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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-QSB/A

Amendment No. 2



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(Mark One)

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

For the quarterly period ended September 30, 2005



| ̈ | 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



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China Evergreen Environmental
Corporation

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



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

5/F, Guowei Building, 73 Xianlie Middle Road

Guangzhou, Guangdong, The Peoples Republic Of China

(Address of principal executive offices)

86-20-8732-7909

(Issuers telephone number)

Not Applicable

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



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Check whether the issuer
(1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 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  x    No ̈

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

As of November 14, 2005, the Company had 135,903,698 shares of its common stock issued and outstanding.

Transitional Small Business Disclosure Format (Check one):    Yes ̈No  x



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PART 1 - FINANCIAL INFORMATION



|                                                                                                                                                                     |  |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                                                                                     |  | Page(s)
|Item 1. Financial Statements                                                                                                                                         |  |        
|                                                                                                                                                                     | 
|Unaudited Consolidated Balance Sheetsat September 30, 2005 and December 31, 2004                                                                                     |  | F-10   
|Unaudited Consolidated Statements of Operations for thethree-month periods ended September 30, 2005 and 2004 andnine-month periods ended September 30, 2005 and 2004 |  | F-11   
|Unaudited Consolidated Statements of Cash Flows for thenine-month periods ended September 30, 2005 and 2004                                                          |  | F-13   
|Notes to Unaudited Consolidated Financial Statements                                                                                                                 |  | F-14   



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PART I - FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

The financial statements and related notes are included as part of this Quarterly Report as indexed
in the appendix on page 10 through 20.

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. Actual operations and results may materially differ from present plans and projections due to
changes in economic conditions, new business opportunities, changed business conditions, and other developments. Other factors that could cause results to differ materially are described in our filings with the Securities and Exchange Commission.

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-QSB 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-QSB.



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RESULTS OF OPERATIONS

The following table sets forth the items in our consolidated statements of operations for the periods indicated.



|                                         |  |                                 |            |   |                                |   |         |      |  |   |            |   |  |   |          |  
|---------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | ------- | ---- |  | - | ---------- | - |  | - | -------- | -
|                                         |  | Three months endedSeptember 30, |            |   | Nine months endedSeptember 30, |  
|                                         |  | 2005                            |            |   | 2004                           |   |         | 2005 |  |   | 2004       |  
|Revenue                                  |  |                                 |            |   |                                |   |         |      |  |   |            |   |  |   |          |  
|BOT projects                             |  | $                               | 70,000     |   |                                | $ | 70,000  |      |  | $ | 207,717    |   |  | $ | 219,347  |  
|Turn-key engineering projects            |  |                                 |           |   |                                |   |        |      |  |   | 3,863,237  |   |  |   | 41,667   |  
|Trading/consultancy                      |  |                                 | 1,394,203  |   |                                |   |        |      |  |   | 1,394,203  |   |  |   |         |  
|Total revenue                            |  |                                 | 1,464,203  |   |                                |   | 70,000  |      |  |   | 5,465,157  |   |  |   | 261,014  |  
|Cost of revenue                          |  |                                 |            |   |                                |   |         |      |  |   |            |   |  |   |          |  
|BOT                                      |  |                                 | (38,203    | ) |                                |   | (43,381 | )    |  |   | (112,193   | ) |  |   | (97,277  | )
|Turn-key Engineering                     |  |                                 |           |   |                                |   |        |      |  |   | (2,583,018 | ) |  |   | (5,082   | )
|Trading/consultancy                      |  |                                 | (52,910    | ) |                                |   |        |      |  |   | (52,910    | ) |  |   |         |  
|Total cost of revenue                    |  |                                 | (91,113    | ) |                                |   | (43,381 | )    |  |   | (2,748,121 | ) |  |   | (102,359 | )
|Gross profit                             |  |                                 | 1,373,090  |   |                                |   | 26,619  |      |  |   | 2,717,036  |   |  |   | 158,655  |  
|General and administrative expenses      |  |                                 | (191,995   | ) |                                |   | (24,762 | )    |  |   | (530,819   | ) |  |   | (200,280 | )
|Income/(loss) from operations            |  |                                 | 1,181,095  |   |                                |   | 1,857   |      |  |   | 2,186,217  |   |  |   | (41,625  | )
|Non-cash financing charges               |  |                                 | (7,022,856 | ) |                                |   |        |      |  |   | (8,001,211 | ) |  |   |         |  
|Unrealized gain in financial instruments |  |                                 | 3,231,846  |   |                                |   |        |      |  |   | 3,788,570  |   |  |   |         |  
|Other income                             |  |                                 | 59         |   |                                |   | 6,848   |      |  |   | 2,920      |   |  |   | 41,942   |  
|Share of results in an associate         |  |                                 | 57,079     |   |                                |   |        |      |  |   | 144,561    |   |  |   |         |  
|Interest expense                         |  |                                 | (13,245    | ) |                                |   | (9,903  | )    |  |   | (37,072    | ) |  |   | (14,721  | )
|Loss before income tax                   |  |                                 | (2,566,022 | ) |                                |   | (1,198  | )    |  |   | (1,916,015 | ) |  |   | (14,404  | )
|Income tax (expense)/credit              |  |                                 | (59,110    | ) |                                |   | 4,695   |      |  |   | (129,977   | ) |  |   | 13,111   |  
|Minority interests                       |  |                                 | (156,142   | ) |                                |   | (1,604  | )    |  |   | (215,097   | ) |  |   | (4,102   | )
|Net (loss)/income                        |  |                                 | (2,781,274 | ) |                                |   | 1,893   |      |  |   | (2,261,089 | ) |  |   | (5,395   | )

REVENUE. The Company reported total revenue of $1,464,203 for the three-month period ended
September 30, 2005 as compared to $70,000 for the three-month period ended September 30, 2004. During the nine-month periods ended September 30, 2005 and 2004, the revenue increased to $5,465,157 from $261,014. This increase in the
three and nine month revenue are mainly due to the sale of GM Bio-Carriers amounted to approximately $0.8million, technical consultancy fee of approximately $0.6 million in the third quarter of 2005 coupled with completion of one turn-key
engineering waste water project in Le Chang City (approximately $1.8 million) in the first quarter of 2005 and the completion of the remaining 15% construction of the waste water treatment plant of XY (approximately $1.6 million) and one turn-key
engineering waste water project in Yong Ji Economic Development Zone (approximately $0.4 million) and the revenue from Tian Jin BOT waste water treatment plant.

COST OF REVENUE. Our total cost of revenue increased from $43,381 to $91,113 in the three-month periods ended September 30, 2005 and 2004. During the nine-month periods ended September 30, 2005 and 2004, the cost of revenue
increased to $2,748,121 from $102,359. The increase in cost of revenue for the three and nine-month periods ended September 30, 2005 is mainly due to the cost of revenue for the turn-key engineering waste water projects in Le Chang City and
Yong Ji Economic Development Zone plus cost for the completion of the waste water treatment plant of XY.



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GROSS PROFIT. Gross profit as a percentage of revenue for the three-month periods ended September 30, 2005
and 2004 were 93.8% or $1,373,090 and 38.0% or $26,619, respectively. During the nine-month periods ended September 30, 2005 and 2004, the gross profit increased to $2,717,036 from $158,655. Revenue for the three-month period ended
June 30, 2004 included revenue from technical transfer which has no extra cost of revenue as it is a transfer of experience and technical knowhow of the company. The percentage of gross margin is higher in the three-month period ended
September 30, 2005 as compared to that in the three-month period ended September 30, 2004 as the revenue for the three-month period ended September 30, 2005 included consultancy fee which has minimal cost of revenue.

GENERAL AND ADMINISTRATIVE EXPENSES. Our total general and administrative expenses for the three-month periods ended September 30, 2005 and 2004 were
$191,995 and $24,762 respectively. During the nine-month periods ended September 30, 2005 and 2004, the general and administrative expenses increased to $530,819 from $200,280. The principal components of general and administrative expenses are
administrative salaries and benefits, depreciation and amortization, finance cost, traveling expenses, rental and other general administration costs. The increase in general and administrative expenses for the three-month period ended
September 30, 2005 as compared to that of September 30, 2004 is mainly due to the certain finance and legal cost associated with the private placement amounted to approximately $0.15 million, and expenses related to SEC filings amounted to
$0.06 million coupled with, to a lesser extent, the expansion of the company since last year.

NON-CASH FINANCING CHARGES. Non-cash financing charge
represents the amount of fair value of derivative liabilities issued exceeds the amount of proceeds received, which is recorded as an expense at the date of issuance. The Non-cash financing charges recorded for the convertible debenture issuance in
April is approximately $0.98 million while the Non-cash financing charges recorded for the September private placement is approximately $7.02 million. No Non-cash financing charges was recorded in 2004.

UNREALIZED GAIN IN FINANCIAL INSTRUMENTS. Unrealized gains or losses in financial instruments represent the change in fair market value of the financial
instruments at each reporting date. The unrealized gain in financial instruments for the three-month and nine-month periods ended September 30, 2005 amounted to approximately $3.23 million and $3.79 million, respectively. There were no
unrealized gains or losses in financial instruments recorded in 2004.

SHARE OF RESULTS IN AN ASSOCIATE XL. This represents the share of net
profits in Xin Le Sheng Mei Water Purifying Company Limited in which the Group has 35% equity interest. Share of results in XL for the three-month and nine-month periods ended September 30, 2005 were $57,079 and $144,561, respectively.

NET (LOSS) / INCOME. We had a net loss, after income tax and minority interests, of $2,781,274 for the three-month period ended September 30,
2005 and a net income, after income tax and minority interests, of $1,893 for the three-month period ended September 30, 2004. During the nine-month period ended September 30, 2005, net loss, after income tax and minority interests,
increased to $2,261,089 from a net loss of $5,395 for the nine-month period ended September 30, 2004.



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LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are our cash and cash flow we generate from operations and financing activities. Net cash used in operating activities during the nine-month period ended September 30, 2005 was
$208,847 while net cash provided by operating activities during the nine-month period ended September 30, 2004 was $919,320. Net cash used in operating activities in the nine-month period ended September 30, 2005 consisted of net loss of
$2,261,089, adjustment for non-cash items of $4,344,701 and $2,292,459 used in operating activities. Cash flows from operating activities consisted primarily of an increase in accounts receivable of $2.55 million due to increase in receivables from
turnkey projects, decrease in accounts payable of $3.96 million due to payments made to our suppliers and decrease in prepayment, deposits and other receivables of $4.82 million. Net cash used in investing activities during the nine-month period
ended September 30, 2005 was $3,666,244 mainly consisted of acquisition of infrastructure assets of $3.66 million. Net cash provided by financing activities during the nine-month period ended September 30, 2005 was $4,467,500 mainly
consisted of proceeds from our April convertible debenture issuance and the September private placement.

In April 2005, we conducted the private placement
sale of 20 units, at $25,000 per unit, for the gross proceeds of $500,000. Each unit consisted of (a) one 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. The debentures are due and payable August 1, 2005. The debenture
holders, however, extended the payment period to September 30, 2005. All the debenture holders have converted the debentures into 3,703,701 shares of our common stock on October 1, 2005.

On September 14, 2005, we 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. 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.

We
anticipate raising capital from outside investors coupled with bank or mezzanine lenders to fund the Companys expansion plan. As of the date of this report, other than as disclosed, we have not entered into any negotiations with any third
parties to provide such capital. We anticipate that our current financing strategy of private debt and equity offerings will meet our anticipated objectives and business operations for the next 12 months. We continue to evaluate



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opportunities for corporate development. Subject to our ability to obtain adequate financing at the applicable time, we
may enter into definitive agreements on one or more of those opportunities.

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.  The Group recognizes revenue using various revenue recognition policies based on the nature of the sale and the terms of the contract.

Revenues from fixed price long-term contracts are recognized on the percentage of completion method for individual contracts. We follow the guidance of 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 relatively short duration, we use the completed contract method of
accounting whereby revenue is recognized when the work is completed. 5% to 10% of the total contract value will be treated as retention monies withheld to ensure performance of contract during the warranty period of up to 12 months as stipulated in
the fixed price contracts, both long term and short term.

Revenues arising from waste water treatment are recognized based on waste water 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 waste water 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.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Revenues from trading and consultancy are recognized when goods are delivered or as 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 Staff Accounting Bulletin 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. The Groups policy is to
periodically review and evaluate whether there has been a permanent impairment in the value of long-lived assets. Factors considered in the evaluation include current operating results, trends and anticipated undiscounted estimated future cash flows
that is expected to result from the use of the asset, or other measure of fair value, is less than the carrying value.

ALLOWANCES FOR ACCOUNTS
RECEIVABLE. The Groups provisioning policy for bad and doubtful debt is based on the evaluation of collectability and aging analysis of accounts receivable and on managements judgment. The Group does no require collateral or other
security to support clients receivables. The Group conducts periodic review of its clients financial condition and customer payment practice to minimize collection risk on accounts receivable. This review is based on a considerable
amount of judgment which is required in assessing the ultimate realization of these receivables, including the current creditworthiness and the past collection history of each customer. During the third quarter of 2005 financial period, the Group
had not made any allowance for doubtful debts.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements.

ITEM 3 CONTROLS AND PROCEDURES

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



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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 for 2005 and 2006. As a result, we have restated the amounts and disclosures in those
annual financial statements.

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



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



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



| | (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.

In the previously filed 2004 10-KSB, as amended to date, and comparative figures in our 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 the upcoming amendments to the 2005 10-KSB, June 30, 2005 10-QSB and comparative figures in this amendment to the September 30, 2005 10-QSB.

Group reorganization

In Note 2(ii) and 2(iii) to the consolidated financial statements contained in the 2004 10-KSB
and 2005 10-KSB and Note 2 to the consolidated financial statements contained in the March 31, 2005 10-QSB, June 30, 2005 10-QSB, March 31, 2006 10-QSB and the previously filed September 30, 2005 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, 2005 10-KSB, March 31, 2005 10-QSB, June 30, 2005 10-QSB, and March 31, 2006 10-QSB (and this amendment of the September 30, 2005 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 March 31, 2005 10-QSB and June 30, 2005 10-QSB.

Reclassification of April warrants

In our 2005
10-KSB, our June 30, 2005 10-QSB and our March 31, 2006 10-QSB, as amended to date, 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. We
will restate our 2005 10-KSB, our June 30, 2005 10-QSB and our March 31, 2006 10-QSB to reclassify the April 2005 warrants as a liability.

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

In our June 30, 2005 10-QSB, we did not record any non-cash financing charges and in
our September 30, 2005 10-QSB, as previously 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 we are filing this restatement of the 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 previously 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 we are filing this restated September 30, 2005 10-QSB to record the unrealized gains or losses in financial instruments which represent the change
in fair market value of the financial instruments at each reporting date for the April warrants and the bifurcated conversion feature for the convertible debenture.

Interest in associate

In our June 30, 2005 10-QSB and our September 30, 2005 10-QSB, as previously 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 we are filing this restatement of the September 30, 2005 10-QSB to include our interest in associate based on a direct interest of 35%.

Prior Restatements

On January 13, 2006, we amended our 2004 10-KSB.
Prior to the January 13, 2006 amendment, in our 2004 10-KSB we recorded our interest in associate based on an effective percentage of equity attributable to 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 auditors, PKF Hong Kong and concluded that these deficiencies constituted material weaknesses, as defined by Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in
Conjunction with an Audit of Financial Statements, established by the Public Company Accounting Oversight Board, or PCAOB.

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



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



| | 2. | modify the mandate of our internal audit function to place greater emphasis on the adequacy of, and compliance with, procedures relating to internal controls over US GAAP financial
reporting and engage an internationally recognized accounting firm, which is not affiliated with PKF Hong Kong, to assist our accounting department and internal audit function in the preparation of our US GAAP consolidated financial statements;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | recruit an accounting staff member with US GAAP expertise and who is not affiliated with PKF Hong Kong; and
| | -- | -----------------------------------------------------------------------------------------------------------



| | 4. | engage an internationally recognized accounting firm, which is not affiliated with PKF Hong Kong, 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 fiscal quarter ended September 30, 2005.

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 CHANGES IN SECURITIES AND USE OF PROCEEDS

In April 2005, we conducted the private placement sale of 20 units, at $25,000 per unit, for the gross proceeds of $500,000. Each unit consisted of
(a) one 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. The debentures are due and payable August 1, 2005. The debenture holders, however, extended the payment period to September 30, 2005. All the debenture holders have converted
the debentures into 3,703,701 shares of our common stock on October 1, 2005.

On September 14, 2005, we 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. 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. Approximately $2.4 million of the proceeds from the September private placement has been placed in escrow for the acquisition of a waste water plant and $0.6 million has been paid as deposit for the purchase of equipments.

ITEM 3 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None



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##### Table of Contents

ITEM 4. OTHER INFORMATION

None.

ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

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 EVERGREEN ENVIRONMENTAL CORPORATION
|                           |  |                                          
|Dated: September 25, 2006. |  |                                           |  |                                      
|                           |  |                                          
|                           |  | By                                        |  | /s/ Chong Liang Pu                   
|                           |  |                                           |  | Chong Liang Pu                       
|                           |  |                                           |  | President and Chief Executive Officer



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##### Table of Contents

CHINA EVERGREEN ENVIRONMENTAL CORPORATION

Unaudited Consolidated Balance Sheets



|                                                              |  |                    |  |                  
|------------------------------------------------------------- |  | ------------------ |  | -----------------
|                                                              |  | September 30, 2005 |  | December 31, 2004
|                                                              |  | (Unaudited) US$    |  | (Audited) US$    
|Current assets                                                |  |                    |  |                  
|Cash and cash equivalents                                     |  | 928,488            |  | 336,079          
|Inventories, net                                              |  | 5,428              |  |                 
|Accounts receivable                                           |  | 3,140,245          |  | 46,960           
|Prepayment, deposits and other receivables                    |  | 5,367,762          |  | 10,193,404       
|Amounts due from related companies                            |  | 2,420,833          |  | 3,158,328        
|Amounts due from directors                                    |  |                   |  | 26,794           
|Amount due from an associate                                  |  | 1,748,019          |  | 1,744,775        
|Deferred tax assets                                           |  | 209,206            |  | 199,981          
|Total current assets                                          |  | 13,819,981         |  | 15,706,321       
|                                                              |  |                   
|Non-current assets                                            |  |                    |  |                  
|Infrastructure assets, net                                    |  | 6,966,930          |  | 3,305,089        
|Property, plant and equipment, net                            |  | 319,520            |  | 330,865          
|Convertible note receivable                                   |  | 1,156,690          |  | 1,366,997        
|Deposit paid for acquisition of property, plant and equipment |  |                   |  | 543,478          
|Interest in an associate                                      |  | 489,924            |  | 383,736          
|Total non-current assets                                      |  | 8,933,064          |  | 5,930,165        
|                                                              |  |                   
|Total assets                                                  |  | 22,753,045         |  | 21,636,486       
|                                                              |  |                   
|Current liabilities                                           |  |                    |  |                  
|Unsecured loan                                                |  | 120,773            |  | 229,468          
|Financial instruments (Note 6)                                |  | 8,744,027          |  |                 
|Other borrowing                                               |  | 24,155             |  | 24,155           
|Accounts payable                                              |  | 4,796,707          |  | 8,755,148        
|Accrued liabilities                                           |  | 1,666,403          |  | 526,068          
|Amounts due to directors                                      |  | 490,037            |  | 606,645          
|Amounts due to related companies                              |  | 224,981            |  | 2,864,506        
|Deposit received for disposal of a subsidiary                 |  |                   |  | 350,514          
|Income tax payable                                            |  | 1,019,976          |  | 626,249          
|Total current liabilities                                     |  | 17,087,059         |  | 13,982,753       
|                                                              |  |                   
|Minority interests                                            |  | 471,357            |  | 198,015          
|                                                              |  |                   
|Stockholders equity                                          |  |                    |  |                  
|Common stock                                                  |  | 100,000            |  | 100,000          
|Additional paid in capital                                    |  | 3,841,096          |  | 3,841,096        
|Retained earnings                                             |  | 1,253,533          |  | 3,514,622        
|Total stockholders equity                                    |  | 5,194,629          |  | 7,455,718        
|                                                              |  |                   
|Total liabilities and stockholders equity                    |  | 22,753,045         |  | 21,636,486       



F-10



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##### Table of Contents

CHINA EVERGREEN ENVIRONMENTAL CORPORATION

Unaudited Consolidated Statements of Operations



|                                               |  |                                  |   |  |                                 |   |  |            |   |  |          |  
|---------------------------------------------- |  | -------------------------------- | - |  | ------------------------------- | - |  | ---------- | - |  | -------- | -
|                                               |  | Three months ended September 30, |   |  | Nine months ended September 30, |  
|                                               |  | 2005                             |   |  | 2004                            |   |  | 2005       |   |  | 2004     |  
|                                               |  | US$                              |   |  | US$                             |   |  | US$        |   |  | US$      |  
|Revenue (Note 4)                               |  |                                  |   |  |                                 |   |  |            |   |  |          |  
|BOT projects                                   |  | 70,000                           |   |  | 70,000                          |   |  | 207,717    |   |  | 219,347  |  
|Turn-key engineering projects                  |  |                                 |   |  |                                |   |  | 3,863,237  |   |  | 41,667   |  
|Trading and consultancy                        |  | 1,394,203                        |   |  |                                |   |  | 1,394,203  |   |  |         |  
|Total Revenue                                  |  | 1,464,203                        |   |  | 70,000                          |   |  | 5,465,157  |   |  | 261,014  |  
|                                               |  |                                  |   | 
|Cost of revenue                                |  |                                  |   |  |                                 |   |  |            |   |  |          |  
|BOT projects                                   |  | (38,203                          | ) |  | (43,381                         | ) |  | (112,193   | ) |  | (97,277  | )
|Turn-key engineering projects                  |  |                                 |   |  |                                |   |  | (2,583,018 | ) |  | (5,082   | )
|Trading and consultancy                        |  | (52,910                          | ) |  |                                |   |  | (52,910    | ) |  |         |  
|Total cost of revenue                          |  | (91,113                          | ) |  | (43,381                         | ) |  | (2,748,121 | ) |  | (102,359 | )
|                                               |  |                                  |   | 
|Gross profit                                   |  | 1,373,090                        |   |  | 26,619                          |   |  | 2,717,036  |   |  | 158,655  |  
|                                               |  |                                  |   | 
|General and administrative expenses            |  | (191,995                         | ) |  | (24,762                         | ) |  | (530,819   | ) |  | (200,280 | )
|                                               |  |                                  |   | 
|Income / (loss) from operations                |  | 1,181,095                        |   |  | 1,857                           |   |  | 2,186,217  |   |  | (41,625  | )
|                                               |  |                                  |   | 
|Non-cash financing charges                     |  | (7,022,856                       | ) |  |                                |   |  | (8,001,211 | ) |  |         |  
|                                               |  |                                  |   | 
|Unrealized gain in financial instruments       |  | 3,231,846                        |   |  |                                |   |  | 3,788,570  |   |  |         |  
|                                               |  |                                  |   | 
|Other income                                   |  | 59                               |   |  | 6,848                           |   |  | 2,920      |   |  | 41,942   |  
|                                               |  |                                  |   | 
|Share of results in an associate               |  | 57,079                           |   |  |                                |   |  | 144,561    |   |  |         |  
|                                               |  |                                  |   | 
|Interest expense                               |  | (13,245                          | ) |  | (9,903                          | ) |  | (37,072    | ) |  | (14,721  | )
|                                               |  |                                  |   | 
|Loss before income tax                         |  | (2,566,022                       | ) |  | (1,198                          | ) |  | (1,916,015 | ) |  | (14,404  | )
|                                               |  |                                  |   | 
|Income tax (expense) / credit                  |  | (59,110                          | ) |  | 4,695                           |   |  | (129,977   | ) |  | 13,111   |  
|                                               |  |                                  |   | 
|Minority interests                             |  | (156,142                         | ) |  | (1,604                          | ) |  | (215,097   | ) |  | (4,102   | )
|                                               |  |                                  |   | 
|Net (loss) / income                            |  | (2,781,274                       | ) |  | 1,893                           |   |  | (2,261,089 | ) |  | (5,395   | )
|                                               |  |                                  |   | 
|Basic net (loss) / income per share (Note 5)   |  | (0.02                            | ) |  | 0.00                            |   |  | (0.02      | ) |  | (0.00    | )
|                                               |  |                                  |   | 
|Diluted net (loss) / income per share (Note 5) |  | (0.02                            | ) |  | 0.00                            |   |  | (0.02      | ) |  | (0.00    | )



F-11



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##### Table of Contents

CHINA EVERGREEN ENVIRONMENTAL CORPORATION

Consolidated Statement of Stockholders Equity



|                                         |  |               |  |           |                              |  |                                            |  |            |                               |  |            |  
|---------------------------------------- |  | ------------- |  | --------- | ---------------------------- |  | ------------------------------------------ |  | ---------- | ----------------------------- |  | ---------- | -
|                                         |  | Common stock  |  |           | Additionalpaid-in capitalUSD |  | Retainedearnings/(accumulated deficit) USD |  |            | Totalstockholders equity USD | 
|                                         |  | No. of shares |  | AmountUSD |                              |  |                                            | 
|At January 1, 2004                       |  | 83,500,000    |  | 83,500    |                              |  | 3,708,891                                  |  | (182,327   | )                             |  | 3,610,064  |  
|                                         |  |               |  |           |                             
|Recapitalization                         |  | 16,499,997    |  | 16,500    |                              |  | 132,205                                    |  |           |                               |  | 148,705    |  
|                                         |  |               |  |           |                             
|Net income                               |  |              |  |          |                              |  |                                           |  | 3,696,949  |                               |  | 3,696,949  |  
|                                         |  |               |  |           |                              |  |                                            |  |            |                               |  |            |  
|At December 31, 2004                     |  | 99,999,997    |  | 100,000   |                              |  | 3,841,096                                  |  | 3,514,622  |                               |  | 7,455,718  |  
|                                         |  |               |  |           |                              |  |                                            |  |            |                               |  |            |  
|At January 1, 2005                       |  | 99,999,997    |  | 100,000   |                              |  | 3,841,096                                  |  | 3,514,622  |                               |  | 7,455,718  |  
|                                         |  |               |  |           |                             
|Issue of shares in September             |  | 32,200,000    |  | 32,200    |                              |  |                                           |  |           |                               |  | 32,200     |  
|                                         |  |               |  |           |                             
|Shares issued accounted for as liability |  |              |  | (32,200   | )                            |  |                                           |  |           |                               |  | (32,200    | )
|                                         |  |               |  |           |                             
|Net loss                                 |  |              |  |          |                              |  |                                           |  | (2,261,089 | )                             |  | (2,261,089 | )
|                                         |  |               |  |           |                              |  |                                            |  |            |                               |  |            |  
|At September 30, 2005                    |  | 132,199,997   |  | 100,000   |                              |  | 3,841,096                                  |  | 1,253,533  |                               |  | 5,194,629  |  
|                                         |  |               |  |           |                              |  |                                            |  |            |                               |  |            |  



F-12



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##### Table of Contents

CHINA EVERGREEN ENVIRONMENTAL CORPORATION

Unaudited Consolidated Statements of Cash Flow



|                                                                                            |  |                                 |   |  |            |  
|------------------------------------------------------------------------------------------- |  | ------------------------------- | - |  | ---------- | -
|                                                                                            |  | Nine months ended September 30, |  
|                                                                                            |  | 2005                            |   |  | 2004       |  
|                                                                                            |  | US$                             |   |  | US$        |  
|Cash flows from operating activities:                                                       |  |                                 |   |  |            |  
|                                                                                            |  |                                
|Net loss                                                                                    |  | (2,261,089                      | ) |  | (5,395     | )
|                                                                                            |  |                                
|Adjustments to reconcile net loss to net cash (used in) / provided by operating activities: |  |                                 |   |  |            |  
|Depreciation and amortization                                                               |  | 12,504                          |   |  | 15,264     |  
|Non-cash financing charges                                                                  |  | 8,001,211                       |   |  |           |  
|Unrealized gain on financial instruments                                                    |  | (3,788,570                      | ) |  |           |  
|Increase in deferred tax assets                                                             |  | (9,225                          | ) |  | (6,461     | )
|Increase in minority interests                                                              |  | 273,342                         |   |  | 4,102      |  
|Share of results in an associate                                                            |  | (144,561                        | ) |  |           |  
|                                                                                            |  |                                
|Changes in operating assets and liabilities:                                                |  |                                 |   |  |            |  
|(Increase) / decrease in inventories                                                        |  | (5,428                          | ) |  | 7,597      |  
|Increase in accounts receivable                                                             |  | (2,549,807                      | ) |  | (4,772     | )
|Decrease in prepayment, deposits and other receivables                                      |  | 4,819,206                       |   |  | 262,887    |  
|Decrease in convertible note receivable                                                     |  | 210,307                         |   |  |           |  
|(Decrease) / increase in accounts payable                                                   |  | (3,958,441                      | ) |  | 765,075    |  
|Increase in accrued liabilities                                                             |  | 1,140,335                       |   |  | 1,774,721  |  
|Decrease in amounts due to directors                                                        |  | (89,814                         | ) |  | (1,072,028 | )
|Decrease / (increase) in amounts due from related companies                                 |  | 737,495                         |   |  | (1,850,776 | )
|Increase in tax payable                                                                     |  | 393,727                         |   |  | 158,148    |  
|Decrease in deposit received for disposal of a subsidiary                                   |  | (350,514                        | ) |  |           |  
|(Decrease) / increase in amounts due to related companies                                   |  | (2,639,525                      | ) |  | 870,958    |  
|                                                                                            |  |                                
|Net cash (used in) / provided by operating activities                                       |  | (208,847                        | ) |  | 919,320    |  
|                                                                                            |  |                                
|Cash flows from investing activities:                                                       |  |                                 |   |  |            |  
|Acquisition of property, plant and equipment                                                |  | (1,159                          | ) |  | (25,132    | )
|Acquisition of infrastructure assets                                                        |  | (3,661,841                      | ) |  |           |  
|Decrease in other investment                                                                |  |                                |   |  | 28,454     |  
|Increase in amount due from an associate                                                    |  | (3,244                          | ) |  | (4,135     | )
|                                                                                            |  |                                
|Net cash used in investing activities                                                       |  | (3,666,244                      | ) |  | (813       | )
|                                                                                            |  |                                
|Cash flows from financing activities:                                                       |  |                                 |   |  |            |  
|Proceeds from financial instruments issued                                                  |  | 4,576,195                       |   |  |           |  
|Increase in share capital                                                                   |  |                                |   |  | 241,546    |  
|Repayment of borrowing                                                                      |  | (108,695                        | ) |  | (1,145,169 | )
|                                                                                            |  |                                
|Net cash provided by / (used in) financing activities                                       |  | 4,467,500                       |   |  | (903,623   | )
|                                                                                            |  |                                
|Net increase in cash and cash equivalents                                                   |  | 592,409                         |   |  | 14,884     |  
|                                                                                            |  |                                
|Cash and cash equivalents, beginning of period                                              |  | 336,079                         |   |  | 54,556     |  
|                                                                                            |  |                                
|Cash and cash equivalents, end of period                                                    |  | 928,488                         |   |  | 69,440     |  



F-13



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##### Table of Contents

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The condensed consolidated financial statements of China Evergreen Environmental Corporation (the Company) and subsidiaries (the Group) included
herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote disclosures normally included in consolidated financial
statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented
not misleading. These condensed consolidated financial statements should be read in conjunction with the annual audited financial statements and the notes thereto included in the Companys Form 10-KSB Annual Report, and other reports filed with
the SEC.

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 the Group 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 of 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 the
Groups costs incurred to reorganize the Group, raise capital, and stock options and awards. Certain financial information that is not required for interim financial reporting purposes has been omitted.

NOTE 2 - DESCRIPTION OF BUSINESS

Our company was organized as a
Nevada corporation on September 10, 1996 under the name Discovery Investments, Inc., and was previously engaged in the business of seeking, investigating and, if such investigation warranted, acquiring an interest in a business opportunity.

On October 15, 2004, we were the subject of a reverse acquisition by Evergreen Asset Group Limited, an International Business Company organized under
the laws of the British Virgin Islands (Evergreen), pursuant to which we have 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. Following the close of the reverse acquisition, we changed our corporate name from Discovery Investments, Inc. to China Evergreen Environmental Corporation (CEEC,
we, us or the Company).

As a result of the transactions described above, Evergreen became our wholly owned subsidiary.
Evergreen, through its three majority owned subsidiaries, Guang Dong Xin Xing Mei Biology Company Limited (XXM), Bei Jing Hao Tai Shi Yuan Water Purifying Company Limited



F-14



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##### Table of Contents

(BJHT) and Hai Yang City Sheng Shi Environment Protection Company Limited (HY), provides waste water
turn-key engineering, equipment and chemical trading. Evergreen currently holds 90% of XXM. XXM provides turn-key waste water treatment engineering design and contracting. XXM 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 (TJSH), which commissioned water treatment in
November 2003 and has a daily treatment capacity of approximately 10,000 cubic meter and; (ii) Xin Le Sheng Mei Water Purifying Company Limited (XL), which also commissioned water treatment in November 2003 and has a daily treatment
capacity of 40,000 cubic meter. XXM is retained as the managers to manage both TJSH and XL. The fees from XL and TJSH did not represent a material portion of our revenue during the third quarter of 2005.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

IMPAIRMENT OF
ASSETS: The Groups policy is to periodically review and evaluate whether there has been a permanent impairment in the value of long-lived assets. Factors considered in the evaluation include current operating results, trends and anticipated
undiscounted future cash flows. An impairment loss is recognized to the extent that the sum of undiscounted estimated future cash flows that is expected to result from the use of the asset, or other measure of fair value, is less than the carrying
value.

OTHER INVESTMENT: Other investment includes equity investment in a private company and is carried at fair value. Unless there has been a permanent
impairment to the value of the investment, the change in fair value is reported as a separate component of other comprehensive income or loss. Permanent impairment to the value of the investment is recognized in the consolidated statements of
operations.

REVENUE RECOGNITION: The Group recognizes revenue using various revenue recognition policies based on the nature of the sale and the terms of
the contract.

Revenues from fixed price long-term contracts are recognized on the percentage of completion method for individual contracts. We follow the
guidance of 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 relatively short duration, we use the completed contract method of accounting whereby revenue is recognized when the work is completed. 5% to 10% of the total contract value will be treated as retention monies withheld to ensure
performance of contract during the warranty period of up to 12 months as stipulated in the fixed price contracts, both long term and short term.



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Revenues arising from waste water treatment are recognized based on waste water 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 waste water 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.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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, composed of
incremental common shares issuable upon the exercise of stock options, unvested restricted common stock and contingently issuable shares that are probable of being issued, are included in diluted income per share to the extent such shares are
dilutive. In accordance with SFAS 128, Earnings Per Share, the Company uses 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.

NOTE 4 - REVENUE

The Company reported total revenue of $1,464,203 for the three-month period ended September 30, 2005 as compared to $70,000 for the three-month period ended September 30, 2004. During the nine-month periods
ended September 30, 2005 and 2004, the revenue increased to $5,465,157 from $261,014. This increase in the three and nine month revenue are mainly due to the sale of GM Bio-Carriers amounted to approximately $0.8million, technical consultancy
fee of approximately $0.6 million in the third quarter of 2005 coupled with completion of one turn-key engineering waste water project in Le Chang City (approximately $1.8 million) in the first quarter of 2005 and the completion of the remaining 15%
construction of the waste water treatment plant of XY (approximately $1.6 million) and one turn-key engineering waste water project in Yong Ji Economic Development Zone (approximately $0.4 million) and the revenue from Tian Jin BOT waste water
treatment plant.



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NOTE 5 - BASIC NET INCOME PER SHARE

The basic net income per share is calculated using the net income and the weighted average number of shares outstanding during the period.



|                                                     |  |                                 |             |      |   |            
|---------------------------------------------------- |  | ------------------------------- | ----------- | ---- | - | -----------
|                                                     |  | Nine months ended September 30,
|                                                     |  | 2005                            |             | 2004
|Net loss                                             |  | $                               | 2,261,089   |      | $ | 5,395      
|                                                     |  |                                
|Weighted average number of common shares outstanding |  |                                 |             |      |   |            
|- Basic                                              |  |                                 | 102,005,125 |      |   | 112,376,794
|- Diluted                                            |  |                                 | 148,136,826 |      |   | 112,376,794
|                                                     |  |                                
|Net loss per share                                   |  |                                 |             |      |   |            
|- Basic                                              |  | $                               | 0.02        |      | $ | 0.00       
|- Diluted                                            |  | $                               | 0.02        |      | $ | 0.00       

NOTE 6  FINANCIAL INSTRUMENTS

The fair values of the financial instruments as of September 30, 2005 are as below:



|                                                           |  |          
|---------------------------------------------------------- |  | ---------
|Convertible debenture                                      |  | 500,000  
|Bifurcated conversion feature of the convertible debenture |  | 500,000  
|April Warrants at fair value                               |  | 550,000  
|September Warrants at fair value                           |  | 7,161,827
|Share capital at par value                                 |  | 32,200   
|                                                           |  |          
|                                                           |  | 8,744,027
|                                                           |  |          

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

The Company used the Black-Scholes model in calculating the fair market value of the April Warrants and allocated $163,384, $81,692 and $163,384 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 35%.



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The Company granted to the holders of the April Warrants certain piggy-back and demand registration rights. Pursuant to
the agreements surrounding the April Private Placement, in the event that the Company determined to undertake a registration of securities, the Company would include, at the request of the holder of Registrable Securities, the
Registrable Securities in the registration statement. If the Company did not file a registration statement by the 120th day from the closing of such financing, and the Company shall have received a written request signed by the holders holding the
majority of the Registrable Securities, then the Company was obligated to file, at its expense, a registration statement covering the Registrable Securities. Once such registration statement has been filed and declared effective, the Company is
obligated to keep such registration statement effective until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to such registration statement, (ii) all Registrable Securities have been otherwise
transferred to persons who may trade such shares without restriction under the Securities Act, and the Company has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend, or (iii) all
Registrable Securities may be sold at any time, without volume or manner of sale limitations pursuant to Rule 144(k) or any similar provision then in effect under the Securities Act. As of September 30, 2005, the Company has not received any
written request signed by the holders holding the majority of the Registrable Securities.

As the convertible debentures are convertible into a variable
number of shares, the requirements for sufficient authorized and unissued shares under paragraphs 19 to 24 of EITF 00-19 Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Companys Own Stock
have not been met with respect to the April Warrants. Accordingly, the April Warrants have been recorded as a liability on the balance sheet. The changes in fair market value (subsequent to the initial recording of the liability based on the
allocation of proceeds) have been recorded as adjustments in the line Unrealized profit/(loss) on financial instrument in the Statement of Operations. In addition, as the registration right agreement is combined with the subscription
agreement, they should be considered together as a unit and accounted for as a derivative under FAS 133. Upon the requirements for sufficient authorized and unissued shares are met and the effectiveness of the registration statement, the April
Warrants will be recorded as equity.

The conversion feature of the convertible debenture issued in April does 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 is bifurcated from the convertible debenture and accounted for as a derivative at fair value with changes
in fair value recorded in earnings.

On September 14, 2005, the Company 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



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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 Company 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 Company used the Black-Scholes model in calculating the fair market value of the September Warrants and allocated $4,797,800 of the
$4,830,000 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%.

The Company granted to the holders of the April Warrants certain piggy-back and demand registration rights. Pursuant to the agreements surrounding the September Private Placement, in the event that the Company
determined to undertake a registration of securities, the Company would include, at the request of the holder of Registrable Securities, the Registrable Securities in the registration statement. If the Company did not file a registration
statement by the 120th day from the closing of such financing, and the Company shall have received a written request signed by the holders holding the majority of the Registrable Securities, then the Company was obligated to file, at its expense, a
registration statement covering the Registrable Securities. Once such registration statement has been filed and declared effective, the Company is obligated to keep such registration statement effective until the earlier of (i) the date that
all of the Registrable Securities have been sold pursuant to such registration statement, (ii) all Registrable Securities have been otherwise transferred to persons who may trade such shares without restriction under the Securities Act, and the
Company has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend, or (iii) all Registrable Securities may be sold at any time, without volume or manner of sale limitations pursuant to
Rule 144(k) or any similar provision then in effect under the Securities Act. As of September 30, 2005, the Company has not received any written request signed by the holders holding the majority of the Registrable Securities.

The September Warrants were issued pursuant to the agreements surrounding the September Private Placement. The subscription agreement contains a liquidated damages
clause which requires cash penalties equal to two percent (2.0%) of the purchase price of the registrable securities purchased from the Company and held by the investors each month (or portion thereof) if the Companys registration of
stock does not become effective within the earlier of sixty (60) days from the first filing date of the Registration Statement or three (3) business days of clearance by the Commission to request effectiveness.



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As the convertible debentures are convertible into a variable number of shares, the requirements for sufficient
authorized and unissued shares under paragraphs 19 to 24 of EITF 00-19 Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Companys Own Stock have not been met with respect to the September
Warrants. Accordingly, the September Warrants have been recorded as a liability on the balance sheet. The changes in fair market value (subsequent to the initial recording of the liability based on the allocation of proceeds) have been recorded as
adjustments in the line Unrealized profit/(loss) on financial instrument in the Statement of Operations. In addition, as the registration right agreement is combined with the subscription agreement, they should be considered together as
a unit and accounted for as a derivative under FAS 133. Upon the requirements for sufficient authorized and unissued shares are met and the effectiveness of the registration statement, the September Warrants will be recorded as equity.

Since the liquidated damages are payable in cash, under paragraphs 12-32 of EITF 00-19 Accounting for Derivative Financial Instruments Indexed to and
Potentially Settled in a Companys Own Stock, contracts that include any provision that could require net-cash settlement cannot be accounted for as equity. In addition, the convertible debentures are convertible into a variable number of
shares, the requirements for sufficient authorized and unissued shares under paragraphs 19 to 24 of EITF 00-19 are not met. Accordingly, the proceeds of the private placement in September allocated for par value of the common stock have been
recorded as a liability on the balance sheet. Upon the requirements for sufficient authorized and unissued shares are met and the effectiveness of the registration statement, the amount will be recorded as equity.



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PART II - OTHER INFORMATION

Item 6. Exhibits.



|    |  |                   |  |                                                                  
|--- |  | ----------------- |  | -----------------------------------------------------------------
|(a) |  | Index to Exhibits
|    |  |                  
|    |  | Exhibit 31.1      |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
|    |  |                  
|    |  | Exhibit 31.2      |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
|    |  |                  
|    |  | Exhibit 32.1      |  | Section 906 Certification                                        



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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 Evergreen Environmental Corporation (Registrant)
|                          |  |                                                       
|Dated: September 25, 2006 |  | By:                                                    |  | /s/ Chong Liang Pu     
|                          |  |                                                        |  | Chong Liang Pu,        
|                          |  |                                                        |  | Chief Executive Officer
|                          |  |                                                       
|Dated: September 25, 2006 |  | By:                                                    |  | /s/ Peh Chung Lim      
|                          |  |                                                        |  | Peh Chung Lim,         
|                          |  |                                                        |  | Chief Financial Officer