U.S. SECURITIES AND EXCHANGE
COMMISSION





WASHINGTON, D.C.
20549





FORM 10-Q





(Mark
One)


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





For the quarterly period ended September
30, 2007





 ̈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
    Employerincorporation or
      organization)
            Identification
      No.)





Suite 7A01, Baicheng
Building


584 Yingbin Road


Dashi, Panyu
District


Guangzhou, Guangdong,
China


(Address of principal executive
offices)


86-20-34799708


(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 requirementsfor the past 90 days.
YES ̈NOx





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 Companyx





Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).
YES  ̈NOx





State the number of shares outstanding
of each of the issuer’s classes of common equity, as of the latest practicable
date: 139,383,450 shares of common stock, par value $.0001 per share, as of
April 8, 2009.





Transitional Small
Business Disclosure Format (Check one).
YES ̈NOx





PART I. - FINANCIAL
INFORMATION


ITEM 1. FINANCIALSTATEMENTS.


CHINA
WATER GROUP, INC.
 
 Table
of Contents
 
 PageConsolidated
      Financial StatementsReport
      of Independent Registered Public Accounting Firm
                3Consolidated
      Balance Sheets
                4Consolidated
      Statements of Operations and Comprehensive Income (Loss)
                5Consolidated
      Statements of Cash Flows
                6Notes
      to Consolidated Financial Statements
                7
  
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders of
 China
Water Group, Inc.
 
 We have
reviewed the accompanying consolidated balance sheet of China Water Group, Inc.
(the “Company”) and its subsidiaries as of September 30, 2007, and the related
consolidated statements of operations and comprehensive income, and cash flows
for the nine months ended September 30, 2007 and 2006. These consolidated
financial statements are the responsibility of the Company's
management.
 
 We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
 
 Based on
our review, we are not aware of any material modifications that should be made
to the accompanying financial statements for them to be in conformity with
accounting principles generally accepted in the United States of
America.
 
 Parsippany,
New Jersey
 March 10,
2009
  3
  CHINA
WATER GROUP, INC.
 
 Consolidated
Balance Sheets
 
 September 30,
                          
                          
                          December 31,2007
                          
                          
                          2006Assets:Current
      assets:Cash
      and cash equivalents
                          
                          $
                          299,762
                          
                          
                          $
                          4,144,484Accounts
      receivable, net of allowance of doubtful accounts of $-0- and $4,402,743,
      respectively
                          
                          
                          422,558
                          
                          
                          
                          2,140,575Prepayment,
      deposits and other receivables
                          
                          
                          8,267,533
                          
                          
                          
                          1,494,039Due
      from related companies
                          
                          
                          1,920,878
                          
                          
                          
                          3,423,961Due
      from affiliated companies
                          
                          
                          3,034,247
                          
                          
                          
                          1,824,529Deferred
      tax assets
                          
                          
                          1,868,036
                          
                          
                          
                          1,796,377Total
      current assets:
                          
                          
                          15,813,014
                          
                          
                          
                          14,823,965Property,
      plant and equipment, net
                          
                          
                          4,
      699,081
                          
                          
                          
                          4,739,533Construction
      in progress
                          
                          
                          64,168
                          
                          
                          
                          3,619,559Interests
      in affiliated companies
                          
                          
                          2,152,419
                          
                          
                          
                          1,080,562Total
      assets:
                          
                          $
                          22,728,682
                          
                          
                          $
                          24,263,619Liabilities
      and stockholders’ equity:Current
      liabilities:Warrant
      liability
                          
                          
                          1,457,320
                          
                          
                          
                          2,305,880Note
      payable
                          
                          
                          26,604
                          
                          
                          
                          25,600Accounts
      payable
                          
                          
                          6,452,297
                          
                          
                          
                          6,854,174Accrued
      liabilities
                          
                          
                          3,171,671
                          
                          
                          
                          3,062,829Due
      to directors
                          
                          
                          1,402,878
                          
                          
                          
                          1,371,627Due
      to related companies
                          
                          
                          1,803,598
                          
                          
                          
                          1,779,943Income
      tax payable
                          
                          
                          1,745,782
                          
                          
                          
                          1,680,094Total
      current liabilities:
                          
                          
                          16,060,150
                          
                          
                          
                          17,080,147Minority
      interests
                          
                          
                          303,892
                          
                          
                          
                          541,105Total
      liabilities:
                          
                          
                          16,364,042
                          
                          
                          
                          17,621,252Stockholders'
      equity:Preferred
      stock, US$0.001 par value, 50,000,000 authorized shares, no shares issued
      and outstanding
                          
                          
                          -
                          
                          
                          
                          -Common
      stock, US$0.001 par value, 200,000,000 shares authorized; 135,903,698 and
      135,903,698 shares issued and outstanding
                          
                          
                          103,704
                          
                          
                          
                          103,704Additional
      paid-in capital
                          
                          
                          4,837,392
                          
                          
                          
                          4,837,392Retained
      earnings
                          
                          
                          509,238
                          
                          
                          
                          1,249,882Accumulated
      other comprehensive income
                          
                          
                          914,306
                          
                          
                          
                          451,389Total
      stockholders' equity:
                          
                          
                          6,364,640
                          
                          
                          
                          6,642,367Total
      Liabilities and Stockholders' Equity:
                          
                          $
                          22,728,682
                          
                          
                          $
                          24,263,619
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  4
  CHINA
WATER GROUP, INC.
 
 Consolidated
Statements of Operations and Comprehensive Income
 For
the Three Months and Nine Months Ended September 30, 2007 and 2006
 
 Three months ended September 30,
                  
                  
                  Nine months ended September 30,2007
                  
                  
                  2006
                  
                  
                  2007
                  
                  
                  2006Revenue:Revenue
      from turn-key engineering projects
                  
                  $
                  -
                  
                  
                  $
                  722,489
                  
                  
                  $
                  -
                  
                  
                  $
                  3,467,838Revenue
      from BOT wastewater treatment services
                  
                  
                  214,223
                  
                  
                  
                  269,277
                  
                  
                  
                  641,286
                  
                  
                  
                  735,769Revenue
      from sales of bottled water
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,027
                  
                  
                  
                  -Total
      revenue:
                  
                  
                  214,223
                  
                  
                  
                  991,766
                  
                  
                  
                  646,313
                  
                  
                  
                  4,203,607Cost
      of revenue:Cost
      of revenue for turn-key engineering projects
                  
                  
                  -
                  
                  
                  
                  (463,731
                  )
                  
                  
                  -
                  
                  
                  
                  (1,891,370
                  )Cost
      of revenue for BOT wastewater treatment services
                  
                  
                  (82,038
                  )
                  
                  
                  (135,563
                  )
                  
                  
                  (222,094
                  )
                  
                  
                  (407,140
                  )Cost
      of revenue from sale of bottled water
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,196
                  )
                  
                  
                  -Depreciation
      and amortization
                  
                  
                  (75,817
                  )
                  
                  
                  (4,323
                  )
                  
                  
                  (234,288
                  )
                  
                  
                  (19,379
                  )Sales
      taxes
                  
                  
                  -
                  
                  
                  
                  (39,737
                  )
                  
                  
                  (442
                  )
                  
                  
                  (196,193
                  )Total
      cost of revenue:
                  
                  
                  (157,855
                  )
                  
                  
                  (643,354
                  )
                  
                  
                  (460,020
                  )
                  
                  
                  (2,514,082
                  )Gross
      profit:
                  
                  
                  56,
      368
                  
                  
                  
                  348,412
                  
                  
                  
                  186,293
                  
                  
                  
                  1,689,525Operating
      expenses:Other
      general and administrative expenses
                  
                  
                  (1,593,402
                  )
                  
                  
                  (183,799
                  )
                  
                  
                  (1,904,744
                  )
                  
                  
                  (439,941
                  )(Loss)/
      Income from operations:
                  
                  
                  (1,537,034
                  )
                  
                  
                  164,613
                  
                  
                  
                  (1,718,451
                  )
                  
                  
                  1,249,584Other
      income (expense):Other
      (expenses) /income
                  
                  
                  1,205
                  
                  
                  
                  -
                  
                  
                  
                  172,920
                  
                  
                  
                  42,609Interest
      expense
                  
                  
                  -
                  
                  
                  
                  (485
                  )
                  
                  
                  -
                  
                  
                  
                  (1,914
                  )Penalty
      for late effectiveness of registration statement
                  
                  
                  (22,382
                  )
                  
                  
                  (294,258
                  )
                  
                  
                  (68,119
                  )
                  
                  
                  (828,027
                  )Gain/(loss)
      on financial instruments
                  
                  
                  (77,280
                  )
                  
                  
                  3,477,393
                  
                  
                  
                  848,560
                  
                  
                  
                  1,743,174Share
      of results in associates - Xin Le and Han Dan
                  
                  
                  61,854
                  
                  
                  
                  58,459
                  
                  
                  
                  184,780
                  
                  
                  
                  172,375Total
      other income (expenses):
                  
                  
                  (36,603
                  )
                  
                  
                  3,241,109
                  
                  
                  
                  1,138,141
                  
                  
                  
                  1,128,217Income/(loss)
      before income tax and minority interests:
                  
                  
                  (1,573,637
                  )
                  
                  
                  3,405,722
                  
                  
                  
                  (580,310
                  )
                  
                  
                  2,377,801Income
      tax expense:
                  
                  
                  -
                  
                  
                  
                  (65,830
                  )
                  
                  
                  (215
                  )
                  
                  
                  (436,337
                  )Income/(loss)
      before minority interests:
                  
                  
                  (1,573,637
                  )
                  
                  
                  3,339,892
                  
                  
                  
                  (580,525
                  )
                  
                  
                  1,941,464Minority
      interests:
                  
                  
                  (10,396
                  )
                  
                  
                  (30,666
                  )
                  
                  
                  (33,009
                  )
                  
                  
                  (128,661
                  )Net
      income/(loss):
                  
                  
                  (1,
      584,033
                  )
                  
                  
                  3,309,226
                  
                  
                  
                  (613,534
                  )
                  
                  
                  1,812,803Other
      Comprehensive income:Foreign
      currency translation adjustment:
                  
                  
                  99,584
                  
                  
                  
                  176,800
                  
                  
                  
                  462,917
                  
                  
                  
                  241,815Comprehensive
      income:
                  
                  $
                  (1,484,449
                  )
                  
                  $
                  3,486,026
                  
                  
                  $
                  (150,617
                  )
                  
                  $
                  2,054,618Basic
      net income/(loss) per share:
                  
                  $
                  (0.01
                  )
                  
                  $
                  0.02
                  
                  
                  $
                  (0.00
                  )
                  
                  $
                  0.01Diluted
      net income/(loss) per share:
                  
                  $
                  (0.01
                  )
                  
                  $
                  0.02
                  
                  
                  $
                  (0.00
                  )
                  
                  $
                  0.01
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  5
  CHINA
WATER GROUP, INC.
 
 Consolidated
Statements of Cash Flows
 For
the Nine Months Ended September 30, 2007 and 2006
 
 2007
                  
                  
                  2006Cash flows from operating
      activities:Net
      income/(loss)
                  
                  $
                  (613,533
                  )
                  
                  $
                  1,812,803Adjustments
      to reconcile net income to net cash provided by operating activities
      :Depreciation
      and amortization
                  
                  
                  234,288
                  
                  
                  
                  19,379(Gain)/loss
      in financial instruments
                  
                  
                  (848,560
                  )
                  
                  
                  (1,743,174
                  )(Increase)
      in deferred expenditure
                  
                  
                  (1,166
                  )
                  
                  
                  -Minority
      interests
                  
                  
                  17,783
                  
                  
                  
                  130,142Share
      of results in an associated company - Xin Le
                  
                  
                  (184,780
                  )
                  
                  
                  (172,375
                  )Changes
      in operating assets and liabilities :Accounts
      receivable
                  
                  
                  1,764,858
                  
                  
                  
                  (1,828,142
                  )Prepayment,
      deposits and other receivables
                  
                  
                  (6,628,402
                  )
                  
                  
                  2,195,548Due
      from related companies
                  
                  
                  2,896,008
                  
                  
                  
                  (130,860
                  )Due
      from affiliated companies
                  
                  
                  (115,738
                  )
                  
                  
                  -Accounts
      payable
                  
                  
                  (437,026
                  )
                  
                  
                  881,171Accruals
      and other liabilities
                  
                  
                  28,475
                  
                  
                  
                  869,459Due
      to a related company
                  
                  
                  (45,218
                  )
                  
                  
                  -Due
      to directors
                  
                  
                  (22,090
                  )
                  
                  
                  64,291Income
      tax payable
                  
                  
                  (215
                  )
                  
                  
                  702,164Total
      adjustments:
                  
                  
                  (2,559,348
                  )
                  
                  
                  2,753,631Net
      cash (used in)/provided by operating activities:
                  
                  
                  (3,955,316
                  )
                  
                  
                  2,800,406Cash
      flows used in investing activities:Disposal
      of interest in a subsidiary
                  
                  
                  15,226
                  
                  
                  
                  -Dividend
      received from an associated company - Xin Le
                  
                  
                  91,196
                  
                  
                  
                  -Acquisition
      of property, plant and equipment
                  
                  
                  (75,837
                  )
                  
                  
                  (358,787
                  )Net
      cash provided by/(used in) investing activities:
                  
                  
                  30,585
                  
                  
                  
                  (358,787
                  )Cash
      flows from financing activities:Repayment
      of unsecured loans
                  
                  
                  -
                  
                  
                  
                  (88,510
                  )Net
      cash provided by/(used in) financing activities:
                  
                  
                  -
                  
                  
                  
                  (88,510
                  )Effect
      of foreign currency translation on cash and cash
    equivalents:
                  
                  
                  80,009
                  
                  
                  
                  (3,431
                  )Net
      (decrease)/increase in cash and cash equivalents:
                  
                  
                  (3,844,722
                  )
                  
                  
                  2,349,678Cash
      and cash equivalents, beginning of period:
                  
                  
                  4,144,484
                  
                  
                  
                  175,224Cash
      and cash equivalents, end of period:
                  
                  $
                  299,762
                  
                  
                  $
                  2,524,902
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  6
 
 CHINA
WATER GROUP, INC.
  Notes
to Consolidated Financial Statements
 September
30, 2007 and 2006
 
 NOTE1 - BASIS OF PRESENTATION
  In these
notes, the terms “CHWG,” “we,” “us,” and “our” mean China Water Group, Inc.
(formerly China Evergreen Environmental Corporation) and subsidiary
companies.
  The
condensed consolidated financial statements of CWG included herein have been
prepared by CHWG, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the “SEC”). Certain information and footnote
disclosures normally included in consolidated financial statements prepared in
conjunction with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. These condensed consolidated
financial statements should be read in conjunction with the financial statements
and the notes thereto included in CHWG's Annual Report on Form 10-KSB for the
period ended December 31, 2006.
  The
accompanying unaudited quarterly consolidated financial statements reflect all
adjustments of a normal and recurring nature which are, in the opinion of
management, necessary to present fairly the financial position, results of
operations and cash flows of CHWG for the periods presented. The results of
operations for these periods are not necessarily comparable to, or indicative
of, results of any other quarterly period or for the fiscal year taken as a
whole. Factors that affect the comparability of financial data from year to year
and for comparable quarterly periods include non-recurring expenses associated
with CHWG's costs incurred to reorganize CHWG, raise capital, and issue stock
options and awards. Certain financial information that is not required for
interim financial reporting purposes has been omitted.
 
 NOTE 2 - DESCRIPTION OFBUSINESS
  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, investigating and, if such investigation warranted, acquiring an
interest in a business opportunity.
  On
October 15, 2004, we were the subject of a 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 currently 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.
  7
  CHINA
WATER GROUP, INC.
 
 Notes
to Consolidated Financial Statements
 September
30, 2007 and 2006
 
 NOTE 2 - DESCRIPTION OFBUSINESS (CONTINUED)
 
 Xinxingmei’s
management fees from Xin Le and Tian Jin did not represent a material portion of
our revenue during the first three quarters of 2007.
 
 The
principal activities of the Group are 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.
 
 On
      January 22 2007, the minority shareholder of Han Dan Cheng Sheng Water
      Affairs Company Limited (“Han Dan”), Guang Dong Xin Sheng Environmental
      Protection Company Limited (“GDXS”), subscribed all of the remaining
      capital injection of Han Dan and there was no further injection of share
      capital from the Company. As a result, the percentage of equity in Han Dan
      hold by the Company decreased from 90% to 34.32% and Han Dan became an
      associated company of the Company instead of a subsidiary
      company.
 
 NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Revenue
      recognition. We recognize revenue using various revenue recognition
      policies based on the nature of the sale and the terms of the
      contract.
  Revenues
      from turn-key engineering projects are recognized on the
      percentage-of-completion method for individual contracts. We follow the
      guidance of the American Institute of Certified Public Accountants
      (“AICPA”) Statement of Position (“SOP”) 81-1, Accounting for
      Performance of Construction-Type and Certain Production-Type Contracts,
      for our accounting policy relating to the use of the
      percentage-of-completion method, estimated costs and claim recognition for
      construction contracts. Revenues are recognized in the ratio that costs
      incurred bear to total estimated contract costs to the extent we believe
      related collection is probable. The use of the percentage-of-completion
      method of revenue recognition requires estimates of percentage of project
      completion. Changes in job performance, estimated profitability and final
      contract settlements may result in revisions to costs and income in the
      period in which the revisions are determined. Provisions for any estimated
      losses on uncompleted contracts are made in the period in which such
      losses are determinable. In instances when the work performed on fixed
      price agreements is of a relatively short duration, we use the completed
      contract method of accounting whereby revenue is recognized when the work
      is completed. From 5% to 10% of the total contract value will be treated
      as retention monies withheld to ensure performance of the contract during
      the warranty period of up to 12 months, as stipulated in both long-term
      and short-term fixed-price
contracts.
  Revenues
      arising from wastewater treatment are recognized based on wastewater
      treated as recorded daily by meters read at rates, in RMB/ton, as
      prescribed under the BOT agreements in accordance with SEC Staff
      Accounting Bulletin (“SAB”) Topic 13, Revenue Recognition. We meet the
      following four criteria for revenue recognition outlined in SAB Topic
      13:
  1.
      There is sufficient evidence to support that sales arrangements
      exist;
  2.
      The price to the buyer is fixed through signed
  contracts;
  3.
      Meter readings illustrate that delivery of treated wastewater has
      occurred; and
  4.
      Collectibility is reasonably assured through one or more of the following:
      due diligence prior to contract signing; historical payment practices; or
      required upfront payments.
  8
  CHINA
WATER GROUP, INC.
 
 Notes
to Consolidated Financial Statements
 September
30, 2007 and 2006
 
 NOTE3 - SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES
(CONTINUED)
 
 Revenues
from the sale of environment protection-related products and provision of
technical services are recognized when goods are delivered or when services are
performed. The contractual terms of the purchase agreements or consultancy
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) is based on management’s judgments regarding
the fixed nature of the selling prices of the products or services 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 we
      consider in this evaluation include current operating results, trends and
      anticipated undiscounted future cash flows that we expect to result from
      the use of the asset, or other measure of fair value, and whether such
      factors reflect that the value of the asset has been
    impaired.
  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 risk 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.
      During the first three quarters of 2007, we made no allowances 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.
  Income
      per share. Basic income per share is computed by dividing the net
      income for the year by the weighted average number of common shares
      outstanding during the year. Diluted income per share is 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 income
      per share to the extent such shares are dilutive. In accordance with
      Statement of Financial Accounting Standards (“SFAS”) No. 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.
  9
  CHINA
WATER GROUP, INC.
 
 Notes
to Consolidated Financial Statements
 September
30, 2007 and 2006
 
 NOTE3 - SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES
(CONTINUED)
 
 Recently
issued accounting pronouncements
 
 In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurement” (“SFAS
157”).  SFAS 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value
measurements.  This Statement shall be effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years.  Earlier application is
encouraged, provided that the reporting entity has not yet issued financial
statements for that fiscal year, including any financial statements for an
interim period within that fiscal year.  The provisions of this
statement should be applied prospectively as of the beginning of the fiscal year
in which this Statement is initially applied, except in some circumstances where
the statement shall be applied retrospectively. The Company is currently
evaluating the effect, if any, of SFAS 157 on its financial
statements.
 
 In
September 2006, the FASB released SFAS No. 158 “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans: an amendment of FASB
Statements No. 87, 88, 106, and 132(R)” which requires an employer to recognize
the over funded or under funded status of defined benefit and other
postretirement plans as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through an adjustment to comprehensive income.  This
statement also requires an employer to measure the funded status of a plan as of
the date of its year-end statement of financial position, with limited
exceptions. The Company is currently evaluating the impact of adopting SFAS
No.158
on its financial statements.
 
 In
February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for
Financial Assets and Financial Liabilities—including an amendment of FASB
Statement No. 115” (“SFAS No. 159”), which permits entities to choose to
measure many financial instruments and certain other items at fair value. The
fair value option established by this Statement permits all entities to choose
to measure eligible items at fair value at specified election dates. A business
entity shall report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting date.
Adoption is required for fiscal years beginning after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS Statement No. 159.  The Company is currently
evaluating the impact of adopting SFAS No.159 on its
financial statements.
 
 In
December 2007, the FASB issued SFAS No. 141, “Business Combinations” (“SFAS
141”).  SFAS 141 defines the acquirer as the entity that obtains
control of one or more businesses in the business combination and establishes
the acquisition date as the date that the acquirer achieves control, and
requires an acquirer to recognize the assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree at the acquisition date,
measured at their fair values as of that date, with limited exceptions specified
in the Statement. SFAS 141 applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS
160”).  SFAS 160 clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. SFAS 160 requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest, and also
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated. The requirements of SFAS 160 are effective for our fiscal
year beginning January 1, 2009.
  10
  CHINA
WATER GROUP, INC.
 
 Notes
to Consolidated Financial Statements
 September
30, 2007 and 2006
 
 NOTE 4 - BASIC NET LOSS PER SHARE
 
 (i)
              The
      basic net income/(loss) per share is calculated using the net income and
      the weighted average number of shares outstanding during the
      year.
 
 Nine months ended September 30,2007
                      
                      
                      2006Net
      income/(loss) (US$)
                      
                      $
                      (613,533
                      )
                      
                      $
                      1,812,803Weighted
      average number of commonshares outstanding
                      
                      
                      135,903,698
                      
                      
                      
                      135,903,698Basic
      net income/(loss) per share (US$)
                      
                      $
                      (0.00
                      )
                      
                      $
                      0.01
 
 (ii)
              The
      diluted net income/(loss) per share is calculated using the net
      income/(loss) and the weighted average number of shares outstanding during
      the year together with incremental common shares issuable upon the
      exercise of all warrants issued.
 
 Nine months ended September 30,2007
                      
                      
                      2006Net
      income/(loss) (US$)
                      
                      $
                      (613,533
                      )
                      
                      $
                      1,812,803Weighted
      average number of commonshares outstanding
                      
                      
                      135,903,698
                      
                      
                      
                      135,903,698Diluted
      net income/(loss) per share (US$)
                      
                      $
                      (0.00
                      )
                      
                      $
                      0.01
 
 As the
April Warrants and the September Warrants are anti-dilutive, they are being
excluded from the calculation of diluted earnings per shares.
 
 NOTE 5 - PREPAYMENT, DEPOSITS ANDOTHER RECEIVABLES
 
 September 30,
                      
                      
                      December 31,2007
                      
                      
                      2006Prepayment
                      
                      $
                      7,147,848
                      
                      
                      $
                      106,767Deposits
                      
                      
                      41,901
                      
                      
                      
                      42,303Other
      receivables:Amounts
      receivable from Beijing Hao Tai
                      
                      
                      765,185
                      
                      
                      
                      737,284Advances
      and miscellaneous receivables
                      
                      
                      312,599
                      
                      
                      
                      607,685Total
                      
                      $
                      8,267,533
                      
                      
                      $
                      1,494,039
 
 The
management believes that all other receivables are
collectible.
  11
  CHINA
WATER GROUP, INC.
 
 Notes
to Consolidated Financial Statements
 September
30, 2007 and 2006
 
 NOTE 6 - PROPERTY, PLANT ANDEQUIPMENT, NET
 
 Property,
plant and equipment, net consisted of the following:-
 
 September 30,
                      
                      
                      December 31,2007
                      
                      
                      2006Purchase
      cost :-Office
      equipment
                      
                      $
                      34,244
                      
                      
                      $
                      31,364Furniture
      and fixtures
                      
                      
                      14,309
                      
                      
                      
                      14,401Tools
      and equipment
                      
                      
                      3,578
                      
                      
                      
                      2,393Motor
      vehicles
                      
                      
                      50,282
                      
                      
                      
                      48,384Waste
      water treatment plants
                      
                      
                      5,282,250
                      
                      
                      
                      5,072,771Total
                      
                      
                      5,384,663
                      
                      
                      
                      5,169,313Less
      : Accumulated depreciation and amortization
                      
                      
                      (685,582
                      )
                      
                      
                      (429,780
                      )Property,
      plant and equipment, net
                      
                      $
                      4,699,081
                      
                      
                      $
                      4,739,533
 
 Depreciation
and amortization expenses for the nine months ended September 30, 2007 and 2006
amounted to US$234,288 and US$19,379 respectively.
 
 NOTE 7 - WARRANT LIABILITY
  The fair
values of the warrant liability as of September 30, 2007 and December 31, 2006
are as below:-
 
 September 30,
                      
                      
                      December 31,2007
                      
                      
                      2006Warrants
      issued in April, at fair value
                      
                      $
                      150,000
                      
                      
                      $
                      200,000Warrants
      issued in September, at fair value
                      
                      
                      1,275,120
                      
                      
                      
                      2,073,680Shares
      issued in September, accounted for as liability
                      
                      
                      32,200
                      
                      
                      
                      32,200Total
                      
                      $
                      1,457,320
                      
                      
                      $
                      2,305,880
  The Group
conducted a private placement in April 2005 (“April Private Placement”) of 20
investment units, at US$25,000 per unit, for gross proceeds of US$500,000. Each
unit consisted of (a) a 12% convertible debenture in the original principal
amount of US$25,000, convertible into shares of our common stock at the rate of
the lesser of (i) US$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 US$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.
  12
  CHINA
WATER GROUP, INC.
 
 Notes
to Consolidated Financial Statements
 September
30, 2007 and 2006
 
 NOTE 7 - WARRANT LIABILITY
(CONTINUED)
  The Group
used the Black-Scholes model in calculating the fair market value of the April
Warrants and allocated US$148,531, US$74,266 and US$185,664 of the US$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 of 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 Group
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 Group determined to undertake a registration of
securities, the Group would include, at the request of the holder of
“Registrable Securities”, the Registrable Securities in the registration
statement. If the Group did not file a registration statement by the 120th day
from the closing of such financing, and the Group shall have received a written
request signed by the holders holding the majority of the Registrable
Securities, then the Group 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 Group 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 Group 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, 2007, the Group has not
received any written request signed by the holders holding the majority of the
Registrable Securities.
  Under
EITF No. 00-19, 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, 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.
  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 debenture was recorded in equity as additional
capital.
  13
  CHINA
WATER GROUP, INC.
 
 Notes
to Consolidated Financial Statements
 September
30, 2007 and 2006
 
 NOTE 7 - WARRANT LIABILITY
(CONTINUED)
  On
September 14, 2005, the Group closed the private placement sale to
accredited investors of units consisting of shares of our common stock and
warrants to purchase shares of our common stock for aggregate gross proceeds of
US$4.83 million (“September Private Placement”). Pursuant to the subscription
agreements entered into with the investors, we issued to the investors 161 units
at a price of US$30,000 per unit. Each unit consisted of 200,000 shares of our
common stock, priced at US$0.15 per share, and warrants to purchase 200,000
shares of our common stock over a five year period at an exercise price of
US$0.20 per share. Pursuant to the terms of the subscription agreements, we
granted the investors limited registration rights for all common shares
comprising the units, including the common shares issuable on exercise of the
warrants. The Group also issued to Westminster Securities Corporation, as
partial compensation for their placement agent services 7,728,000 placement
agent warrants to purchase one share each of our common shares, a portion of
which has been assigned by Westminster Securities Corporation to certain of its
officers and employees (the warrants issued in the September Private Placement
together with the placement agent warrants are hereinafter referred to as
“September Warrants”).
  The Group
used the Black-Scholes model in calculating the fair market value of the
September Warrants and allocated US$4,140,535 of the US$4,172,735 net proceeds
to the September Warrants. The difference between the fair value of the
September Warrants and the allocated amount is recorded as non-cash financing
charges and expensed of at the date of issuance. The principal assumptions used
in the computation of the September Warrants are: expected term of 5 years; a
risk-free rate of return of 4.24%; dividend yield of zero percent; and a
volatility of 70%.
 
 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, 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 September 30, 2007, we have made an
accrual of $1,102,606 for registration right liability.
 
 Under
paragraphs 12–32 of EITF 00-19, 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.
  14
  CHINA
WATER GROUP, INC.
 
 Notes
to Consolidated Financial Statements
 September
30, 2007 and 2006
 
 NOTE 8 - INTERESTS INAFFILIATED COMPANIES
 
 Interests
      in associated companies as of September 30, 2007 and December 31, 2006 are
      as below:
 
 September 30,
                                  
                                  
                                  December 31,2007
                                  
                                  
                                  2006Xin
      Le Sheng Mei Water Purifying Company Limited (“Xin Le”)
                                  
                                  $
                                  1,218,502
                                  
                                  
                                  $
                                  1,080,562Han
      Dan Cheng Sheng Water Affairs Company Limited (“Han Dan”)
                                  
                                  
                                  933,917
                                  
                                  
                                  
                                  -Total
                                  
                                  $
                                  2,152,419
                                  
                                  
                                  $
                                  1,080,562
 
 NOTE 9 - INCOME TAXES
 
 The
      income tax benefit consisted of the
following:-
 
 Nine Months Ended September 30,2007
                          
                          
                          2006Current
      tax :PRC
                          
                          $
                          215
                          
                          
                          $
                          436,337Deferred
      tax :PRC
                          
                          
                          -
                          
                          
                          
                          -Total
      income tax benefit
                          
                          $
                          215
                          
                          
                          $
                          436,337
 
 The
provision for income tax represents the provision for PRC enterprise income tax
calculated at the standard income tax rate of 33% on the assessable profits of
the PRC’s subsidiaries and the standard withholding income tax rate of 10% on
the total revenue generated by Evergreen, a company incorporated in the British
Virgin Islands, in the PRC.
 
 NOTE 10 - 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 11 - CONCENTRATION
 
 Our major
customers for the nine months ended September 30, 2007 were:
 
 (i) Hai
Yang City Zoning and Construction Management Bureau, which accounted for
approximately 66% of our total revenue for the nine months ended September 30,
2007; the revenues from this customer arose from BOT-waste water treatment
service; and
 
 (ii)
Tianjin City Wuqing Zone Environment Protection Bureau, which accounted for
approximately 33% of our total revenue for the nine months ended September 30,
2007; the revenues from this customer arose from BOT-waste water treatment
service.
  15




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 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 environmental regulations, our ability toobtain 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
relianceon 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
informationexcept 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 relatednotes contained in Item 1 of Part I of
this Form 10-Q.





RESULTS OF
OPERATIONS





Quarter Ended September 30, 2007 vs
Quarter Ended September 30, 2006





Total
revenue. We reported total
revenue of $214,223 for the three months ended September 30, 2007 as
compared to $991,766 for
the three months ended September 30, 2006.  Nearly all of the
difference was the lack of any revenue from turn-key engineering projects during
the third quarter 2007 quarter as compared to $722,489 of revenue from turn-key
engineeringprojects during the third quarter of
2006. We reported revenue from BOT wastewater treatment services of $214,223
during the third  quarter of 2007 as compared to revenue from BOT
wastewater treatment services of $269,277 during the third quarter of
2006,a decrease of 20.6%.  We have
determined to leave the field of providing turn-key engineering projects and to
concentrate our future efforts on the sale of bottled water.  Revenues
from these efforts should be significant in future periods.  We
continue toprovide BOT wastewater treatment
services in existing facilities, but are not seeking to operate additional
facilities and,  the Company will from time to time seek to dispose of
existing facilities to concentrate on its bottled water
business.


16





Cost ofrevenue. Our total cost of revenue, exclusive
of depreciation, amortization and sales taxes, decreased from $643,354 for the
three months ended September30, 2006 to $157,855 for the three months ended
September 30, 2007. This was primarily due to our decreased levels of operation during the
quarter ended September 30, 2007 as we continued our move away from turn-key
engineering projects.





Gross
profit. Gross profit, as a
percentage of total revenue for the three months ended September 30, 2007 and
2006, was approximately
26.3%, or $56,368, and approximately 35.1, or $348,412,
respectively.   Decreased gross profits and margins reflect the
Company’s transition away from turn-key
engineering projects.




General and administrative expenses. Our total general and administrative
expenses for the three months ended September 30, 2007 and 2006 were $1,593,402
and $183,799, respectively. The principal components of general and
administrative expenses were administrative salaries and benefits, depreciation
and amortization, traveling expenses, rental expenses and other general
administration costs. The increase in general and administrative expenses for
the three months ended September 30, 2007 as compared to the three months ended
September 30, 2006 was primarily due to the decreased levels of operations.
General and Administrative expenses also reflect the write off of a loan of
approximately $1,500,000 by XinXinMei, an affiliate of the
Company.





Penalty for late
effectiveness of registration statementThis amount represents the liquidated damages payment
obligation we accrued in connection with the September Private Placement by
missing the deadline we agreed to for effectiveness of the registration
statement we filed in connection with that financing. 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, we would pay to the investors in the September Private Placement
liquidated damages in the amount of 2.0% of the purchase price of theregistrable 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 inthe 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 dateof the September Warrants, these
liquidated damages obligations will stop accruing. As of September 14, 2006 the
liquidated damages obligations stopped accruing for a period of time and then
other related damages began to accrue. As of September 30, 2006,we had made an accrual of $828,027 for
such liquidated damages.


17





Under paragraphs 12–32 of EITF 00-19, 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.  In 2007
webegan accruing smaller amounts for
other penalties which amounted to $22,382 for the quarter and $68,119 for the
year to date.





Unrealized
gain/(loss) 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 loss on financial instruments
for the three months ended September 30, 2007 was ($77,280). The unrealized gain
on financial instruments for the three months ended September 30, 2006
was  $3,477,393.





Share of results in
an associates. CWG holds a
35% interest in the net profits in Xin Le and a 34.32% interest in Han Dan. Our
share of results in Xin Le and Han Dan for the three months ended September 30,
2007 and 2006 was$61,854
and $58,549, respectively. The increase in our share of net profits in 2007 was
as a result of increase in net profit of our associates.





Net
(loss)/income. We had a net
loss, after income tax and minority interests, of ($1,584,033) for the threemonths ended September 30,
2007, and a net income, after income tax and minority interests, of $3,339,892
for the three months ended September 30, 2006.  The loss as compared
to net income in the prior period reflects our reduced scale of operations has
wehave exited the turn-key engineering
project aspect of our business.





Nine months Ended September 30, 2007 vs
Nine months Ended September 30, 2006





Total
revenue. We reported total
revenue of $648,313 for the nine months ended September 30, 2007 as
compared to $4,203,607 for
the nine months ended September 30, 2006.  Nearly all of the
difference was the lack of any revenue from turn-key engineering projects during
the first nine months of 2007 quarter as compared to $3,467,838 of revenue from
turn-key engineering projects during the first nine
months of 2006. We reported revenue from BOT wastewater treatment services of
$641,286 during the first nine months of 2007 as compared to revenue from BOT
wastewater treatment services of $735,769 during the first nine months of 2006.  We also
recognized revenue of $5,027 from the sale of bottled water during the first
nine months of 2007.   The sales of bottled water reflect a test
marketing of the product during thte period.  We have determined to
leave the field ofproviding turn-key engineering projects
and to concentrate our future efforts on the sale of bottled
water.  We continue to provide BOT wastewater treatment services in
existing facilities, but are not seeking to operate additional facilities
and,  the Company will from time to time seek to
dispose of existing facilities to concentrate on its bottled water
business.


18





Cost of
revenue. Our total cost of
revenue, exclusive of depreciation, amortization and sales taxes, decreased from
$2,514,082 for the ninemonths ended September 30, 2006 to $460,020 for the nine months ended September
30, 2007. This was primarily due our decreased levels of operation during the
nine months September 30, 2007 as we continued our move away from turn-key
engineering projects.





Gross
profit. Gross profit, as a
percentage of total revenue for the nine months ended September 30, 2007 and
2006, was approximately 28.9%, or $186,293, and approximately 40.2%, or
$1,689,525 respectively.   Decreased gross profits and margins
reflect the
Company’s transition away from turn-key
engineering projects.





General and
administrative expenses.
Our total general and administrative expenses for the nine months ended
September 30, 2007 and 2006 were $1,904,744 and $439,941, respectively. The
principal components of
general and administrative expenses were administrative salaries and benefits,
depreciation and amortization, traveling expenses, rental expenses and other
general administration costs. The increase in general and administrative
expensesfor the nine months ended September 30,
2007 as compared to the nine months ended September 30, 2006 was primarily due
to the increase of traveling expenses and general meeting costs as management
sought more potential expansion opportunities for the company. General and Administrative expenses
also reflect the write off of a loan of approximately $1,500,000 made by
XinXinMei, an affiliate of the Company.





Penalty for late
effectiveness of registration statementThis amount represents the liquidated
damagespayment obligation
we accrued in connection with the September Private Placement by missing the
deadline we agreed to for effectiveness of the registration statement we filed
in connection with that financing. 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 statementis not declared effective by the SEC
within the earlier of 120 days from the final closing, 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 Placementinterest 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 for a period of time and then other related damages began to
accrue. As of September 30, 2006, we had made an accrual of $828,027 for such liquidated
damages.


19





Under paragraphs 12–32 of EITF 00-19, 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.





Unrealized
gain/(loss) 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. There was an unrealized gain on
financial instruments for the nine months ended September 30, 2007 of $848,560 and $1,743,174 for the
nine months ended September 30, 2006.





Share of results in
an associates. CWG holds a
35% interest in the net profits in Xin Le and a 34.32% interest in Han Dan. Our
share of results in Xin Le and Han Dan for the ninemonths ended September 30, 2007 and
2006 was $184,780 and $172,375, respectively. The increase in our share of net
profits in 2007 was as a result of increase in net profit of our
associates.





Net
(loss)/income. We had a net
loss, after income tax and minority interests, of $(613,534) for the
nine months ended September 30, 2007, and a net income, after income tax and
minority interests, of $1,812,803 for the nine months ended September 30,
2006.  The loss in the 2007 period as compared to the gain in
the2006 period is  principally
attributable to the reduced on financial instruments and increased selling
general and administrative costs discussed above.





LIQUIDITY AND CAPITAL
RESOURCES





Our principal sources of liquidity are
our cash and cash flow generated from operations. Net cash provided by
operating activities during the nine months ended September 30, 2007 was a
negative $(3,844,722).  The total decrease in net cash for the nine
months ended September 30, 2007 was primarily the result of an
interestfree 30,000,000 RMB ($4,000,000)
interest free demand loan to an affiliated entity.  At the end of the
period, our cash and cash equivalents were $299,762.





APPLICATION OF CRITICAL ACCOUNTING
POLICIES





Our financial statements and
accompanying notes areprepared 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, andexpenses. These estimates and
assumptions are affected by management's application of accounting policies.
Critical accounting policies include revenue recognition, impairment of assets
and accounting for allowance of accounts receivable.


20





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





Revenues from turn-key engineering
projects are recognized on the percentage-of-completion method for individual
contracts. We follow the
guidance of the American Institute of Certified Public Accountants
(“AICPA”) Statement of Position (“SOP”) 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts, for our accounting
policy relating tothe use of the percentage-of-completion
method, estimated costs and claim recognition for construction contracts.
Revenues are recognized in the ratio that costs incurred bear to total estimated
contract costs to the extent we believe related collection isprobable. The use of the
percentage-of-completion method of revenue recognition requires estimates of
percentage of project completion. Changes in job performance, estimated
profitability and final contract settlements may result in revisions to costs
andincome in the period in which the
revisions are determined. Provisions for any estimated losses on uncompleted
contracts are made in the period in which such losses are determinable. In
instances when the work performed on fixed price agreements is of arelatively short duration, we use the
completed contract method of accounting whereby revenue is recognized when the
work is completed. From 5% to 10% of the total contract value will be treated as
retention monies withheld to ensure performance of the contract during the warranty period of up to
12 months, as stipulated in both long term and short term fixed price
contracts.





Revenues arising from wastewater
treatment are recognized based on wastewater treated as recorded daily by meters
read at rates, in RMB/ton,
as prescribed under the BOT agreements in accordance with SAB Topic 13, Revenue
Recognition. We meet the following four criteria for revenue recognition
outlined in SAB Topic 13:





1. There is sufficient evidence to
support that sales arrangements exist;





2. The price to the buyer is fixed
through signed contracts;





3. Meter readings illustrate that
delivery of treated wastewater has occurred; and





4. Collectibility is reasonably assured
through one or more of the following: due diligence prior to contract signing; historical payment
practices; or required upfront payments.


21


Revenues from the sale of environment
protection-related products and provision of technical services are recognized
when goods are delivered or when services are performed. Thecontractual terms of the purchase
agreements or consultancy 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
fixednature of the selling prices of the
products or services 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 therelated 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 that are expected
to result from the use of the asset, or other measure of fair value, and whether
such factors reflect that the value of the asset has been
impaired.





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 no 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
thecurrent creditworthiness and the past
collection history of each customer. During the third quarter of 2006, we made
no allowances 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 fairvalue based on our expected borrowing
rate for debt with similar remaining maturities and comparable
risk.





Income per share. Basic income per
share is computed by dividing the net income for the year by the weighted
average number of common shares outstanding during the year. Diluted income
per share is 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 income 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.


22





New accounting pronouncements





In May 2006, the SEC announced that the
compliance date for non-accelerated filers pursuant to Section 404 of the
Sarbanes-Oxley Act had been extended. Under the latest extension, a company that
is not required to file its annual and quarterlyreports on an accelerated basis must
begin to comply with the internal control over financial reporting requirements
for its first fiscal year ending on or after July 15, 2008, which, for us, is
effective for fiscal 2008 beginning January 1, 2008. This isa one-year extension from the previously
established July 15, 2007 compliance date established in September 2005. The SEC
similarly extended the compliance date for these companies relating to
requirements regarding evaluation of internal control over financial reporting and management
certification requirements. We are currently evaluating the impact of Section
404 of the Sarbanes-Oxley Act on our results of operations, cash flows or
financial condition.





In July 2006, the Financial Accounting
Standards Board
(“FASB”) issued FASB Interpretation
(“FIN”) No. 48, Accounting for Uncertainty in
Income Taxes - An Interpretation of FASB Statement No. 109. This Interpretation
provides guidance for recognizing and measuring uncertain tax positions, as
defined in Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a threshold
condition that a tax position must meet for any of the benefit of an uncertain
tax position to be recognized in the financial statements. Guidance is also provided regarding
derecognition, classification and disclosure of uncertain tax positions. FIN No.
48 is effective for fiscal years beginning after December 15, 2006. The Company
does not expect that this Interpretation will have a material impact on their financial position,
results of operations or cash flows.





In September 2006, the FASB issued SFAS
No. 157, Fair Value Measurements (“FAS 157”). FAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value measurements
but does not require any new fair value measurements. FAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company has not yet determined the impact of
applying FAS 157.





In September 2006, the FASB issued
SFAS No. 158, Employers’Accounting for Defined Benefit Pension
and Other Postretirement Plans (“FAS 158”). FAS 158 requires an employer to
recognize the overfunded or
underfunded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income. FAS 158 is
effective for financial statements as of December 31, 2006. The Company does not
expect any material impact from applying FAS 158.


23


In September 2006, the SEC issued SAB
108, which provides interpretive guidance on how the effects of the carryover or reversal
of prior year misstatements should be considered in quantifying a current year
misstatement. SAB 108 is effective for the first interim period following the
first fiscal year ending after November 15, 2006, which, for us, is effective for fiscal 2007
beginning January 1, 2007. We believe that the adoption of SAB 108 will not have
a material impact on our results of operations, cash flows or financial
condition.





Off-Balance Sheet
Arrangements





We do not have any off-balance sheet
arrangements.





ITEM 3. CONTROLS AND
PROCEDURES





Our disclosure controls and procedures
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,summarized and reported,
within the time periods specified in the rules and forms of the Securities and
Exchange Commission’s rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure thatsuch 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. Our Chief
Executive Officer and Chief Financial Officer have reviewed the effectiveness of
our disclosure controls and procedures and have concluded that the disclosure
controls and procedures are not effective as of the end of theperiod covered by this report as
discussed below. There were no significant changes in our internal controls or
in other factors that could significantly affect these controls subsequent to
the last day they were evaluated.





Our Chief Executive Officer
andChief 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, our Chief Executive Officer and Chief Financial
Officer 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 us in the reports that we file or submit under the Exchange Act 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 forfiscal 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:


24





(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;





(iii)          theunaudited 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 September 30,
2005 (the “September 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 the
XY





As previously disclosed inour 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, estimatedcosts and claim recognition for
construction contracts. The amount accounted for 97% of our total revenue in
2004.


25





In the previously filed 2004 10-KSB, as
amended to date, and comparative figures in our original filing of the 2005
10-KSB, the accountingtreatment 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 ofthe 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 or
have been reclassified to prepayment, deposits and other receivables in our
upcoming amendment to the 2004 10-KSB and comparative figuresin the recent amendments to the 2005
10-KSB, September 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 2004 10-KSB and 2005 10-KSB
and Note 2 to the consolidated financial statements
contained in the originally filed March 31, 2005 10-QSB, September 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 recent or upcoming
amendments to the 2004 10-KSB, 2005 10-KSB,
March 31, 2005 10-QSB, September 30, 2005 10-QSB, and September 30, 2005 10-QSB
and this amendment to the March 31, 2006 10-QSB do or will not include or
references to CWG reorganization transactions throughout thefinancial statements. We will also
restate or have restated the common stock immediately after the recapitalization
to $100,000 in the amended March 31, 2005 10-QSB and September 30, 2005
10-QSB.


26





Reclassification of April
warrants





In our originally filed2005 10-KSB, September 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 asa 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 warrantholders 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, 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 timeas the warrants are exercised or expire
or we are otherwise able to modify the warrant agreement to remove the
provisions which require this treatment. We have recently restated our 2005
10-KSB, September 30, 2005 10-QSB and March 31, 2006 10-QSB to
reclassify the April 2005 warrants as a
liability.





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





In our September 30, 2005 10-QSB, we did
not record any non-cash financing charges and in our September 30, 2005 10-QSB
(original filing and
Amendment No. 1), 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 have restated our September
30, 2005 10-QSB and 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 have
recently been reclassified under non-cash financing charges.





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





Inour September 30, 2005 10-QSB and our
September 30, 2005 10-QSB (original filing and Amendment No. 1), 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 have restated the September30, 2005 10-QSB and September 30, 2005
10-QSB 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.


27





Interest in
associate


In our September 30, 2005 10-QSB and our
September 30, 2005 10-QSB (original filing and Amendment No. 1), the comparative
figures for our interest in associate as of December 31, 2004 were recorded based on an effective
percentage of equity attributable to CWG of 31.5% instead of a direct interest
of 35%. We have restated the comparative figures for our interest in associate
as of December 31, 2004 in the September 30, 2005 10-QSB and September 30, 2005 10-QSB to include our
interest in associate based on a direct interest of 35%.





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 CWG 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.
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 theSeptember 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 financialinstruments, however, required to be
further restated (see discussion above). In addition, we have restated the
common stock immediately after the recapitalization to
$100,000.





Material Weaknesses





In connection with the above matters, we
have identifiedmaterial
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;


28


(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





We have communicatedwith 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 FinancialStatements, established by the Public
Company Accounting Oversight Board, or PCAOB.





In order to address these material
weaknesses our senior management has conducted a thorough review of our US GAAP
financial reporting processes and prepared and implemented a US GAAP action plan. This plan was
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. The US GAAP
action plan incorporates, 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
internationally recognized accounting firm, which is not affiliated
with  our former audotors. ,to assist our accounting department and
internal audit function in the preparation of our US GAAP consolidated financial
statements;





3. recruit an accounting staff member with US
GAAP expertise and who is not affiliated with our former
auditors.





Our board of directors discussed the
matters disclosed in this filing with the registrant’s independent accountant. On September
25, 2006, we filed acurrent 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, which are included within disclosure controls and procedures,
during our most recently completed fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our internal
controls.





PART II. OTHER
INFORMATION





ITEM 1. LEGAL
PROCEEDINGS





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


29





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





None.





ITEM 3. DEFAULTS UPON SENIOR
SECURITIES





None.





ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS





None.





ITEM 5. OTHER
INFORMATION





None.





ITEM 6. EXHIBITS





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 theundersigned,
thereunto duly authorized.


30





CHINA WATER GROUP,
      INC.(Registrant)Dated: April132009
              
              By: /s/ Wenge
      FangWenge Fang,Chief Executive
      OfficerDated: April13, 2009
              
              By:  /s/ Ding
      RencaiDing
Rencai,Chief Financial
      Officer


31