              
              
              19
              
              
              1,047
              
              
              969
              
              
              133Total
                  assets
              
              
              
              
              
              738,082
              
              
              738,975
              
              
              101,304**Liabilities***Current
                  liabilities*Short-term
                  bank loans
              
              
              12
              
              
              239,678
              
              
              188,027
              
              
              25,776Accounts
                  payable
              
              
              
              
              
              12,809
              
              
              19,609
              
              
              2,688Accrued
                  expenses and other payables
              
              
              13
              
              
              19,497
              
              
              18,544
              
              
              2,542Deferred
                  income tax liabilities
              
              
              19
              
              
              191
              
              
              265
              
              
              36Total
                  liabilities
              
              
              
              
              
              272,175
              
              
              226,445
              
              
              31,043**Shareholders’
                  equity**
              
              
              14Ordinary
                  shares of US$0.129752 par value; 20,000,000 shares authorized; and
                  13,062,500 issued and outstanding as of December 31, 2006 and 2007,
                  respectively
              
              
              
              
              
              13,323
              
              
              13,323
              
              
              1,826Additional
                  paid-in capital
              
              
              
              
              
              311,907
              
              
              311,907
              
              
              42,759Accumulated
                  other comprehensive income
              
              
              
              
              
              1,785
              
              
              1,148
              
              
              157Retained
                  earnings
              
              
              
              
              
              138,892
              
              
              186,152
              
              
              25,519Total
                  shareholders’ equity
              
              
              
              
              
              465,907
              
              
              512,530
              
              
              70,262Total
                  liabilities and shareholders’ equity
              
              
              
              
              
              738,082
              
              
              739,975
              
              
              101,304




See
      accompanying notes to the consolidated financial statements.


F-4




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




**CONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME**


For
      the
      years ended December 31, 2005, 2006 and 2007


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





Note
            
            2005
            
            2006
            
            2007RMB
            
            RMB
            
            RMB
            
            US$Revenues,
                net
            
            
            15
            
            
            346,205
            
            
            436,884
            
            
            449,373
            
            
            59,083Cost
                of goods sold
            
            
            16,17
            
            
            (259,090
            )
            
            (334,341
            )
            
            (349,531
            )
            
            (45,956
            )Gross
                profit
            
            
            
            
            
            87,115
            
            
            102,543
            
            
            99,842
            
            
            13,127Operating
                expenses-
                Distribution expenses
            
            
            16,17
            
            
            (10,517
            )
            
            (16,483
            )
            
            (15,061
            )
            
            (1,980
            )-
                Administrative expenses
            
            
            16
            
            
            (10,599
            )
            
            (8,043
            )
            
            (20,515
            )
            
            (2,698
            )Total
                operating expenses
            
            
            
            
            
            (21,116
            )
            
            (24,526
            )
            
            (35,576
            )
            
            (4,678
            )Operating
                income
            
            
            
            
            
            65,999
            
            
            78,017
            
            
            64,266
            
            
            8,450Other
                income/(expense)-
                Interest income
            
            
            
            
            
            863
            
            
            43
            
            
            589
            
            
            77-
                Interest expense
            
            
            18
            
            
            (13,747
            )
            
            (12,884
            )
            
            (13,233
            )
            
            (1,739
            )-
                Sales of scrap materials
            
            
            
            
            
            3,596
            
            
            3,639-
                Others, net
            
            
            
            
            
            358
            
            
            (393
            )
            
            319
            
            
            42Total
                other income/(expense)
            
            
            
            
            
            (8,930
            )
            
            (9,595
            )
            
            (12,325
            )
            
            (1,620
            )Income
                before income tax benefit/(expense)
            
            
            
            
            
            57,069
            
            
            68,422
            
            
            51,941
            
            
            6,829Income
                tax benefit/(expense)
            
            
            19
            
            
            59
            
            
            (757
            )
            
            (4,681
            )
            
            (615
            )Net
                income
            
            
            
            
            
            57,128
            
            
            67,665
            
            
            47,260
            
            
            6,214Other
                comprehensive income-
                Foreign currency translation adjustments
            
            
            
            
            
            1,732
            
            
            53
            
            
            (637
            )
            
            -Comprehensive
                income
            
            
            
            
            
            58,860
            
            
            67,718
            
            
            46,623
            
            
            6,214Earnings
                per share
            
            
            25-
                Basic
            
            
            
            
            
            74,096
            
            
            61.46
            
            
            3.62
            
            
            0.48-
                Diluted
            
            
            
            
            
            74,096
            
            
            61.37
            
            
            3.62
            
            
            0.48Weighted
                average number of ordinary shares
            
            
            25-
                Basic
            
            
            
            
            
            771
            
            
            1,101,031
            
            
            13,062,500
            
            
            13,062,500-
                Diluted
            
            
            
            
            
            771
            
            
            1,102,488
            
            
            13,062,500
            
            
            13,062,500





See
      accompanying notes to the consolidated financial
      statements.


F-5


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





**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**


For
      the
      years ended December 31, 2005, 2006 and 2007


(amounts
      in thousands, except share data)




Ordinary
                shares
            
            Additional
            
            Accumulated
              other
            
            
            
            TotalNote
            
            Number
                    of
                      shares
            
            Amount
            
            paid-in
                    capital
            
            comprehensive
                      income
            
            Retained
                  earnings
            
            shareholders’
                    equityRMB
            
            RMB
            
            RMB
            
            RMB
            
            RMBBalance
                as of January 1, 2005
            
            
            
            
            
            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
            
            
            14(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
            
            
            465,907Net
              income
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            47,260
            
            
            47,260Foreign
              currency translation adjustment
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            (637
            )
            
            -
            
            
            (637
            )Balance
              as of December 31, 2007
            
            
            
            
            
            13,062,500
            
            
            13,323
            
            
            311,907
            
            
            1,148
            
            
            186,152
            
            
            512,530Balance
              as of December 31, 2007US$
            
            
            
            
            
            13,062,500
            
            
            1,826
            
            
            42,759
            
            
            157
            
            
            25,519
            
            
            70,262




See
      accompanying notes to the consolidated financial statements.




F-6


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


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


For
      the
      years ended December 31, 2005, 2006 and 2007


(amounts
      in thousands)





2005
            
            2006
            
            2007
            
            2007RMB
            
            RMB
            
            RMB
            
            US$*Cash
                flow from operating activities*Net
                income
            
            
            57,128
            
            
            67,665
            
            
            47,260
            
            
            6,214Adjustments
                to reconcile net income to net cash(used
                in)/provided by operating activities-
                Gain on disposal of property, plant and equipment
            
            
            (32
            )
            
            -
            
            
            -
            
            
            --
                Depreciation of property, plant and equipment
            
            
            23,337
            
            
            23,425
            
            
            23,217
            
            
            3,053-
                Amortization of intangible assets
            
            
            73
            
            
            72
            
            
            73
            
            
            10-
                Lease prepayments charged to expense
            
            
            392
            
            
            724
            
            
            741
            
            
            97-
                Deferred income taxes
            
            
            (59
            )
            
            757
            
            
            152
            
            
            20-
                Bad debt expense/(recovery)
            
            
            1,007
            
            
            (1,143
            )
            
            1,772
            
            
            233-
                Foreign currency exchange loss
            
            
            1
            
            
            53
            
            
            -
            
            
            -Changes
                in operating assets and liabilities-
                Accounts receivable
            
            
            (21,676
            )
            
            (28,258
            )
            
            17,335
            
            
            2,279-
                Inventories
            
            
            (6,855
            )
            
            1,104
            
            
            (19,659
            )
            
            (2,585
            )-
                Prepaid expenses and other current assets
            
            
            4,780
            
            
            (8,220
            )
            
            6,698
            
            
            881-
                Accounts payable
            
            
            (1,044
            )
            
            2,196
            
            
            6,824
            
            
            897-
                Accrued expenses and other payables
            
            
            (13,880
            )
            
            117
            
            
            (1,557
            )
            
            (205
            )-
                Amounts due from related parties
            
            
            415
            
            
            -
            
            
            -
            
            
            -Net
                cash provided by operating activities
            
            
            43,587
            
            
            58,492
            
            
            82,856
            
            
            10,894*Cash
                flow from investing activities*Purchases
                of property, plant and equipment
            
            
            (22,411
            )
            
            (37,526
            )
            
            (590
            )
            
            (78
            )Restricted
                cash related to trade finance
            
            
            -
            
            
            (3,311
            )
            
            (61,598
            )
            
            (8,099
            )Payment
                of land use rights
            
            
            -
            
            
            (2,649
            )
            
            -
            
            
            -Deposits
                paid for purchase of property, plant and equipment
            
            
            (13,900
            )
            
            -
            
            
            (184,600
            )
            
            (24,271
            )Proceeds
                from sale of property, plant and equipment
            
            
            111
            
            
            7
            
            
            -
            
            
            -Collection
                of amounts due from related parties
            
            
            4,721
            
            
            -
            
            
            -
            
            
            -Net
                cash used in investing activities
            
            
            (31,479
            )
            
            (43,479
            )
            
            (246,787
            )
            
            (32,447
            )*Cash
                flow from financing activities*Net
                proceeds from issuance of share capital
            
            
            -
            
            
            235,867
            
            
            -
            
            
            -Principal
                payments of short-term bank loans
            
            
            (252,600
            )
            
            (18,368
            )
            
            (51,650
            )
            
            (6,791
            )Proceeds
                from short-term bank loans
            
            
            300,056
            
            
            10,000
            
            
            -
            
            
            -Repayments
                of loans payable to related parties
            
            
            (29,989
            )
            
            -
            
            
            -
            
            
            -Payments
                of expenses relating to the proposed offering
            
            
            (1,785
            )
            
            -
            
            
            -
            
            
            -Dividends
                paid
            
            
            (26,265
            )
            
            -
            
            
            -
            
            
            -Net
                cash (used in)/provided by financing activities
            
            
            (10,583
            )
            
            227,499
            
            
            (51,650
            )
            
            (6,791
            )Effect
                of foreign exchange rate changes
            
            
            (1
            )
            
            -
            
            
            (3,448
            )
            
            555Net
                increase/ (decrease) in cash
            
            
            1,524
            
            
            242,512
            
            
            (219,029
            )
            
            (27,789
            )CashAt
                beginning of the year
            
            
            5,903
            
            
            7,427
            
            
            249,939
            
            
            32,027At
                end of the year
            
            
            7,427
            
            
            249,939
            
            
            30,909
            
            
            4,237




F-7


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


(amounts
      in thousands)





2005
            
            2006
            
            2007RMB
            
            RMB
            
            RMB
            
            US$Supplemental
                disclosure of cash flow informationCash
                paid during the year for interest expense
            
            
            14,899
            
            
            15,739
            
            
            12,921
            
            
            1,699





Supplemental
      disclosure of non-cash investing and financing activities:




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




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




F-8


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





**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


For
      the
      years ended December 31, 2005, 2006 and 2007


(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 were
      received.





**(2)
      Basis of Presentation**





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




F-9


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





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





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.





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 2007 RMB amounts included in the accompanying
          consolidated balance sheet has been translated into U.S. dollars at the
          rate of
          US$1.00 = RMB 7.2946, being the noon buy rate for U.S. dollars in effect
          on
          December 31, 2007 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, 2007, or at any other date. The Company used average exchange rate
          of
          US$1=RMB 7.6058 to
          translate the consolidated statement of operations and statement of cash
          flow
          for the year ended December 31, 2007 and historical rate for the statement
          of
          stockholders’ equity for the year ended December 31, 2007.


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.


F-10


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





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





***(c)
      Cash and Restricted Cash***





As
      of
      December 31, 2006 , there was restricted cash of RMB3,311 for trade financing
      purposes. As of December 31, 2007, there was restricted cash of RMB64,909
      (US$8,898) which includes RMB26,000(US$3,418) cash payments reserved to invest
      in a hotel and paid in January 2008.




***(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.





***(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 year ended December 31, 2005, 2006, and 2007 was RMB23,337, RMB23,425,
      and
      RMB23,217 (US$3,053) respectively, of which 98%, 97% and 93% were recorded
      in
      cost of goods sold and 2%, 3% and 7% 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.


F-11


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





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





***(g)
      Lease Prepayments***





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




***(h)
      Intangible Assets***





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





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




***(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 2007 and determined that the fair value of Shandong Fuwei exceeded its net
      book value as of December 31, 2007. 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.


F-12


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





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





***(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.





***(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
      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 were recognized
      to
      compensate research and development expenses incurred and were recorded in
      administrative expenses. For the year ended December 31, 2007, government grants
      of RMB20,000 (US$2,762) 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, RMB1,157, RMB3,650 and RMB 420 (US$55) for the year ended December
      31, 2005, 2006 and 2007 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.





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


F-13


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





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





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





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





On
      December 18, 2006, the Company granted 187,500 stock options to Maxim Group
      LLC
      as part of the compensation for the provision of services relating to the IPO
      of
      the Company. The stock option is exercisable at an 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.





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.




The
      Company recognized share-based compensation expenses of RMB5,643 for the year
      ended December 31, 2006, as listing expense deducted from IPO proceeds and
      recorded in additional paid-in capital. As of December 31, 2007, 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
      years ended December 31, 2005, 2006 and 2007


(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***





In
      September 2006, FASB issued SFAS No. 158 “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
      No. 87, 88, 106, and 132(R)”. This Statement improves financial reporting by
      requiring an employer to recognize the over funded or under funded status of
      a
      defined benefit postretirement plan (other than a multiemployer plan) as an
      asset or liability in its statement of financial position and to recognize
      changes in that funded status in the year in which the changes occur through
      comprehensive income of a business entity or changes in unrestricted net assets
      of a not-for-profit organization. This Statement also improves financial
      reporting by requiring an employer to measure the funded status of a plan as
      of
      the date of its year-end statement of financial position, with limited
      exceptions. An employer with publicly traded equity securities is required
      to
      initially recognize the funded status of a defined benefit postretirement plan
      and to provide the required disclosures as of the end of the fiscal year ending
      after December 15, 2006. An employer without publicly traded equity securities
      is required to recognize the funded status of a defined benefit postretirement
      plan and to provide the required disclosures as of the end of the fiscal year
      ending after June 15, 2007. However, an employer without publicly traded equity
      securities  is
      required to disclose the following information in the notes to financial
      statements for a fiscal year ending after December 15, 2006, but before June
      16,
      2007, unless it has applied the recognition provisions of this Statement in
      preparing those financial statements:




·
            A
                brief description of the provisions of this Statement


F-15


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





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





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




·
            The
                date that adoption is required




·
            The
                date the employer plans to adopt the recognition provisions of this
                Statement, if earlier.




The
      requirement to measure plan assets and benefit obligations as of the date of
      the
      employer’s fiscal year-end statement of financial position is effective for
      fiscal years ending after December 15, 2008. Management is currently evaluating
      the effect of this pronouncement on financial statements.





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




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




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





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





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


F-16


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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




**(4)
      Unaudited Quarterly Data**





**Quarter
                Ended**
            
            **Mar.
                  31**
            
            **Jun.
                30**
            
            **Sept.
                30**
            
            **Dec.
                31**
            
            **Total***Fiscal
                year 2007*
            
            *RMB*
            
            *US$*
            
            *RMB*
            
            *US$*
            
            *RMB*
            
            *US$*
            
            *RMB*
            
            *US$*
            
            *RMB*
            
            *US$*Revenue
            
            
            99,265
            
            
            12,853
            
            
            120,929
            
            
            15,750
            
            
            107,652
            
            
            14,261
            
            
            121,526
            
            
            16,293
            
            
            449,373
            
            
            59,083Gross
                profit
            
            
            23,556
            
            
            3,050
            
            
            32,665
            
            
            4,254
            
            
            23,585
            
            
            3,125
            
            
            19,318
            
            
            2,600
            
            
            99,842
            
            
            13,127Net
                income
            
            
            13,263
            
            
            1,717
            
            
            20,086
            
            
            2,616
            
            
            12,911
            
            
            1,712
            
            
            999
            
            
            163
            
            
            47,260
            
            
            6,214Basic
                earnings pershare
            
            
            1.02
            
            
            0.13
            
            
            1.54
            
            
            0.20
            
            
            0.99
            
            
            0.13
            
            
            0.08
            
            
            0.01
            
            
            3.62
            
            
            0.48Diluted
                earnings pershare
            
            
            1.02
            
            
            0.13
            
            
            1.54
            
            
            0.20
            
            
            0.99
            
            
            0.13
            
            
            0.08
            
            
            0.01
            
            
            3.62
            
            
            0.48




F-17


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





**(5)
      Accounts Receivable, net**




Accounts
      receivable at December 31, 2006 and 2007 consist of the following:




2006
            
            2007
            
            2007RMB
            
            RMB
            
            US$Accounts
                receivable
            
            
            39,053
            
            
            35,893
            
            
            4,920Less:
                Allowance for doubtful accounts
            
            
            (872
            )
            
            (2,644
            )
            
            (362
            )38,181
            
            
            33,249
            
            
            4,558Bills
                receivable
            
            
            37,349
            
            
            24,946
            
            
            3,42075,530
            
            
            58,195
            
            
            7,978





An
      analysis of the allowance for doubtful accounts for 2005, 2006 and 2007 is
      as
      follows:




2005
            
            2006
            
            2007
            
            2007RMB
            
            RMB
            
            RMB
            
            US$Balance
                at beginning of year
            
            
            1,008
            
            
            2,015
            
            
            872
            
            
            120Bad
                debt expense/(recovery)
            
            
            1,007
            
            
            (1,143
            )
            
            1,772
            
            
            242Write-offs
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance
                at end of year
            
            
            2,015
            
            
            872
            
            
            2,644
            
            
            363




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





**(6)**
            **Inventories**





Inventories
      at December 31, 2006 and 2007 consist of the following:





2006
            
            2007RMB
            
            RMB
            
            US$Raw
                materials
            
            
            10,526
            
            
            14,944
            
            
            2,049Work-in-progress
            
            
            2,029
            
            
            956
            
            
            131Finished
                goods
            
            
            10,874
            
            
            25,321
            
            
            3,471Consumables
                and spare parts
            
            
            354
            
            
            449
            
            
            6223,783
            
            
            41,670
            
            
            5,712





**(7)
      Prepayments and Other Receivables**





Prepayments
      and other receivables at December 31, 2006 and 2007 consist of the
      following:


F-18


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





**(7)
      Prepayments and Other Receivables (continued)**





2006
            
            2007RMB
            
            RMB
            
            US$Purchase
                deposits of raw materials
            
            
            5,724
            
            
            13,538
            
            
            1,854Prepayments
                (Note)
            
            
            3,354
            
            
            774
            
            
            106Other
                receivables
            
            
            10,360
            
            
            1,848
            
            
            25319,438
            
            
            16,160
            
            
            2,215





Note:
      Prepayments at December 31, 2006 and 2007 include an amount of RMB767 and RMB741
      (US$102), respectively, representing the current portion of lease prepayments
      of
      the Group (see Note 9).





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





Property,
      plant and equipment consist of the following:





2006
            
            2007RMB
            
            RMB
            
            US$Buildings
            
            
            33,699
            
            
            33,699
            
            
            4,620Plant
                and equipment
            
            
            276,328
            
            
            276,943
            
            
            37,966Computer
                equipment
            
            
            955
            
            
            1,007
            
            
            138Furniture
                and fixtures
            
            
            1,798
            
            
            1,844
            
            
            253Motor
                vehicles
            
            
            1,390
            
            
            1,273
            
            
            174Construction-in-progress
            
            
            66,753
            
            
            265,253
            
            
            36,362380,923
            
            
            580,019
            
            
            79,513Less:
                accumulated depreciation
            
            
            (63,233
            )
            
            (86,456
            )
            
            (11,852
            )317,690
            
            
            493,563
            
            
            67,661





All
      of
      the Group’s buildings are located in the PRC. As of December 31, 2006 and 2007,
      property, plant and equipment with carrying value totaling RMB242,242 and
      RMB360,003 (US$49,352) respectively were pledged to banks as collateral for
      short-term bank loans of RMB178,270 and RMB152,590 (US$20,918) respectively
      (see
      Note 12).





Construction-in-progress
      represents capital expenditure in respect of the BOPET production line. Interest
      expense capitalized during the year ended December 31, 2005, 2006 and 2007
      was
      RMB1,152 , RMB2,855 and RMB 12,805 (US$1,684), respectively (see Note 18).





**(9)
      Lease Prepayments**





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


F-19


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





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





2006
            
            2007RMB
            
            RMB
            
            US$Non-current
                portion
            
            
            23,059
            
            
            22,290
            
            
            3,056Current
                portion - amount charged to expense next year
            
            
            767
            
            
            741
            
            
            10223,826
            
            
            23,031
            
            
            3,157





As
      of
      December 31, 2006 and 2007, prepaid land use rights were pledged to banks as
      collateral for short-term bank loans of RMB52,600 and RMB0 (US$0) respectively
      (Note 12).




Charges
      for the year ended December 31, 2005, 2006 and 2007 was RMB392, RMB724, and
      RMB741(US$102) respectively.





As
      of
      December 31, 2007, 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 RMB23,031. 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**





2006
            
            2007RMB
            
            RMB
            
            US$Trademark
            
            
            362
            
            
            362
            
            
            48Less:
                accumulated amortization
            
            
            (253
            )
            
            (326
            )
            
            (43
            )109
            
            
            36
            
            
            5





Intangible
      asset represents the trademark of “Neo-luck” acquired by Shandong Fuwei from
      Shandong Neo-Luck on July 20, 2003. Amortization expense is recognized
      on a straight-line basis over the estimated useful life of 5 years. Amortization
      of intangible asset was RMB73, RMB72 and RMB73 (US$10) for the year ended
      December 31, 2005, 2006 and 2007, respectively.





The
      estimated amortization expense of intangible assets is as follows:





RMB2008
            
            
            36




**(11)
      Goodwill**





Goodwill
      of RMB10,276 (US$1,409) at December 31, 2006 and 2007, 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.


F-20






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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





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




Interest rate per
            
            2006
            
            2007Lender
            
            annum
            
            RMB
            
            RMB
            
            US$Bank
                of Communications Co.,Ltd.-
                December 30, 2005 to November 25, 2006
            
            
            6.70
            %
            
            52,600
            
            
            -
            
            
            --
                December 20, 2005 to December 13, 2006
            
            
            6.70
            %
            
            52,546
            
            
            -
            
            
            --
                April 27, 2005 to September 20, 2006
            
            
            5.76
            %
            
            100,000
            
            
            -
            
            
            --
                January 15, 2007 to January 15, 2008
            
            
            6.73
            %
            
            -
            
            
            100,000
            
            
            13,709-
                February 6, 2007 to January 15, 2008
            
            
            6.73
            %
            
            -
            
            
            52,590
            
            
            7,209Weifang
                Commercial Bank-
                January 31, 2007 to January 30, 2008
            
            
            3.06
            %
            
            -
            
            
            16,500
            
            
            2,262-
                October 30, 2007 to January 24, 2008
            
            
            0.00
            %
            
            -
            
            
            3,500
            
            
            480China
                Construction Bank Corporation-
                March 31, 2006 to January 20, 2007
            
            
            5.84
            %
            
            8,934
            
            
            -
            
            
            -Agricultural
                Bank of China Co., Ltd.-
                September 30, 2005 to September 9, 2006
            
            
            7.25
            %
            
            8,790
            
            
            -
            
            
            --
                October 17, 2005 to October 16, 2006
            
            
            7.25
            %
            
            8,000
            
            
            -
            
            
            --
                October 28, 2005 to October 27, 2006
            
            
            7.25
            %
            
            6,800
            
            
            -
            
            
            -Discounted
                bills (Note 24(c))
            
            
            6.86%-7.00
            %
            
            2,008
            
            
            -
            
            
            -Bank
                of China-
                August 25, 2007 to August 24, 2008
            
            
            6.02
            %
            
            -
            
            
            4,826
            
            
            661-
                August 13, 2007 to August 12, 2008
            
            
            6.03
            %
            
            -
            
            
            3,399
            
            
            466-
                August 31, 2007 to August 30, 2008
            
            
            6.01
            %
            
            -
            
            
            2,252
            
            
            309-
                August 31, 2007 to August 30, 2008
            
            
            6.01
            %
            
            -
            
            
            3,100
            
            
            425-
                November 14, 2007 to November 14, 2008
            
            
            5.66
            %
            
            -
            
            
            1,860
            
            
            255239,678
            
            
            188,027
            
            
            25,776





Notes:




During
      the years ended December 31, 2006 and 2007, the Company entered into various
      loan agreements with commercial banks with terms ranging from three months
      to
      one year to finance its working capital, construction, and foreign trade. None
      of the loan agreements requires the Company to comply with financial covenants.
      The weighted average interest rate of short-term bank loans outstanding as
      of
      December 31, 2006 and 2007 were 6.32% and 6.22% per annum,
      respectively.





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


F-21


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





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





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 6.73% per
      annum.





The
      Company obtained from Weifang Commercial Bank new short term loan of RMB16,500
      (US$2,262) on January 15, 2007, with the maturity date on January 30, 2008,
      and
      interest charged at 3.060% per annum. The Company obtained from Weifang
      Commercial Bank new short term loan of RMB3,500(US$480) on January 31, 2007,
      with the maturity date on January 24, 2008 and , and interest charged at 0.00%
      per annum. the loan is a low interest rate loan from the government to
      enterprises and the interest rate applied in the Fund is 50% lower than the
      prevailing interest rate published by People’s Bank of China. The loan is a kind
      of industrial development fund loan administered by the local government in
      Shandong with the purpose of enhancing the independent innovation and technical
      research and development ability of local enterprises and supporting the
      development of local high and new technology companies. RMB 20,000 (US$2,742)
      proceeds from this loan have been invested in the construction of the Fuwei
      technology center testing production line project.





All
      of
      the short-term loans from Agricultural Bank of China Co., Ltd., totaling
      RMB23,590 (US$3,234), and a short-term loan from Bank of Communications Co.,
      Ltd. of RMB 52,600 (US$7,211), were fully repaid in January 2007 and February
      2007, respectively.




On
      August
      and September 2007, Shandong Fuwei recommended a foreign currency portfolio
      from
      Bank of China Weifang branch, expect it will be reduce the cost of foreign
      exchange for Shandong Fuwei import raw material. The portfolio transactions
      are
      guaranteed by RMB 64,909 (US$1,879) security deposit. Loan contract is signed
      between two parties when L/C is opened and contract stated that term is one
      year
      and lending interest rates base on low fix benchmark interest rate of the
      People’s Bank of China (the “PBOC”), and dollar is purchased at lower exchange
      rate. The Company obtained from Bank of China new short term loans totaling
      RMB15,981 from August 2007 to November 2007, with maturity terms of one year
      from the borrowing dates. All of the loans are due before December 31, 2008.
      The
      interest rates are between 5.66% to 6.03% per annum.





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





2006
            
            2007RMB
            
            RMB
            
            US$Secured
                by:-
                property, plant and equipment
            
            
            178,270
            
            
            152,590
            
            
            20,288-
                lease prepayments
            
            
            52,600
            
            
            -
            
            
            --
                bills receivable
            
            
            2,008
            
            
            -
            
            
            -Guaranteed
                by related parties (Note 20(a))
            
            
            6,800
            
            
            20,000
            
            
            2,742Restricted
                cash
            
            
            -
            
            
            15,437
            
            
            2,116239,678
            
            
            188,027
            
            
            25,776




F-22


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





**(13)
      Accrued Expenses and Other Payables**





Accrued
      expenses and other payables at December 31, 2006 and 2007 consist of the
      following:





2006
            
            2007RMB
            
            RMB
            
            US$Payables
                to contractors
            
            
            8,677
            
            
            -
            
            
            -Receipts
                in advance from customers
            
            
            3,929
            
            
            11,020
            
            
            1,511VAT
                payable and other taxes payable
            
            
            893
            
            
            3,709
            
            
            508Audit
                fee
            
            
            1,990
            
            
            84
            
            
            12IPO
                expenses
            
            
            1,923
            
            
            -
            
            
            -Others
            
            
            2,085
            
            
            3,731
            
            
            51119,497
            
            
            18,544
            
            
            2,542





**(14)
      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.





**(15)
      Revenues**





The
      Group’s revenue is primarily derived from the manufacture and sale of plastic
      flexible packaging materials.





F-23





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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





**(15)
      Revenues (continued)**




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:


2005
            
            2006
            
            2007RMB
            
            RMB
            
            RMB
            
            US$The
                PRC
            
            
            304,421
            
            
            345,122
            
            
            335,213
            
            
            44,073Overseas
                countries (principally Korea, United States of America and
                Europe)
            
            
            41,784
            
            
            91,762
            
            
            114,160
            
            
            15,010346,205
            
            
            436,884
            
            
            449,373
            
            
            59,083





The
      Group’s revenue by significant types of films for 2005, 2006 and 2007 is as
      follows:




2005
            
            2006
            
            2007RMB
            
            RMB
            
            RMB
            
            US$Printing
                film
            
            
            103,682
            
            
            95,315
            
            
            83,453
            
            
            10,972Stamping
                film
            
            
            94,711
            
            
            99,856
            
            
            94,366
            
            
            12,407Metallization
                film
            
            
            39,647
            
            
            34,772
            
            
            30,668
            
            
            4,032Base
                film for other application
            
            
            59,826
            
            
            46,784
            
            
            70,925
            
            
            9,325Special
                film
            
            
            48,339
            
            
            160,157
            
            
            169,961
            
            
            22,346346,205
            
            
            436,884
            
            
            449,373
            
            
            59,083





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:





2005
            
            2006
            
            2007RMB
            
            RMB
            
            RMB
            
            US$Revenues
                from external customers(Note
                (a))
            
            
            342,085
            
            
            429,354
            
            
            450,946
            
            
            59,290Segment
                income
            
            
            58,240
            
            
            65,620
            
            
            54,823
            
            
            7,208Reconciling
                items (Note (b))
            
            
            (1,171
            )
            
            2,802
            
            
            2,788
            
            
            367Income
                before income taxes
            
            
            57,069
            
            
            68,422
            
            
            51,941
            
            
            6,829Depreciation
                and amortization
            
            
            23,802
            
            
            24,221
            
            
            23,290
            
            
            3,062Segment
                assets (Note (c))
            
            
            
            
            
            496,334
            
            
            753,863
            
            
            103,345Expenditures
                for long-lived assets
            
            
            
            
            
            40,175
            
            
            185,190
            
            
            24,349


F-24


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





**(15)
      Revenues (continued)**





(a)
            Reconciliation
                of total segment revenue to consolidated
                revenue





2005
            
            2006
            
            2007RMB
            
            RMB
            
            RMB
            
            US$Total
                segment revenues underPRC
                GAAP
            
            
            342,085
            
            
            429,354
            
            
            450,946
            
            
            59,290Reconciliation
                from PRC GAAP toUS
                GAAP:-
                Freight and other operating expenses
            
            
            4,120
            
            
            7,530
            
            
            1,573
            
            
            207Consolidated
                revenues under US GAAP
            
            
            346,205
            
            
            436,884
            
            
            449,373
            
            
            59,083





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





2005
            
            2006
            
            2007RMB
            
            RMB
            
            RMB
            
            US$Total
                segment income under PRC GAAP
            
            
            58,240
            
            
            65,620
            
            
            54,823
            
            
            7,208-
                Depreciation on property, plant and equipment
            
            
            871
            
            
            871
            
            
            907
            
            
            119-
                Capitalization of interest expense
            
            
            1,152
            
            
            2,855
            
            
            1,170
            
            
            122-
                Other adjustments
            
            
            (806
            )
            
            1,214
            
            
            1,963
            
            
            2591,217
            
            
            4,940
            
            
            3,040
            
            
            400Total
                segment income under US GAAP
            
            
            59,457
            
            
            70,560
            
            
            57,863
            
            
            7,608Interest
                income of holding companies
            
            
            -
            
            
            14
            
            
            91
            
            
            12Administrative
                expenses of holding companies
            
            
            (2,388
            )
            
            (2,152
            )
            
            (5,929
            )
            
            (756
            )Consolidated
                income before income taxes
            
            
            57,069
            
            
            68,422
            
            
            52,025
            
            
            6,840







F-25


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





**(15)
      Revenues (continued)**




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


2006
            
            2007RMB
            
            RMB
            
            US$Total
                assets for reportable segment under PRC GAAP
            
            
            496,334
            
            
            753,863
            
            
            103,345Reconciliation
                from PRC GAAP to US GAAP:-
                Property, plant and equipment
            
            
            (25,201
            )
            
            (15,453
            )
            
            (2,118
            )-
                Lease prepayments
            
            
            2,754-
                Deferred tax assets
            
            
            1,047
            
            
            1,047
            
            
            144-
                Goodwill
            
            
            10,276
            
            
            10,276
            
            
            1,409-
                Accounts receivable, net
            
            
            3,088
            
            
            (2,946
            )
            
            (404
            )-
                Prepayments and other receivables
            
            
            (1,171
            )
            
            (7,796
            )
            
            (1,014
            )Total
                segment assets under US GAAP
            
            
            487,127
            
            
            738,991
            
            
            101,302Cash
                held by the Company
            
            
            240,978
            
            
            131
            
            
            18Others
                (Note)
            
            
            9,977
            
            
            (147
            )
            
            (20
            )Consolidated
                total assets
            
            
            738,082
            
            
            738,975
            
            
            101,304





Note:
      The
      2006 balance primarily includes other receivables of the Company. The 2007
      balance primarily includes other payables of third parties.





**(16)
      Depreciation and Amortization**





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





2005
            
            2006
            
            2007RMB
            
            RMB
            
            RMB
            
            US$Cost
                of goods sold
            
            
            22,737
            
            
            22,721
            
            
            22,557
            
            
            2,966Distribution
                expenses
            
            
            12
            
            
            10
            
            
            14
            
            
            2Administrative
                expenses
            
            
            661
            
            
            766
            
            
            719
            
            
            9523,410
            
            
            23,497
            
            
            23,290
            
            
            3,062





**(17)
      Freight Costs**





The
      Group
      records freight costs related to the transporting of the raw materials to the
      Group’s warehouse in cost of goods sold and all other outbound freight costs in
      distribution expenses. For the year ended December 31, 2005, 2006 and 2007,
      freight costs included in cost of goods sold were RMB186, RMB177 and RMB3,030
      (US$398), respectively, and RMB7,913, RMB13,170 and RMB10,843 (US$1,426),
      respectively, were included in distribution expenses.


F-26


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





**(18)
      Interest Expense**





The
      Group
      capitalizes interest expense as a component of the cost of construction in
      progress. The following is a summary of interest cost incurred during the year
      ended December 31, 2005, 2006 and 2007:





2005
            
            2006
            
            2007RMB
            
            RMB
            
            RMB
            
            US$Interest
                cost capitalized
            
            
            1,152
            
            
            2,855
            
            
            170
            
            
            22Interest
                cost charged to expense
            
            
            13,747
            
            
            12,884
            
            
            13,233
            
            
            1,68414,899
            
            
            15,739
            
            
            12,975
            
            
            1,706





**(19)
      Income Taxes**





*Cayman
      Islands Tax*




Under
      the
      current Cayman Island laws, the Company is not subject to tax on income or
      capital gain. In addition, upon payments of dividends by the Company to its
      shareholders, no Cayman Islands withholding tax is imposed.





*PRC
      Tax*




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




In
      addition, Shandong Fuwei has been granted certain tax relief under which it
      is
      exempted from PRC income tax for the period from January 28, 2003 to December
      31, 2006,
      and 50%
      reduction in tax rate for the year ended December 31, 2007.




If
      Shandong Fuwei was not entitled to a reduced enterprise income tax, or EIT,
      rate
      of 0% for the year ended December 31, 2005 and2006,
      and
      rate of 7.5% for the year ended December 31, 2007,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.




2005
            
            2006
            
            2007RMB
            
            RMB
            
            RMB
            
            US$Net
                income
            
            
            (8,736
            )
            
            (10,453
            )
            
            (4,340
            )
            
            (571
            )Earnings
                per share-
                Basic
            
            
            (11,331
            )
            
            (9.50
            )
            
            (0.33
            )
            
            (0.04
            )-
                Diluted
            
            
            (11,331
            )
            
            (9.48
            )
            
            (0.33
            )
            
            (0.04
            )


F-27


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





**(19)
        Income Taxes (continued)**
  The
        Group
        had minimal operations in jurisdictions other than the PRC. (Loss)/income
        before
        income taxes consists of:


2005
            
            2006
            
            2007RMB
            
            RMB
            
            RMB
            
            US$Cayman
                Islands
            
            
            (60
            )
            
            (2,117
            )
            
            (5,893
            )
            
            (775
            )British
                Virgin Islands
            
            
            (2,328
            )
            
            (21
            )
            
            55
            
            
            7PRC
            
            
            59,457
            
            
            70,560
            
            
            57,863
            
            
            7,60857,069
            
            
            68,422
            
            
            52,025
            
            
            6,840





The
      Company has no material unrecognized tax benefit which would favorably affect
      the income taxes in future periods and do not believe there will be any
      significant increases or decreases within the next twelve month. No Interest
      or
      penalties have been accrued at the date of adoption.





Pursuant
      to the acquisition by Fuwei (BVI), Shandong Fuwei became a wholly foreign-owned
      enterprise under the laws of the PRC on January 5, 2005. Accordingly, Shandong
      Fuwei is entitled to a new 2-year-exemption-3-year-50%-reduction Foreign
      Enterprise Income Tax holiday whereby the profit for the first two financial
      years beginning with the first profit-making year (after setting off tax losses
      carried forward from prior years) is exempted from income tax in the PRC and
      the
      profit for each of the subsequent three financial years is taxed at 50% of
      the
      prevailing tax rates set by the relevant tax authorities. The tax holiday of
      Shandong Fuwei commenced in 2005.




On
      December 29, 2006, the Standing Committee of the Tenth National People’s
      Congress (“NPC”) passed a resolution to submit the draft Enterprises Income Tax
      Law (“New Tax Law”) to the Tenth NPC plenary session for voting. On March 16,
      2007, the National People’s Congress of the PRC passed the Enterprise Income Tax
      Law of the People’s Republic of China, which law will take effect as of January
      1, 2008. Further, on December 6, 2007, the State Council Released the
      Implementation Rules to the Corporate Income Tax Law (“the Implementation
      Rules”).





According
      to the New Tax Law, from January 1, 2008, the standard corporate income tax
      rates for enterprises in the PRC will be reduced from 33% to 25%. However,
      an
“encouraged hi-tech enterprise” will continue to be entitled a reduced corporate
      income tax rate of 15%.





Under
      the
      New Tax Law being effective from January 1, 2008, and in accordance with
“Notification of the State Council on carrying out the Transitional Preferential
      Policies concerning Enterprise Income Tax”(Guo Fa [2007] No.39) promulgated by
      the State Council on December 26, 2007, an entity established before March
      16,
      2007 that was entitled to preferential tax treatment prior to the New Tax Law
      will be subject to transitional tax rate beginning in period 2008 (“
Transitional Tax rate”) before the new corporate income tax rate of 25% applies.
      For company currently enjoying a reduced tax rate of 15%, the Transitional
      Tax
      Rate is 18%, 20%, 22%, 24% and 25% in 2008, 2009, 2010, 2011and 2012 on wards
      respectively. The tax rate will transit to the standard tax rate of 25% for
      entities with current rate of 24% effective from January 1, 2008.





The
      Company believes that Shandong Fuwei will continue qualifying as an “encouraged
      hi-tech enterprise” under the New Tax Law.  Accordingly, the deferred taxes
      as of December 31, 2007, have been
      calculated employing the statutory rate of the Shandong Fuwei of
      15%.


F-28


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





**(19)
      Income Taxes (continued)**


Income
          tax benefit/ (expense) consists of:


Current
            
            Deferred
            
            TotalPRC
                income tax
            
            RMB
            
            RMB
            
            RMBYear
                ended December 31, 2005
            
            
            -
            
            
            59
            
            
            59Year
                ended December 31, 2006
            
            
            -
            
            
            (757
            )
            
            (757
            )Year
                ended December 31, 2007
            
            
            (4,529
            )
            
            (152
            )
            
            (4,681
            )Year
                ended December 31, 2007 (US$)
            
            
            (595
            )
            
            (20
            )
            
            (615
            )




Income
      tax benefit reported in the consolidated statements of income differs from
      the
      income tax expense amount computed by applying the PRC income tax rate of 15%
      (the statutory tax rate of the Company’s principal subsidiary) for the year
      ended December 31, 2005, 2006 and 2007 for the following reasons:





2005
            
            2006
            
            2007RMB
            
            RMB
            
            RMB
            
            US$Income
                before income taxes
            
            
            57,069
            
            
            68,422
            
            
            51,941
            
            
            6,829Computed
                “expected” tax expense
            
            
            (8,560
            )
            
            (10,263
            )
            
            (7,791
            )
            
            (1,024
            )Non-deductible
                expenses
            
            
            (419
            )
            
            (377
            )
            
            (900
            )
            
            (118
            )Non-taxable
                income
            
            
            -
            
            
            2
            
            
            24
            
            
            3Tax
                holiday
            
            
            8,978
            
            
            9,827
            
            
            3,986
            
            
            524Tax
                rate differential of other tax jurisdictions
            
            
            60
            
            
            54
            
            
            -
            
            
            -Actual
                income tax benefit/(expenses)
            
            
            59
            
            
            (757
            )
            
            (4,681
            )
            
            (615
            )





Tax
      effects of temporary differences that give rise to significant portions of
      the
      deferred tax assets/(liabilities) as of December 31, 2006 and 2007, are
      presented below.


F-29


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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




**(19)
        Income Taxes (continued)**
  Deferred
        income tax assets/(liabilities):




2006
            
            2007RMB
            
            RMB
            
            US$CurrentAccounts
                receivable
            
            
            (162
            )
            
            (265
            )
            
            (36
            )Other
                receivables
            
            
            (29
            )
            
            –
            
            
            –(191
            )
            
            (265
            )
            
            (36
            )Non-currentProperty,
                plant and equipment, principally due to differences in depreciation
                and
                capitalized interest
            
            
            2,205
            
            
            2,666
            
            
            365Construction
                in progress, principally due to capitalized interest
            
            
            (722
            )
            
            (1,150
            )
            
            (158
            )Lease
                prepayments, principally due to differences in charges
            
            
            (436
            )
            
            (547
            )
            
            (74
            )1,047
            
            
            969
            
            
            133Net
                deferred income tax assets
            
            
            856
            
            
            704
            
            
            97





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, 2007. The profit before taxation
      for Shandong Fuwei for the year ended December 31, 2005, 2006 and 2007 was
      RMB58,586 and RMB69,933 and RMB 51,941 (US$7,120) respectively. Based upon
      the
      level of historical performance of Shandong Fuwei, management believes the
      deferred tax assets are realizable.


F-30


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





**(20)
      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.





(a)
      The
      principal related party transactions during the year ended December 31, 2005,
      2006 and 2007 are as follows:





Note
            
            2005
            
            2006
            
            2007RMB
            
            RMB
            
            RMB
            
            US$Guarantee
                of bank loans
            
            
            (i
            )
            
            6,800
            
            
            6,800
            
            
            -
            
            
            -Rentals
                for staff quarters
            
            
            (ii
            )
            
            201
            
            
            151
            
            
            160
            
            
            21Interest
                income
            
            
            (iii
            )
            
            838
            
            
            -
            
            
            -
            
            
            -





Notes:





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





(ii)
      During the year ended December 31, 2005, 2006 and 2007, the Group paid the
      rental expenses to Fuhua Management for renting an apartment for the purpose
      of
      staff quarters.





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


F-31


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





**(21)
      Pension and Other Postretirement Benefits**





Pursuant
      to the relevant PRC regulations, the Group is required to make contributions
      at
      a rate of 20% of employees’ salaries and wages to a defined contribution
      retirement scheme organized by the local Social Bureau in respect of the
      retirement benefits for the Group’s employees in the PRC. The total amount of
      contributions of RMB527, RMB456 and RMB433 (US$57) for the year ended December
      31, 2005, 2006 and 2007, 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.





**(22)
      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.




**(23)
      Business and Credit Concentrations**





(a)
      Almost all of the Group’s customers are located in the PRC. There is no
      individual customer with gross revenue more than 10% of total gross revenue
      during the year ended December 31, 2005, 2006 and 2007.





There
      were no amounts due from customers representing more than 10% of the outstanding
      accounts receivable at December 31, 2006 and 2007.





(b)
      The
      Group purchased a significant portion of PET resin required for the production
      of BOPET film from Sinopec Yizheng Chemical Fibre Company Limited (“Sinopec
      Yizheng”) during the year ended December 31, 2005 , 2006 and 2007. The Group
      believes that there are a limited number of suppliers in the PRC with the
      ability to consistently supply PET resin that meets the Group’s quality
      standards and requirements. Currently, the Group has an annual supply agreement
      with Sinopec Yizheng pursuant to which Sinopec Yizheng has agreed to supply
      fixed quantities of PET resin to the Group on a monthly basis at the prevailing
      market prices. The terms of such supply agreement are reviewed annually.
      Although the Group believes that it maintains a good relationship with its
      major
      suppliers, there can be no assurance that Sinopec Yizheng will continue to
      sell
      to the Group under normal commercial terms as and when needed. In the event
      that
      these major suppliers ceased to sell to the Group and the Group could not secure
      other sources of supply, the Group’s turnover and profitability might be
      adversely affected.





The
      following are the vendors that supplied 5% or more of our raw materials for
      each
      of the year ended December 31, 2005, 2006 and 2007:





**Percentage
                of total purchases (%)****Name
                of****Vender**
            
            **Supply**
            
            2005
            
            2006
            
            2007Sinopec
                Yizheng
            
            
            PET
                resin
            
            
            66.6
            
            
            58.5
            
            
            46.4Hyosung
                Corporation
            
            
            PET
                resin
            
            
            -
            
            
            2.1
            
            
            18.0Yizheng
                Tianbao Polyester Co., Ltd.
            
            
            Additives
            
            
            16.7
            
            
            23.9
            
            
            16.6Jiangyin
                Xingtai New Material Co., Ltd.
            
            
            PET
                resin
            
            
            -
            
            
            6.7
            
            
            12.3Zhuhai
                Yubua Polyester Co., Ltd.
            
            
            PET
                resin and additives
            
            
            5.3
            
            
            2.1
            
            
            -




F-32


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





**(24)
      Commitments and Contingencies**





**(a)
      Operating lease commitments**





Future
      minimum lease payments under non-cancelable operating leases as of December
      31,
      2007 are as follows:





RMB2008
            
            
            490





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
      year ended December 31, 2005, 2006 and 2007, total rental expenses for
      non-cancelable operating leases were RMB321, RMB309 and RMB2,792 (US$367),
      respectively.




**(b)
      Capital commitments**





Capital
      commitments for purchase of property, plant and equipment as of December 31,
      2007 were RMB155,058 (US$21,257).





**(c)
      Outstanding bills receivable discounted**





As
      of
      December 31, 2006, the Company had retained a recourse obligation of RMB2,008
      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 year presented, the Company did not experience
      any losses on bills receivable discounted. The discounted bills at 2006 was
      RMB2,008 and was disclosed as secured short-term loans (see Note
      12).





As
      of
      December 31, 2007, the Company had not retained any recourse obligation in
      respect of bills receivable discounted with and sold to banks.




**(d)
      Legal proceedings**





In
      2006,
      Shandong Fuwei received 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.




At
      the
      invitation of Weifang Neoluck (Group) Co., Ltd (“Neoluck Group”), the original
      majority shareholder of Shandong Neoluck, the Neoluck Group and DMT engaged
      in
      efforts to achieve a settlement of the pending arbitration on January 18, 2008.
      The Company joined those discussions as an interested party and in order to
      support a resolution of the pending dispute and to achieve resolution of certain
      outstanding service and spare part issues.





The
      arbitration proceeding between DMT and Shandong Neoluck, after several weeks
      of
      negotiations among the parties, the parties entered into two agreements, a
      Service and Technical Assistance Agreement (the “Service Agreement”) was signed
      between DMT and Shandong Fuwei on March 5, 2008 under the Service Agreement,
      Shandong Fuwei will pay an amount of US$180 in two installments for receiving
      service and spare parts.




In
      connection with this agreement a third party is
      required to compensate the plantiff if the third party does not perform under
      the terms of settlement the Company’s liability in regard to this matter 
may increase.


F-33


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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




**(24)
      Commitments and Contingencies**





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





At
      December 31, 2007, Hampden Kent Group LLC (“HKG”) commenced arbitration for the
      amount of US$3,800 relating to a claim for a penalty fee in connection with
      services allegedly performed by HKG in connection with attempting to provide
      financing to Fuwei pursuant to a service agreement between the parties. As
      regarding the service agreement, any dispute between the parties would be
      arbitrated by the American Arbitration Association (“AAA”) in accordance with
      its rules. Pursuant to these rules, a demand for arbitration must be filed
      with
      the AAA regional office together with a filing fee by the claiming party, in
      this case, HKG. In December 2007, HKG filed a demand for arbitration with the
      International Dispute Center of the AAA. The Company believes the allegations
      are without merit and that it intends to defend itself vigorously against the
      claims. Management estimated the exposure to the claim ranges from US$0 to
      US$3,800 as of December 31, 2007.





On
      October 19, 2007, the Company became aware that a class action lawsuit had
      been
      filed on behalf of all purchasers of the Company’s stock (collectively, the
“Plaintiffs”) from the date of the Company’s Initial Public Offering on December
      19, 2006 through October 16, 2007. The case is pending in the United States
      District Court for the Southern District of New York. The complaint alleges
      that
      the Company and certain of its present and former officers, directors and
      control persons (collectively, the “defendants”) violated the Securities Act of
      1933. On
      November 21, 2007, the Company was given notice that a class action lawsuit
      had
      been commenced on behalf of all purchasers of the Company’s stock (collectively,
      the “plaintiffs”) pursuant or traceable to the Registration Statement and
      Prospectus issued in connection with the Company’s Initial Public Offering on
      December 19, 2006 through November 12, 2007. The case is pending in the United
      States District Court for the Southern Disctrict of New York. The complaint
      alleges that the Company, its underwriters and certain of its executives
      (collectively, the “Defendants”) violated Section 11, 12(2) and 15 of the
      Securities Act of 1933. The complaint also alleges that the Defendants
      misrepresented or omitted material information regarding the Company and its
      business operation. The
      Company’s management believes that the allegation are without merit, and the
      Company intends to defend itself vigorously against the claims, and has engaged
      a law firm in this regard. However, it is currently unable to reasonably
      estimate the amount or range of possible losses that will result from the
      ultimate resolution of this matter.





**(25)
      Earnings per Share**





Basic
      and
      diluted earnings per share for the period/year ended December 31, 2005,
      2006 and 2007 have been calculated as follows:





2005
            
            2006
            
            2007RMB
            
            RMB
            
            RMB
            
            US$Net
                income available to ordinary shareholders
            
            
            57,128
            
            
            67,665
            
            
            47,260
            
            
            6,214Denominator
                for basic net income available toordinary
                shareholders:Weighted
                average number of ordinary sharesOutstanding
            
            
            771
            
            
            1,101,031
            
            
            13,062,500
            
            
            13,062,500Basic
                earnings per share
            
            
            74,096
            
            
            61.46
            
            
            3.62
            
            
            0.48Net
                income available to ordinary shareholders
            
            
            57,128
            
            
            67,665
            
            
            47,260
            
            
            6,214Denominator
                for diluted net income available to ordinary shareholders:Weighted
                average number of ordinary sharesoutstanding
            
            
            771
            
            
            1,101,031
            
            
            13,062,500
            
            
            13,062,500Weighted
                average number of share options
            
            
            -
            
            
            1,457
            
            
            -
            
            
            -771
            
            
            1,102,488
            
            
            13,062,500
            
            
            13,062,500Diluted
                earnings per share
            
            
            74,096
            
            
            61.37
            
            
            3.62
            
            
            0.48





F-34


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





**(26)
      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, 2007,
      additional transfers of RMB4,741 (US$623) 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, 2007, an aggregate amount of RMB36,312 (US$4,978) has been
      appropriated from retained earnings and set aside for statutory general
      reserve and public welfare fund, by Shandong Fuwei.




As
      of
      December 31, 2007, the amount of restricted net assets of Shandong Fuwei, which
      may not be transferred to the Company in the form of loans, advances or cash
      dividends by the subsidiaries without the consent of a third party, was
      approximately 70% of the Company’s consolidated net assets as discussed above.
      In addition, the current foreign exchange control policies applicable in the
      PRC
      also restrict the transfer of assets or dividends outside the PRC.




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





**Condensed
      Balance Sheet as of December 31, 2006 and 2007**




2006
            
            2007RMB
            
            RMB
            
            US$Cash
                and cash equivalents
            
            
            240,978
            
            
            74
            
            
            10Other
                current assets
            
            
            96,045
            
            
            311,835
            
            
            42,749Investments
                in subsidiaries
            
            
            147,762
            
            
            147,762
            
            
            20,256Total
                assets
            
            
            484,785
            
            
            459,671
            
            
            63,015Current
                liabilities
            
            
            18,878
            
            
            21,194
            
            
            2,905Total
                shareholders’ equity
            
            
            465,907
            
            
            438,477
            
            
            60,110Total
                liabilities and shareholders’ equity
            
            
            484,785
            
            
            459,671
            
            
            63,015





F-35


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





**(26)
      Fuwei Films (Holdings) Co., Ltd (Parent Company)
      (continued)**





**Condensed
      Statements of Operations (For the year ended December 31, 2005, 2006 and
      2007)**




2005
            
            2006
            
            2007RMB
            
            RMB
            
            RMB
            
            US$Interest
                income
            
            
            -
            
            
            14
            
            
            91
            
            
            12General
                and administrative expenses
            
            
            (60
            )
            
            (2,131
            )
            
            (5,984
            )
            
            (787
            )Loss
                before equity in undistributedearnings
                of subsidiaries
            
            
            (60
            )
            
            (2,117
            )
            
            -
            
            
            -Equity
                in earnings of subsidiaries
            
            
            57,188
            
            
            69,782
            
            
            -
            
            
            -Net
                income
            
            
            57,128
            
            
            67,665
            
            
            (5,983
            )
            
            (787
            )





F-36


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





**(26)
      Fuwei Films (Holdings) Co., Ltd (Parent Company)
      (continued)**





**Condensed
      Statement of Cash Flows (For the year ended December 31, 2005, 2006 and
      2007)**




2005
            
            2006
            
            2007RMB
            
            RMB
            
            RMB
            
            US$**Cash
                flow from operating activities**Net
                income
            
            
            57,128
            
            
            67,665
            
            
            (5,893
            )
            
            (775
            )Adjustment
                to reconcile net income to net cash from operating activities:-
                Equity in earnings of subsidiaries
            
            
            (57,188
            )
            
            (69,782
            )
            
            -
            
            
            --
                Foreign exchange gain
            
            
            -
            
            
            (1,473
            )
            
            -
            
            
            -Changes
                in operating assets and liabilities:-
                Other current assets
            
            
            (89,323
            )
            
            (9,974
            )
            
            9,631
            
            
            1,266-
                Other current liabilities
            
            
            89,396
            
            
            18,659
            
            
            (3,713
            )
            
            (488
            )Net
                cash provided by operating activities
            
            
            13
            
            
            5,095
            
            
            25
            
            
            3**Cash
                flow from financing activities**Payments
                to related parties
            
            
            -
            
            
            -
            
            
            (232,656
            )
            
            (30,589
            )Issuance
                of share capital
            
            
            -
            
            
            235,867
            
            
            -
            
            
            -Effect
                of exchange
            
            
            -
            
            
            -
            
            
            (8,273
            )
            
            (1,088
            )Net
                cash provided by/(used in) financing activities
            
            
            -
            
            
            235,867
            
            
            (240,929
            )
            
            (31,677
            )Net
                increase/(decrease)  in cash
            
            
            13
            
            
            240,962
            
            
            (240,904
            )
            
            (31,674
            )Cash:At
                beginning of year
            
            
            3
            
            
            16
            
            
            240,978
            
            
            30,878At
                end of year
            
            
            16
            
            
            240,978
            
            
            74
            
            
            10





**(27)
      Subsequent Events**




The
      arbitration proceeding between DMT S. A. (“DMT”) and Shandong Neoluck Plastics
      Co. Ltd. (“Neoluck”), after several weeks of negotiations among the parties, the
      parties entered into two Agreements, one is a Service and Technical Assistance
      Agreement (the “Service Agreement”) between DMT and Shandong Fuwei, dated March
      5, 2008, providing for the payment of $180 in two installments in order to
      commence receiving service and spare parts with respect to the equipment that
      had been originally sold by DMT. On March 12, 2008, the Neoluck Group entered
      into a Settlement Agreement (the “Settlement Agreement”) with DMT, pursuant to
      which Neoluck Group will make a payment of $900 through an irrevocable bank
      draft delivered to DMT to be drawn upon within sixty days. In accordance with
      the provisions of the Settlement Agreement, upon DMT’s collection of moneys to
      be paid under the Settlement Agreement and the Service Agreement, the pending
      dispute in arbitration will be withdrawn and DMT will release the Neoluck Group
      and Fuwei from any claims relating to the original sale of the
      equipment.


F-37


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





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


For
      the
      years ended December 31, 2005, 2006 and 2007


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





**(27)
      Subsequent Events (continued)**




In
      accordance with the Settlement Agreement, a letter, signed by counsel to DMT
      and
      Fuwei, has been transmitted to the ICC International Court of Arbitration
      requesting a suspension of any further proceeding pending the performance of
      the
      payment obligations under the Settlement Agreement and the Service Agreement.
      Once such payment obligations are performed, the arbitration proceeding will
      be
      withdrawn as settled between the parties.




On
      January 24, 2008, the Court consolidated into a single action the putative
      securities class actions pending against the Company and certain of its
      officers, directors, and shareholders.  The Court also appointed
      Ninyat Tonyaz as lead plaintiff, appointed the Rosen Law Firm, P.A. as lead
      counsel, and granted plaintiffs leave to file a consolidated amended class
      action complaint.  The consolidated action is styled In re Fuwei
      Films Securities Litigation, Case No. 07-CV-9416 (RJS).  On
      March 14, 2008, plaintiffs filed a consolidated amended class action complaint
      naming as defendants the Company, Xiaoan He, Mark Stulga, Jun Yin, Tongju Zhou,
      Duo Wang, and the Company's IPO underwriters — Maxim Group LLC,
      WR Hambrecht + Co. and Chardan Capital Markets, LLC.  The consolidated
      amended class action complaint asserts claims for violation of Sections 11,
      12(a)(2), and 15 of the Securities Act of 1933.  At this point, we believe
      that only the Company, Mr. Stulga, and the Underwriter Defendants have been
      properly served with the consolidated amended class action complaint.
 Pursuant to a scheduling order entered by the Court on February 19, 2008,
      the parties named as defendants in the consolidated class action are required
      to
      answer or otherwise respond to the consolidated complaint on or before April
      30,
      2008.




On
      February 18, 2008, HKG submitted an Amended Demand for Arbitration and Statement
      of Claim, correcting certain clerical errors in its original
      demand.  On March 14, 2008, the Company submitted its answering
      statement and counterclaim in response to HKG's Amended Demand for Arbitration
      and Statement of Claim.  The Company denied HKG's claims for breach of
      contract and breach of the covenant of good faith and fair dealing as legally
      and factually without merit and asserted various defenses.  The Company
      also asserted a counterclaim against HKG for breach of the August 19, 2006
      Letter Agreement, seeking to recover the over $300 in fees and costs paid
      to HKG and other consequential damages.  On March 27, 2008, HKG
      submitted a letter in reply to the Company's counterclaim, generally
      denying the allegations and claims made by the Company.  At the
      request of HKG, the Company has agreed to attempt to resolve this dispute
      through mediation.  A neutral mediator has been appointed by the AAA's
      International Centre for Dispute Resolution; however, the mediation has not
      yet
      been scheduled.




F-38