UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 Washington,
        D.C. 20549
 
 **FORM
        10-Q**
 
 R  QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934
 For
        the
        quarterly period ended September 30, 2008
 
 £  TRANSITION
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934
 For
        the
        transition period from __________ to __________
 Commission
        File Number: 0-9879
 
 **FUDA
                  FAUCET WORKS, INC.**(Exact
                  name of registrant as specified in its
                  charter)
 
 **Delaware**
              
              **13-2648442**(State
                  or other jurisdiction of incorporation or organization)
              
              (I.R.S.
                  Employer Identification No.)**Ge
                  Jia Ba, Hua Ting, Yiyang Jiangxi, P.R.C.**
              
              **334400**(Address
                  of principal executive offices)
              
              (Zip
                  Code)
 
 **86
                  793-5887178**(Registrant’s
                  telephone number, including area code)**None.**(Former
                  name, former address and former fiscal year, if changed since last
                  report)
  Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. **Yes**  R   **No**  £
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, a non-accelerated filer, or a smaller reporting company.
        See
        the definitions of “large accelerated filer,” “accelerated filer” and “smaller
        reporting company” in Rule 12b-2 of the Exchange Act.
 Large
                  accelerated filer£
              Accelerated
                  filer£Non-accelerated
                  filer£
              Smaller
                  reporting companyR
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). **Yes** £  **No** R
 Indicate
        the number of shares outstanding of each of the issuer’s classes of common
        stock, as of the latest practicable date.
 **Class**
              
              **Outstanding
                  at November 14, 2008**Common
                  Stock, $0.001 par value per share
              
              10,765,968
                  shares
  
 
  **TABLE
        OF CONTENTS**
  PART
                  I.
              FINANCIAL
                  INFORMATION
              3ITEM
                  1.
              FINANCIAL
                  STATEMENTS
              3ITEM
                  2.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS.
              23ITEM
                  3.
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
              33ITEM
                  4.
              CONTROLS
                  AND PROCEDURES.
              33PART
                  II.
              OTHER
                  INFORMATION.
              34ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS.
              34ITEM
                  6.
              EXHIBITS.
              34SIGNATURES
              35
  2
  **PART
        I.**  **FINANCIAL
        INFORMATION**
  **ITEM
        1.**  **FINANCIAL
        STATEMENTS**
  **FUDA
        FAUCET WORKS, INC.**
 CONSOLIDATED
        BALANCE SHEETS
  (US
                    dollars)September
                    30, 2008
                
                December
                    31, 2007Item
                
                (UNAUDITED)
                
                (AUDITED)Restated**ASSETS**Current
                    assetsCash
                    and cash equivalents
                
                
                1,083,201
                
                
                169,319Accounts
                    receivable
                
                
                10,130,214
                
                
                487,471Due
                    from related parties - tradel
                
                
                -
                
                
                6,996,322Prepayments
                    to suppliers
                
                
                700,797
                
                
                14,326Inventories
                
                
                6,381,201
                
                
                8,260,479Other
                    current assets
                
                
                179,717
                
                
                251,619Total
                    current assets
                
                
                18,475,130
                
                
                16,179,536Property,
                    plant and equipmentLand
                    use right
                
                
                2,106,104
                
                
                869,251Buildings
                
                
                7,200,979
                
                
                1,180,427Machinery
                    and equipment
                
                
                5,798,678
                
                
                983,079Automobiles
                
                
                210,970
                
                
                128,495Office
                    equipment
                
                
                38,113
                
                
                14,003Property
                    plant and equipment - total
                
                
                15,354,844
                
                
                3,175,255Accumulated
                    depreciation
                
                
                (1,283,669
                )
                
                (777,600
                )Property
                    plant and equipment - net
                
                
                14,071,175
                
                
                2,397,655Construction
                    in progress
                
                
                883
                
                
                1,867,513Other
                    long-term assets - idle assetsMachinery
                    and equipment - net
                
                
                177,482
                
                
                165,662Land
                    use right - net
                
                
                197,343
                
                
                184,20532,922,013
                
                
                20,794,571**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY**Current
                    liabilitiesShort-term
                    bank loans
                
                
                14,231,723
                
                
                5,252,594Accounts
                    payable
                
                
                1,140,021
                
                
                686,114Due
                    to related parties - trade
                
                
                180,096
                
                
                1,189,152Due
                    to related parties - non-trade
                
                
                459,122
                
                
                869,802Accrued
                    expenses
                
                
                312,716
                
                
                112,280Other
                    payables
                
                
                88,752
                
                
                81,143Total
                    current liabilities
                
                
                16,412,430
                
                
                8,191,085Commitments
                    and ContingenciesStockholders’equityPreferred
                    stock, 20,000,000 shares authorized;
                  0.001
                    par value and 0.0000001 par value on September
                  30,
                    2008 and December 31, 2007, respectively;
                  3,090,909
                    shares issued and outstanding on September
                  30,
                    2008 and December 31, 2007, respectively
                
                
                3,091
                
                
                -Common
                    stock, 110,000,000 shares and 900,000,000 shares
                  authorized
                    on September 30, 2008 and December 31,
                  2007;
                    0.001 par value and 0.0000001 par value;
                  10,765,968
                    shares and 10,725,440 shares issued and
                  outstanding
                    on September 30, 2008 and December
                  31,
                    2007
                
                
                10,766
                
                
                1Additional
                    paid-in capital
                
                
                7,397,961
                
                
                3,748,785Surplus
                    reserve
                
                
                260,430
                
                
                260,430Retained
                    earnings
                
                
                7,021,371
                
                
                7,753,585Accumulated
                    other comprehensive income
                
                
                1,815,964
                
                
                840,685Total
                    stockholders’equity
                
                
                16,509,583
                
                
                12,603,486Total
                    liabilities and stockholders’equity
                
                
                32,922,013
                
                
                20,794,571
  See
          notes
          to consolidated financial statements.
  3
  **FUDA
          FAUCET WORKS, INC.**
 CONSOLIDATED
          STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 (UNAUDITED)
  (US
                      dollars)
                  
                  (US
                      dollars)Item
                  
                  Three
                      Months Ended September 30,
                  
                  Nine
                      Months Ended September 30,2008
                  
                  2007
                  
                  2008
                  
                  2007**Net
                      sales**
                  
                  
                  10,214,112
                  
                  
                  7,018,677
                  
                  
                  28,718,551
                  
                  
                  17,917,908**Cost
                      of sales (exclusive of items shown separately
                      below):**Non-related
                      parties
                  
                  
                  5,879,788
                  
                  
                  1,017,116
                  
                  
                  12,368,933
                  
                  
                  4,595,834Related
                      parties
                  
                  
                  2,639,658
                  
                  
                  4,575,883
                  
                  
                  10,946,246
                  
                  
                  9,770,6328,519,446
                  
                  
                  5,592,999
                  
                  
                  23,315,179
                  
                  
                  14,366,466**Gross
                      margin**
                  
                  
                  1,694,666
                  
                  
                  1,425,678
                  
                  
                  5,403,372
                  
                  
                  3,551,442**Operating
                      expenses:**Selling
                      expenses
                  
                  
                  93,120
                  
                  
                  54,036
                  
                  
                  333,553
                  
                  
                  182,720General
                      and administrative
                  
                  
                  429,265
                  
                  
                  145,538
                  
                  
                  975,230
                  
                  
                  300,974Officers’
                      compensation
                  
                  
                  31,588
                  
                  
                  5,962
                  
                  
                  61,154
                  
                  
                  17,609Depreciation
                      and amortization
                  
                  
                  36,334
                  
                  
                  18,417
                  
                  
                  86,578
                  
                  
                  24,689Consulting
                      and professional fees
                  
                  
                  98,207
                  
                  
                  110,940
                  
                  
                  268,053
                  
                  
                  110,940**Total
                      operating expenses**
                  
                  
                  688,514
                  
                  
                  334,893
                  
                  
                  1,724,568
                  
                  
                  636,932Income
                      from transfer of patent - net
                  
                  
                  -
                  
                  
                  576,493
                  
                  
                  -
                  
                  
                  576,493**Operating
                      income**
                  
                  
                  1,006,152
                  
                  
                  1,667,278
                  
                  
                  3,678,804
                  
                  
                  3,491,003**Other
                      incme (expenses):**Other
                      income
                  
                  
                  121,542
                  
                  
                  32,206
                  
                  
                  135,961
                  
                  
                  38,047Interest
                      expense
                  
                  
                  (298,446
                  )
                  
                  (96,220
                  )
                  
                  (593,631
                  )
                  
                  (265,540
                  )Foreign
                      currency transactions loss
                  
                  
                  (17,286
                  )
                  
                  -
                  
                  
                  (384,316
                  )
                  
                  **-**(194,190
                  )
                  
                  (64,014
                  )
                  
                  (841,986
                  )
                  
                  (227,493
                  )**Net
                      income**
                  
                  
                  811,962
                  
                  
                  1,603,264
                  
                  
                  2,836,818
                  
                  
                  3,263,510**Other
                      comprehensive income**Foreign
                      currency translation adjustment
                  
                  
                  88,677
                  
                  
                  119,837
                  
                  
                  975,279
                  
                  
                  297,019**Comprehensive
                      income**
                  
                  
                  900,639
                  
                  
                  1,723,101
                  
                  
                  3,812,097
                  
                  
                  3,560,529**Earnings
                      per common share**Basic
                  
                  
                  0.08
                  
                  
                  0.15
                  
                  
                  0.26
                  
                  
                  0.31Diluted
                  
                  
                  0.06
                  
                  
                  0.15
                  
                  
                  0.21
                  
                  
                  0.31**Weighted
                      average number of common shares outstanding**Basic
                  
                  
                  10,752,523
                  
                  
                  10,564,647
                  
                  
                  10,734,533
                  
                  
                  10,564,647Diluted
                  
                  
                  13,843,432
                  
                  
                  10,564,647
                  
                  
                  13,831,875
                  
                  
                  10,564,647
  See
            notes
            to consolidated financial statements.
  4
  **FUDA
          FAUCET WORKS, INC.**
 CONSOLIDATED
          STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 (US
                      dollars)Item
                  
                  Nine
                      Months Ended September 30,2008
                  
                  2007**Cash
                      flows from operating activities:**Net
                      income
                  
                  
                  2,836,818
                  
                  
                  3,263,510Adjustments
                      to reconcile net income to
                    net
                      cash provided by operating activities:Depreciation
                      and amortization
                  
                  
                  506,069
                  
                  
                  134,923Changes
                      in operating assets and liabilitiesAccounts
                      receivable
                  
                  
                  (9,642,743
                  )
                  
                  (3,313,712
                  )Due
                      from related parties - trade
                  
                  
                  6,996,322
                  
                  
                  -Prepayments
                      to suppliers
                  
                  
                  (646,471
                  )
                  
                  336,967Inventories
                  
                  
                  1,879,278
                  
                  
                  (854,986
                  )Other
                      current assets
                  
                  
                  46,944
                  
                  
                  74,651Accounts
                      payable
                  
                  
                  453,907
                  
                  
                  874,337Due
                      to related parties-trade
                  
                  
                  (1,009,056
                  )
                  
                  (565,925
                  )Accrued
                      expenses
                  
                  
                  200,436
                  
                  
                  59,024Other
                      payables
                  
                  
                  7,609
                  
                  
                  220,784**Net
                      cash provided by operating activities:**
                  
                  
                  1,629,113
                  
                  
                  229,573**Cash
                      flows from investing activities:**Purchase
                      of property, plant and equipment
                  
                  
                  (9,872,620
                  )
                  
                  (1,734,721
                  )**Net
                      cash used in investing activities**
                  
                  
                  (9,872,620
                  )
                  
                  (1,734,721
                  )**Cash
                      flows from financing activities:**Proceeds
                      from issuance of common stock
                  
                  
                  54,000
                  
                  
                  -Proceeds
                      from short-term bank loans
                  
                  
                  29,640,778
                  
                  
                  8,827,891Repayment
                      of short-term bank loans
                  
                  
                  (21,051,283
                  )
                  
                  (7,643,654
                  )Loans
                      from related parties
                  
                  
                  2,913,131
                  
                  
                  2,891,491Repayment
                      to related parties
                  
                  
                  (3,324,901
                  )
                  
                  (3,014,818
                  )**Net
                      cash provided by financing activities**
                  
                  
                  8,231,725
                  
                  
                  1,060,910**Effect
                      of exchange rate fluctuation on cash and cash
                      equivalents**
                  
                  
                  925,664
                  
                  
                  268,966**Net
                      increase (decrease) in cash and cash equivalents**
                  
                  
                  913,882
                  
                  
                  (175,272
                  )**Cash
                      and cash equivalents, beginning of period**
                  
                  
                  169,319
                  
                  
                  380,714**Cash
                      and cash equivalents, end of period**
                  
                  
                  1,083,201
                  
                  
                  205,442Supplemental
                      Disclosures of Cash flow Information:Cash
                      paid for interest
                  
                  
                  593,631
                  
                  
                  265,540Cash
                      paid for income taxes
                  
                  
                  -
                  
                  
                  -Non-cash
                      investing and financing activities:Increase
                      of paid-in capital of Fuda Yiyang
                    with
                      its retained earnings
                  
                  
                  3,569,032
                  
                  
                  -Change
                      of par value of authorized shares
                  
                  
                  13,845
                  
                  
                  -Issuance
                      of common stock to independent directors as
                    compensation
                  
                  
                  40,000
                  
                  
                  -
  See
            notes
            to consolidated financial statements.
  5
  **FUDA
          FAUCET WORKS, INC.**
 Notes
          to
          Consolidated Financial Statements
 (Unaudited)
 
  **1.**  **Organization
          and Basis of Presentation**
  ***(1).***  ***Management’s
          Responsibility for Interim Financial Statements***
  Management
          acknowledges its responsibility for the preparation of the accompanying
          interim
          consolidated financial statements. The accompanying unaudited consolidated
          financial statements have been prepared in accordance with accounting principles
          generally accepted in the United States of America for interim financial
          information and with the instructions to Form 10-Q and Rule 8-03 of Regulation
          S-X. In the opinion of management, the consolidated financial statements
          reflect
          all adjustments (consisting of normal recurring adjustments) considered
          necessary for a fair presentation of the Company’s results of operations and
          financial position as of and for the periods presented. Operating results
          for
          interim periods are not necessarily indicative of results that may be expected
          for the fiscal year as a whole. These consolidated financial statements
          should
          be read in conjunction with the summary of significant accounting policies
          and
          notes to consolidated financial statements included in the Company’s annual
          report on Form 10-KSB for the fiscal year ended December 31, 2007.
  ***(2).***  ***Organization***
  Fuda
          Faucet Works, Inc. (the “Company”) was incorporated in Delaware on June 10, 1969
          under the name Magnum Communications Corp. On December 9, 1980, the Company
          changed its name to Vacation Ownership Marketing, Inc. and was engaged
          in the
          development and marketing of time-shared condominiums. In 1983, the Company
          ceased operations due to continued financial difficulties and adverse
          litigation. From 1983 until August 29, 2001, the Company was not engaged
          in any
          business. On August 29, 2001, the Company acquired Encore Builders, Inc.,
          a
          construction company, through what was then a subsidiary of the Company.
          Beginning on August 29, 2001, the Company was engaged in the construction
          of
          Conquistador Plaza Apartments in Miami, Florida, pursuant to a lump sum
          construction contract with Conquistador Plaza. These operations ceased
          with the
          separation of Encore Builders from the Company in the first quarter of
          2002. On
          May 6, 2004, the Company changed its corporate name to Capital Solutions
          I, Inc.
          Prior to December 3, 2007, the Company was not engaged in any business.
          On
          January 3, 2008, the Company changed its name to Fuda Faucet Works, Inc.
          Unless
          the context indicates otherwise, references to the Company include its
          subsidiaries and Jiangxi Yiyang Fuda Copper Co. Ltd. (“Fuda Yiyang”), an
          affiliated company whose financial statements are consolidated pursuant
          to FIN
          46.
  On
          December 3, 2007, the Company entered into a buy-back agreement with Richard
          Astrom and Christopher Astrom, who were the Company’s principal stockholders and
          sole directors and Christopher Astrom was the Company’s President, Chief
          Executive Officer and Chief Financial Officer, pursuant to which they sold
          to
          the Company all of the shares of common stock owned by them, which constituted
          75% of the Company’s outstanding common stock, for a purchase price of $625,000.
          Richard and Christopher Astrom resigned from all positions as officers
          and
          directors simultaneously.
  Contemporaneously
          with the purchase of stock from the former principal stockholders, the
          Company
          executed a share exchange agreement with Jibrin Issa Jibrin Al Jibrin,
          trustee
          of the Wu Yiting Stock Trust, the sole stockholder of Moral Star Development
          Limited, a British Virgin Islands company (“Moral Star BVI”), pursuant to which
          the trustee transferred to the Company all of the capital stock of Moral
          Star
          BVI in exchange for 10,564,647 shares of the Company’s common stock,
          approximately 98.5% of the Company’s outstanding common stock, which were issued
          to the Trust and the designees of the Trust. As a result, Moral Star BVI
          became
          the Company’s wholly-owned subsidiary and the business of Moral Star BVI and its
          affiliated companies became our business. The sole beneficiary of the trust
          is
          Ms. Wu Yiting, who, as a result of the exchange, became the Chief Executive
          Officer, President and a director of the Company. Under generally accepted
          accounting principles, the company accounted for this transaction as a
          reverse
          acquisition.
 
 6
 **FUDA
            FAUCET WORKS, INC.**
 Notes
            to
            Consolidated Financial Statements
 (Unaudited)
 On
          January 3, 2008, the Company effected a 3.2-for-one stock distribution
          pursuant
          to which each share of common stock was converted into 3.2 shares of common
          stock. All references in these financial statements to shares and per share
          information give effect to the stock distribution.
  On
          July
          31, 2008, the Company’s certificate of incorporation was amended and restated.
          As a result of this amendment, the par value per share of the Company’s
          preferred stock and common stock was changed from $0.0000001 to $0.001,
          and the
          number of authorized shares of common stock was decreased from 900,000,000
          shares to 110,000,000 shares. The amendment did not affect the number of
          authorized shares of preferred stock, which remains at 20,000,000
          shares.
  Moral
          Star BVI owns 100% of the stock of Jiangxi Moral Star Copper Technology
          Co.,
          Ltd. (“Moral Star China”), which is a wholly foreign-owned enterprise organized
          under the laws of the Peoples’ Republic of China (“PRC”). Moral Star China is a
          party to a series of contractual arrangements with Fuda Yiyang, a limited
          liability company headquartered in, and organized under the laws of the
          PRC.
  The
          contractual arrangements among Moral Star China, Fuda Yiyang, its sole
          owner, Wu
          Yiting and related parties are represented by a series of agreements, including
          Management Agreement, Related Transactions Agreement, Purchase Agreement,
          Stockholders’ Voting Proxy Agreement, Shares Pledge Agreement, Exclusive Option
          Agreement, Patent Transfer Agreement, and Trademark Transfer Agreement,
          pursuant
          to which the Company obtained control over the business and operations
          of Fuda
          Yiyang, and became the primary beneficiary of Fuda Yiyang’s operations.
  Under
          generally accepted accounting principles, the acquisition by the Company
          of
          Moral Star BVI is considered to be capital transactions in substance, rather
          than a business combination. That is, the acquisition is equivalent, in
          the
          acquisition by Moral Star BVI of the Company, then known as Capital Solutions
          I,
          Inc., with the issuance of stock by Moral Star BVI for the net monetary
          assets
          of the Company. This transaction is accompanied by a recapitalization,
          and is
          accounted for as a change in capital structure. Accordingly, the accounting
          for
          the acquisition is identical to that resulting from a reverse acquisition,
          except that no goodwill is recorded. Under reverse takeover accounting,
          the
          comparative historical financial statements of the Company, as the legal
          acquirer, are those of the accounting acquirer, Moral Star BVI. Since Moral
          Star
          BVI and Moral Star China did not have any business activities, the Company’s
          financial statements prior to the closing on the reverse acquisition, reflect
          only business of Fuda Yiyang. The accompanying financial statements reflect
          the
          recapitalization of the stockholders’ equity as if the transactions occurred as
          of the beginning of the first period presented. Thus, the 10,564,647 shares
          of
          common stock issued to the trust and its designees are deemed to be outstanding
          from December 31, 2005.
 
 The
          relationship among the above companies as follows:
 
 7
  **FUDA
            FAUCET WORKS, INC.**
 Notes
            to
            Consolidated Financial Statements
 (Unaudited)
 
  ***(3).***  ***Business***
  The
          Company’s business is presently the business conducted by Fuda Yiyang prior to
          the share exchange, which is the development, manufacturing and distribution
          of
          a wide range of brass faucets and related spouts and fittings. The Company’s
          products include kitchen and bar faucets, bathroom faucets and bathroom
          accessories. The Company produces all of its products in China and exports
          most
          of them into the international marketplace. The Company started doing business
          by focusing on copper re-processing when Fuda Yiyang was initially formed
          in
          1995. In 2002, the Company began to produce and sell the European style
          brass
          faucets, spouts and fittings to the Chinese local market, and in 2004,
          it began
          to sell our products internationally. We sell our products to bathroom
          supplies
          distributors.
  ***(4).***  ***Basis
          of Presentation***
  The
          consolidated financial statements have been prepared pursuant to the rules
          and
          regulations of the Securities and Exchange Commission (“SEC”) and in accordance
          with generally accepted accounting principles in the United States of America
          (“US GAAP”). The Company’s functional currency is the China Renminbi (RMB);
          however the accompanying consolidated financial statements have been translated
          and presented in United States Dollars (“U.S. dollars” or “US$”).
 
 **Principles
          of consolidation** –
The
          Company’s consolidated financial statements include the financial statements of
          its wholly owned subsidiaries, Moral Star BVI and Moral Star China, as
          well as
          Fuda Yiyang, which is a variable interest entity whose financial statements
          are
          consolidated with those of the Company pursuant to FASB Interpretation
          No. 46R
“Consolidation of Variable Interest Entities, an Interpretation of Accounting
          Research Bulletin No. 51” (“FIN 46R”). All significant intercompany accounts and
          transactions have been eliminated in the combination.
  FIN
          46R
          requires a variable interest entity to be consolidated by a company if
          that
          company is subject to a majority of the risk of loss for the variable interest
          entity or is entitled to receive a majority of the variable interest entity’s
          residual returns. Variable interest entities are those entities in which
          the
          Company, through contractual arrangements, bears the risks of, and enjoys
          the
          rewards normally associated with ownership of the entities, and therefore
          the
          Company is the primary beneficiary of these entities.
 
 Moral
          Star China is a party to a series of contractual arrangements with Fuda
          Yiyang.
          These agreements include a management agreement pursuant to which all net
          income
          after deduction of necessary expenses, if any, generated by Fuda Yiyang
          is paid
          to Moral Star China and Moral Star China is responsible for paying Fuda
          Yiyang’s
          obligations incurred in connection with its business. In addition, Moral
          Star
          China manages and controls all of the funds of Fuda Yiyang. Moral Star
          China
          also has the right to purchase Fuda Yiyang’s equipment and patents and lease its
          manufacturing plants, land and remaining equipment. This agreement is designed
          so that Moral Star China can conduct its business in China. Pursuant to
          two
          other agreements, the sole stockholder of Fuda Yiyang, who is also the
          Company’s
          Chief Executive Officer, has pledged all of her equity in Fuda Yiyang as
          security for performance of Fuda Yiyang’s obligations to Moral Star China, and
          she granted Moral Star China an irrevocable grant of a proxy over her stock
          in
          Fuda Yiyang. As a result, Fuda Yiyang is considered a variable interest
          entity.
  8
 **FUDA
            FAUCET WORKS, INC.**
 Notes
            to
            Consolidated Financial Statements
 (Unaudited)
  **Use
          of Estimates** –
The
          preparation of financial statements in conformity with US GAAP requires
          management to make estimates and assumptions that affect the reported amounts
          of
          assets and liabilities, disclosure of contingent assets and liabilities
          at the
          date of the financial statements, and the reported amounts of revenues
          and
          expenses during the reporting period. Actual results could differ from
          those
          estimates. Significant accounting estimates include bad debt provision,
          impairment of long-lived assets, depreciation and amortization,
          etc.
  **Country
          Risk** –
As
          the
          Company’s manufacturing base is located in China and its market is mainly
          located in Middle East and Russia, the Company is subject to special
          considerations and significant risks not typically associated with companies
          in
          North America and/or Western Europe. These risks include, among others,
          risks
          associated with the political, economic and legal environments and foreign
          currency exchange limitations encountered in these areas. The Company’s results
          of operations may be adversely affected by changes in the political and
          social
          conditions in these areas, and by changes in governmental policies with
          respect
          to laws and regulations, among other things.
  In
          accordance with the relevant Chinese rules and regulations on management
          of
          foreign exchanges, the foreign exchanges generated by Fuda Yiyang and Moral
          Star
          China from sales of our products out of China shall be brought back into
          China
          and exchanged to RMB in designated banks instead of being deposited out
          of China
          without authorization. The Company also has to buy foreign exchanges from
          designated banks when paying current expenditures with foreign exchanges.
          Both
          the conversion of RMB into foreign currencies and the remittance of foreign
          currencies abroad require the approval of the Chinese government. In recent
          years, the Chinese government has gradually relaxed its control over foreign
          exchange, especially on current foreign exchange accounts, for instance,
          canceling of advance examination and approval for the opening of current
          foreign
          exchange accounts and enhancing of quota of current foreign exchange
          accounts.
  **Credit
          Risk** –
The
          Company performs ongoing credit evaluations of its customers and intends
          to
          establish an allowance for doubtful accounts when outstanding balances
          are not
          considered fully collectable. According to the Company’s credit policy, the
          Company generally provides 100% bad debt provision for the amounts outstanding
          over 180 days after the deduction of the amount collected after the balance
          sheet date, which management believes is consistent with industry
          practice.
  The
          Company may require its customers to make a partial payment, based on the
          Company’s credit evaluation. The Company generally requires payment within three
          months. The Company maintains a policy that all sales are final and it
          does not
          allow returns. No returns occurred in the nine months ended September 30,
          2008.
          Based on industry practice and the credit history of customers, the Company
          believes the net accounts receivable shown on its balance sheets are fully
          collectable.
  **Risks
          Related to Raw Materials** –
The
          principal raw material for the Company’s products is copper. The price of copper
          is subject to fluctuations which can be significant. In times of increasing
          prices, the Company needs to try to fix the price at which it purchases
          copper
          in order to avoid increases in costs which it cannot recoup through increases
          in
          sales prices. Similarly, in times of decreasing prices, the Company may
          have
          purchased copper at a price which is high in terms of the price at which
          it can
          sell its products, which also can impair its margins.
 
 9
  **FUDA
            FAUCET WORKS, INC.**
 Notes
            to
            Consolidated Financial Statements
 (Unaudited)
 **Foreign
          Currency Translation** –
The
          functional currency of the Company is China RMB, which is the primary medium
          of
          exchange where the Company operates. The Company reports its financial
          results
          in U.S. dollars.
 
 The
          Company translates its assets and liabilities into U.S. dollars using the
          rate
          of exchange prevailing at the balance sheet date, and the statement of
          operations is translated at the average rates over each month during the
          reporting period. Equity items are translated at historical exchange rates.
          Adjustments resulting from the translation from RMB into U.S. dollars are
          recorded in stockholders’ equity as part of accumulated comprehensive income
          (loss). Gains or losses resulting from transactions in currencies other
          than RMB
          are reflected in the statement of operations and comprehensive income.
          The
          translation rates from RMB to US dollars for the third quarter of 2008
          and 2007
          are as follows:
  Translation
                    rate for assets and liabilities as of September 30, 2008
                
                
                6.8183:1Translation
                    rate for assets and liabilities as of December 31, 2007
                
                
                7.3046:1Translation
                    rate for profit and loss items for the three months ended September
                    30,
                    2008
                
                
                6.8305:1Translation
                    rate for profit and loss items for the three months ended September
                    30,
                    2007
                
                
                7.5484:1Translation
                    rate for equity items of Fuda Yiyang as of December 31,
                    2007
                
                
                8.2875:1Translation
                    rate for equity items of Fuda Yiyang as of September 30,
                    2008
                
                
                7.1902:1Translation
                    rate for equity items of Moral Star China as of September 30,
                    2008
                
                
                7:3802:1Translation
                    rate for equity items of Moral Star China as of December 31,
                    2007
                
                
                7.3938:1
 
 **Revenue
          Recognition** –
The
          Company recognizes sales of its products in accordance with Securities
          and
          Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101, “Revenue
          Recognition in Financial Statements,” as amended by SAB No. 104, “Revenue
          Recognition.” Revenues represent the invoiced value of goods, net of value added
          tax (“VAT”), if any, and are recognized upon delivery of goods and passage of
          title.
  Pursuant
          to China’s VAT rules and regulations, Fuda Yiyang’s sales in China mainland are
          subject to a tax rate of 17% (“output VAT”) as an ordinary VAT taxpayer, and the
          related revenues were recognized by the invoiced value offsetting 17% output
          VAT. However, its sales outside of China mainland are applicable for VAT
          exemption, credit and refund policy, and the related revenues were equal
          to the
          invoiced value. The applicable refund rate from January 1, 2007 to June
          30, 2007
          was 13% and it has been adjusted down to 9% since July 1, 2007. However
          the
          refund rate for valve, one category of our products, has resumed to 13%
          since
          July 1, 2008. The actual VAT payable is the balance after offsetting both
          VAT
          paid on purchases (“input VAT”) and the amount exempted or credited. The actual
          VAT refunded is recognized as other income.
  **Shipping
          and Handling Cost** –
The
          Company bears shipping and handling costs from its factory to its customers’
designated location, and does not bill these expenses separately to customers.
          The Company records such costs as
 delivery
          expenses, which are accounted for as part of selling expenses. Delivery
          expenses
          for the three months ended September 30, 2008 and 2007 were $125,378 and
          $49,864, respectively, and for the nine months ended September 30, 2008
          and 2007
          were $308,551 and $132,339.
  10
 
 **FUDA
              FAUCET WORKS, INC.**
 Notes
              to
              Consolidated Financial Statements
 (Unaudited)
 **Advertising** - The
          Company expenses all advertising costs as incurred. The advertising cost
          for the
          three months ended September 30, 2008 and 2007 was $6,799 and $79, respectively,
          and for the nine months ended September 30, 2008 and 2007 were $7,966 and
          $36,982.
  **Comprehensive
          Income (Loss)** –
The
          Company has adopted SFAS No. 130, “Reporting Comprehensive Income” which
          establishes standards for reporting and presentation of comprehensive income
          (loss) and its components in a full set of general-purpose financial statements.
          The Company has chosen to report comprehensive income (loss) in the statements
          of operations and comprehensive income.
  **Income
          Taxes** –
The
          Company accounts for income taxes under the provisions of SFAS No. 109,
          “Accounting for Income Taxes” which requires recognition of deferred tax assets
          and liabilities for the expected future tax consequences of events that
          have
          been included in the consolidated financial statements or tax returns.
          Deferred
          tax assets and liabilities are recognized for the future tax consequence
          attributable to the difference between the tax bases of assets and liabilities
          and their reported amounts in the financial statements. Deferred tax assets
          and
          liabilities are measured using the enacted tax rate expected to apply to
          taxable
          income in the years in which those temporary differences are expected to
          be
          recovered or settled. The effect on deferred tax assets and liabilities
          of a
          change in tax rates is recognized in income in the period that includes
          the
          enactment date. The Company establishes a valuation allowance when it is
          more
          likely than not that the assets will not be recovered.
 
 With
          the
          approvals of the County Government of Yiyang on July 17, 2007, Fuda Yiyang
          was
          exempt from corporate income taxes for 2008 and 2007. The Local Tax Bureau
          of
          Yiyang County (“Yiyang Tax Authority”) also retroactively confirmed the
          above-said preferential tax treatment on September 30, 2007.
  On
          March
          16, 2007, China’s parliament, the National People’s Congress, adopted the
          Enterprise Income Tax Law, which took effect on January 1, 2008. The new
          income
          tax law sets unified income tax rate for domestic and foreign companies
          at 25%
          except a 15% corporate income tax rate for qualified high and new technology
          enterprises. In accordance with this new income tax law, low preferential
          tax
          rate in accordance with both the tax laws and administrative regulations
          prior
          to the promulgation of this Law shall gradually transit to the new tax
          rate
          within five years after the implementation of this law.
  Fuda
          Yiyang has filed its income tax returns for the first three quarters of
          2008
          with Yiyang Tax Authortiy, in which the income tax for each quarter of
          2008 was
          nil subject to the exemption policy. Yiyang Tax Authority accepted it and
          didn’t
          put forward any objection to the return. Management believes Fuda Yiyang
          can
          continue to enjoy the income tax exemption policy in 2008 in accordance
          with
          above-mentioned governmental documents.
  **Earnings
          per Share** - The
          Company computes net income (loss) per share in accordance with SFAS No.
          128,
“Earnings per Share” (SFAS 128). SFAS 128 requires presentation of both basic
          and diluted earnings per share (“EPS”) on the face of the income statement.
          Basic EPS is computed by dividing net income (loss) available to common
          shareholders (numerator) by the weighted average number of common shares
          outstanding (denominator) during the period. Diluted EPS gives effect to
          all
          dilutive potential common shares outstanding during the period including
          warrants, using the treasury stock method, and convertible preferred stock,
          using the if-converted method. In computing diluted EPS, the average stock
          price
          for the period is used in determining the number of shares assumed to be
          purchased from the exercise of warrants. Diluted EPS excludes all dilutive
          potential common shares if their effect is antidilutive.
  11
  **FUDA
            FAUCET WORKS, INC.**
 Notes
            to
            Consolidated Financial Statements
 (Unaudited)
  **Cash
          and Cash Equivalents** –
Highly
          liquid investments with a maturity of three months or less at the time
          of
          acquisition are considered to be cash equivalents.
  **Inventories** –
          Inventories are stated at the lower of cost, determined on a weighted average
          basis, and net realizable value. Work in progress and finished goods are
          composed of direct material, direct labour and a portion of manufacturing
          overhead. Net realizable value is the estimated selling price, in the ordinary
          course of business, less estimated costs to complete and dispose. Management
          believes that there was no obsolete inventory as of September 30, 2008.
  **Property,
          Plant and Equipment** –
          Property, plant and equipment are stated at cost. Major expenditures for
          betterments and renewals are capitalized while ordinary repairs and maintenance
          costs are expensed as incurred. Depreciation and amortization is provided
          using
          the straight-line method over the estimated useful life of the assets after
          taking into account the estimated residual value. The estimated useful
          life of
          property, plant and equipment are as follows:
 
 Land
                    use rights
                50
                    yearsBuildings
                30
                    yearsMachinery
                    and equipment
                10
                    yearsAutomobiles
                5
                    yearsOffice
                    equipment
                5
                    years
 
 There
          is
          no private ownership of land in the PRC. All land is owned by the government
          which grants a transferable land use right pursuant to which the holder
          of the
          land use right has the right to use the land for the term of the land use
          rights. The estimated useful life of the land use rights is based on the
          term of
          the land use rights, which is 50 years.
  We
          periodically evaluate our investment in long-lived assets, including property
          and equipment, for recoverability whenever events or changes in circumstances
          indicate the net carrying amount may not be recoverable. Our judgments
          regarding
          potential impairment are based on legal factors, market conditions and
          operational performance indicators, among others. In assessing the impairment
          of
          property and equipment, we make assumptions regarding the estimated future
          cash
          flows and other factors to determine the fair value of the respective assets.
          If
          these estimates or the related assumptions change in the future, we may
          be
          required to record impairment charges for these assets. From December 2004
          to
          September 30, 2008, fixed assets carried at $374,825 were left unused,
          including
          land, workshop building and equipment. Since value of land in similar sections
          of the city was increasing, no impairment on land use right has been charged.
          The workshop buildings were maintained in good condition, and most of the
          equipment would be transported and reinstalled into the Company’s new workshop
          building. Therefore a provision for impairment of certain idle assets in
          the
          amount of $177,478 was made previously when they were turned into idle
          status.
          As of September 31, 2008, although such equipment had been transported
          and
          reinstalled in the new workshop building, which was completed in the second
          quarter of 2008, the relevant production line has not been in operation;
          therefore such equipment was still regarded as idle assets.
  **Derivative
          Instruments** - The
          Company accounts for financial instruments under the provisions of SFAS
          No. 133,
“Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
          Settled in, a Company’s Own Stock”, which requires that all derivative financial
          instruments be recognized in the consolidated financial statements and
          maintained at fair value regardless of the purpose or intent for holding
          them.
  12
  **FUDA
            FAUCET WORKS, INC.**
 Notes
            to
            Consolidated Financial Statements
 (Unaudited)
 We
          accounted for our convertible preferred stock and relating freestanding
          warrants
          as equity. At the same time, we evaluated the fair values of such preferred
          stock, warrants and embedded conversion feature and made the allocation
          of
          proceeds between the detachable warrants and equity based on their relative
          fair
          values.
  **Financial
          Instruments and Fair Value** - SFAS
          No. 107 “Disclosures about Fair Value of Financial Instruments”, requires that
          the Company disclose estimated fair values of financial instruments. The
          carrying amounts for cash and cash equivalents, accounts receivable,
          prepayments, short-term loans, accounts payable, advances, accruals and
          other
          payables approximate their fair values because of the short maturity of
          those
          instruments.
  **Reclassification
          from Prior Period Financial Statements** -
          Certain prior period comparative figures have been reclassified to conform
          to
          the current year presentation.
  **2.**  **Recent
          Accounting Pronouncements**
  In
          March
          2008, the FASB issued SFAS No.161, “Disclosures about Derivative Instruments and
          Hedging Activities-an amendment of FASB Statement No. 133.” SFAS No. 161 gives
          financial statement users better information about the reporting entity's
          hedges
          by providing for qualitative disclosures about the objectives and strategies
          for
          using derivatives, quantitative data about the fair value of and gains
          and
          losses on derivative contracts, and details of credit-risk-related contingent
          features in their hedged positions. SFAS No. 161 is effective for financial
          statements issued for fiscal years beginning after November 15, 2008 and
          interim
          periods within those years. The Company does not expect the adoption of
          SFAS No.
          161 to have a material effect on the Company's financial
          statements.
 
 In
          May
          2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
          Accounting Principles.” SFAS No. 162 identifies the sources of accounting
          principles and the framework for selecting the principles to be used in
          the
          preparation of financial statements of nongovernmental entities that are
          presented in conformity with GAAP. SFAS No. 162 directs the GAAP hierarchy
          to
          the entity, not the independent auditors, as the entity is responsible
          for
          selecting accounting principles for financial statements that are presented
          in
          conformity with GAAP. SFAS No. 162 is effective 60 days following the SEC's
          approval of the Public Company Accounting Oversight Board amendments to
          remove
          the GAAP hierarchy from the auditing standards. SFAS No. 162 is not expected
          to
          have an impact on the Company's financial statements.
  In
          May
          2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
          Insurance Contracts—an interpretation of FASB Statement No. 60.” SFAS No. 163 is
          primarily geared towards financial guarantee insurance contracts by insurance
          enterprises. It is not expected to have any material effect on the reporting
          of
          the Company’s results of operations.
  Other
          recent accounting pronouncements issued by the FASB (including its Emerging
          Issues Task Force), the AICPA, and the SEC did not or are not believed
          by
          management to have a material impact on the Company’s present or future
          consolidated financial statements.
  **3.**  **Variable
          Interest Entity**
  As
          a
          result of the contractual arrangements among Moral Star China, Fuda Yiyang,
          its
          sole shareholder, Wu Yiting, and related parties, the Company was given
          control
          over the business and operations of Fuda Yiyang and became the primary
          beneficiary of Fuda Yiyang. The consolidated financial statements for the
          three
          and nine months ended September 30, 2008 and 2007 included the results
          of
          operations of Fuda Yiyang for the same periods, even though the Company
          does not
          own any of Fuda Yiyang’s equity.
 
 13
 **FUDA
            FAUCET WORKS, INC.**
 Notes
            to
            Consolidated Financial Statements
 (Unaudited)
 Fuda
          Yiyang’s assets and liabilities as of September 30, 2008 and December 31, 2007
          are as follows:
 
 (US dollars)Item
                
                September 30, 2008
                
                December 31, 2007RestatedCash
                    and cash equivalents
                
                $
                1,017,507
                
                $
                167,148Accounts
                    receivable
                
                
                10,130,214
                
                
                487,471Due
                    from related parties - trade
                
                
                -
                
                
                6,996,322Prepayments
                    to suppliers
                
                
                700,797
                
                
                14,326Inventories
                
                
                6,359,201
                
                
                8,239,944Other
                    current assets
                
                
                94,061
                
                
                55,724Property
                    plant and equipment - net
                
                
                13,827,332
                
                
                2,131,044Construction
                    in progress
                
                
                883
                
                
                1,867,513Other
                    long-term assets
                
                
                374,825
                
                
                349,868Total
                    assets
                
                $
                32,504,820
                
                $
                20,309,360Short-term
                    bank loans
                
                $
                14,231,723
                
                $
                5,252,594Accounts
                    payable
                
                
                1,100,431
                
                
                602,901Due
                    to related parties-trade
                
                
                180,096
                
                
                1,189,152Due
                    to related parties-non-trade
                
                
                17,600
                
                
                676,559Accrued
                    expenses
                
                
                295,816
                
                
                112,280Other
                    payables
                
                
                87,662
                
                
                81,143Total
                    liabilities
                
                $
                15,913,328
                
                $
                7,914,629
 
 A
          $2,050,673 intercompany payable on Fuda Yiyang’s books was not included in the
          above table, since this balance had been eliminated during
          consolidation.
  As
          of
          September 30, 2008 and December 31, 2007, 100% of the equity of Fuda Yiyang
          owned by Wu Yiting, who is the Company’s chief executive officer.
  **4.**  **Accounts
          Receivable**
  As
          of
          September 30, 2008 and December 31, 2007, the balance of accounts receivable,
          excluding receivables from related parties, was $10,130,214 and $487,471,
          respectively. All the balance as of September 30, 2008 was within 180 days.
          The
          Company believes that these receivables are fully collectible and has not
          established bad debt provision.
  As
          of
          December 31, 2007, the balance due from Al Jibrin General Trading Co.,
          Ltd.
          (“Jibrin Company”), a related party, was $6,996,322. During the first quarter of
          2008, this outstanding balance was collected, and there were no sales to
          the
          Jibrin Company or any other related party during the nine months ended
          September
          30, 2008.
  14
  **FUDA
            FAUCET WORKS, INC.**
 Notes
            to
            Consolidated Financial Statements
 (Unaudited)
  **5.**  **Inventories**
  Inventories
          consisted of the following as of September 30, 2008 and December 31, 2007.
          Management believes that no inventory was obsolete on each balance sheet
          date.
 
 (US dollars)Item
                
                September 30, 2008
                
                December 31, 2007Raw materials
                
                
                1,471,055
                
                
                3,844,897Work
                    in progress
                
                
                4,114,444
                
                
                2,098,383Finished
                    goods
                
                
                795,702
                
                
                2,317,199Total
                
                
                6,381,201
                
                
                8,260,479
  **6.**  **Property,
          Plant and Equipment**
  Total
          cost of property, plant and equipment was $15,354,844 and $3,175,255 as
          of
          September 30, 2008 and December 31, 2007, respectively. The increase $12,179,589
          in gross amount of property, plant and equipment was mainly attributable
          to Fuda
          Yiyang’s establishment of new manufacturing facilities during the first three
          quarters of 2008, including (1) purchase of new equipment; (2) completion
          of new
          workshop buildings; and (3) purchase of the land use right of one block
          of land
          from Wu Yiting, a related party (See Note 12), on which the new factory
          buildings are located.
  In
          China,
          all land is owned by the government and there is no private ownership of
          land.
          The government issues a certificate of land use right, which is transferable,
          and permits the holder to use the land. Under four “State-owned Land Use Right
          Certificates,” the Company owns the land use right for three blocks of
          industrial-use land, covering 491,372 square feet, for the term of 50 years,
          beginning from issuance date of the certificates, which were 1999, 2001
          and
          2003.
  Depreciation
          expense was $227,346 and $46,948 for the three months ended September 30,
          2008
          and 2007, respectively, and $506,069 and $134,923 for the nine months ended
          September 30, 2008 and 2007, respectively.
  In
          accordance with a mortgage agreement dated September 6, 2004, as extended
          on
          September 6, 2007, the land use rights for one parcel of land and 10 workshop
          buildings were used as collateral. The agreement permits the Company to
          borrow
          from time to time up to a maximum amount $1.7 million. On July 1, 2008,
          it was
          replaced by a new mortgage agreement that expires on June 30, 2010, pursuant
          to
          which the land use rights for two parcel of land and 18 workshop buildings
          were
          used as collateral and the Company may borrow from time to time up to a
          maximum
          of $4.5 million . The net book value of these property and plants as collateral
          as of September 30, 2008 and December 31, 2007 was $5,842,701 and $1,517,483,
          respectively. The maximum borrowing in the agreement is expressed in RMB,
          and
          the amount that the Company may borrow in US dollars, will depend on the
          exchange rate at the time of the borrowing.
  **7.**  **Construction
          in Progress**
  As
          of
          September 30, 2008 and December 31, 2007, the balance of construction in
          progress was $883 and $1,867,513, respectively. The property is owned by
          Fuda
          Yiyang. The Company made progress payments to the contractor in based on
          the
          construction progress, with the amount paid being consistent with the work
          performed..
  15
 **FUDA
            FAUCET WORKS, INC.**
 Notes
            to
            Consolidated Financial Statements
 (Unaudited)
 The
          balance $1,867,513 of construction in progress as of December 31, 2007
          represented the construction of new workshop buildings to expand current
          production capability in a new location, which started in the early part
          of
          2007. In the second quarter of 2008, with the completion of these workshop
          buildings, this balance together with the new investment occurred during
          the
          first half of 2008 was transferred to the property, plant and
          equipment.
  The
          upgrade or betterment of the original manufacturing facilities and also
          construction of a new warehouse, which started in the early of 2008, were
          finished during the third quarter of 2008. Thus, at September 30, 2008,
          this
          property is reflected as property, plant and equipment.
 
 The
          balance $883 as of September 30, 2008, represented upfront expenses for
          new
          production facility which is in the pre-planning stage.
  **8.**  **Other
          long-term Assets**
  As
          of
          September 30, 2008 and December 31, 2007, other long-term assets were $374,825
          and $349,867, respectively. The increase was due to appreciation of value
          of the
          RMB against U.S. dollars. These other long-term assets include one block
          of land
          and a workshop building and equipment, which have not been used since 2004.
          Since value of land in similar sections of the city was increasing, no
          impairment on land use right has been charged. The workshop buildings were
          maintained in good condition, and most of the equipment would be transported
          and
          reinstalled into the Company’s new workshop buildings. A provision for
          impairment of certain idle assets in the amount of $177,478 was made previously
          when they were turned into idle status. As of September 31, 2008, although
          such
          equipment had been transported and reinstalled in the new workshop building,
          which was completed in the second quarter of 2008, the relevant production
          line
          has not been in operation; therefore such equipment was still regarded
          as idle
          assets.
  **9.**  **Short-term
          Bank Loans** ****
  The
          balance of short-term bank loans as of September 30, 2008 and December
          31, 2007
          was $14,231,723 and $5,252,594, respectively as follows:
 (US
                            dollars)September
                            30, 2008
                        
                        December
                            31, 2007Interest
                            rate
                        
                        
                        
                        Interest
                            rate(per
                        
                        
                        
                        (perLoan
                            Bank
                        
                        Main
                            Terms
                        
                        Principal
                        
                        annum)
                        
                        Principal
                        
                        annum)Industrial
                            and Commercial
                        
                        
                        
                        
                        
                        
                        
                        444,925
                        
                        7.776
                        %Bank
                            of China Ltd.,
                        
                        Two
                            or three-month-term
                        
                        
                        
                        
                        
                        521,589
                        
                        8.07
                        %YiYang
                            Branch(1)
                        
                        loans,
                            bearing benchmark
                        
                        
                        
                        
                        
                        2,349,205
                        
                        8.42
                        %interest
                            rate announced by
                        
                        3,272,077
                        
                        6.57
                        %
                        383,320
                        
                        8.54
                        %People's
                            Bank of China
                        
                        3,408,474
                        
                        8.54
                        %
                        130,055
                        
                        9.13
                        %**
                        **
                        *Subtotal*
                        **
                        *6,680,551*
                        **
                        **
                        **
                        *3,829,094*
                        **
                        **
  16
 **FUDA
                    FAUCET WORKS, INC.**
 Notes
                    to
                    Consolidated Financial Statements
 (Unaudited)
  Two
                            or three-month-termsecured
                            loans, bearing
                        
                        
                        
                        
                        
                        57,000
                        
                        6.25
                        %Bank
                            of China, YiYang
                        
                        benchmark
                            interest rate
                        
                        
                        
                        
                        
                        140,000
                        
                        6.44
                        %Branch
                        
                        announced
                            by People's Bank
                        
                        
                        
                        
                        
                        960,000
                        
                        7.00
                        %of
                            China
                        
                        1,729,000
                        
                        8.693
                        %
                        266,500
                        
                        8.69
                        %**
                        **
                        *Subtotal*
                        **
                        *1,729,000*
                        **
                        **
                        **
                        *1,423,500*
                        **
                        ****
                        **
                        **
                        **
                        **
                        **
                        **
                        **
                        **
                        **
                        **Two
                            or three-month-termChina
                            Construction Bank
                        
                        unsecured
                            loans
                        
                        4,502,195
                        
                        6.57
                        %
                        -
                        
                        -**
                        **
                        *Subtotal*
                        **
                        *4,502,195*
                        **
                        **
                        **
                        *-*
                        **
                        ****
                        **
                        **
                        **
                        **
                        **
                        **
                        **
                        **
                        **
                        **410,660
                        
                        8.5905
                        %Agricultural
                            Bank of
                        
                        One-year
                            term unsecuredChina
                        
                        loans
                        
                        909,317
                        
                        8.591
                        %
                        -
                        
                        -**
                        **
                        *Subtotal*
                        **
                        *1,319,977*
                        **
                        **
                        **
                        *-*
                        **
                        **Total
                        
                        14,231,723
                        
                        
                        
                        5,252,594
  (1)
                The
                    loans from Industrial and Commercial bank of China Ltd., Yiyang
                    Branch,
                    were secured by the land use right for one block of land and
                    10 workshop
                    buildings under a mortgage agreement with the bank dated September
                    6,
                    2004, and on September 6, 2007, this mortgage contract was replaced
                    by a
                    mortgage which will expire on September 5, 2010. See Note
                    7
  **10.**  **Accounts
          Payable**
  The
          balance of accounts payable was $1,140,021 and $686,114 as of September
          30, 2008
          and December 31, 2007, respectively, which included payables to material
          suppliers and professional service providers.
  **11.**  **Related
          Party Transactions**
  The
          transactions between the Company and related parties are classified into
          two
          categories: non-trade and trade.
 
 **(1)
          Ms. Wu Yiting**
  (i)
          Non-trade transactions
  Ms.
          Wu
          Yiting is the Company’s Chief Executive Officer, President and Chairman of the
          Board. She is also the sole stockholder of Fuda Yiyang. See Paragraph (2)
          of
          Note 1 and Note 3 for information relating to the relationship between
          the
          Company and and Fuda Yiyang.
  From
          time
          to time the Company has borrowed money from Ms. Wu for its operations.
          As of
          December 31, 2007, the amount due to Ms. Wu Yiting was $869,802. During
          nine
          months ended September 30, 2008, Ms. Wu Yiting advanced $2,913,131 to the
          Company, and the Company repaid $3,323,811. As of September 30, 2008, the
          amount
          due to Ms. Wu Yiting was $459,122. The loans from Ms. Wu are non-interest
          bearing.
  17
 **FUDA
            FAUCET WORKS, INC.**
 Notes
            to
            Consolidated Financial Statements
 (Unaudited)
 (ii)
          Trade transaction: land use right transfer
  In
          April
          2008, Ms. Wu Yiting transferred to Fuda Yiyang the land use right of one
          block
          of land (covering 229,703 square feet), on which its new workshop buildings
          are
          located. The consideration due to Ms. Wu for the land use right, $1,167,866,
          has
          been paid by the Company.
  **(2)
          Trade transactions: copper purchase from Yiyang KunPeng Worn Metal Recycling
          Co., Ltd.**
 
 Ms.
          Wu
          Yiting holds 80% equity of, and is the chairman of, Yiyang KunPeng Metal
          Recycling Co., Ltd. (“KunPeng”). Mr. Yang Kun, Vice-President of Fuda Yiyang,
          holds the remaining 20% equity of KunPeng.
  The
          Company purchases a significant percentage of copper from KunPeng. During
          the
          nine months ended September 30, 2008 and 2007, the Company purchased copper
          in
          the amount of $11,277,132 and $9,110,664 from KunPeng , representing 56.2%
          and
          54.6% of the total raw material purchased by the Company,
          respectively.
  As
          of
          September 30, 2008 and December 31, 2007, the amount due to Kunpeng in
          connection with the Company’s purchase of copper was $180,096 and $1,189,152,
          respectively.
  **12.**  **Accrued
          Expenses**
  As
          of
          September 30, 2008 and December 31, 2007, the accrued expenses were $312,716
          and
          $112,280, respectively. Accrued expenses mainly consist of accrued salaries
          and
          delivery expenses.
  **13.**  **Equity-based
          Transactions** ****
  (1)
          Authorized shares
  At
          September 30, 2008, the Company’s authorized capital stock consisted of
          20,000,000 shares of preferred stock, par value $0.001 per share and 110,000,000
          shares of common stocks, par value $0.001 per share.
 
 In
          December 2007, the Company’s board of directors and the holders of a majority of
          its capital stock approved a restated certificate of incorporation which
          changes
          the authorized capital stock to 130,000,000 shares, of which 20,000,000
          are
          shares of preferred stock, par value $.001 per share, and 110,000,000 are
          shares
          of common stock, par value $.001 per share. The restated certificate of
          incorporation which reflected the change in authorized capital and par
          value
          became effective on July 31, 2008.
 
 (2)
          Common Stock
  As
          of
          September 30, 2008 and December 31, 2007, the Company had 10,765,968 shares
          and
          10,725,440 shares of common stock issued and outstanding,
          respectively.
 
 In
          July
          2008, the Company issued 30,000 shares of common stock upon exercise of
          warrants, for which it received $54,000.
  18
 **FUDA
            FAUCET WORKS, INC.**
 Notes
            to
            Consolidated Financial Statements
 (Unaudited)
 In
          August
          2008, the Company issued 10,528 shares to four independent directors (2,632
          shares each independent) as part of their compensation, at the price equal
          to
          the close price of the Company’s common stock on the date the board approved the
          stock grants.
 
 (3)
          Preferred stock and Warrants
  As
          of
          September 30, 2008 and December 31, 2007, the Company had 3,090,909 shares
          of
          series A preferred stock issued and outstanding, which were issued on December
          3, 2007 pursuant to a securities purchase agreement and an escrow agreement
          with
          three investors. At the same time the Company also issued to the three
          investors
          warrants to purchase 2,060,606 shares of common stock at $1.80 per share
          and
          4,121,212 shares of common stock at $3.00 per share. On July 18, 2008,
          one of
          the investors exercised its warrants to purchase 30,000 shares of the Company’s
          common stock at $1.80 per share and the Company received the proceeds $54,000.
          In addition, 3,000,000 shares of series A preferred stock are held in escrow
          for
          issuance in the event that the Company does not meet target levels of earnings
          before interest and taxes as defined (“EIBT”) are less than specified levels.
          The 3,000,000 shares that are held in escrow are not treated as outstanding
          since the condition which would result in the delivery of the shares from
          escrow
          has not occurred. The target level was met for 2007. The target number,
          which is
          expressed in RMB, for 2008, is RMB¥2.3045 ($0.338) per share. The dollar
          equivalent is based on the exchange rate in effect on September 30, 2008,
          which
          was RMB¥6.8183 to $1.00.
  If
          the
          targets are not met, the number of shares to be delivered to the investors
          is
          determined by a formula by which the 3,000,000 is multiplied by a percentage
          determined by the following formula: (1/(1-P)) - 1), where P is the percentage
          shortfall.
  EBIT
          is
          defined as income before income taxes and interest, determined in accordance
          with GAAP plus (a) any charges which are reflected under GAAP in the Company’s
          financial statements which relate to the transaction contemplated by the
          purchase agreement and the registration rights agreement and the other
          documents
          executed in connection with the financing, including the issuance of the
          series
          A preferred stock and warrants and any other securities issuable pursuant
          to the
          purchase agreement, the registration rights agreement and the other documents,
          minus (b) the amount, if any, by which all non-recurring losses or expenses
          exceed all non-recurring items or income or gain. EBIT shall not be adjusted
          if
          all non-recurring items of income or gain exceed all non-recurring losses
          or
          expenses. Items shall be deemed to be non-recurring only if they qualify
          as
          non-recurring pursuant to GAAP.
  For
          purpose of determining EBIT per share on a fully-diluted basis, all shares
          of
          common stock issuable upon conversion of convertible securities and upon
          exercise of warrants and options (whether or not vested) shall be deemed
          to be
          outstanding, regardless of whether (i) such shares are treated as outstanding
          for determining diluted earnings per share under GAAP, (ii) such securities
          are
“in the money,” or (iii) such shares may be issued as a result of a 4.9%
          limitation; provided, however, that none of the 3,000,000 shares of series
          A
          preferred stock held in escrow nor the shares of common stock issuable
          upon
          conversion of such series A preferred stock shall be deemed
          outstanding.
 
 The
          Company agreed that, by March 2, 2008, which is 90 days after the closing
          on
          December 3, 2007, it would have appointed such number of independent directors
          that would result in a majority of our directors being independent directors
          and
          we would have an audit committee composed solely of at least three independent
          directors and a compensation committee would have a majority of independent
          directors. The agreement provides that the Company pay liquidated damages
          (i) if
          the Company fails to have a majority of independent directors 90 days after
          the
          closing or (ii) thereafter, if the Company subsequently fails to meet these
          requirements for a period of 60 days for an excused reason, as defined
          in the
          purchase agreement, or 75 days for a reason which is not an excused reason.
          Liquidated damages are payable in cash or additional shares of series A
          preferred stock, with the series A preferred stock being valued at its
          liquidated preference of $1.10 per share. The liquidated damages are computed
          at
          the rate of 12% per annum of the purchase price, with a limit of $408,000.
          The
          appointment of four directors, all of which are independent directors,
          took
          effect on April 28, 2008 and related board committees were created on the
          same
          day. The investors waived their right to liquidated damages resulting from
          the
          failure to have met the required schedule.
  19
  **FUDA
            FAUCET WORKS, INC.**
 Notes
            to
            Consolidated Financial Statements
 (Unaudited)
  The
          Company and the investors entered into a registration rights agreement
          pursuant
          to which the Company is required to have a registration statement filed
          with the
          SEC by February 1, 2008 and declared effective by the SEC not later than
          June
          29, 2008. We are required to pay liquidated damages at the rate of 1,000
          shares
          of series A preferred stock for each day after June 29, 2008 that the
          registration statement is not declared effective or for any period that
          we fail
          to keep the registration statement effective, up to a maximum of 370,000
          shares.
          The number of shares of series A preferred stock issuable pursuant to the
          liquidated damages provision is subject to reduction based on the maximum
          number
          of shares that can be registered under the applicable SEC guidelines. The
          registration statement was declared effective on June 17, 2008 and no liquidated
          damage incurred.
  **14.**  **Retained
          Earnings**
  As
          of
          September 30, 2008 and December 31, 2007, the retained earnings were $7,021,371
          and $7,753,585, respectively. The decrease of $732,214 was due to: (1)
          net
          income $2,836,818 realized during the nine months ended September 30, 2008;
          (2)
          allocation of retained earnings of $3,569,032 (RMB 25 million) to increase
          registered capital of Fuda Yiyang in April 2008, which resulted in the
          increase
          of Fuda Yiyang’s registered capital from $603,321 (RMB 5 million) to $4,172,353
          (RMB 30 million).
  **15.**  **Earnings
          per Share**
  Basic
          earnings per share (EPS) are calculated based on the weighted average shares
          outstanding during the period. Diluted earnings per share include the dilutive
          effect of warrants and convertible preferred stock. There were warrants
          to
          purchase 6,251,818 and 6,151,818 common shares that were outstanding during
          the
          three and nine months ended September 30, 2008 which had an exercise price
          which
          is greater than the average market price, respectively. These warrants
          were not
          included in the calculation of diluted earnings per share. There were no
          dilutive securities for the same period of 2007.
 
 The
          computation of basic and diluted EPS is as follows:
 
 **Three Months Ended September 30,**
                
                **Nine Months Ended September 30,****2008**
                
                **2007**
                
                **2008**
                
                **2007****Basic EPS:**Net
                    income
                
                $
                811,962
                
                $
                1,603,264
                
                $
                2,836,818
                
                $
                3,263,510Weighted
                    average shares outstanding
                
                
                10,752,523
                
                
                10,564,647
                
                
                10,734,533
                
                
                10,564,647Basic
                    EPS
                
                $
                0.08
                
                $
                0.15
                
                $
                0.26
                
                $
                0.31**Diluted
                    EPS:**Net
                    income
                
                $
                811,962
                
                $
                1,603,264
                
                $
                2,836,818
                
                $
                3,263,510Weighted
                    average number of common shares outstanding
                
                
                10,752,523
                
                
                10,564,647
                
                
                10,734,533
                
                
                10,564,647Dilutive
                    warrants
                
                
                -
                
                
                -
                
                
                6,433
                
                
                -Dilutive
                    convertible preferred stock
                
                
                3,090,909
                
                
                -
                
                
                3,090,909
                
                
                -Dilutive
                    weighted average shares
                
                
                13,843,432
                
                
                10,564,647
                
                
                13,831,875
                
                
                10,564,647Diluted
                    EPS
                
                $
                0.06
                
                $
                0.15
                
                $
                0.21
                
                $
                0.31
 
 20
  **FUDA
            FAUCET WORKS, INC.**
 Notes
            to
            Consolidated Financial Statements
 (Unaudited)
  **16.**  **Concentration
          of Suppliers and Customers**
  Two
          largest suppliers accounted for 55.7% and 32.5% of the Company’s raw material
          purchases for the three months ended September 30, 2008. The largest suppliers
          accounted for 84.4% for the comparable period of 2007. No other supplier
          accounted for more than 10% of our purchases for either period. KunPeng
          was the
          largest supplier for the three months ended September 30, 2008 and 2007.
          Ms. Wu
          Yiting, the Company’s Chief Executive Officer, is the 80% stockholder and chief
          executive officer of KunPeng. (See Note 12).
  Two
          suppliers accounted for 56.2% and 16.7% of the Company’s raw material purchases
          for the nine months ended September 30, 2008, of which KunPeng was the
          largest
          supplier. Two suppliers accounted for 54.6% and 37.6% for the comparable
          period
          of 2007, with KunPeng being the largest one. No other supplier accounted
          for
          more than 10% of our purchases for either period.
  The
          following table sets forth information as to sales to each customer that
          accounted for 10% or more of the Company’s sales in the three and nine months
          ended September 30, 2008 and 2007.
 
 Three Months Ended September 30,
                
                Nine Months Ended September 30,2008
                
                2007
                
                2008
                
                2007Amount ($)
                
                %
                
                Amount ($)
                
                %
                
                Amount ($)
                
                %
                
                Amount ($)
                
                %Super Way General Trading L.L.C
                
                
                5,287,303
                
                
                51.8
                %
                
                
                *
                
                
                
                
                16,791,842
                
                
                58.5
                %
                
                
                *Isabella
                    Hardware Trading L.L.C
                
                
                1,710,349
                
                
                16.7
                %
                
                4,876,570
                
                
                69.5
                %
                
                7,902,202
                
                
                27.5
                %
                
                12,894,862
                
                
                72.0
                %Automax
                    Enterprises Co., Ltd.
                
                
                1,650,089
                
                
                16.2
                %
                
                
                *
                
                
                
                
                
                
                
                
                
                
                
                *Venus
                    Building Materials Trading L.L.C.
                
                
                1,566,370
                
                
                15.3
                %
                
                
                *
                
                
                
                
                
                *
                
                
                
                
                
                *Al
                    Jaber Building Material Trading L.L.C
                
                
                
                *
                
                
                
                
                1,307,501
                
                
                18.6
                %
                
                
                *
                
                
                
                
                3,738,890
                
                
                20.9
                %
  *
                    less than 10%
  **17.**  **Segment
          Reporting**
  The
          Company operates in one segment - producing and distributing brass faucets
          and
          related spouts and fittings, no business segment information is presented.
          The
          following table sets forth information concerning the Company’s net sales
          classified by the major geographic areas in which it sold its
          products:
  21
 **FUDA
              FAUCET WORKS, INC.**
 Notes
              to
              Consolidated Financial Statements
 (Unaudited)
 Three Months Ended September 30,2008
                
                2007Amount
                  (US dollars)
                
                Percentage
                
                Amount
                  (US dollars)
                
                PercentageUnited Arab Emirates
                
                $
                8,647,742
                
                
                84.7
                %
                $
                6,184,071
                
                
                88.1
                %Russia
                
                
                1,566,370
                
                
                15.3
                %
                
                617,629
                
                
                8.8
                %Other
                
                
                -
                
                
                0.0
                %
                
                216,977
                
                
                3.1
                %Total
                
                $
                10,214,112
                
                
                100.0
                %
                $
                7,018,677
                
                
                100.0
                %
  Nine Months Ended September 30,2008
                
                2007Amount
                  (US dollars)
                
                Percentage
                
                Amount
                  (US dollars)
                
                PercentageUnited Arab Emirates
                
                $
                25,853,739
                
                
                90.0
                %
                $
                16,847,296
                
                
                94.0
                %Russia
                
                
                2,864,812
                
                
                10.0
                %
                
                678,493
                
                
                3.8
                %Other
                
                
                -
                
                
                0.0
                %
                
                392,119
                
                
                2.2
                %Total
                
                $
                28,718,551
                
                
                100.0
                %
                $
                17,917,908
                
                
                100.0
                %
 
 The
          Company’s products fall within three categories - kitchen and bar faucets,
          bathroom faucets and bathroom accessories. The following table sets forth
          our
          sales in each product category for the three months ended September 30,
          2008 and
          2007.
 
 (US dollars)Three Months Ended September 30,2008
                
                2007Kitchen
                    and bar faucets
                
                $
                4,555,663
                
                $
                2,779,683Bathroom
                    faucets
                
                
                3,108,700
                
                
                3,927,680Bathroom
                    accessories
                
                
                2,547,741
                
                
                311,314Total
                
                $
                10,214,112
                
                $
                7,018,677
 
 (US dollars)Nine Months Ended September 30,2008
                
                2007Kitchen
                    and bar faucets
                
                $
                11,169,910
                
                $
                7,643,625Bathroom
                    faucets
                
                
                14,902,000
                
                
                9,683,627Bathroom
                    accessories
                
                
                2,644,633
                
                
                590,656Total
                
                $
                28,718,551
                
                $
                17,917,908
  **18.**  **Commitments
          and Contingencies**
  The
          Company is a party to a
          one
          year lease dated March 2, 2008, for an office in Dubai at a monthly rent
          $1,467.
          Rent expense under operating leases was $13,203 for the nine months ended
          September 30, 2008 and2007 and $4,401 for the three months ended September
          30,
          2008 and 2007.
  22
  **ITEM
          2.**  **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
          OPERATIONS.**
  **Overview**
  Prior
          to
          December 3, 2007, we were a public reporting blind pool company with no
          assets.
          On December 3, 2007, we consummated a share exchange agreement with Jibrin
          Issa
          Jibrin Al Jibrin, trustee of the Wu Yitang Trust, which was the sole stockholder
          of Moral Star BVI. Pursuant to the share exchange agreement, the Trustee
          transferred to us all of the capital stock of Moral Star BVI in exchange
          for
          10,564,647 shares of our common stock, which were issued to the Trust and
          the
          designees of the Trust, some of whom acquired their shares as nominees
          of Ms. Wu
          Yiting, our chief executive officer. As a result, Moral Star BVI became
          our
          wholly-owned subsidiary and our sole business became the business of Moral
          Star
          BVI and its affiliated companies. The transaction is treated as a reverse
          acquisition. As a result, for accounting purposes, Moral Star BVI is treated
          as
          the acquiring company for accounting purposes and our financial statements
          for
          period prior to December 3, 2007 reflect the historical operations of Fuda
          Yiyang.
  We
          have a
          series of contractual arrangements with Fuda Yiyang, which provide us with
          both
          control over the operations of Fuda Yiyang and the net income from Fuda
          Yiyang’s
          operations. Thus this discussion relates to the business, financial condition
          and results of operations of Fuda Yiyang.
  We
          develop, manufacture, distribute and market high-quality brass faucets
          and
          related spouts and fittings. We produce all our products in China and export
          most of them to international markets, including Middle East, primarily
          United
          Arab Emirates, and Russia. In the first three quarter of 2008, we had no
          sales
          in China, and 90% of our sales were made to distributors in the United
          Arab
          Emirates and 10% of sales to distributors in Russia. We do not have long-term
          contracts with any of our customers.
  Our
          principal raw material is copper, a significant portion of which we purchase
          from KunPeng, a related party. The price of copper is subject to significant
          fluctuations. During the past year the price had been subject to significant
          increases, however, commencing in August 2008, the price has been decreasing
          swiftly. The price of copper affects our gross margins, since it affects
          both
          the cost of our principal raw material and the price that customers are
          willing
          to pay for the finished product. In
          times
          of increasing prices, we need to try to fix the price at which we purchase
          copper in order to avoid increases in costs which we cannot recoup through
          increases in sales prices. Similarly, in times of decreasing prices, we
          may have
          purchased copper at a price which is high in terms of the price at which
          we can
          sell our product .
  We
          sell
          our products to a small number of customers, each of which is a distributor
          of
          our products. Different customers may account for significant revenue in
          each
          period. As a result, the loss of any customer could have a material adverse
          effect upon our business if we are not able to replace that customer. The
          following table sets forth information as to each customer that accounted
          for
          10% or more of our revenue for the three and nine three month periods ended
          September 30, 2008 and 2007 (dollars in thousands).
  23
  Three Months Ended September 30,
                
                Nine Months Ended September 30,2008
                
                2007
                
                2008
                
                2007Amount ($)
                
                %
                
                Amount ($)
                
                %
                
                Amount ($)
                
                %
                
                Amount ($)
                
                %Super
                    Way General Trading L.L.C
                
                
                5,287,303
                
                
                51.8
                %
                
                
                *
                
                
                
                
                16,791,842
                
                
                58.5
                %
                
                
                *Isabella
                    Hardware Trading L.L.C
                
                
                1,710,349
                
                
                16.7
                %
                
                4,876,570
                
                
                69.5
                %
                
                7,902,202
                
                
                27.5
                %
                
                12,894,862
                
                
                72.0
                %Automax
                    Enterprises Co., Ltd.
                
                
                1,650,089
                
                
                16.2
                %
                
                
                *
                
                
                
                
                
                *
                
                
                
                
                
                *Venus
                    Building Materials Trading L.L.C.
                
                
                1,566,370
                
                
                15.3
                %
                
                
                *
                
                
                
                
                
                *
                
                
                
                
                
                *Al
                    Jaber Building Material Trading L.L.C
                
                
                
                *
                
                
                
                
                1,307,501
                
                
                18.6
                %
                
                
                *
                
                
                
                
                3,738,890
                
                
                20.9
                %  *
                      less than 10%
 
 At
          September 30, 2008, we had accounts receivable of $10.13 million, representing
          accounts receivables from four customers, all of which were less than 90
          days
          old. These four customers accounted for 52.0%, 16.9%, 16.3% and 14.8% of
          our
          accounts receivable. Despite the age of the receivables, we believe that
          these
          receivables are fully collectible. The largest receivables are from our
          Super
          Way General Trading and Isabella Hardware Trading, respectively.
  Our
          growth is dependent on expanding the production capacity, upgrading the
          products, improving quality and expanding our marketing effort to develop
          a
          larger customer base. In the second quarter 2008, we completed the construction
          of a new factory, which was put into operation in April 2008. As a result
          of
          this expansion, our production capacity increased to 3.5 million sets,
          as
          compared to 1.2 million sets at the end of 2007. In addition, the upgrade
          and
          improvement of our original facilities has also finished in the third quarter
          of
          2008.
 
 Since
          our
          products are generally sold to companies in the construction and home
          improvement segments, any downturn in the housing and renovation market
          in those
          areas where we sell out products could have a material adverse effect upon
          our
          business. During the nine months ended September 30, 2008, our sales were
          made
          primarily to distributors in Dubai, United Arab Emerates, and, to a lesser
          extent, in Russia.
 
 Our
          operations have been financed largely with short-term bank loans, which
          typically have a two or three-month term and have generally been rolled
          over at
          the end of the term. Although in the past these notes have been rolled
          over at
          the then current interest rate, we cannot assure you that the banks will
          continue to lend us money.
  **Significant
          Accounting Estimates and Policies**
  The
          discussion and analysis of our financial condition and results of operations
          is
          based upon our condensed consolidated financial statements, which have
          been
          prepared in accordance with US GAAP. The preparation of these financial
          statements requires management to make estimates and judgments that affect
          the
          reported amounts of assets and liabilities. On an on-going basis, we evaluate
          our estimates including the allowance for doubtful accounts, the salability
          and
          recoverability of our products, impairment of long-term assets, income
          taxes and
          contingencies. We base our estimates on historical experience and on other
          assumptions that we believe to be reasonable under the circumstances, the
          results of which form our basis for making judgments about the carrying
          values
          of assets and liabilities that are not readily apparent from other sources.
          Actual results may differ from these estimates under different assumptions
          or
          conditions.
  **Revenue
          Recognition** - We
          recognizes sales of our products in accordance with SEC Staff Accounting
          Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements” as
          amended by SAB No. 104, “Revenue Recognition.” Sales represent the invoiced
          value of goods, net of value added tax (“VAT”), if any, and are recognized upon
          delivery of goods and passage of title.
  24
  Pursuant
          to China’s VAT rules and regulations, Fuda Yiyang’s sales in China are subject
          to a VAT tax rate of 17% (“output VAT”) as an ordinary VAT taxpayer, and the
          relating revenues were recognized by the invoiced value offsetting 17%
          output
          VAT. However, our sales outside of China are eligible for VAT exemption,
          credit
          and refund policy, and the relating revenues were equal to the invoiced
          value.
          The applicable refund rate from January 1, 2006 to June 30, 2007 was 13%
          and
          since July 1, 2007, it has been 9%. However the refund rate for valve,
          one
          category of our products, was increased to 13% since July 1, 2008. The
          actual
          VAT payable is the balance after offsetting both VAT paid on purchases
          (“input
          VAT”) and the amount exempted or credited.
  **Variable
          Interest Entity** –
Our
          condensed consolidated financial statements include the financial statements
          of
          our wholly owned subsidiaries, Moral Star BVI and Moral Star China, as
          well as
          Fuda Yiyang, which is a variable interest entity whose financial statements
          are
          consolidated with ours pursuant to FASB Interpretation No. 46R “Consolidation of
          Variable Interest Entities” (“FIN 46R”), an Interpretation of Accounting
          Research Bulletin No. 51. FIN 46R requires a variable interest entity to
          be
          consolidated by a company if that company is subject to a majority of the
          risk
          of loss for the variable interest entity or is entitled to receive a majority
          of
          the variable interest entity’s residual returns. Variable interest entities are
          those entities in which we, through contractual arrangements, bear the
          risks of,
          and enjoy the rewards normally associated with ownership of the entities,
          and
          therefore we are the primary beneficiary of these entities.
  Moral
          Star China is a party to a series of agreements with Fuda Yiyang. These
          agreements include a management agreement pursuant to which all net income
          after
          deduction of necessary expenses, if any, generated by Fuda Yiyang is paid
          to
          Moral Star China and Moral Star China is responsible for paying Fuda Yiyang’s
          obligations incurred in connection with its business. In addition, Moral
          Star
          China manages and controls all of the funds of Fuda Yiyang. Moral Star
          China
          also has the right to purchase Fuda Yiyang’s equipment and patents and lease its
          manufacturing plants, land and remaining equipment. This agreement is designed
          so that Moral Star China can conduct its business in China. Pursuant to
          two
          other agreements, the sole stockholder of Fuda Yiyang, who is also our
          chief
          executive officer, has pledged all of her equity in Fuda Yiyang as security
          for
          performance of Fuda Yiyang’s obligations to Moral Star China, and she granted
          Moral Star China an irrevocable grant of a proxy over her stock in Fuda
          Yiyang.
          As a result, Fuda Yiyang is considered a variable interest entity.
 
 **Comprehensive
          Income (Loss)** - We
          have adopted Statements of Financial Accounting Standards (“SFAS”) No. 130,
“Reporting Comprehensive Income,” which establishes standards for reporting and
          presentation of comprehensive income (loss) and its components in a full
          set of
          general-purpose financial statements. We have has chosen to report comprehensive
          income (loss) in the statements of operations and comprehensive
          income.
  **Income
          Taxes** - We
          account for income taxes under the provisions of SFAS No. 109, “Accounting for
          Income Taxes”, which requires recognition of deferred tax assets and liabilities
          for the expected future tax consequences of events that have been included
          in
          the consolidated financial statements or tax returns. Deferred tax assets
          and
          liabilities are recognized for the future tax consequence attributable
          to the
          difference between the tax bases of assets and liabilities and their reported
          amounts in the financial statements. Deferred tax assets and liabilities
          are
          measured using the enacted tax rate expected to apply to taxable income
          in the
          years in which those temporary differences are expected to be recovered
          or
          settled. The effect on deferred tax assets and liabilities of a change
          in tax
          rates is recognized in income in the period that includes the enactment
          date. We
          establish a valuation allowance when it is more likely than not that the
          assets
          will not be recovered.
  25
  With
          the
          approvals of the County Government of Yiyang on July 17, 2007, Fuda Yiyang
          was
          exempt from corporate income taxes during 2008 and 2007. On March 16, 2007,
          China’s parliament, the National People’s Congress, adopted the Enterprise
          Income Tax Law, which took effect on January 1, 2008. The new income tax
          law
          sets unified income tax rate for domestic and foreign companies at 25%,
          except
          that qualified high and new technology enterprises are eligible for a 15%
          corporate income tax rate. Under the new income tax law, the low preferential
          tax rate shall gradually increase to the new tax rate within five years
          after
          the implementation of this law. Fuda Yiyang had no income tax as a result
          of the
          exemption.
  **Accounts
          Receivable** –
We
          perform ongoing credit evaluations of our customers and intend to establish
          an
          allowance for doubtful accounts when outstanding balances are not considered
          fully collectable. According to our credit policy, we generally provides
          100%
          bad debt provision for the amounts outstanding over 180 days after the
          deduction
          of the amount subsequently settled after the balance sheet date, which
          management believes is consistent with industry practice.
  We
          may
          require our customers to make a partial payment when placing an order,
          based on
          our credit evaluation. We generally require payment within three months.
          We
          maintain a policy that all sales are final and we do not allow returns.
          No
          return occurred in the three and nine months ended September 30, 2008 and
          2007.
          Based on industry practice and the credit history of customers, we believe
          the
          accounts receivable shown on its balance sheets are fully
          collectable.
  **Inventories** -
          Inventories are stated at the lower of cost, determined on a weighted average,
          method, and net realizable value. Work in progress and finished goods are
          composed of direct material, direct labor and a portion of manufacturing
          overhead. Net realizable value is the estimated selling price, in the ordinary
          course of business, less estimated costs to complete and dispose. We believe
          that there was no obsolete inventory as of September 30, 2008 and December
          31,
          2007.
 
 **Property,
          Plant and Equipment** -
          Property, plant and equipment are stated at cost. Major expenditures for
          betterments and renewals are capitalized while ordinary repairs and maintenance
          costs are expensed as incurred. Depreciation and amortization is provided
          using
          the straight-line method over the estimated useful life of the assets after
          taking into account the estimated residual value.
 
 There
          is
          no private ownership of commercial land in China. All land ownership is
          held by
          the government of China, its agencies and collectives. Land use rights
          are
          obtained from government, and are typically renewable. Land use rights
          can be
          transferred upon approval by the land administrative authorities of China
          (State
          Land Administration Bureau) upon payment of the required transfer fee.
          Under
          four “State-owned Land Use Right Certificates,” issued in September 23, 1999,
          November 23, 1999, July 19, 2001 and February 28, 2003, we own the use
          right of
          three blocks of industrial-use land (covering 491,372 square feet) for
          the term
          of 50 years, beginning from issuance date of the certificates, respectively.
          The
          block acquired in 2008 was transferred by Wu Yiting to the Company for
          $1,167,866, which had been fully paid. We record the property subject to
          land
          use rights as property.
  **Impairment
          of Long-lived Assets** - Our
          long-lived assets consist of property, including land use rights, buildings
          and
          equipment. As of September 30, 2008 and December 31, 2007, the net value
          of
          property and equipment was $14,446,883 and $4,615,035, respectively, which
          represented approximately 43.8% and 22.2% of our total assets.
  Since
          December 2004, property and equipment, including land use rights, workshop
          buildings and equipment that are carried as $374,825 were unused. Since
          the
          value of land in similar sections of the city was increasing, no impairment
          on
          land use right has been charged. The workshop buildings were maintained
          in good
          condition, and most of the equipment have been transported and reinstalled
          into
          the Company’s new workshop buildings, which is now in the process of trial run.
          A provision for impairment of certain idle assets in the amount of $177,478
          was
          made previously when they became idle.
  26
  **Recent
          Accounting Pronouncements**
  See
          Note
          2 to the Consolidated Financial Statements.
  **Results
          of Operations**
  **Three
          Months ended September 30, 2008 and 2007**
  The
          following table sets forth information from our statements of operations
          for the
          three months ended September 30, 2008 and 2007, in thousand U.S. dollars
          and as
          a percentage of net sales.
 
 Three Months Ended September 30,2008
                
                2007Item
                
                
                
                Percentage
                
                
                
                PercentageThousands of
                
                of
                
                Thousands of
                
                ofUS dollars
                
                Net sales
                
                US dollars
                
                Net salesNet
                    sales
                
                
                10,214
                
                
                100.0
                %
                
                7,019
                
                
                100.0
                %Cost
                    of sales (exclusive of items shown separately below):Non-related
                    parties
                
                
                5,880
                
                
                57.6
                %
                
                1,017
                
                
                14.5
                %Related
                    parties
                
                
                2,640
                
                
                25.8
                %
                
                4,576
                
                
                65.2
                %8,520
                
                
                83.4
                %
                
                5,593
                
                
                79.7
                %Gross
                    margin
                
                
                1,694
                
                
                16.6
                %
                
                1,426
                
                
                20.3
                %Operating
                    expenses:Selling
                    expenses
                
                
                93
                
                
                0.9
                %
                
                54
                
                
                0.8
                %General
                    and administrative
                
                
                429
                
                
                4.2
                %
                
                146
                
                
                2.1
                %Officers’
                    compensation
                
                
                32
                
                
                0.3
                %
                
                6
                
                
                0.1
                %Depreciation
                    and amortization
                
                
                36
                
                
                0.4
                %
                
                18
                
                
                0.3
                %Consulting
                    and professional fees
                
                
                98
                
                
                1.0
                %
                
                111
                
                
                1.6
                %Total
                    operating expenses
                
                
                688
                
                
                6.7
                %
                
                335
                
                
                4.8
                %Income
                    from transfer of patent - net
                
                
                -
                
                
                
                
                
                576
                
                
                8.2
                %Operating
                    income
                
                
                1,006
                
                
                9.8
                %
                
                1,667
                
                
                23.7
                %Other
                    income (expenses):Other
                    income
                
                
                122
                
                
                1.2
                %
                
                32
                
                
                0.5
                %Interest
                    expense
                
                
                (298
                )
                
                (2.9
                )%
                
                (96
                )
                
                (1.4
                )%Foreign
                    currency transactions loss
                
                
                (17
                )
                
                (0.2
                )%
                
                -
                
                
                0.0
                %(193
                )
                
                (1.9
                )%
                
                (64
                )
                
                (0.9
                )%Net
                    income
                
                
                813
                
                
                8.0
                %
                
                1,603
                
                
                22.8
                %Other
                    comprehensive income:Foreign
                    currency translation adjustment
                
                
                89
                
                
                0.9
                %
                
                120
                
                
                1.7
                %Comprehensive
                    income
                
                
                902
                
                
                8.8
                %
                
                1,723
                
                
                24.5
                %
 
 27
  **Net
            Sales**
 Net
            sales
            were $10,214,112 and $7,018,677 for the three months ended September
            30,2008 and
            2007, respectively, representing an increase $3,195,435, or 45.5%. The
            increase
            is mainly due to the success of our marketing efforts in United Arab
            Emirates
            and Russia, where substantially all of our products are sold.
  **Cost
          of Sales; Gross Margin**
 Cost
          of
          sales was $8,519,446 (of which $2,639,658 represented raw materials purchased
          from KunPeng, a related party) and $5,592,999 (of which $4,575,883 represented
          raw materials purchased from KunPeng ) for the three months ended September
          30,
          2008 and 2007, respectively. The increase of $2,926,447, or 52.3%, was
          primarily
          due to the rapid increase of sales. Cost of sales is the cost of finished
          goods
          sold, including raw materials, labor costs and manufacturing overhead.
          Manufacturing overhead covers the depreciation of production facilities.
          We
          treat delivery expenses as a selling expense rather than as an element
          of cost
          of sales.
  As
          a
          result, our gross profit was $1,694,666 for third quarter of 2008, representing
          gross margin of 16.6%, compared with $1,425,678 for the same period of
          2007,
          representing a gross margin of 20.3%. The decline in the gross margin reflected
          the increased depreciation included in cost of sales with the completion
          of the
          new factory and betterment of the original manufacturing facilities, and
          the  increased
          percentage of copper used in  some
          products pursuant to customer requirements.
 
 **Selling
          Expenses**
 During
          the third quarter of 2008, selling expenses were $93,120, an increase of
          $39,084, or 72.3%, from $54,036 for the same period of 2007, resulting
          from the
          increase in sales. Selling expenses include delivery expense, advertising
          and
          salaries.
 
 **General
          and administrative**
 General
          and administrative expenses were $429,265 and $145,538 for the three months
          ended September 30, 2008 and 2007, an increase of $283,727 or 195.0%. General
          and administrative expenses include salaries, insurance premium, business
          entertainment, travel and entertainment, rent, office expense, car expenses
          and
          insurance costs. The significant increase is mainly resulted from the expansion
          of our operating activities in Fuda Yiyang, which led to the increased
          amount of
          salaries, insurance, car expenses, business entertainment, travel, office
          expenses.
  **Officers’
          compensation**
 Officers’
          compensation, which includes compensation to our independent directors,
          was
          $31,588 and $5,962 for three months ended September 30, 2008 and 2007,
          respectively, an increase $25,626 or 429.8%. The increase was mainly resulted
          from the compensation for four independent directors who were elected at
          the end
          of April 2008. During the third quarter of 2008, their compensation was
          $16,667
          in total, including monthly fees and amortization of the value of the common
          stock issued to them over a one-year term.
  **Depreciation
          and amortization**
 Depreciation
          and amortization, excluding depreciation included in cost of sales, increased
          $17,917 or 97.3% from $18,417 of third quarter of 2007 to $36,334 of comparable
          period of 2008. The increase in depreciation and amortization is mainly
          due to
          additional office equipment and automobiles purchased in 2008.
  **Consulting
          and professional fees**
 During
          the three months ended September 30, 2008, the Company incurred $98,207
          consulting and professional fees, representing $12,733 or 11.5% decrease
          from
          $110,940 for the comparable period of 2007. The decrease in consulting
          and
          professional fees was mainly due to high consulting and professional fees
          in
          connection with reverse merger and financing in 2007.
 
 28
  **Income
          from Transfer of Patent**
 During
          the third quarter of 2007, we transferred two patents to a non-affiliated
          company for $621,451. The costs relating to the development of these patents
          had
          been expensed as incurred and not capitalized. As a result, the basis of
          these
          patents was zero. We recognized income of $576,493, representing the purchase
          price less related taxes and expenses.
 
 **Net
          Interest Expense**
 Net
          interest expense, offsetting minor interest income, was $298,446 and $96,220
          for
          the third quarter of 2008 and 2007, respectively, representing a $202,226,
          or
          210.2% increase, as a result of both the rapid increase of short-term bank
          loans
          to finance our growth and increases in the interest rate.
  **Net
          Foreign Currency Transactions Loss**
 Net
          foreign currency loss during third quarter of 2008 was $17,286. We did
          not incur
          any foreign significant exchange loss during the third quarter of 2007.
          The
          foreign exchange loss in 2008 reflected a foreign exchange loss on accounts
          receivable from the customers out of China, offsetting minor foreign exchange
          gain, which generated from loans of United States dollars
 
 **Net
          Income**
 Principally
          as a result of the lower gross margin, the increase in operating expenses
          and
          interest expense and the non-recurring income from the transfer of patents
          in
          the third quarter of 2007, our net income for the third quarter of 2008
          was
          $811,962, or $0.08 per share (basic) and $0.06 per share (diluted), compared
          with and $1,603,264, or $0.15 per share (basic and diluted), representing
          a
          decrease of $791,302, or 49.4%.
  29
  **Nine
          Months ended September 30, 2008 and 2007**
  The
          following table sets forth information from our statements of operations
          for the
          nine months ended September 30, 2008 and 2007, in dollars and as a percentage
          of
          net sales (dollars in thousands).
 
 Nine Months Ended September 30,2008
                
                2007Percentage
                
                
                
                PercentageItem
                
                Thousands of
                
                of
                
                Thousands of
                
                ofUS dollars
                
                Net sales
                
                US dollars
                
                Net salesNet
                    sales
                
                
                28,719
                
                
                100.0
                %
                
                17,918
                
                
                100.0
                %Cost
                    of sales (exclusive of items shown separately below):Non-related
                    parties
                
                
                12,369
                
                
                43.1
                %
                
                4,596
                
                
                25.7
                %Related
                    parties
                
                
                10,946
                
                
                38.1
                %
                
                9,771
                
                
                54.5
                %23,315
                
                
                81.2
                %
                
                14,367
                
                
                80.2
                %Gross
                    margin
                
                
                5,404
                
                
                18.8
                %
                
                3,551
                
                
                19.8
                %Operating
                    expenses:Selling
                    expenses
                
                
                334
                
                
                1.2
                %
                
                183
                
                
                1.0
                %General
                    and administrative
                
                
                975
                
                
                3.4
                %
                
                301
                
                
                1.7
                %Officers’
                    compensation
                
                
                61
                
                
                0.2
                %
                
                18
                
                
                0.1
                %Depreciation
                    and amortization
                
                
                87
                
                
                0.3
                %
                
                25
                
                
                0.1
                %Consulting
                    and professional fees
                
                
                268
                
                
                0.9
                %
                
                111
                
                
                0.6
                %Total
                    operating expenses
                
                
                1,725
                
                
                6.0
                %
                
                638
                
                
                3.6
                %Income
                    from transfer of patent – net
                
                
                -
                
                
                0.0
                %
                
                576
                
                
                3.2
                %Operating
                    income
                
                
                3,679
                
                
                12.8
                %
                
                3,489
                
                
                19.5
                %Other
                    income (expenses):Other
                    income
                
                
                136
                
                
                0.5
                %
                
                38
                
                
                0.2
                %Interest
                    expense
                
                
                (594
                )
                
                (2.1
                )%
                
                (266
                )
                
                (1.5
                )%Foreign
                    currency transactions loss
                
                
                (384
                )
                
                (1.3
                )%
                
                -
                
                
                0.0
                %(842
                )
                
                (2.9
                )%
                
                (228
                )
                
                (1.3
                )%Net
                    income
                
                
                2,837
                
                
                9.9
                %
                
                3,261
                
                
                18.2
                %Other
                    comprehensive income:Foreign
                    currency translation adjustment
                
                
                975
                
                
                3.4
                %
                
                297
                
                
                1.7
                %Comprehensive
                    income
                
                
                3,812
                
                
                13.3
                %
                
                3,558
                
                
                19.9
                %
 
 **Net
          Sales**
 Net
          sales
          were $28,718,551 and $17,917,908 for the nine months ended September 30,2008
          and
          2007, respectively, representing an increase $10,800,643, or 60.3%. The
          increase
          is mainly due to the success of our marketing efforts in United Arab Emirates
          and Russia, where substantially all of our products are sold.
  **Cost
          of Sales; Gross Margin**
 Cost
          of
          sales was $23,315,179 (of which $10,946,246 represented raw materials purchased
          from KunPeng, a related party) and $14,366,466 (of which $9,770,632 represented
          raw materials purchased from KunPeng ) for the nine months ended September
          30,
          2008 and 2007, respectively. The increase of $8,948,713, or 62.3%, was
          primarily
          due to the rapid increase of sales. Cost of sales is the costs of finished
          goods
          sold, including raw materials, labor costs and manufacturing overhead.
          Manufacturing overhead covers the depreciation of production facilities.
          We
          treat delivery expenses as a selling expense rather than as an element
          of cost
          of sales.
 
 As
          a
          result, our gross margin was $5,403,372 for the nine months ended September
          30,
          2008, representing gross profit margin of 18.8%, compared with $3,551,442
          for
          the same period of 2007, representing a gross margin of 19.8%. The decline
          in
          the gross margin reflected the increased depreciation included in cost
          of sales
          with the completion of the new factory and betterment of the original
          manufacturing facilities, and the  increased
          percentage of copper used in  some
          products in pursuant to customer requirements.
  **Selling
          Expenses**
 During
          the nine months ended September 30, 2008, selling expenses were $333,553,
          an
          increase of $150,833, or 82.5%, from $182,720 for the same period of 2007.
          Selling expenses include delivery expense, advertising and salaries. This
          marked
          increase is mainly attributable to significantly increase of delivery expenses
          (from $132,339 to $308,551) resulting from both the growth in sales volume
          and
          the increased shipping rate and sales salaries (from $9,306 to $41,958).
          Our
          advertising expenses decreased from $36,982 to $7,966.
  30
  **General
          and administrative**
 General
          and administrative expenses were $975,230 and $300,974 for the nine months
          ended
          September 30, 2008 and 2007, an increase of $674,256 or 224.0%. General
          and
          administrative expenses include salaries, insurance premium, business
          entertainment, travel and entertainment, rent, office expense, car expenses
          and
          insurance costs. The significant increase is mainly resulted from the expansion
          of our operating activities in Fuda Yiyang, which led to the increased
          amount of
          salaries, insurance, car expenses, business entertainment, travel, office
          expenses.
 
 **Officers’
          compensation**
 Officers’
          compensation, which includes compensation to our independent directors,
          was
          $61,154 and $17,609 for the nine months ended September of 2008 and 2007,
          respectively, with an increase $43,545 or 247.3%. The increase was mainly
          resulted from the compensation for four independent directors who were
          elected
          at the end of April. During the nine months ended September 30, 2008, their
          compensation was $41,667 in total, including monthly fees and amortization
          of
          the value of common stock to be issued to them over a one-year
          term.
  **Depreciation
          and amortization**
 Depreciation
          and amortization, excluding depreciation included in cost of sales, increased
          $61,889 or 250.7% from $24,689 during the nine months ended September 30,
          2008
          of 2007 to $86,578 of comparable period of 2008. The increase in depreciation
          and amortization is mainly due to additional office equipment and automobiles
          purchased in 2008.
  **Consulting
          and professional fees**
 During
          the nine months ended September 30, 2007, the Company incurred consulting
          and
          professional fees of $110,940. During the comparable period of 2008, the
          Company
          incurred $268,053 consulting and professional fees. The increase was mainly
          due
          to operation as a public company in 2008, such as consulting fees relating
          to
          registration statements , road shows and etc.
 
 **Income
          from Transfer of Patent**
 During
          the third quarter of 2007, we transferred two patents to a non-affiliated
          company for $621,451. The costs relating to the development of these patents
          had
          been expensed as incurred and not capitalized. As a result, the basis of
          these
          patents was zero. We recognized income of $576,493, representing the purchase
          price less related taxes and expenses.
 
 **Net
          Interest Expense**
 Net
          interest expense, offsetting minor interest income, was $593,631 and $265,540
          for the nine months of 2008 and 2007, respectively, representing a $328,091,
          or
          123.6% , increase, as a result of the both rapid increase of short-term bank loans
          and
          interest rate.
  **Foreign
          Currency Transaction Loss**
 Net
          foreign Currency Transaction loss during the nine months ended September
          30,
          2008 was $384,316. We did not incur any foreign exchange loss during the
          same
          period of 2007. The foreign exchange loss in 2008 reflected a foreign exchange
          loss on accounts receivable from the customers out of China, offsetting
          minor
          foreign exchange gain, which generated from loans of United States dollars.
  31
  **Net
          Income**
 As
          a
          result of the factors described above, our net income for the nine months
          ended
          September 30, 2008 was $2,836,818, or $0.26 per share (basic) and $0.21
          per
          share (diluted) compared with $3,263,510, or $0.31 per share (basic and
          diluted), representing a decrease of $426,692, or 13.1%.
  **Liquidity
          and Capital Resources**
  At
          September 30, 2008, we had working capital of $2,062,700, reflecting a
          current
          ratio of 1.1:1 and quick ratio of 0.7:1, compared to working capital of
          $7,988,451, reflecting a current ratio 2.0:1 and quick ratio of 1.0:1 as
          of
          December 31, 2007.
 
 As
          of
          September 30, 2008 and December 31, 2007, we had cash of $1,083,201 and
          $169,319, respectively.
  During
          nine months end September 30, 2008, our operations provided cash of $1,629,113
          as compared with cash generated by operating activities of $229,573 for
          the same
          period of 2007. The improvement of our cash position in operating activities
          was
          attributable to the increase of sales and better collection of accounts
          receivable.
  During
          the nine months ended September 30, 2008, accounts receivable increased
          from
          $487,471(excluding receivables from a related party $6,996,332) to $10,130,214,
          representing receivables from four customers which were less than 90 days
          old.
          At December 31, 2007, most of our receivables ($6,996,322) were from a
          related
          party and are shown on the December 31, 2007 balance sheet as “due from related
          party - trade.” This amount was paid in full and there was no comparable
          receivable at September 30, 2008.
  During
          the nine months end September 30, 2008, we utilized $9,872,620 to purchase
          fixed
          assets, principally buildings, equipments and land use right, as compared
          to
          $1,734,721 for the same period during 2007.
  During
          nine months ended September 30, 2008, our financing activities provided
          $8,231,725 as compared with net cash inflow of $1,060,910 for the same
          period of
          2007. We received $29,640,778 from short-term loans from several banks,
          which
          was partly offset by repayment of $21,051,283 to the banks. Loan proceeds
          from
          Ms. Wu Yiting, a related party were $2,913,131, which was offset by repayment
          to
          Ms. Wu of $3,324,901 in nine months ended September 30, 2008. We also received
          $54,000 from the exercise of warrants. In the same period of 2007, we made
          short-term loans from banks of $8,827,891 with repayment of $7,643,654;
          advances
          $2,891,491 from Ms. Wu with repayment of $3,014,818 and loans $690,828
          from
          employees, which was fully repaid. All of our bank loans are short-term
          loans,
          which are typically due in two to three months. The loans are made to Fuda
          Yiyang.
  **Off-Balance
          Sheet Arrangements**
  At
          September 30, 2008, we did not have any off-balance sheet
          arrangements.
  32
  **ITEM
          3.**  **QUANTITATIVE
          AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**
  **Foreign
          Currency Exchange Rate Risk**
  We
          produce all our products in China and export most of them to international
          markets. The export price is dominated in United States dollars. Thus,
          most of
          our revenues and operating results may be impacted by exchange rate fluctuations
          between RMB and United States dollar. We have not reduced our exposure
          to
          exchange rate fluctuations by using hedging transactions. While we may
          choose to
          do so in the future, the availability and effectiveness of any hedging
          transactions may be limited and we may not be able to successfully hedge
          our
          exchange rate risks. Accordingly, we may experience economic losses and
          negative
          impacts on earnings and equity as a result of foreign exchange rate
          fluctuations. For the quarter ended September 30, 2008, the foreign exchange
          losses were approximately $17,286 and the foreign currency translation
          adjustments to our comprehensive income were $88,677 primarily as a result
          of
          the appreciation of the RMB against the United States dollar.
  **ITEM
          4.**  **CONTROLS
          AND PROCEDURES.** ****
  Our
          principal executive officer and principal financial officer conducted an
          evaluation of our disclosure controls and procedures, as such term is defined
          under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934,
          as
          amended (the “Exchange Act”), within 90 days of the filing date of this report.
          In designing and evaluating the Company’s disclosure controls and procedures,
          management recognized that any controls and procedures, no matter how well
          designed and operated, can provide only reasonable assurance of achieving
          their
          objectives and management necessarily applied its judgment in evaluating
          the
          cost-benefit relationship of possible controls and procedures. Based on
          this
          evaluation, the Company’s chief executive officer and chief financial officer
          concluded that as of September 30, 2008, the Company’s disclosure controls and
          procedures were (1) designed to ensure that material information relating
          to the
          Company, including its consolidated subsidiaries, is made known to the
          Company’s
          chief executive officer and chief financial officer by others within those
          entities, particularly during the period in which this report was being
          prepared
          and (2) effective, in that they provide reasonable assurance that information
          required to be disclosed by the Company in the reports that it files or
          submits
          under the Exchange Act is recorded, processed summarized and reported within
          the
          time periods specified in the SEC’s rules and forms.
 
 It
          is the
          responsibility of management to establish and maintain adequate internal
          controls over financial reporting. We believe that our internal controls
          over
          financial reporting are effective. However, management does not expect
          that our
          disclosure controls and procedures or our internal control over financial
          reporting will necessarily prevent all fraud and material errors. An internal
          control system, no matter how well conceived and operated, can provide
          only
          reasonable, not absolute, assurance that the objectives of the control
          system
          are met. Further, the design of a control system must reflect the fact
          that
          there are resource constraints, and the benefits of controls must be considered
          relative to their costs. Because of the inherent limitations on all internal
          control systems, no evaluation of controls can provide absolute assurance
          that
          all control issues and instances of fraud, if any, within the Company have
          been
          detected. Because of the inherent limitations in a cost effective internal
          control system, financial reporting misstatements due to error or fraud
          may
          occur and not be detected on a timely basis.
 
 There
          were no changes in the Company’s internal control over financial reporting
          during the quarter ended September 30, 2008 that have materially affected,
          or
          are reasonably likely to materially affect, our internal control over financial
          reporting.
  33
  **PART
          II.**  **OTHER
          INFORMATION.** ****
  **ITEM
          4.**  **SUBMISSION
          OF MATTERS TO A VOTE OF SECURITY HOLDERS.** ****
  On
          December 4, 2007, the holders of more than a majority of our outstanding
          common
          stock approved our restated certificate of incorporation and we filed a
          preliminary Schedule 14C regarding this issue with SEC on February 19,
          2008 and
          then a definitive Schedule 14C on July 11, 2008. The restated certificate
          of
          incorporation became effective on July 31, 2008.
  **ITEM
          6.**  **EXHIBITS.** ****
  31.1
                Certification
                    by Chief Executive Officer pursuant to Sarbanes Oxley Act of
                    2002 Section
                    302.
 31.2
                Certification
                    by Chief Financial Officer pursuant to Sarbanes Oxley Act of
                    2002 Section
                    302.
 32.1
                Certification
                    by chief executive officer and chief financial officer pursuant
                    to
                    Sarbanes-Oxley Act of 2002 Section
                    906.
  34
  **SIGNATURES**
  Pursuant
          to the requirements of the Securities Exchange Act of 1934, the registrant
          has
          duly caused this report to be signed on its behalf by the undersigned thereunto
          duly authorized.
 
 **Fuda
                    Faucet Works, Inc.**(Registrant)November
                    14, 2008
                /s/
                    Wu
                    YitingWu
                    Yiting, Chief Executive OfficerNovember
                    14, 2008
                /s/
                    Wu
                    YaxuWu
                    Yaxu, Chief Financial Officer
  35