U.S. SECURITIES AND EXCHANGE COMMISSION



WASHINGTON, D.C. 20549



FORM 10-Q



(Mark One)

x QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended March 31,
2011



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



For the transition period from  _______________  to
_______________



Commission File Number 000-26175



China Water Group, Inc.



(Exact name of small business issuer as
specified in its charter)



|Nevada                          |  | 88-0409151         
|------------------------------- |  | -------------------
|(State or other jurisdiction of |  | (IRS Employer      
|incorporation or organization)  |  | Identification No.)



Suite 7A01, Baicheng Building

584 Yingbin Road

Dashi, Panyu District

Guangzhou, Guangdong, China

(Address of principal executive offices)

86-20-3479 9708

(Issuer’s telephone number)



NA

(Former name, former address and former fiscal
year, if changed since last report)



Check whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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  ̈ NO x



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



|Large Accelerated Filer  ̈ | Accelerated Filer  ̈ | Non-Accelerated Filer  ̈ | Smaller Reporting Company x
|------------------------- | ------------------- | ----------------------- | ---------------------------





Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  ̈  NO x



State the number of shares outstanding of
each of the issuer’s classes of common equity, as of the latest practicable date: 160,869,561 shares of common stock, par
value $.0001 per share, as of March 31, 2011.



Transitional Small Business Disclosure Format
(Check one). YES  ̈ NO x















CHINA WATER GROUP, INC.



CONSOLIDATED FINANCIAL STATEMENTS



MARCH 31, 2011 AND 2010



(UNAUDITED)















CHINA WATER GROUP, INC.

Consolidated Financial Statements

March 31, 2011 and 2010

(Unaudited)



Table of Contents



|                                              |  | Page
|--------------------------------------------- |  | ----
|                                              |  |     
|Consolidated Balance Sheets                   |  | 2   
|                                              |  |     
|Consolidated Statements of Operations         |  | 3   
|                                              |  |     
|Consolidated Statements of Comprehensive Loss |  | 4   
|                                              |  |     
|Consolidated Statements of Cash Flows         |  | 5   
|                                              |  |     
|Notes to Consolidated Financial Statements    |  | 6   





1









CHINA WATER GROUP, INC.



Consolidated Balance Sheets



|                                                                                                                                                                               |  | March 31,   |             |   | December 31, |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------- | ----------- | - | ------------ | -
|                                                                                                                                                                               |  | 2011        |             |   | 2010         |  
|                                                                                                                                                                               |  | (Unaudited) |             |   |              |  
|Assets                                                                                                                                                                         |  |             |             |   |              |  
|Current assets:                                                                                                                                                                |  |             |             |   |              |  
|Cash and cash equivalents                                                                                                                                                      |  | $           | 513,946     |   |              | $
|Accounts receivable, net of allowance for doubtful accounts of $726,546 and $721,788 as of March 31, 2011 and December 31, 2010, respectively                                  |  |             | 61,258      |   |              |  
|Inventory                                                                                                                                                                      |  |             | 247,734     |   |              |  
|Receivable for disposal of Evergreen                                                                                                                                           |  |             | 1,221,600   |   |              |  
|Other current assets                                                                                                                                                           |  |             | 129,122     |   |              |  
|Total current assets                                                                                                                                                           |  |             | 2,173,660   |   |              |  
|                                                                                                                                                                               |  |             |             |   |              |  
|Property, plant and equipment, net                                                                                                                                             |  |             | 1,029,343   |   |              |  
|Intangible assets, net                                                                                                                                                         |  |             | 212,893     |   |              |  
|Goodwill                                                                                                                                                                       |  |             | 6,217,884   |   |              |  
|                                                                                                                                                                               |  |             |             |   |              |  
|Total assets                                                                                                                                                                   |  | $           | 9,633,780   |   |              | $
|                                                                                                                                                                               |  |             |             |   |              |  
|Liabilities                                                                                                                                                                    |  |             |             |   |              |  
|Current liabilities:                                                                                                                                                           |  |             |             |   |              |  
|                                                                                                                                                                               |  |             |             |   |              |  
|Warrant liability                                                                                                                                                              |  | $           | 22,271      |   |              | $
|Accounts payable                                                                                                                                                               |  |             | 169,850     |   |              |  
|Accrued expenses                                                                                                                                                               |  |             | 1,380,417   |   |              |  
|Due to shareholders                                                                                                                                                            |  |             | 284,591     |   |              |  
|Due to related companies                                                                                                                                                       |  |             | 3,834,573   |   |              |  
|Due to affiliated companies                                                                                                                                                    |  |             | 2,047,818   |   |              |  
|Other current liabilities                                                                                                                                                      |  |             | 382,496     |   |              |  
|Total current liabilities                                                                                                                                                      |  |             | 8,122,016   |   |              |  
|                                                                                                                                                                               |  |             |             |   |              |  
|Other payables for acquisition of a subsidiary                                                                                                                                 |  |             | -           |   |              |  
|                                                                                                                                                                               |  |             |             |   |              |  
|Total liabilities                                                                                                                                                              |  |             | 8,122,016   |   |              |  
|                                                                                                                                                                               |  |             |             |   |              |  
|Equity                                                                                                                                                                         |  |             |             |   |              |  
|Stockholders' equity:                                                                                                                                                          |  |             |             |   |              |  
|Preferred stock, $0.001 par value, 50,000,000 shares authorized,                                                                                                               |  |             |             |   |              |  
|no shares issued and outstanding                                                                                                                                               |  |             | -           |   |              |  
|Common stock, $0.001 par value, 200,000,000 shares authorized, 169,133,450 and 139,383,450 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively |  |             | 169,133     |   |              |  
|Additional paid-in capital                                                                                                                                                     |  |             | 12,051,782  |   |              |  
|Accumulated deficit                                                                                                                                                            |  |             | (12,212,359 | ) |              |  
|Accumulated other comprehensive income                                                                                                                                         |  |             | 1,903,004   |   |              |  
|Total stockholders' equity                                                                                                                                                     |  |             | 1,911,560   |   |              |  
|                                                                                                                                                                               |  |             |             |   |              |  
|Noncontrolling interest                                                                                                                                                        |  |             | (399,796    | ) |              |  
|                                                                                                                                                                               |  |             |             |   |              |  
|Total equity                                                                                                                                                                   |  |             | 1,511,764   |   |              |  
|                                                                                                                                                                               |  |             |             |   |              |  
|Total liabilities and equity                                                                                                                                                   |  | $           | 9,633,780   |   |              | $



The accompanying notes are an integral part of these consolidated
financial statements.





2







CHINA WATER GROUP, INC.



Consolidated Statements of Operations

(Unaudited)



|                                                       |  | For the Three Months Ended March 31, |            
|------------------------------------------------------ |  | ------------------------------------ | -----------
|                                                       |  | 2011                                 |            
|                                                       |  |                                      |            
|Sales                                                  |  | $                                    | 43,375     
|                                                       |  |                                      |            
|Cost of sales                                          |  |                                      | 33,219     
|                                                       |  |                                      |            
|Gross profit                                           |  |                                      | 10,156     
|                                                       |  |                                      |            
|Operating expenses:                                    |  |                                      |            
|Selling and distribution expenses                      |  |                                      | 34,482     
|General and administrative expenses                    |  |                                      | 166,702    
|                                                       |  |                                      |            
|Total operating expenses                               |  |                                      | 201,184    
|                                                       |  |                                      |            
|Loss from operations                                   |  |                                      | (191,028   
|                                                       |  |                                      |            
|Other income (expense):                                |  |                                      |            
|Interest income (expense)                              |  |                                      | 34         
|Gain (loss) on financial instruments                   |  |                                      | 14,588     
|Other expense                                          |  |                                      | (177       
|                                                       |  |                                      |            
|Total other income (expense)                           |  |                                      | 14,445     
|                                                       |  |                                      |            
|Loss before income taxes                               |  |                                      | (176,583   
|                                                       |  |                                      |            
|Provision for income taxes                             |  |                                      | 203        
|                                                       |  |                                      |            
|Net loss                                               |  |                                      | (176,786   
|                                                       |  |                                      |            
|Less: net loss attributable to noncontrolling interest |  |                                      | (13,484    
|                                                       |  |                                      |            
|Net loss attributable to China Water Group, Inc.       |  | $                                    | (163,302   
|                                                       |  |                                      |            
|Basic loss per share                                   |  | $                                    | (0.00      
|Diluted loss per share                                 |  | $                                    | (0.00      
|                                                       |  |                                      |            
|Weighted average number of common shares outstanding   |  |                                      |            
|Basic                                                  |  |                                      | 160,869,561
|Diluted                                                |  |                                      | 160,869,561



The accompanying notes are an integral part of these consolidated
financial statements.





3









CHINA WATER GROUP, INC.



Consolidated Statements of Comprehensive Loss

(Unaudited)



|                                                                     |  | For the Three Months Ended |         
|-------------------------------------------------------------------- |  | -------------------------- | --------
|                                                                     |  | March 31,                  |         
|                                                                     |  | 2011                       |         
|                                                                     |  |                            |         
|Net loss                                                             |  | $                          | (176,786
|                                                                     |  |                            |         
|Other comprehensive income (loss)                                    |  |                            |         
|Foreign currency translation adjustment                              |  |                            | 68,439  
|                                                                     |  |                            |         
|Total other comprehensive income
    (loss)                          |  |                            | 68,439  
|                                                                     |  |                            |         
|Comprehensive loss                                                   |  |                            | (108,347
|                                                                     |  |                            |         
|Less: comprehensive loss attributable to the noncontrolling interest |  |                            | (16,060 
|                                                                     |  |                            |         
|Comprehensive loss attributable to China Water
    Group, Inc.       |  | $                          | (92,287 



The accompanying notes are an integral part of these consolidated
financial statements.





4









CHINA WATER GROUP, INC.



Consolidated Statements of Cash Flows

(Unaudited)



|                                                                                                  |  | For the Three Months Ended March 31, |          
|------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ---------
|                                                                                                  |  | 2011                                 |          
|Cash flows from operating activities:                                                             |  |                                      |          
|Net loss                                                                                          |  | $                                    | (176,786 
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities:         |  |                                      |          
|Depreciation and amortization                                                                     |  |                                      | 25,035   
|Gain on fair value of financial instruments                                                       |  |                                      | (14,588  
|Changes in operating assets and liabilities :                                                     |  |                                      |          
|Accounts receivable                                                                               |  |                                      | (29,537  
|Inventory                                                                                         |  |                                      | (239     
|Other current assets                                                                              |  |                                      | 14,132   
|Accounts payable                                                                                  |  |                                      | 4,903    
|Accrued expenses                                                                                  |  |                                      | (175     
|Other current liabilities                                                                         |  |                                      | (30,857  
|Total adjustments                                                                                 |  |                                      | (31,326  
|                                                                                                  |  |                                      |          
|Net cash used in operating activities                                                             |  |                                      | (208,112 
|                                                                                                  |  |                                      |          
|Cash flows from investing activities:                                                             |  |                                      |          
|Acquisition of property, plant and equipment                                                      |  |                                      | -        
|                                                                                                  |  |                                      |          
|Net cash used in investing activities                                                             |  |                                      | -        
|                                                                                                  |  |                                      |          
|Cash flows from financing activities:                                                             |  |                                      |          
|Due to related companies                                                                          |  |                                      | 696,359  
|Due to affiliated companies                                                                       |  |                                      | -        
|                                                                                                  |  |                                      |          
|Net cash provided by financing activities                                                         |  |                                      | 696,359  
|                                                                                                  |  |                                      |          
|Effect of foreign currency translation on cash and cash equivalents                               |  |                                      | 1,826    
|                                                                                                  |  |                                      |          
|Net increase in cash and cash equivalents                                                         |  |                                      | 490,073  
|                                                                                                  |  |                                      |          
|Cash and cash equivalents - beginning                                                             |  |                                      | 23,873   
|                                                                                                  |  |                                      |          
|Cash and cash equivalents - ending                                                                |  | $                                    | 513,946  
|                                                                                                  |  |                                      |          
|Supplemental schedule of non-cash activities:                                                     |  |                                      |          
|Issuance of common stock pursuant to conversion of other payables for acquisition of a subsidiary |  | $                                    | 5,950,000



The accompanying notes are an integral part of these consolidated
financial statements.





5









CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)



Note
1 – Organization and nature of business



In these notes, the terms “CHWG,”
“we,” “us,” “our” and “the Company” mean China Water Group, Inc. (formerly China
Evergreen Environmental Corporation) and subsidiary companies.



We were organized as a Nevada
corporation on September 10, 1996 under the name “Discovery Investments, Inc.” and were previously engaged in
the business of seeking, investing and, acquiring an interest in various business opportunities.



On October 15, 2004, we
were subject to the reverse acquisition by Evergreen Asset Group Limited, an International Business Company organized under the
laws of the British Virgin Islands (“Evergreen”), pursuant to which we acquired 100% of the outstanding shares of Evergreen
capital stock in exchange for a controlling interest in our common stock. Pursuant to a securities purchase agreement dated September 9,
2004, as amended, we issued 83,500,000 shares of our common stock (representing 83.5% of our outstanding capital stock) in exchange
for all of the issued and outstanding shares of Evergreen capital stock transferred to us by the Evergreen shareholders at the
closing (the “Reverse Acquisition”). Following the close of the Reverse Acquisition, we changed our corporate name
from “Discovery Investments, Inc.” to “China Evergreen Environmental Corporation.” On November 7,
2006, we changed our name to “China Water Group, Inc.” to reflect our focus on China’s water treatment and supply
needs.



As a result of the Reverse
Acquisition, Evergreen became our wholly owned subsidiary. Evergreen has three majority owned subsidiaries: Guang Dong Xin Xing
Mei Biology Company Limited (“Xinxingmei”), and Hai Yang City Sheng Shi Environment Protection Company Limited (“Haiyang”).
Through Xinxingmei and Haiyang, we provide wastewater turn-key engineering, equipment and chemical trading. Evergreen then holds
90% of Xinxingmei. Xinxingmei provides turn-key wastewater treatment engineering design and contracting. Xinxingmei also holds
90% and 35% respectively in the equity interest of the following two water treatment facilities operated through build, operate
and transfer (“BOT”) arrangements with the PRC government: (i) Tian Jin Shi Sheng Water Treatment Company Limited
(“Tian Jin”), which commissioned water treatment in November 2003 and has a daily treatment capacity of approximately
10,000 cubic meters and (ii) Xin Le Sheng Mei Water Purifying Company Limited (“Xin Le”), which also commissioned
water treatment in November 2003 and has a daily treatment capacity of 40,000 cubic meters. Xinxingmei was retained to manage both
Tian Jin and Xin Le.



The principal activities of
the Company were the research and development of waste water, garbage treatment and aqueous purifying techniques, investment and
construction of waste water treatment plant and sales of environment protection related products. The Company is now engaged in
the production, sales and marketing of the bottled water.



On January 8, 2008, the Chinese
government approved the sale of Evergreen’s 58% of the total equity interest in Guang Dong Xin Xing Mei Biology Company Limited
(“Xinxingmei”) to Wenming Pu at a total consideration of RMB 7,308,600. After completing the transfer formalities,
Evergreen held 32% of total equity of Xinxingmei, instead of the previous 90% interest.



On January 23, 2008, the Chinese
government approved China Water Group Inc’s. acquisition of 90% equity interest in Guangzhou Xinchen Water Company Limited
from Fortune Luck Global International Limited. Guangzhou Xinchen Water Company Limited owns 100% equity interest of Aba Xinchen
Dagu Glacier Spring Co., Limited. The acquisition was completed for a consideration of $13.45 million, of which $7.5 million was
paid in cash, and the remaining $5.95 million will be paid in the future.  The primary reason for the acquisition was
to enter into the bottled water industry.  The Company recorded a liability of $5.95 million, which represented the fair
value of stock calculated based on US$ 0.2 per share, with reference to contemporaneous prices of the Company’s common stock
on the Pink Quote, with total of 29.75 million shares.   Approximately $13 million of the purchase price of $13.45 million
was assigned to goodwill as the net asset of Aba Xinchen Dagu Glacier Spring Co., Limited. was minimum at the acquisition date
(see Note 7). On January 26, 2011, the Company issued 29.75 million shares of its common stock to Fortune Luck Global International
Limited to settle the $5.95 million remaining purchase price incurred for the acquisition.





6







CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

Note
1 – Organization and nature of business (continued)



In January, 2009, the Company
sold 100% of the equity interest in Evergreen to Whole Treasure Investment Ltd. at a total consideration of RMB 19,000,000 (approximately
$2,784,450). After completing the transfer formalities, the Company no longer holds any share in Evergreen. As of March 31, 2011,
the receivable for disposal of Evergreen was $1,221,600.



On February 26, 2009, Guangzhou
Xinchen Water Company established a subsidiary, Chengdu Jiuqiannian Water Company, in the PRC as a wholly-owned limited liability
company with registered capital of RMB 500,000 (approximately $73,250).



On August 24, 2009, Guangzhou
Xinchen Water Company established a subsidiary, Beijing Jiuqiannian Trading Company Ltd., in the PRC as a wholly-owned limited
liability company with registered capital of RMB 300,000 (approximately $43,971).



Note
2 – Summary of significant accounting policies



Basis
of Presentation



The Company’s consolidated
financial statements include the accounts of its controlled subsidiaries. All intercompany balances and transactions are eliminated
in consolidation. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting
principles (“GAAP”) applicable to interim financial information and the requirements of Form 10-Q and Article 8 of
Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures
required by accounting principles generally accepted in the United States of America for complete financial statements. Interim
results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments considered necessary
for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been
included.



In preparing the accompanying
unaudited consolidated financial statements, the Company evaluated the period from March 31, 2011 through the date the financial
statements were issued for material subsequent events requiring recognition or disclosure. (see Note18)



Interim
Financial Statements



These interim financial statements
should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31,
2010, as not all disclosures required by generally accepted accounting principles for annual financial statements are presented.
The interim financial statements followed the same accounting policies and methods of computations as the audited financial statements
for the year ended December 31, 2010.



Financial
instruments



The carrying amounts of all
financial instruments approximate their fair value. The carrying amounts of cash, accounts receivable, related party receivables,
unsecured loans, accounts payable and related party payables approximate their fair value due to the short-term nature of these
items. The carrying amounts of borrowings approximate their fair value based on our expected borrowing rate for debt with similar
remaining maturities and comparable risk.



Note
3 – Inventory



Inventory as of March
31, 2011 and December 31, 2010 consisted of the following:



|               |  | March 31, |         |  | December 31, |  
|-------------- |  | --------- | ------- |  | ------------ | -
|               |  | 2011      |         |  | 2010         |  
|               |  |           |         |  |              |  
|Raw materials  |  | $         | 98,591  |  |              | $
|Finished goods |  |           | 149,143 |  |              |  
|               |  |           |         |  |              |  
|Total          |  | $         | 247,734 |  |              | $





7









CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

Note
4 – Other Current Assets



Other current assets consisted
mainly of prepayments to vendors for goods and services. The balance of other current assets as of March 31, 2011 and December
31, 2010 was $ 129,122 and $142,364, respectively.



Note
5 – Property, Plant And Equipment, Net



Property, plant and equipment,
net as of March 31, 2011 and December 31, 2010 consists of the following:



|                                   |  | March 31, 2011 |           |  | December 31, 2010 |  
|---------------------------------- |  | -------------- | --------- |  | ----------------- | -
|                                   |  |                |           |  |                   |  
|Office equipment                   |  | $              | 5,691     |  |                   | $
|Furniture and fixtures             |  |                | 32,735    |  |                   |  
|Motor vehicles                     |  |                | 259,521   |  |                   |  
|Building and structure             |  |                | 265,519   |  |                   |  
|Bottled water production equipment |  |                | 755,526   |  |                   |  
|Subtotal                           |  |                | 1,318,992 |  |                   |  
|Less: Accumulated depreciation     |  |                | 378,669   |  |                   |  
|                                   |  |                | 940,323   |  |                   |  
|Construction in progress           |  |                | 89,020    |  |                   |  
|Total                              |  | $              | 1,029,343 |  |                   | $



Depreciation expense for the
three months ended March 31, 2011 and 2010 was $23,855 and $20,785, respectively.



Note
6 – Intangible Assets



Intangible assets at
March 31, 2011 and December 31, 2010 consist of the following:



|                               |  | March 31, 2011 |         |  | December 31, 2010 |  
|------------------------------ |  | -------------- | ------- |  | ----------------- | -
|Rights to use land             |  | $              | 231,330 |  |                   | $
|Less: accumulated amortization |  |                | 18,437  |  |                   |  
|Total                          |  | $              | 212,893 |  |                   | $



Amortization expense for the
three months ended March 31, 2011 and 2010 was $1,180 and $728, respectively.



Note
7 - Goodwill



On January 23, 2008, the
Company completed its acquisition of 90% equity interest in Guangzhou Xinchen Water Company Limited from Fortune Luck Global International
Limited for a consideration of $13.45 million. Goodwill, which is equal to the excess of cost over the fair value of acquired assets,
has been recorded in conjunction with the acquisition. Goodwill is accounted for in accordance with ASC 350 (formerly SFAS 142).
Under ASC 350, goodwill is not amortized and is subject to impairment test, at least annually, when events occur or circumstances
change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances
could include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated
competition, or (3) an adverse action or assessment by a regulator. The test of goodwill impairment consists of two steps. First,
the identification of potential impairment is performed by comparing the fair value of the reporting unit to its carrying amount,
including goodwill. The Company estimates the fair value of the reporting unit using a discounted cash flow (“DCF”)
model. Second, if there is impairment identified in the first step, an impairment loss is recognized for any excess of the carrying
amount of the reporting unit’s goodwill over the implied fair value of goodwill. The implied fair value of goodwill is determined
by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with ASC 450-10
(formerly SFAS No 141(R)), “Business Combinations”. After recognizing an impairment loss of $7,499,608 at December
31, 2010, the adjusted balance of goodwill at March 31, 2011 was as follows:



|Balance as of December 31, 2010       |  | $ | 6,128,051 | 
|------------------------------------- |  | - | --------- | 
|Foreign currency exchange adjustment  |  |   | 89,833    | 
|Adjusted balance as of March 31, 2011 |  | $ | 6,217,884 | 





8







CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)



Note
8 - Warrant Liability



The fair values of the warrant
liability as of March 31, 2011 and December 31, 2010 were as following:



|                                                            |  | March 31, 2011 |        |  | December 31, 2010 |  
|----------------------------------------------------------- |  | -------------- | ------ |  | ----------------- | -
|                                                            |  |                |        |  |                   |  
|Warrants issued in April 2005, at fair value                |  | $              | 22,271 |  |                   | $
|Shares issued in September 2005, accounted for as liability |  |                | -      |  |                   |  
|                                                            |  |                |        |  |                   |  
|Total                                                       |  | $              | 22,271 |  |                   | $



The Company conducted a private
placement in April 2005 (“April Private Placement”) of 20 investment units, at $25,000 per unit, for gross proceeds
of $500,000. Each unit consisted of (a) a 12% convertible debenture in the original principal amount of $25,000, convertible into
shares of our common stock at the rate of the lesser of (i) $0.20 per share or (ii) a 10% discount to the price per share of common
stock (or conversion price per share of common stock) of the next private placement conducted by us prior to any conversion of
the debenture, and (b) 125,000 detachable warrants to purchase one share each of our common stock at an exercise price of $0.20
per share, expiring ten years from their date of issuance (“April Warrants”). As a result of the September 2005 private
placement, pursuant to Section 5(d) of the warrant agreement, the exercise price has been adjusted to $0.15 per share on September
14, 2005. The debentures were due and payable August 1, 2005. The debenture holders, however, extended the payment period to September
30, 2005. The debentures were converted into 3,703,701 shares of common stock on October 1, 2005.



The Company used the Binomial
Option Pricing Model in calculating the fair market value of the April Warrants and allocated $148,531, $74,266 and $185,664 of
the $408,461 net proceeds to the Convertible Debenture, the Bifurcated Conversion Feature of the Debenture and the April Warrants,
respectively. The differences between the fair value of each of the Convertible Debenture, the Bifurcated Conversion Feature of
the Debenture and the April Warrants and the respective allocated amounts are recorded as non-cash financing charges and expensed
at the date of issuance. The principal assumptions used in the computation of the April Warrants are: expected term of 10 years;
a risk-free rate of return of 4.24%; dividend yield of zero percent; and a volatility of 70%.



The Company granted to the holders
of the April Warrants certain piggy-back and demand registration rights. Pursuant to the agreements surrounding the April Private
Placement, in the event that the Company determined to undertake a registration of securities, the Company would include, at the
request of the holder of “Registrable Securities”, the Registrable Securities in the registration statement. If the
Company did not file a registration statement by the 120th day from the closing of such financing, and the Company shall have received
a written request signed by the holders holding the majority of the Registrable Securities, then the Company was obligated to file,
at its expense, a registration statement covering the Registrable Securities. Once such registration statement has been filed and
declared effective, the Company is obligated to keep such registration statement effective until the earlier of (i) the date that
all of the Registrable Securities have been sold pursuant to such registration statement, (ii) all Registrable Securities have
been otherwise transferred to persons who may trade such shares without restriction under the Securities Act, and the Company has
delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend, or (iii) all Registrable
Securities may be sold at any time, without volume or manner of sale limitations pursuant to Rule 144(k) or any similar provision
then in effect under the Securities Act. As of March 31, 2011, the Company has not received any written request signed by the holders
holding the majority of the Registrable Securities.





9









CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)



Note
8 - Warrant Liability (continued)



Under ASC 815-40-05, Accounting
for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock, the fair value of the April
Warrants should be reported as a liability. Pursuant to the related warrant agreement, because there is currently no effective
registration statement covering the shares of common stock underlying these warrants, these warrants are currently subject to a
cashless exercise whereby the warrant holders may surrender their warrants to the company in exchange for shares of common stock.
The number of shares of common stock into which a warrant would be exchangeable in such a cashless exercise depends on both the
exercise price of the warrants and the market price of the common stock, each at or near the time of exercise. Because both of
these factors are variable, it is possible that we could have insufficient authorized shares to satisfy a cashless exercise. In
this scenario, if we were unable to obtain shareholder approval to increase the number of authorized shares, we could be obligated
to settle such a cashless exercise with cash rather than by issuing shares of common stock. Further, ASC 815-40-05 requires that
we record the potential settlement obligation at each reporting date using the current estimated fair value of the warrants, with
any changes being recorded through our statement of operations. We will continue to report the potential settlement obligation
as a liability until such time as the warrants are exercised or expire or we are otherwise able to modify the warrant agreement
to remove the provisions which require this treatment.



The conversion feature of the
convertible debenture issued in April did not qualify for the scope of exception from the provisions of SFAS 133 because the convertible
debentures are convertible into a variable number of shares. As such, the conversion feature was bifurcated from the convertible
debenture and accounted for as a derivative at fair value with changes in fair value recorded in earnings. Upon the conversion
of the convertible debentures in October 2005, the convertible debentures were recorded in equity as additional capital.



Under the subscription agreement
for the September Private Placement, we agreed to prepare and file with the SEC (and did so file), at our own expense, a registration
statement covering the registrable securities related to that placement. We agreed that in the event that the registration statement
is not declared effective by the SEC within the earlier of 120 days from the final closing or three (3) business days of clearance
by the Commission to request effectiveness, we would pay to the investors in the September Private Placement liquidated damages
in the amount of 2.0% of the purchase price of the registrable securities for each month until the registration statement is declared
effective. These liquidated damages began accruing on January 12, 2006. We agreed that if we do not remit payment of these liquidated
damages, we will pay the investors in the September Private Placement interest at the rate of 12% per year until the liquidated
damages are paid in full. The subscription agreement provides that if a registration statement is not effective at any time after
one year following the issuance date of the September Warrants, these liquidated damages obligations will stop accruing. As of
September 14, 2006 the liquidated damages obligations stopped accruing. As of March 31, 2011, we have made an accrual of $1,324,735
for registration right liability.



The fair value of the warrants
liability as of March 31, 2011 was $22,271 which was calculated by Binomial Option Pricing Model.



Under ASC 815-40, contracts
that include any provision that could require net-cash settlements cannot be accounted for as equity. Accordingly, the proceeds
of the September Private Placement allocated for par value of the common stock and the September Warrants have been recorded as
a liability on the balance sheet. Upon the effectiveness of the registration statement, the amount will be recorded as equity.





10









CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)



Note
9 – Accrued Expenses



Accrued expenses as
of March 31, 2011 and December 31, 2010 consist of the following:



|                                                      |  | March 31, 2011 |           |  | December 31, 2010 |  
|----------------------------------------------------- |  | -------------- | --------- |  | ----------------- | -
|City maintenance construction tax and value added tax |  | $              | 16,820    |  |                   | $
|Contribution for employee welfare plan                |  |                | 38,862    |  |                   |  
|Registration right liability                          |  |                | 1,324,735 |  |                   |  
|Total                                                 |  | $              | 1,380,417 |  |                   | $



Note
10 – Other Current Liabilities



Other current liabilities
as of March 31, 2011 and December 31, 2010 consist of the following:





|                  |  | March 31, 2011 |         |  | December 31, 2010 |  
|----------------- |  | -------------- | ------- |  | ----------------- | -
|Other payables    |  | $              | 259,200 |  |                   | $
|Customer deposits |  |                | 123,296 |  |                   |  
|Total             |  | $              | 382,496 |  |                   | $







Note
11 – Due to Related Companies



As of March 31, 2011 and December
31, 2010, the balance due to related companies was $3,834,573 and $3,115,298, respectively. This balance represents financing obtained
from Guang Dong Xin Sheng Environmental Protection Company Limited (“GDXS”) and Beijing Zhao Cheng Chuang Zhan Investment
Company Limited (“BJZC”) in which Mr. Pu, the Chairman of the Board, has equity interests. All amounts are non-interest-bearing,
unsecured and repayable on demand.



Note
12 – Due to Affiliated Companies



As of March 31, 2011 and December
31, 2010, the balance due to affiliated companies was $2,047,818, and $2,034,407, respectively. This balance represents financing
obtained from Guang Dong Xin Xing Mei Biology Company Limited (“Xinxingmei”). All amounts are non-interest-bearing,
unsecured and repayable on demand.



Note
13 – Income Taxes



The Company is a Nevada corporation
and conducts all of its business through its Chinese subsidiaries, which solely operate in the PRC. As the Company is a U.S. holding
company, it did not generate any revenues for the three months ended March 31, 2011 and 2010, and therefore there was no income
tax provision or benefit for U.S. income tax purpose.



The Company’s Chinese subsidiaries
are governed by the Income Tax Law of the PRC and are subject to statutory income tax rate of 25%. For the three months endedMarch 31, 2011 and 2010, the income tax provision for the Company was $203, and $413, respectively.



On February 22, 2008, the Ministry
of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular
1 (“Circular 1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a Foreign Invested
Entity (“FIE”) prior to January 1, 2008 to foreign investor(s) in 2008 or after will be exempt from withholding tax
(“WHT”) while distribution of the profit earned by an FIE after January 1, 2008 to its foreign investor(s) shall be
subject to WHT. Since the Company intends to reinvest its earnings to further expand its businesses in mainland China, its foreign
invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future.



Note
14 – Loss Per Share



The Company presents loss per
share on a basic and diluted basis. Basic loss per share is computed by dividing net loss by the weighted average number of common
shares outstanding. Diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding
including the dilutive effect of equity securities. The weighted average number of shares calculated for diluted loss per share
excludes the potential common stock that would be exercised under the warrants granted to investors because of their anti-dilutive
effect.



|                                                                        |  | For the Three Months Ended March 31, |            
|----------------------------------------------------------------------- |  | ------------------------------------ | -----------
|                                                                        |  | 2011                                 |            
|Net loss attributable to CHWG                                           |  | $                                    | (163,302   
|Weighted average common shares (denominator for basic loss per share)   |  |                                      | 160,869,561
|Effect of dilutive securities:                                          |  |                                      | -          
|Weighted average common shares (denominator for diluted loss per share) |  |                                      | 160,869,561
|Basic loss per share                                                    |  | $                                    | (0.00      
|Diluted loss per share                                                  |  | $                                    | (0.00      





11











CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)



Note
14 – Loss Per Share (continued)



As the April Warrants and the
September Warrants are anti-dilutive, they are being excluded from the calculation of diluted loss per share.



Note
15 – Employee Welfare Plan



The Company has established
an employee welfare plan in accordance with Chinese law and regulations. The Company makes monthly contributions of 12% of all
employees' salaries to the employee welfare plan.



Note
16 – Risk of Concentrations in Sales and Purchases



Two major customers accounted
for approximately 17% and 25% of the Company’s sales for the three months ended March 31, 2011 and 2010, respectively. Total
sales to these customers were $7,369 and $12,076, for the three months ended March 31, 2011 and 2010, respectively.



One major vendor accounted for
approximately 51% and 98% of the Company’s cost for purchases for the three months ended March 31, 2011 and 2010, respectively.
Total purchases from the vendor were $11,195 and $2,608 for the three months ended March 31, 2011 and 2010, respectively.



Financial instruments which potentially
subject the Company to credit risk consist principally of cash on deposit with financial institutions. Management believes that
the financial institutions which hold the Company’s cash and cash equivalents are financially sound and minimal credit risk
exists with respect to these investments.



Note
17 - SUPPLEMENTAL Disclosure of CASH FLOW Information



The following is the supplemental
information relating to the consolidated statements of cash flows:



|                           |  | For the Three Months Ended March 31, |    
|-------------------------- |  | ------------------------------------ | ---
|                           |  | 2011                                 |    
|                           |  |                                      |    
|Cash paid for interest     |  | $                                    | -  
|                           |  |                                      |    
|Cash paid for income taxes |  | $                                    | 203



12







CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)



Note
18 – Subsequent Event



On the September 30, 2011, Guangzhou
Xinchen Water Co., a subsidiary of the Company and China Construction Bank Co., Ltd. Guangzou Liwan Sub-branch, signed an RMB 15
million ($2.37 million) loan agreement (the “Loan Agreement”). The Loan Agreement specifies the loan term as three
years commencing from October 9, 2011, a variable loan interest rate of equal to the benchmark interest rate of People’s
Bank of China as in effect from time to time (currently 6.65%) plus 15% resulting in a current rate of 7.65%. The loan proceeds
will be used for the Registrant’s working capital needs to expand its bottled water operations.



13







ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATIONS



FORWARD-LOOKING INFORMATION



Much of the discussion in this Item is “forward
looking” as that term is used in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Actual operations and results may materially differ from present
plans and projections due to changes in economic conditions, new business opportunities, changes in business conditions, and other
developments. Other factors that could cause results to differ materially are described in our filings with the SEC.



The following are factors that could cause
actual results or events to differ materially from those anticipated, and include, but are not limited to general economic, financial
and business conditions, changes in and compliance with governmental laws and regulations, including various state and federal
food regulations, our ability to obtain additional financing from outside investors and/or bank and mezzanine lenders; and our
ability to generate sufficient revenues to cover operating losses and position us to achieve positive cash flow.



Readers are cautioned not to place undue reliance
on the forward-looking statements contained herein, which speak only as of the date hereof. We believe the information contained
in this Form 10-Q to be accurate as of the date hereof. Changes may occur after that date. We will not update that information
except as required by law in the normal course of our public disclosure practices.



Additionally, the following discussion regarding
our financial condition and results of operations should be read in conjunction with the financial statements and related notes
contained in Item 1 of Part I of this Form 10-Q.



RESULTS OF OPERATIONS



Quarter Ended March 31,2011 vs. Quarter
Ended March 31, 2010



Total revenue. We reported total revenue
of $43,375 for the three months ended March 31, 2011 which decreased by approximately 9% as compared to $47,928 for the three months
ended March 31, 2010. After the year 2009 the Company reassessed its sales policy and found what it believes will prove more suitable
channels of distribution for its bottled water. We are seeking higher quality customers who accept our preferred price levels and
pay promptly. During the 2011 the company continued to carry out this sales policy, However, this repositioning of our marketing
and distribution effort resulted in a decrease in sales in first quarter of 2011.



Cost of revenue. Our total cost of
revenue decreased by $11,158 approximately 25% from $44,377 for the three months ended March 31, 2010 to $33,219 for the three
months ended March 31,2010. This was primarily due to decreased sales and enhanced management of the expenditure of materials



14







Gross profit. Gross profit, as a percentage
of total revenue for the three months ended March 31, 2011 and 2010, was approximately 23% or $10,156 as compared to7.41% or $3,551.  Increased
gross margins were mainly due to the decreased materials and labor cost and reduced promotional cost related to price reduction
during the first quarter of 2011



Operating expenses. Our total operating
expenses for the three months ended March 31, 2011 and 2010 were $201,184 and $169,500, respectively. The principal components
of operating expenses were selling and distribution expenses, administrative salaries and benefits, depreciation and amortization,
travel expense, rental expense and other general administration cost. An increase in operating expenses for the three months ended
March 31, 2011 of $31,684 as compared to the three months ended March 31, 2010 was primarily due to the increased levels of selling
and distribution expense as sales effort was enhanced during this period of repositioning of our branded bottled water.



Unrealized gain on financial instruments.
Unrealized gains or losses on financial instruments represent the change in the fair market value of the financial instruments
at each reporting date. The unrealized gain on financial instruments for the three months ended March 31, 2011 was $14,588. There
was an unrealized gain on financial instruments of $ 46,175 for the three months ended March 31,2010.



Net loss. We had a net loss of
$(176,786) for the three months ended March 31, 2011, and  $(126,350) for the three months ended March 31, 2010.  The
increased net loss primarily due to the increased levels of selling and distribution expense as sales effort was enhanced during
this period of repositioning of our branded bottled water.



LIQUIDITY AND CAPITAL RESOURCES



Our principal sources of liquidity are our
cash and cash flow generated from financing. Net cash provided by financing activities during the three months ended March 31,
2011was $ 696,359, which was mainly attributable to the proceeds due to affiliated (related) companies. Our cash and cash equivalents
were $513,946.   We plan to secure bank loans to support our future projects.  Our Chairman, the majority
shareholder, has also promised to provide additional funds when needed. However, thispromise is
not a legally binding commitment.



APPLICATION OF CRITICAL ACCOUNTING POLICIES



Our financial statements and accompanying
notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing financial
statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by management's application of accounting policies. Critical accounting
policies include revenue recognition and impairment of assets.



Revenue recognition. We recognize revenue
using various revenue recognition policies based on the nature of the sale and the terms of the contract.



15







Revenues from the sale of bottled water products
are recognized when goods are delivered. The contractual terms of the purchase agreements dictate the recognition of revenues by
us. We recognize revenue in accordance with SAB No. 104. Accordingly, four basic criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and
(4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding
the fixed nature of the selling prices of the products delivered and the collectibility of those amounts. Provisions for discounts
and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related
sales are recorded. We defer any revenue for which the product has not been delivered or is subject to refund until such time that
we and our customer jointly determine that the product has been delivered or no refund will be required.



Impairment of assets. Our policy is to periodically
review and evaluate whether there has been a permanent impairment in the value of long-lived assets. Factors considered in this
evaluation include current operating results, trends and anticipated undiscounted estimated future cash flows are less than the
carrying value.



Allowances for accounts receivable. Our provisioning
policy for bad and doubtful debt is based on the evaluation of collectibility and aging analysis of accounts receivable and on
management's judgment. We do not require collateral or other security to support client receivables. We conduct periodic reviews
of our clients' financial condition and customer payment practices to minimize collection risks on accounts receivable. This review
is based on a considerable amount of judgment which is required in assessing the ultimate realization of these receivables, including
the current creditworthiness and the past collection history of each customer. As of March 31, 2011, we had made $726,546 allowance
for doubtful debts.



Financial instruments. The carrying amounts
of all financial instruments approximate fair value. The carrying amounts of cash, accounts receivable, related party receivables,
unsecured loans, accounts payable and related party payables approximate fair value due to the short-term nature of these items.
The carrying amounts of borrowings approximate the fair value based on our expected borrowing rate for debt with similar remaining
maturities and comparable risk.



Earnings per share. Basic earnings per share
are computed by dividing the net income attributable to common stock for the year by the weighted average number of common shares
outstanding during the year. Diluted earnings per share are computed by dividing the net income for the year by the weighted
average number of common and common equivalent shares outstanding during the year. Common equivalent shares (which includes incremental
common shares issuable upon the exercise of stock options, unvested restricted common stock and shares that may be issued on a
contingent basis) are included in diluted earnings per share to the extent such shares are dilutive. In accordance with SFAS 128,
Earnings Per Share, we use income from continuing operations, net of income taxes, as the “control number” in determining
whether common equivalent shares are dilutive or anti-dilutive in periods where discontinued operations are reported.



16







Recently issued accounting pronouncements



In December 2011, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-12, Comprehensive
Income (Topic 220) (“ASU 2011-12”). ASU 2011-12 allows deferral of the effective date for amendments to the presentation
of reclassifications of items out of accumulated other comprehensive income in ASU No. 2011-05. This update is effective at the
same time as the amendments in ASU No. 2011-05. The adoption of this ASU will not have a material impact on the Company’s
financial statements.



In December
2011, FASB issued ASU No. 2011-11, Balance Sheet (Topic 210) (“ASU 2011-11). ASU 2011-11 provides enhanced disclosures that
will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s
financial position. The objective of this update is to facilitate comparison of entities that prepare their financial statements
on the basis of U.S. generally accepted accounting principles (“GAAP”) with those preparing their financial statements
on the basis of International Financial Reporting Standards (“IFRS”). ASU 2011-11 is effective for annual reporting
periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this ASU will not
have a material impact on the Company’s financial statements.



In June 2011, the FASB issued
Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,”
(“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement
of changes in equity. ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented in either a single
continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied
retrospectively. This guidance will be effective for the Company beginning January 1, 2012. The Company anticipates that the adoption
of this standard will not change the presentation of its consolidated financial statements.



In May 2011, the FASB issued
Accounting Standards Update No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in U.S. GAAP and IFRSs,” (“ASU 2011-04”). ASU 2011-04 expands the disclosures for
fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied
prospectively. This guidance will be effective for the Company beginning January 1, 2012. The Company anticipates that the adoption
of this standard will not materially affect its consolidated financial statements.



Off-Balance Sheet Arrangements



We do not have any off-balance sheet arrangements.



17







ITEM 3.  QUANTITATIVE and QUALITATIVE
DISCLOSURES about MARKET RISK.



Not applicable.



ITEM 4. CONTROLS AND PROCEDURES



Disclosure controls and
procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports
that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial
officers, as appropriate to allow timely decisions regarding required disclosure.



Material Weaknesses
identified Prior to Fiscal 2010



Our Chief Executive Officer
and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as this term is defined
under the rules of the SEC) as of August 10, 2006. Based on this evaluation, the Company’s Chief Executive Officer and
Chief Financial Officer and Executive Chairman concluded that, as of August 10, 2006, our disclosure controls and procedures
were not effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed
by the Company in the reports that it files or submits under the US Securities Exchange Act of 1934 as a result of material weaknesses
in our internal control over financial reporting described below.



In the process of filing
our registration statement, we identified certain accounting errors in our reported US GAAP annual results for fiscal 2004
and 2005 and certain quarterly results in 2005 and 2006. As a result, we have restated the amounts and disclosures in those annual
financial statements.



The financial statements
which should no longer be relied upon include:



| | (i) | the audited consolidated financial statements contained in our report on Form 10-KSB for the fiscal
year ended December 31, 2004 (the “2004 10-KSB”), filed with the SEC on April 15, 2005, Amendment No. 1 to the 2004
10-KSB filed on July 15, 2005, and Amendment No. 2 to the 2004 10-KSB filed on January 13, 2006 ;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | the audited consolidated financial statements contained in our report on Form 10-KSB for the fiscal
year ended December 31, 2005 (the “2005 10-KSB”), filed with the SEC on April 17, 2006;
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



18







| | (iii) | the unaudited consolidated financial statements contained in our quarterly report on Form 10-QSB for
the quarterly period ended March 31, 2005 (the “March 31, 2005 10-QSB”), filed with the SEC on May 24, 2005;
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | the unaudited consolidated financial statements contained in our quarterly report on Form 10-QSB for
the quarterly period ended June 30, 2005 (the “June 30, 2005 10-QSB”), filed with the SEC on August 15, 2005;
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (v) | the unaudited consolidated financial statements contained in our quarterly report on Form 10-QSB for
the quarterly period ended September 30, 2005 (the “ September 30, 2005 10-QSB”), filed with the SEC on November 15,
2005 and Amendment No. 1 to the September 30, 2005 10-QSB filed on January 13, 2006; and
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vi) | the unaudited consolidated financial statements contained in our quarterly report on Form 10-QSB for
the quarterly period ended March 31, 2006 (the “March 31, 2006 10-QSB”), filed with the SEC on May 15, 2006.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Gain on disposal of XY



As previously disclosed
in our 2004 10-KSB, including amendments thereto, and comparative figures in our 2005 10-KSB, we recorded a gain on disposal of
$2,029,720 in 2004 for the disposal of our 90% attributable interest in Xian Yang Bai Sheng Water Purifying Company Limited (“XY”)
to True Global Limited (“TGL”), an independent party, at a consideration of $4,130,435 (RMB34.2 million). The disposal
was made pursuant to a tri-party framework agreement between Evergreen Asset Group Limited (“EGAG”), TGL and Guang
Dong Xin Sheng Environmental Protection Company Limited (“GDXS”) in which EGAG transferred 90% of its equity interest
in XY to TGL while GDXS continued to own 10% of its equity interest in XY. The transaction was consummated on October 26, 2004
and the gain represents the difference between the disposal proceeds and our attributable share of net assets of XY at the date
of disposal. In the same year, we also recognized an amount of $9,115,942 for the construction revenue of XY using the percentage-of-completion
method, estimated costs and claim recognition for construction contracts. The amount accounted for 97% of our total revenue in
2004.



19







In the previously filed
2004 10-KSB, as amended to date, and comparative figures in our previously filed 2005 10-KSB, the accounting treatment for the
construction revenue of XY does not comply with SOP 81-1 or EITF 00-21. As a result, we will file an amendment to the 2004 10-KSB
and 2005 10-KSB with adjusted disclosure to record the transaction as part of the gain on the disposal of the XY subsidiary rather
than as revenue from construction of wastewater treatment plant. As such our adjusted total revenue for the fiscal year ended December
31, 2004 was $250,571 and the adjusted gain on disposal of interest in a subsidiary - XY was $5,220,299. Due to the same reason,
account receivable from TGL amounted to $9,416,039 as of December 31, 2004 will be reclassified to prepayment, deposits and
other receivables in our upcoming amendment to the 2004 10-KSB, comparative figures in this amendment to the 2005 10-KSB and comparative
figures in the upcoming or recently filed amendments to the June 30, 2005 10-QSB and September 30, 2005 10-QSB.



Group reorganization



In Note 2(ii) and 2(iii)
to the consolidated financial statements contained in the previously filed 2004 10-KSB and 2005 10-KSB and Note 2 to the consolidated
financial statements contained in the previously filed March 31, 2005 10-QSB, June 30, 2005 10-QSB, September 30, 2005 10-QSB
and March 31, 2006 10-QSB, we disclosed group reorganization transactions. Pursuant to rules promulgated by the SEC, the merger
or acquisition of a private operating company into a non-operating public shell corporation with nominal net assets is considered
a capital transaction, rather than a business combination. As such, no disclosures are required under FAS 141 because the transactions
described were not business combinations. For accounting purposes, the transaction has been treated as a reverse acquisition and
a recapitalization, and pro-forma information is not presented. Accordingly, the upcoming amendments  to the 2004 10-KSB,
this amendment to the 2005 10-KSB, and the recent or upcoming amendments to the March 31, 2005 10-QSB, June 30, 2005 10-QSB, September
30, 2005 10-QSB and March 31, 2006 10-QSB will not include references to the group reorganization  transactions throughout
the financial statements. We will also restate the common stock immediately after the recapitalization to $100,000 in the upcoming
amended March 31, 2005 10-QSB and have done so in the recent amended June 30, 2005 10-QSB.



Reclassification of April warrants



In our previously filed
2005 10-KSB, June 30, 2005 10-QSB and March 31, 2006 10-QSB, we recorded as equity the warrants issued as part of the units sold
in our April 2005 convertible debt issuance. Under EITF No. 00-19, the fair value of these warrants should be reported as a liability.
Pursuant to the Warrant Agreement, because there is currently no effective registration statement covering the shares of common
stock underlying these warrants, these warrants are currently subject to a cashless exercise whereby the warrant holders may surrender
their warrants to the company in exchange for shares of common stock. The number of shares of common stock into which a warrant
would be exchangeable in such a cashless exercise depends on both the exercise price of the warrants and the market price of the
common stock, each at or near the time of exercise. Because both of these factors are variable, it is possible that the company
could have insufficient authorized shares to satisfy a cashless exercise. In this scenario, if the company were unable to obtain
shareholder approval to increase the number of authorized shares, the company could be obligated to settle such a cashless exercise
with cash rather than by issuing shares of common stock. Further, EITF No. 00-19 requires that we record the potential settlement
obligation at each reporting date using the current estimated fair value of the warrants, with any changes being recorded through
our statement of operations. We will continue to report the potential settlement obligation as a liability until such time as the
warrants are exercised or expire or we are otherwise able to modify the warrant agreement to remove the provisions which require
this treatment. In addition to this restatement of our 2005 10-KSB, we will restate our June 30, 2005 10-QSB and our March 31,
2006 10-QSB to reclassify the April 2005 warrants as a liability.



20







April and September 2005 Private Placements—non-cash
financing charges



In our June 30, 2005 10-QSB,
we did not record any non-cash financing charges and in our September 30, 2005 10-QSB, as amended to date, we did not properly
record the non-cash financing charges. Non-cash financing charges represent the amount by which the fair value of derivative liabilities
issued exceeds the amount of proceeds received, as an expense at the date of issuance of the April convertible debenture and the
September private placement. We will restate our June 30, 2005 10-QSB and our September 30, 2005 10-QSB to record the non-cash
financing charges, which represent the amount by which the fair value of derivative liabilities issued exceeds the amount of proceeds
received, as an expense at the date of issuance of the April convertible debenture and the September private placement. As a result
of the recording of non-cash financing charges, certain expenses which were previously recorded under general and administrative
expenses in our September 30, 2005 10-QSB will be reclassified under non-cash financing charges.



April 2005 Private Placements—unrealized
gains or losses in financial instruments



In our June 30, 2005 10-QSB
and our September 30, 2005 10-QSB, as amended to date, we did not record properly the unrealized gains or losses in financial instruments,
which represent the change in fair market value of the financial instruments at each reporting date for the April warrants and
the bifurcated conversion feature for the convertible debenture. The unrealized gains or losses in financial instruments should
have been reported in those filings. We will restate the June 30, 2005 10-QSB and September 30, 2005 10-QSB, as amended to
date, to record the unrealized gains or losses in financial instruments which represent the change in fair market value of the
financial instruments at each reporting date for the April warrants and the bifurcated conversion feature for the convertible debenture.



Interest in associate



In our June 30, 2005 10-QSB
and our September 30, 2005 10-QSB, as amended to date, the comparative figures for our interest in associate as of December 31,
2004 were recorded based on an effective percentage of equity attributable to the group of 31.5% instead of a direct interest of
35%. We will restate the comparative figures for our interest in associate as of December 31, 2004 in the June 30, 2005 10-QSB
and September 30, 2005 10-QSB to include our interest in associate based on a direct interest of 35%.



21







Prior Restatements



On January 13, 2006, we
amended our 2004 10-KSB. Prior to the January 13, 2006 amendment, in our 2004 10-KSB we recorded our interest in associate based
on an effective percentage of equity attributable to the group of 31.5% instead of a direct interest of 35%.  In the
January 13, 2006 restatement of our 2004 10-KSB, we reported our interest in associate based on a direct interest of 35%. In addition,
we have restated the common stock immediately after the recapitalization to $100,000.



On January 13, 2006, we
amended our September 30, 2005 10-QSB. Prior to the January 13, 2006 amendment, the September 30, 2005 10-QSB classified as equity
the proceeds of our April Debenture and September 2005 private placement allocated to the warrants issued in these transactions.
For reasons both the April warrants and September warrants should have been classified as a liability. The restated financial
statements in the January 13, 2006 amendment of the September 30, 2005 10-QSB reflect this reclassification. In addition, prior
to the January 13, 2006 amendment, the September 30, 2005 10-QSB did not originally report the unrealized gains or losses in financial
instruments, which represent the change in fair market value of the financial instruments at each reporting date. The unrealized
gains or losses in financial instruments should have been reported in the original filing. Accordingly, the January 13, 2006
restatement of the September 30, 2006 10-QSB reported the unrealized gains or losses in financial instruments, which represent
the change in fair market value of the financial instruments at each reporting date. The restatement to the unrealized gains or
losses in financial instruments, however, required to be further restated (refer discussion above). In addition, we have restated
the common stock immediately after the recapitalization to $100,000.



Steps Undertaken with respect to Material
Weaknesses Prior to 2010



In connection with the
above matters, we have identified material weaknesses in our internal control over financial reporting, which weaknesses we have
reported to our auditors. These material weaknesses comprise:



| | (a) | insufficient knowledge and experience among our internal accounting personnel regarding the application
of US GAAP and SEC requirements;
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------



| | (b) | insufficient written policies and procedures for accounting and financial reporting with respect to
the requirements and application of US GAAP and SEC disclosure requirements; and
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | insufficient emphasis by management on compliance with US GAAP requirements.
| | --- | ----------------------------------------------------------------------------



22







We have communicated with
our auditors,Patrizio & Zhao,LLC. and concluded that these deficiencies constituted material weaknesses, as defined by
Auditing Standard No. 2, “An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of
Financial Statements,” established by the Public Company Accounting Oversight Board, or PCAOB.



In order to address these
material weaknesses our senior management is in the process of conducting a thorough review of our US GAAP financial reporting
processes and will prepare and implement a US GAAP action plan. This plan will be designed to generally improve our US GAAP reporting
processes and to strengthen our control processes and procedures in order to prevent a recurrence of the circumstances that resulted
in the need to restate our quarterly financial statements. Our senior management intends to complete its review and implement a
US GAAP action plan as soon as practicable. The US GAAP action plan will incorporate, among other matters, the following initiatives



| | 1. | arrange for our senior management and certain accounting and finance-related personnel to attend training
sessions on US GAAP and financial reporting responsibilities and SEC disclosure requirements;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | modify the mandate of our internal audit function to
place greater emphasis on the adequacy of, and compliance with, procedures relating to internal controls over US GAAP financial
reporting and engage an experience accountant familiar with USGAAP which is not affiliated with ,Patrizio & Zhao,LLC, to assist
our accounting department and internal audit function in the preparation of our US GAAP consolidated financial statements;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





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| | 3. | recruit an accounting staff member with US GAAP expertise and who is not affiliated with Patrizio
& Zhao, LLC; and
| | -- | ------------------------------------------------------------------------------------------------------------------



| | 4. | engage an internationally recognized accounting firm, which is not affiliated with ,Patrizio &
Zhao, LLC, to provide us with technical advice on US GAAP matters and SEC disclosure requirements on an ongoing basis.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We have fully implemented
items 1, 2, and 3, while item 4 remains in the planning stage.



Our board of directors
discussed the matters disclosed in this filing with the registrant’s independent accountant. On September 25, 2006, we filed
a current report on Form 8-K relating to these matters, including a response from our independent account relating to the statements
contained therein.



Other than those disclosed
above, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting during the first quarter of our 2010 fiscal year.



Material Weaknesses
as at March 31, 2011



(a) Evaluation of Disclosure Controls and
Procedures

As of the end of the period covered by this
report, China Water Group’s management, with the participation of Wenge Fang, our principal executive officer, and Ding
Rencai, our principal financial officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). In designing and evaluating
its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures
are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment
in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls
and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential future conditions. Based upon that evaluation,
Messrs. Fang and Rencai concluded that these disclosure controls and procedures were effective as of the end of the period covered
in this report and that they provided reasonable assurance that the goals of the disclosure controls were met.



(b) Management’s Report on Internal
Control Over Financial Reporting

The Company’s management is responsible
for establishing and maintaining adequate internal control over financial reporting for the Company. In order to evaluate the effectiveness
of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act,  management has conducted
an assessment, including testing, using the criteria in Internal Control - Integrated Framework, issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s system of internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate. Based on its assessment, management has concluded that the Company’s
internal control over financial reporting was effective as of March 31,2010. Management’s report was not subject to attestation
by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission
that permit the Company to provide only management’s report in this annual report.



24







(c) Changes in Internal Control over Financial
Reporting

There was no change in internal control over
financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934 that occurred during the first quarter
of our year ended December 31, 2009 that has materially affected or is reasonably likely to materially affect our internal control
over financial reporting.



This report does not include an attestation
report of our registered public accounting firm regarding internal control over financial reporting pursuant to temporary rules
of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.



PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



As of the date of this report, we are not
involved in any legal proceedings



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS



None.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



None.



ITEM 4. MINE SAFETY DISCLOSURES

None.



ITEM 5. OTHER INFORMATION



None.



ITEM 6. EXHIBITS



25







Exhibit No.



Description

| | 31.1 | Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------



| | 31.2 | Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------



| | 32.1 | Certification of Chief Executive Officer  pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------



| | 32.2 | Certification of Chief Financial Officer  pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------



SIGNATURES



In accordance with the requirements of the
Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                     | CHINA WATER GROUP, INC.
|-------------------- | -----------------------
|                     | (Registrant)           
|                     |                        
|Dated: July 24, 2012 |                        
|                     |                        
|                     |                        
|                     |                        
|Dated: July 24, 2012 |                        
|                     |                        
|                     |                        





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