U.S.
SECURITIES AND EXCHANGE COMMISSION
 
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 
 (Mark One)
 x
              QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
quarterly period ended June 30, 2008
   ̈
              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)
 86-20-3479
9708
 (Issuer’s
telephone number)
 
 NA
 (Former
name, former address and former fiscal year, if changed since last
report)
  Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES  ̈ NO
x
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company
filer.  See definition of “accelerated filer” and “large accelerated
filer” in Rule 12b-2 of the Exchange Act (Check one):
 
 Large Accelerated Filer  ̈
                    
                    Accelerated Filer  ̈
                    
                    Non-Accelerated Filer ̈
                    
                    Smaller Reporting Company x
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES NO x
  State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: 139,383,450 shares of common stock, par value
$.0001 per share, as of June 8, 2009.
  Transitional
Small Business Disclosure Format (Check one). YES  ̈ NO
x
  
  PART
I. - FINANCIAL INFORMATION
 ITEM 1. FINANCIAL
STATEMENTS.
 
 CHINA
WATER GROUP, INC.
 
 CONSOLIDATED
FINANCIAL STATEMENTS
 
 JUNE
30, 2008 AND 2007
 
 (UNAUDITED)
  
  CHINA
WATER GROUP, INC.
 Consolidated
Financial Statements
 June
30, 2008 and 2007
 (Unaudited)
 
 Table
of Contents
 
 PageConsolidated
      Financial StatementsReport of Independent Registered Public Accounting
      Firm
                      
                      
                      1Consolidated
      Balance Sheets
                      
                      
                      2Consolidated
      Statements of Operations and Comprehensive Income
                      
                      
                      3Consolidated Statements of Cash Flows
                      
                      
                      4Notes
      to Consolidated Financial Statements
                      
                      
                      5
  
 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 June 30, 2008, and the related
consolidated statements of operations and comprehensive income for the three
months and six months ended June 30, 2008 and 2007, and cash flows for the six
months ended June 30, 2008 and 2007. 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.
 
 We have
previously audited, in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
China Water Group, Inc. as of December 31, 2007, and the related consolidated
statements of income, retained earnings and comprehensive income, and cash flows
for the year then ended (not presented herein); and in our report dated March
10, 2009, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2007, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
 
  
 Parsippany,
New Jersey
 March 15,
2009
  1
 
 CHINA
WATER GROUP, INC.
 
 Consolidated
Balance Sheets
 June
      30,
                  
                  
                  December
      31,2008
                  
                  
                  2007(Unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  55,973
                  
                  
                  $
                  341,575Accounts
      receivable, net of allowance for doubtful accounts of $-0- for
      June30,
      2008 and December 31, 2007
                  
                  
                  143,333
                  
                  
                  
                  518,066Prepayments,
      deposits and other receivables
                  
                  
                  363,164
                  
                  
                  
                  8,531,742Due
      from related companies
                  
                  
                  512,298
                  
                  
                  
                  1,940,670Due
      from affiliated companies
                  
                  
                  2,820,114
                  
                  
                  
                  3,166,470Deferred
      expenses
                  
                  
                  1,454,588
                  
                  
                  
                  -Deferred
      tax assets
                  
                  
                  14,838
                  
                  
                  
                  1,928,186Total
      current assets
                  
                  
                  5,364,308
                  
                  
                  
                  16,426,709Property,
      plant and equipment, net
                  
                  
                  4,528,515
                  
                  
                  
                  4,752,192Construction
      in progress
                  
                  
                  13,917
                  
                  
                  
                  95,309Intangible
      assets
                  
                  
                  136,746
                  
                  
                  
                  -Goodwill
                  
                  
                  7,137,935
                  
                  
                  
                  -Interests
      in affiliated companies
                  
                  
                  1,259,945
                  
                  
                  
                  2,180,947Total
      assets
                  
                  $
                  18,441,366
                  
                  
                  $
                  23,455,157Liabilities
      and stockholders’ equityCurrent
      liabilities:Warrant
      liability
                  
                  
                  93,626
                  
                  
                  
                  1,179,965Notes
      payable
                  
                  
                  -
                  
                  
                  
                  27,344Accounts
      payable
                  
                  
                  668,067
                  
                  
                  
                  6,923,872Accrued
      expenses
                  
                  
                  1,675,829
                  
                  
                  
                  3,168,841Due
      to directors
                  
                  
                  714,399
                  
                  
                  
                  1,454,372Due
      to related companies
                  
                  
                  4,219,906
                  
                  
                  
                  1,853,779Income
      taxes payable
                  
                  
                  1,357,321
                  
                  
                  
                  1,794,580Total
      current liabilities
                  
                  
                  8,729,148
                  
                  
                  
                  16,402,753Minority
      interests
                  
                  
                  148,426
                  
                  
                  
                  313,986Total
      liabilities
                  
                  
                  8,877,574
                  
                  
                  
                  16,716,739Stockholders'
      equity:Preferred
      stock, $0.001 par value, 50,000,000 authorized shares,no
      shares issued and outstanding
                  
                  
                  -
                  
                  
                  
                  -Common
      stock, $0.001 par value, 200,000,000 shares authorized;139,217,550
      shares issued and outstanding
                  
                  
                  139,218
                  
                  
                  
                  139,218Additional
      paid-in capital
                  
                  
                  6,361,428
                  
                  
                  
                  6,131,697Retained
      earnings
                  
                  
                  1,408,675
                  
                  
                  
                  (670,851
                  )Accumulated
      other comprehensive income
                  
                  
                  1,654,471
                  
                  
                  
                  1,138,354Total
      stockholders' equity
                  
                  
                  9,563,792
                  
                  
                  
                  6,738,418Total
      Liabilities and Stockholders' Equity
                  
                  $
                  18,441,366
                  
                  
                  $
                  23,455,157
  The
accompanying notes are an integral part of these consolidated financial
statements.
  2
 
 CHINA
WATER GROUP, INC.
 
 Consolidated
Statements of Operations and Comprehensive Income
 (Unaudited)
 Three
      Months Ended June 30,
                      
                      
                      Six
      Months Ended June 30,2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007Revenue:Revenue
      from BOT wastewater treatment services
                      
                      $
                      185,210
                      
                      
                      $
                      223,948
                      
                      
                      $
                      357,681
                      
                      
                      $
                      427,098Revenue
      from sales of bottled water
                      
                      
                      57,057
                      
                      
                      
                      1,845
                      
                      
                      
                      104,780
                      
                      
                      
                      4,992Total
      revenue
                      
                      
                      242,267
                      
                      
                      
                      225,793
                      
                      
                      
                      462,461
                      
                      
                      
                      432,090Cost
      of revenue:Cost
      of revenue for BOT wastewater treatment services
                      
                      
                      (63,249
                      )
                      
                      
                      (81,574
                      )
                      
                      
                      (108,830
                      )
                      
                      
                      (140,081
                      )Cost
      of revenue from sale of bottled water
                      
                      
                      (26,283
                      )
                      
                      
                      (1,131
                      )
                      
                      
                      (35,249
                      )
                      
                      
                      (3,174
                      )Depreciation
      and amortization
                      
                      
                      (70,072
                      )
                      
                      
                      (74,619
                      )
                      
                      
                      (138,104
                      )
                      
                      
                      (158,471
                      )Sales
      taxes
                      
                      
                      (663
                      )
                      
                      
                      (75
                      )
                      
                      
                      (682
                      )
                      
                      
                      (439
                      )Total
      cost of revenue
                      
                      
                      (160,267
                      )
                      
                      
                      (157,399
                      )
                      
                      
                      (282,865
                      )
                      
                      
                      (302,165
                      )Gross
      profit
                      
                      
                      82,000
                      
                      
                      
                      68,394
                      
                      
                      
                      179,596
                      
                      
                      
                      129,925Operating
      expenses:Selling
      and distribution expenses
                      
                      
                      (224,528
                      )
                      
                      
                      -
                      
                      
                      
                      (429,763
                      )
                      
                      
                      -Other
      general and administrative expenses
                      
                      
                      (178,089
                      )
                      
                      
                      (122,980
                      )
                      
                      
                      (306,951
                      )
                      
                      
                      (311,342
                      )Loss
      from operations
                      
                      
                      (320,617
                      )
                      
                      
                      (54,586
                      )
                      
                      
                      (557,118
                      )
                      
                      
                      (181,417
                      )Other
      income (expense):Other
      (expenses) /income
                      
                      
                      (471
                      )
                      
                      
                      171,069
                      
                      
                      
                      (1,084
                      )
                      
                      
                      171,713Interest
      expense
                      
                      
                      (299
                      )
                      
                      
                      -
                      
                      
                      
                      (437
                      )
                      
                      
                      -Penalty
      for late effectiveness of registration statement
                      
                      
                      (22,363
                      )
                      
                      
                      (22,644
                      )
                      
                      
                      (45,051
                      )
                      
                      
                      (45,737
                      )Gain
      on financial instruments
                      
                      
                      567,798
                      
                      
                      
                      -
                      
                      
                      
                      1,086,340
                      
                      
                      
                      925,840Share
      of results in associates - Xinxingmei and Han Dan
                      
                      
                      185,154
                      
                      
                      
                      61,664
                      
                      
                      
                      231,495
                      
                      
                      
                      122,926Total
      other income
                      
                      
                      729,819
                      
                      
                      
                      210,089
                      
                      
                      
                      1,271,263
                      
                      
                      
                      1,174,742Income
      before income tax and minority interests
                      
                      
                      409,202
                      
                      
                      
                      155,503
                      
                      
                      
                      714,145
                      
                      
                      
                      993,325Income
      tax expense
                      
                      
                      (5,988
                      )
                      
                      
                      -
                      
                      
                      
                      (12,675
                      )
                      
                      
                      (213
                      )Income
      before minority interests
                      
                      
                      403,214
                      
                      
                      
                      155,503
                      
                      
                      
                      701,470
                      
                      
                      
                      993,112Minority
      interests
                      
                      
                      (4,080
                      )
                      
                      
                      (11,466
                      )
                      
                      
                      (8,718
                      )
                      
                      
                      (22,613
                      )Net
      income
                      
                      
                      399,134
                      
                      
                      
                      144,037
                      
                      
                      
                      692,752
                      
                      
                      
                      970,499Other
      Comprehensive incomeForeign
      currency translation adjustment
                      
                      
                      208,928
                      
                      
                      
                      138,749
                      
                      
                      
                      516,117
                      
                      
                      
                      363,333Comprehensive
      income
                      
                      $
                      608,062
                      
                      
                      $
                      282,786
                      
                      
                      $
                      1,208,869
                      
                      
                      $
                      1,333,832Basic
      earnings per share
                      
                      $
                      0.00
                      
                      
                      $
                      0.00
                      
                      
                      $
                      0.00
                      
                      
                      $
                      0.00Diluted
      earnings per share
                      
                      $
                      0.00
                      
                      
                      $
                      0.00
                      
                      
                      $
                      0.00
                      
                      
                      $
                      0.00Weighted
      average number of common shares outstandingBasic
      and Diluted
                      
                      
                      139,217,550
                      
                      
                      
                      135,903,698
                      
                      
                      
                      139,217,550
                      
                      
                      
                      135,903,698
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  3
  CHINA
WATER GROUP, INC.
 
 Consolidated
Statements of Cash Flows
 (Unaudited)
 For
      the Six Months Ended June 30,2008
                  
                  
                  2007Cash
      flows from operating activities:Net
      income
                  
                  $
                  692,752
                  
                  
                  $
                  970,499Adjustments
      to reconcile net income to net cash provided by (used in)operating
      activities:Depreciation
      and amortization
                  
                  
                  138,104
                  
                  
                  
                  158,471Gain
      on financial instruments
                  
                  
                  (1,086,340
                  )
                  
                  
                  (925,840
                  )Minority
      interests
                  
                  
                  (180,495
                  )
                  
                  
                  7,495Deferred
      expenses
                  
                  
                  (1,413,284
                  )
                  
                  
                  -Share
      of results in affiliated companies - Xinxingmei and Han
Dan
                  
                  
                  (231,495
                  )
                  
                  
                  (122,926
                  )Changes
      in operating assets and liabilities :Accounts
      receivable
                  
                  
                  (79,653
                  )
                  
                  
                  174,370Prepayments,
      deposits and other receivables
                  
                  
                  6,400,289
                  
                  
                  
                  199,832Due
      from related companies
                  
                  
                  3,407,484
                  
                  
                  
                  (4,017,584
                  )Due
      from  affiliated companies
                  
                  
                  (4,750,405
                  )
                  
                  
                  (86,052
                  )Accounts
      payable
                  
                  
                  187,433
                  
                  
                  
                  (322,558
                  )Accrued
      expenses
                  
                  
                  118,822
                  
                  
                  
                  1,522Due
      to directors
                  
                  
                  93,656
                  
                  
                  
                  (21,935
                  )Due
      to related companies
                  
                  
                  3,573,984
                  
                  
                  
                  (44,901
                  )Income
      taxes payable
                  
                  
                  9,713
                  
                  
                  
                  -Total
      adjustments
                  
                  
                  8,961,323
                  
                  
                  
                  (4,117,306
                  )Net
      cash provided by (used in) operating activities
                  
                  
                  6,880,565
                  
                  
                  
                  (4,029,607
                  )Cash
      flows from investing activities:Acquisition
      of interest in a subsidiary - Aba and Xinchen
                  
                  
                  (6,666,609
                  )
                  
                  
                  -Disposal
      of interest in a subsidiary - Xinxingmei and Han Dan
                  
                  
                  503,632
                  
                  
                  
                  15,119Dividend
      received from affiliated company - Xin Le
                  
                  
                  -
                  
                  
                  
                  90,556Acquisition
      of property, plant and equipment
                  
                  
                  (883,579
                  )
                  
                  
                  (59,921
                  )Acquisition
      of intangible assets
                  
                  
                  (132,863
                  )
                  
                  
                  -Net
      cash provided by (used in) investing activities
                  
                  
                  (7,179,419
                  )
                  
                  
                  45,754Effect
      of foreign currency translation on cash and cash
    equivalents
                  
                  
                  13,252
                  
                  
                  
                  47,065Net
      decrease in cash and cash equivalents
                  
                  
                  (285,602
                  )
                  
                  
                  (3,936,788
                  )Cash
      and cash equivalents, beginning of period
                  
                  
                  341,575
                  
                  
                  
                  4,144,484Cash
      and cash equivalents, end of period
                  
                  $
                  55,973
                  
                  
                  $
                  207,696
 
  The
accompanying notes are an integral part of these consolidated financial
statements.
  4
  CHINA
WATER GROUP, INC.
 
 Notes
to Consolidated Financial Statements
 June
30, 2008 and 2007
 (Unaudited)
 
 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 CHWG included herein have been
prepared by CHWG, and are unaudited, 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 accordance with US generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations. These
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in CHWG's Form
10-K for the year ended December 31, 2007.
  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.
 
 NOTE2 –Organization
and Description of Business
  We were
organized as a Nevada corporation on September 10, 1996 under the name
“Discovery Investments, Inc.” and were previously engaged in the business of
seeking, investing and, acquiring an interest in various business
opportunities.
  On
October 15, 2004, we were 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.
  5
 
 CHINA
WATER GROUP, INC.
 
 Notes
to Consolidated Financial Statements
 June
30, 2008 and 2007
 (Unaudited)
 
 NOTE 2 - Description
of Business(CONTINUED)
 
 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 8, 2008, the Chinese government approved the sale of Evergreen’s
      58% of the total equity interest in Guang Dong Xin Xing Mei Biology
      Company Limited (“Xinxingmei”) to Wenming Pu at a total consideration of
      RMB 7,308,600. After completing the transfer formalities, Evergreen
      possesses 32% of total equity of Xinxingmei, instead of the previous 90%
      interest.
  On
      January 23, 2008, the Chinese government approved China Water Group Inc.’s
      acquisition of 90 percent equity interest in Aba Xinchen Dagu Glacier
      Spring Co., Limited from Fortune Luck Global International Limited through
      its subsidiary Guangzhou Xinchen Water Company. The acquisition was
      completed for a consideration of $13.45 million, of which $7.5 million was
      paid in cash, and the remaining $5.95 million was paid in common
      shares.
  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.
 6
 
 CHINA
WATER GROUP, INC.
 
 Notes
to Consolidated Financial Statements
 June
30, 2008 and 2007
 (Unaudited)
 
 NOTE3 -Summary of
Significant Accounting Policies (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 dictates the recognition of revenues. 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.
 
 Allowance
for doubtful accounts
  Our
      policy for bad debt is based on the evaluation of collectibility, and
      analysis of accounts receivable aging 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 credit worthiness and the past collection history of each
      customer. During the first two quarters of 2008, we made no allowances for
      doubtful accounts.
 
 Financial
instruments
  The
      carrying amounts of all financial instruments approximate fair value. The
      carrying amounts of cash, accounts receivable, related party receivables,
      unsecured loans, accounts payable and related party payables approximate
      fair value due to the short-term nature of these items. The carrying
      amounts of borrowings approximate the fair value based on our expected
      borrowing rate for debt with similar remaining maturities and comparable
      risk.
 
 Earnings
per share
  Basic
      earnings per share are computed by dividing the net income for the year by
      the weighted average number of common shares outstanding during the year.
      Diluted earnings per share are computed by dividing the net income for the
      year by the weighted average number of common and common equivalent shares
      outstanding during the year. Common equivalent shares (which includes
      incremental common shares issuable upon the exercise of stock options,
      unvested restricted common stock and shares that may be issued on a
      contingent basis) are included in diluted 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.
  7
 
 CHINA
WATER GROUP, INC.
 
 Notes
to Consolidated Financial Statements
 June
30, 2008 and 2007
 (Unaudited)
  NOTE3 -Summary of
Significant Accounting Policies (continued)
 
 Recently
issued accounting pronouncements
 
 In
December 2007, the FASB issued SFAS No. 141®, “Business Combinations”
(“SFAS 141R”). 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.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133”
(“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). SFAS 162 is effective 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles.
 
 Note
4 - Earnings Per Share
 
 (i)
                  The
      basic net earnings per share are calculated using the net income and the
      weighted average number of shares outstanding during the
    year.
 
 Three
      months ended June 30,2008
                  
                  
                  2007Net
      income
                  
                  $
                  399,134
                  
                  
                  $
                  144,037Weighted
      average number of common shares outstanding
                  
                  
                  139,217,550
                  
                  
                  
                  135,903,698Basic
      earnings per share
                  
                  $
                  0.00
                  
                  
                  $
                  0.00
 8
  CHINA
WATER GROUP, INC.
 
 Notes
to Consolidated Financial Statements
 June
30, 2008 and 2007
 (Unaudited)
 
 Note
4 - Earnings Per Share (continued)
 
 Six
      months ended June 30,2008
                  
                  
                  2007Net
      income
                  
                  $
                  692,752
                  
                  
                  $
                  970,499Weighted
      average number of common shares outstanding
                  
                  
                  139,217,550
                  
                  
                  
                  135,903,698Basic
      earnings per share
                  
                  $
                  0.00
                  
                  
                  $
                  0.01
 
 (ii)
                  The
      diluted earnings per share are calculated using the net income and the
      weighted average number of shares outstanding during the year together
      with incremental common shares issuable upon the exercise of all warrants
      issued.
 
 Three
      months ended June 30,2008
                  
                  2007Net
      income
                  $
                  399,134
                  $
                  144,037Weighted
      average number of common shares outstanding
                  
                  139,217,550
                  
                  135,903,698Diluted
      earnings per share
                  $
                  0.00
                  $
                  0.00
 
 Six
      months ended June 30,2008
                  
                  2007Net
      income
                  $
                  692,752
                  $
                  970,499Weighted
      average number of common shares outstanding
                  
                  139,217,550
                  
                  135,903,698Diluted
      earnings per share
                  $
                  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 – Prepayments, Deposit And Other Receivables
 
 June
      30,
                  
                  December
      31,2008
                  
                  2007Prepayments
                  $
                  68,238
                  $
                  7,329,100Deposits
                  
                  -
                  
                  2,119Other
      receivables:Amounts
      receivable from Beijing Hao Tai
                  
                  -
                  
                  792,041Advances
      and miscellaneous receivables
                  
                  294,926
                  
                  408,482Total
                  $
                  363,164
                  $
                  8,531,742
 
 The
management believes that all other receivables are collectible.
 
  9
 CHINA
WATER GROUP, INC.
 
 Notes
to Consolidated Financial Statements
 June
30, 2008 and 2007
 (Unaudited)
  Note
6 – Property, Plant And Equipment, Net
 
 Property,
plant and equipment, net consisted of the following:
 
 June
      30,
                  
                  
                  December
      31,2008
                  
                  
                  2007Office
      equipment
                  
                  $
                  12,434
                  
                  
                  $
                  35,197Furniture
      and fixtures
                  
                  
                  3,240
                  
                  
                  
                  14,707Tools
      and equipment
                  
                  
                  -
                  
                  
                  
                  3,678Motor
      vehicles
                  
                  
                  38,408
                  
                  
                  
                  51,681Waste
      water treatment plants
                  
                  
                  5,083,609
                  
                  
                  
                  5,429,945Total
                  
                  
                  5,137,691
                  
                  
                  
                  5,535,208Less
      : Accumulated depreciation and amortization
                  
                  
                  (609,176
                  )
                  
                  
                  (783,016
                  )Property,
      plant and equipment, net
                  
                  $
                  4,528,515
                  
                  
                  $
                  4,752,192
 
 Depreciation
and amortization expenses for the three months ended June 30, 2008 and 2007
amounted to $70,072 and $74,619 respectively. Depreciation and amortization
expenses for the six months ended June 30, 2008 and 2007 amounted to $138,104
and $158,471 respectively.
 
 Note
7 - Warrant Liability
  The fair
values of the warrant liability as of June 30, 2008 and December 31, 2007 are as
following:
 
 June
      30,
                  
                  
                  December
      31,2008
                  
                  
                  2007Warrants
      issued in April, at fair value
                  
                  $
                  24,255
                  
                  
                  $
                  154,350Warrants
      issued in September, at fair value
                  
                  
                  37,171
                  
                  
                  
                  993,415Shares
      issued in September, accounted for as liability
                  
                  
                  32,200
                  
                  
                  
                  32,200Total
                  
                  $
                  93,626
                  
                  
                  $
                  1,179,965
  The Group
conducted a private placement in April 2005 (“April Private Placement”) of 20
investment units, at $25,000 per unit, for gross proceeds of $500,000. Each unit
consisted of (a) a 12% convertible debenture in the original principal amount of
$25,000, convertible into shares of our common stock at the rate of the lesser
of (i) $0.20 per share or (ii) a 10% discount to the price per share of common
stock (or conversion price per share of common stock) of the next private
placement conducted by us prior to any conversion of the debenture, and (b)
125,000 detachable warrants to purchase one share each of our common stock at an
exercise price of $0.20 per share, expiring ten years from their date of
issuance (“April Warrants”). As a result of the September 2005 private
placement, pursuant to Section 5 (d) of the warrant agreement, the exercise
price has been adjusted to $0.15 per share on September 14, 2005. The debentures
were due and payable August 1, 2005. The debenture holders, however, extended
the payment period to September 30, 2005. The debentures were converted into
3,703,701 shares of common stock on October 1, 2005.
  10
 CHINA
WATER GROUP, INC.
 
 Notes
to Consolidated Financial Statements
 June
30, 2008 and 2007
 (Unaudited)
  Note
7 - Warrant Liability (continued)
  The Group
used the Black-Scholes model in calculating the fair market value of the April
Warrants and allocated $148,531, $74,266 and $185,664 of the $408,461 net
proceeds to the Convertible Debenture, the Bifurcated Conversion Feature of the
Debenture and the April Warrants, respectively. The differences between the fair
value of each of the Convertible Debenture, the Bifurcated Conversion Feature of
the Debenture and the April Warrants and the respective allocated amounts are
recorded as non-cash financing charges and expensed 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 June 30, 2008, 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.
  11
  CHINA
WATER GROUP, INC.
 
 Notes
to Consolidated Financial Statements
 June
30, 2008 and 2007
 (Unaudited)
 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 $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 $30,000 per unit. Each unit consisted of 200,000 shares of our common stock,
priced at $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 $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 June 30, 2008, we have made an accrual of
$1,275,211 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.
  During
October 2007, 295,000 April warrants, 7,200,000 September and 1,642,615
placement agent warrants were exercised for 3,479,752 shares of common stock in
total.
 12
  CHINA
WATER GROUP, INC.
 
 Notes
to Consolidated Financial Statements
 June
30, 2008 and 2007
 (Unaudited)
 
 Note
8 - Interests in Affiliated Companies
  Interests
      in affiliated companies as of June 30, 2008 and December 31, 2007 are as
      following:
  June
      30,
                  
                  
                  December
      31,2008
                  
                  
                  2007Xin
      Le Sheng Mei Water Purifying Company Limited (“Xin Le”)
                  
                  $
                  -
                  
                  
                  $
                  1,221,046Han
      Dan Cheng Sheng Water Affairs Company Limited (“HanDan”)
                  
                  
                  1,259,945
                  
                  
                  
                  959,901Total
                  
                  $
                  1,259,945
                  
                  
                  $
                  2,180,947
  Note
9 - Income Taxes
 
 The
      income tax benefit consisted of the
following:
 
 Six
      Months Ended June 30,2008
                  
                  
                  2007Current
      tax :PRC
                  
                  $
                  12,675
                  
                  
                  $
                  213Deferred
      tax :PRC
                  
                  
                  -
                  
                  
                  
                  -Total
      income tax benefit
                  
                  $
                  12,675
                  
                  
                  $
                  213
 
 The
provision for income tax represents the provision for PRC enterprise income tax
calculated at the standard income tax rate of 25% 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
 
 Hai Yang
City Zoning and Construction Management Bureau, which accounted for
approximately 77% of our total revenue for the six months ended June 30, 2008;
the revenues from this customer arose from BOT-waste water treatment service;
and
  13
 
 ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
 
 FORWARD-LOOKING
INFORMATION
 
 Much of
the discussion in this Item is “forward looking” as that term is used in Section
27A of the Securities Act 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 to obtain additional financing from
outside investors and/or bank and mezzanine lenders; and our ability to generate
sufficient revenues to cover operating losses and position us to achieve
positive cash flow.
 
 Readers
are cautioned not to place undue reliance on the forward-looking statements
contained herein, which speak only as of the date hereof. We believe the
information contained in this Form 10-Q to be accurate as of the date hereof.
Changes may occur after that date. We will not update that information except as
required by law in the normal course of our public disclosure
practices.
 
 Additionally,
the following discussion regarding our financial condition and results of
operations should be read in conjunction with the financial statements and
related notes contained in Item 1 of Part I of this Form 10-Q.
 
 RESULTS
OF OPERATIONS
 
 Quarter
Ended June 30, 2008 vs. Quarter Ended June 30, 2007
 
 Total revenue. We reported
total revenue of $242,267 for the three months ended June 30, 2008 as compared
to $225,793 for the three months ended June 30, 2007 as increased revenue from
sales of bottled water ($57,057 in Q2 2008 vs. $1,845 in Q2 2007) offset
decreased revenues from BOT wastewater treatment services ($185,210 in Q2 2008
vs. $223,948 in Q2 2007).  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 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.  The
results for the quarter reflect these new directions as there were no revenues
from turn-key engineering projects, revenues from BOT wastewater treatment
services continued to decline and sales of bottled water increased reflecting
the commercial rollout of the Company’s branded bottled water as opposed to a
test marketing effort during Q2 of 2007.
  14
  Cost of revenue. Our total
cost of revenue was relatively flat during the three months  ended
June 30 2008 as compared to the three months ended June 30, 2007, increasing
from $157,399 in Q 2 2007 to $160,267 in Q2 2008, an increase of less than
2%.  This result was primarily due to our decreased BOT wastewater
treatment services which resulted in reduced cost of revenue for these services
($63,249 in Q1 2008 vs. $81,574 in Q1 2007) and reduced depreciation and
amortization ($70,072 in Q1 2008 vs. $74,619 in Q1 2007), as we seek to dispose
of these operations, being offset by an increase in cost of sales related to
bottled water to $26,283 in Q2 2008 from $1,131 in Q2 2007.
 
 Gross profit. Gross profit, as
a percentage of total revenue for the three months ended June 30, 2008 and 2007,
was 33.8%, or $82,000, and 30.3%, or $68,394,
respectively.   Increased gross profits and margins reflect the
Company’s transition away from turn-key engineering projects and BOT waste water
treatment services and into sales of branded bottled water.
  General and administrative expenses. Our
total general and administrative expenses, inclusive of selling and distribution
expenses, for the three months ended June 30, 2008 and 2007 were $402,617 and
$122,980, 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 June 30, 2008 of $279,637 as compared to the three months
ended June 30, 2007 was primarily due to the decreased levels of operations in
BOT waste water treatment services and our incurring $224,528 of costs related
to our selling and distributing bottled water.  The increase relates
to the commercial introduction of the Company’s branded bottled
water.
 
 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 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 for a
period of time and then other related damages began to accrue. As of March 31,
2006, we had made an accrual of $828,027 for such liquidated
damages.
  15
  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 we began accruing smaller amounts
for other penalties which amounted to $22,363 for the quarter.
 
 Unrealized gain on financial
instruments. Unrealized gains or losses on financial instruments
represent the change in the fair market value of the financial instruments at
each reporting date. The unrealized gain on financial instruments for the three
months ended June 30, 2008 was $567,798. The unrealized gain on financial
instruments for the three months ended March 31, 2007
was  $-0-.
 
 Share of results in
associates. CHWG holds a 35% interest in the net profits in Xin Le and a
34.32% interest in Han Dan. Our share of results in
these companies for the three months ended June 30, 2008 and 2007 was $185,154
and $61,664, respectively. The increase in our share of net profits in the
second quarter of 2008 was as a result of an increase in net profit of our
associates.
 
 Net  income. We had
a net income, after income tax and minority interests, of $399,134 for the three
months ended June 30, 2008, and a net income, after income tax and minority
interests, of $144,037 for the three months ended June 30, 2007.  The
increased net income as compared to the prior period reflects the various
factors described above.
 
 Six
Months Ended June 30, 2008 vs. Six Months Ended June 30, 2007
 
 Total revenue. We reported
total revenue of $462,461 for the six months ended June 30, 2008 as compared to
$432,090 for the six months ended June 30, 2007 as increased revenue from sales
of bottled water ($104,780 in the first six months of 2008 vs. $4,992 in the
first six months of 2007) offset decreased revenues from BOT wastewater
treatment services ($357,681 in the first six months of 2008 vs. 427,098 in the
first six months of 2007).  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 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.  The results for the six months reflect these new directions
as there were no revenues from turn-key engineering projects, revenues from BOT
wastewater treatment services continued to decline and sales of bottled water
increased reflecting the commercial rollout of the Company’s branded bottled
water as opposed to a test marketing effort during first half of
2007.
  16
  Cost of revenue. Our total
cost of revenue decreased moderately during the six months ended June 30 2008 as
compared to the six months ended June 30, 2007, decreasing from $302,165 in the
first six months of 2007 to $282,865 in the first six months of 2008, an
decrease of approximately 7%.  This result was primarily due to our
decreased BOT wastewater treatment services which resulted in reduced cost of
revenue for these services ($108,830 in the first six months of 2008 vs. 140,081
in the first six months of 2007) and reduced depreciation and amortization
($138,104 in the first six months of 2008 vs. $158,471 in the first six months
of 2007), as we seek to dispose of these operations, being offset by an increase
in cost of sales related to bottled water to $35,249 in the first six months of
2008 from $3,174 in the first six months of 2007.
 
 Gross profit. Gross profit, as
a percentage of total revenue for the six months ended June 30, 2008 and 2007,
was 38.8%, or $179,596, and 30.1%, or $129,925,
respectively.   Increased gross profits and margins reflect the
Company’s transition away from turn-key engineering projects and BOT waste water
treatment services and into sales of branded bottled water which have higher
margins.
  General and administrative
expenses. Our total general and administrative expenses, inclusive of
selling and distribution expenses, for the six months ended June 30, 2008 and
2007 were $736,714 and $311,342, 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 six months ended June 30, 2008 of $425,372 as compared to the
six months ended June 31, 2007 was due to the decreased levels
of operations in BOT waste water treatment services and our incurring
$429,763 of costs related to our selling and distributing bottled
water.  The increase relates to the commercial introduction of the
Company’s branded bottled water.
  17
  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 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 for a
period of time and then other related damages began to accrue. As of March
31, 2006, we had made an accrual of $828,027 for such liquidated
damages.
 
 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 we began accruing smaller amounts
for other penalties which amounted to $45,737 for the six months ended June 30,
2007.
 
 Unrealized gain on financial
instruments. Unrealized gains or losses on financial instruments
represent the change in the fair market value of the financial instruments at
each reporting date. The unrealized gain on financial instruments for the six
months ended June 30, 2008 was $1,086,340. The unrealized gain on financial
instruments for the six months ended June 30, 2007
was  $925,840.
 
 Share of results in
associates. CHWG holds a 35% interest in the net profits in Xin Le and a
34.32% interest in Han Dan. Our share of results in these companies for the six
months ended June 30, 2008 and 2007 was $231,495 and $122,926, respectively. The
increase in our share of net profits in the second quarter of 2008 was as a
result of an increase in net profit of our associates.
 
 Net  income. We had
a net income, after income tax and minority interests, of $692,752 for the six
months ended June 30, 2008, and a net income, after income tax and minority
interests, of $970,499 for the six months ended June 30, 2007.  The
decreased net income as compared to the prior period reflects the various
factors described above.
  18
  LIQUIDITY
AND CAPITAL RESOURCES
 
 Our
principal sources of liquidity are our cash and cash flow generated from
operations. Net cash used by operating activities during the three months ended
June 30, 2008 was  $7,179,419.  The primary factor in the
decrease was increased amounts recorded as prepayments, deposits and other
receivables $6,400,289.  This amount relates in large part to the
working capital requirements of the branded bottled water
business.  At the end of the period cash and cash equivalents were
$55,973.   We plan to secure bank loans to support our future
projects.  Our Chairman, the majority shareholder, has also promised
to provide additional funds when needed. However, thispromise is not a legally
binding commitment.  Furthermore, we do not have any commitments for
bank loans. If bank loans are not obtained and our majority shareholder does not
provide funding, we could be required to severely curtail our
operations.
 
 APPLICATION
OF CRITICAL ACCOUNTING POLICIES
 
 Our
financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States of America.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by management's
application of accounting policies. Critical accounting policies include revenue
recognition, impairment of assets and accounting for allowance of accounts
receivable.
 
 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 SAB Topic 13, Revenue Recognition. We meet the
following four criteria for revenue recognition outlined in SAB Topic
13:
  19
  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.
 
 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) are
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
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 the current creditworthiness and the past
collection history of each customer. During the second quarter of 2008, we
made no allowances for doubtful debts.
  20
  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 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.
 
 Recently
issued accounting pronouncements
 
 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.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133”
(“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008.
  21
  In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). SFAS 162 is effective 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles.
 
 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 that such
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 the period 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 and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures (as this term is defined under the
rules of the SEC) as of August 10, 2006. Based on this evaluation, the Company’s
Chief Executive Officer and Chief Financial Officer and Executive Chairman
concluded that, as of August 10, 2006, our disclosure controls and procedures
were not effective in recording, processing, summarizing and reporting, on a
timely basis, information required to be disclosed by the Company in the reports
that it files or submits under the US Securities Exchange Act of 1934 as a
result of material weaknesses in our internal control over financial reporting
described below.
 
 In the
process of filing our registration statement, we identified certain accounting
errors in our reported US GAAP annual results for fiscal 2004 and 2005 and
certain quarterly results in 2005 and 2006. As a result, we have restated the
amounts and disclosures in those annual financial statements.
 
 The
financial statements which should no longer be relied upon
include:
  22
  (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)     the
unaudited consolidated financial statements contained in our quarterly report on
Form 10-QSB for the quarterly period ended March 31, 2005 (the “March 31, 2005
10-QSB”), filed with the SEC on May 24, 2005;
 
 (iv)     the
unaudited consolidated financial statements contained in our quarterly report on
Form 10-QSB for the quarterly period ended June 30, 2005 (the “June 30, 2005
10-QSB”), filed with the SEC on August 15, 2005;
 
 (v)      the
unaudited consolidated financial statements contained in our quarterly report on
Form 10-QSB for the quarterly period ended September 30, 2005 (the “ September
30, 2005 10-QSB”), filed with the SEC on November 15, 2005 and Amendment No. 1
to the September 30, 2005 10-QSB filed on January 13, 2006; and
 
 (vi)     the
unaudited consolidated financial statements contained in our quarterly report on
Form 10-QSB for the quarterly period ended March 31, 2006 (the “March 31, 2006
10-QSB”), filed with the SEC on May 15, 2006.
 
 Gain
on disposal of the XY
 
 As
previously disclosed in our 2004 10-KSB, including amendments thereto, and
comparative figures in our 2005 10-KSB, we recorded a gain on disposal of
$2,029,720 in 2004 for the disposal of our 90% attributable interest in Xian
Yang Bai Sheng Water Purifying Company Limited (“XY”) to True Global Limited
(“TGL”), an independent party, at a consideration of $4,130,435 (RMB34.2
million). The disposal was made pursuant to a tri-party framework agreement
between Evergreen Asset Group Limited (“EGAG”), TGL and Guang Dong Xin Sheng
Environmental Protection Company Limited (“GDXS”) in which EGAG transferred 90%
of its equity interest in XY to TGL while GDXS continued to own 10% of its
equity interest in XY. The transaction was consummated on October 26, 2004 and
the gain represents the difference between the disposal proceeds and our
attributable share of net assets of XY at the date of disposal. In the same
year, we also recognized an amount of $9,115,942 for the construction revenue of
XY using the percentage-of-completion method, estimated costs and claim
recognition for construction contracts. The amount accounted for 97% of our
total revenue in 2004.
  23
  In the
previously filed 2004 10-KSB, as amended to date, and comparative figures in our
previously filed 2005 10-KSB, the accounting treatment for the construction
revenue of XY does not comply with SOP 81-1 or EITF 00-21. As a result, we will
file an amendment to the 2004 10-KSB and 2005 10-KSB with adjusted disclosure to
record the transaction as part of the gain on the disposal of the XY subsidiary
rather than as revenue from construction of wastewater treatment plant. As such
our adjusted total revenue for the fiscal year ended December 31, 2004 was
$250,571 and the adjusted gain on disposal of interest in a subsidiary - XY was
$5,220,299. Due to the same reason, account receivable from TGL amounted to
$9,416,039 as of December 31, 2004 will be reclassified to prepayment, deposits
and other receivables in our upcoming amendment to the 2004 10-KSB, comparative
figures in this amendment to the 2005 10-KSB and comparative figures in the
upcoming or recently filed amendments to the June 30, 2005 10-QSB and September
30, 2005 10-QSB.
 
 Group
reorganization
 
 In Note
2(ii) and 2(iii) to the consolidated financial statements contained in the
previously filed 2004 10-KSB and 2005 10-KSB and Note 2 to the consolidated
financial statements contained in the previously filed March 31, 2005 10-QSB,
June 30, 2005 10-QSB, September 30, 2005 10-QSB and March 31, 2006 10-QSB, we
disclosed group reorganization transactions. Pursuant to rules promulgated by
the SEC, the merger or acquisition of a private operating company into a
non-operating public shell corporation with nominal net assets is considered a
capital transaction, rather than a business combination. As such, no disclosures
are required under FAS 141 because the transactions described were not business
combinations. For accounting purposes, the transaction has been treated as a
reverse acquisition and a recapitalization, and pro-forma information is not
presented. Accordingly, the upcoming amendments to the 2004 10-KSB, this
amendment to the 2005 10-KSB, and the recent or upcoming amendments to the March
31, 2005 10-QSB, June 30, 2005 10-QSB, September 30, 2005 10-QSB and March 31,
2006 10-QSB will not include references to the group reorganization transactions
throughout the financial statements. We will also restate the common stock
immediately after the recapitalization to $100,000 in the upcoming amended March
31, 2005 10-QSB and have done so in the recent amended June 30, 2005
10-QSB.
 
 Reclassification
of April warrants
 
 In our
previously filed 2005 10-KSB, June 30, 2005 10-QSB and March 31, 2006 10-QSB, we
recorded as equity the warrants issued as part of the units sold in our April
2005 convertible debt issuance. Under EITF No. 00-19, the fair value of these
warrants should be reported as a liability. Pursuant to the Warrant Agreement,
because there is currently no effective registration statement covering the
shares of common stock underlying these warrants, these warrants are currently
subject to a cashless exercise whereby the warrant holders may surrender their
warrants to the company in exchange for shares of common stock. The number of
shares of common stock into which a warrant would be exchangeable in such a
cashless exercise depends on both the exercise price of the warrants and the
market price of the common stock, each at or near the time of exercise. Because
both of these factors are variable, it is possible that the company could have
insufficient authorized shares to satisfy a cashless exercise. In this scenario,
if the company were unable to obtain shareholder approval to increase the number
of authorized shares, the company could be obligated to settle such a cashless
exercise with cash rather than by issuing shares of common stock. Further, EITF
No. 00-19 requires that we record the potential settlement obligation at each
reporting date using the current estimated fair value of the warrants, with any
changes being recorded through our statement of operations. We will continue to
report the potential settlement obligation as a liability until such time as the
warrants are exercised or expire or we are otherwise able to modify the warrant
agreement to remove the provisions which require this treatment. In addition to
this restatement of our 2005 10-KSB, we will restate our June 30, 2005 10-QSB
and our March 31, 2006 10-QSB to reclassify the April 2005 warrants as a
liability.
  24
  April
and September 2005 Private Placements—non-cash financing charges
 
 In our
June 30, 2005 10-QSB, we did not record any non-cash financing charges and in
our September 30, 2005 10-QSB, as amended to date, we did not properly record
the non-cash financing charges. Non-cash financing charges represent the amount
by which the fair value of derivative liabilities issued exceeds the amount of
proceeds received, as an expense at the date of issuance of the April
convertible debenture and the September private placement. We will restate our
June 30, 2005 10-QSB and our September 30, 2005 10-QSB to record the non-cash
financing charges, which represent the amount by which the fair value of
derivative liabilities issued exceeds the amount of proceeds received, as an
expense at the date of issuance of the April convertible debenture and the
September private placement. As a result of the recording of non-cash financing
charges, certain expenses which were previously recorded under general and
administrative expenses in our September 30, 2005 10-QSB will be reclassified
under non-cash financing charges.
 
 April
2005 Private Placements—unrealized gains or losses in financial
instruments
 
 In our
June 30, 2005 10-QSB and our September 30, 2005 10-QSB, as amended to date, we
did not record properly the unrealized gains or losses in financial instruments,
which represent the change in fair market value of the financial instruments at
each reporting date for the April warrants and the bifurcated conversion feature
for the convertible debenture. The unrealized gains or losses in financial
instruments should have been reported in those filings. We will restate the June
30, 2005 10-QSB and September 30, 2005 10-QSB, as amended to date, to record the
unrealized gains or losses in financial instruments which represent the change
in fair market value of the financial instruments at each reporting date for the
April warrants and the bifurcated conversion feature for the convertible
debenture.
 
 Interest
in associate
 
 In our
June 30, 2005 10-QSB and our September 30, 2005 10-QSB, as amended to date, the
comparative figures for our interest in associate as of December 31, 2004 were
recorded based on an effective percentage of equity attributable to the group of
31.5% instead of a direct interest of 35%. We will restate the comparative
figures for our interest in associate as of December 31, 2004 in the June 30,
2005 10-QSB and September 30, 2005 10-QSB to include our interest in associate
based on a direct interest of 35%.
  25
  Prior
Restatements
 
 On
January 13, 2006, we amended our 2004 10-KSB. Prior to the January 13, 2006
amendment, in our 2004 10-KSB we recorded our interest in associate based on an
effective percentage of equity attributable to the group of 31.5% instead of a
direct interest of 35%. In the January 13, 2006 restatement of our 2004 10-KSB,
we reported our interest in associate based on a direct interest of 35%. In
addition, we have restated the common stock immediately after the
recapitalization to $100,000.
 
 On
January 13, 2006, we amended our September 30, 2005 10-QSB. Prior to the January
13, 2006 amendment, the September 30, 2005 10-QSB classified as equity the
proceeds of our April Debenture and September 2005 private placement allocated
to the warrants issued in these transactions. For reasons both the April
warrants and September warrants should have been classified as a liability. The
restated financial statements in the January 13, 2006 amendment of the September
30, 2005 10-QSB reflect this reclassification. In addition, prior to the January
13, 2006 amendment, the September 30, 2005 10-QSB did not originally report the
unrealized gains or losses in financial instruments, which represent the change
in fair market value of the financial instruments at each reporting date. The
unrealized gains or losses in financial instruments should have been reported in
the original filing. Accordingly, the January 13, 2006 restatement of the
September 30, 2006 10-QSB reported the unrealized gains or losses in financial
instruments, which represent the change in fair market value of the financial
instruments at each reporting date. The restatement to the unrealized gains or
losses in financial instruments, however, required to be further restated (refer
discussion above). In addition, we have restated the common stock immediately
after the recapitalization to $100,000.
 
 Material
Weaknesses
 
 In
connection with the above matters, we have identified material weaknesses in our
internal control over financial reporting, which weaknesses we have reported to
our auditors. These material weaknesses comprise:
 
 (a)      insufficient
knowledge and experience among our internal accounting personnel regarding the
application of US GAAP and SEC requirements;
 
 (b)    
 insufficient written policies and procedures for accounting and financial
reporting with respect to the requirements and application of US GAAP and SEC
disclosure requirements; and
 
 (c)   
 insufficient emphasis by management on compliance with US GAAP
requirements.
 
 We have
communicated with our auditor, Patrizio & Zhao, LLC. and concluded that
these deficiencies constituted material weaknesses, as defined by Auditing
Standard No. 2, “An Audit of Internal Control Over Financial Reporting Performed
in Conjunction with an Audit of Financial Statements,” established by the Public
Company Accounting Oversight Board, or PCAOB.
  26
  In order
to address these material weaknesses our senior management is in the process of
conducting a thorough review of our US GAAP financial reporting processes and
will prepare and implement a US GAAP action plan. This plan will be designed to
generally improve our US GAAP reporting processes and to strengthen our control
processes and procedures in order to prevent a recurrence of the circumstances
that resulted in the need to restate our quarterly financial statements. Our
senior management intends to complete its review and implement a US GAAP action
plan as soon as practicable. The US GAAP action plan will incorporate, among
other matters, the following initiatives:
 
 1.     arrange
for our senior management and certain accounting and finance-related personnel
to attend training sessions on US GAAP and financial reporting responsibilities
and SEC disclosure requirements; we are in the process of searching for a CFO
who is competent with US GAAP and familiar with 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 auditors, Patrizio & Zhao,LLC, to
assist our accounting department and internal audit function in the preparation
of our US GAAP consolidated financial statements; we are in the process of
establishing an internal audit department.
 
 3.     recruit
an accounting staff member with US GAAP expertise and who is not affiliated with
our auditors ,Patrizio & Zhao,LLC; and
 
 4.     engage
an internationally recognized accounting firm, which is not affiliated with our
auditors, Patrizio & Zhao,LLC, to provide us with technical advice on US
GAAP matters and SEC disclosure requirements on an ongoing basis.
 
 Our board
of directors discussed the matters disclosed in this filing with the
registrant’s independent accountant. On September 25, 2006, we filed a current
report on Form 8-K relating to these matters, including a response from our
independent account relating to the statements contained therein.
 
 Other
than those disclosed above, there were no changes in our internal controls over
financial reporting that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting during the
quarter ended June 30, 2008.
 
 PART
II. OTHER INFORMATION
 
 ITEM
1. LEGAL PROCEEDINGS
 
 As of the
date of this report, we are not involved in any legal proceedings
 
 ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 None.
  27
  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.
  28
 
 SIGNATURES
 
 In
accordance with the requirements of the Exchange Act, the Registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 CHINA
      WATER GROUP, INC.(Registrant)Dated:
      June 16, 2009
                By:
                /s/
      Wenge FangWenge Fang,Chief Executive OfficerDated:
      June 16, 2009
                By:
                /s/
      Ding RencaiDing Rencai,Chief Financial Officer
  29