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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-QSB



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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 June 30, 2006



| ̈ | 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.)

Suite 7A01, Baicheng Building

584 Yingbin Road

Dashi, Panyu District

Guangzhou, Guangdong, China

(Address
of principal executive offices)

86-20-3479 9708

(Issuers telephone number)

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 August 18, 2006, 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 Sheets at June 30, 2006 and December 31, 2005                                                                                |  | 16     
|Unaudited Consolidated Statements of Operations for the three-month periods ended June 30, 2006 and 2005 and six-month periods ended June 30, 2006 and 2005 |  | 17     
|Unaudited Consolidated Statements of Stockholders Equity                                                                                                   |  | 18     
|Unaudited Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2006 and 2005                                                      |  | 19     
|Notes to Unaudited Consolidated Financial Statements                                                                                                        |  | 20     



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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 16 through 28.

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 endedJune 30, |   |  | Six months ended June 30, |  
|                                                                                                        |  | 2006                       |   |  | 2005                      |   |  | 2006       |   |  | 2005       |  
|                                                                                                        |  | US$                        |   |  | US$                       |   |  | US$        |   |  | US$        |  
|                                                                                                        |  |                            |   | 
|Revenue from turn-key engineering projects                                                              |  | 1,930,603                  |   |  | 2,051,643                 |   |  | 2,745,349  |   |  | 3,863,237  |  
|Revenue from BOT waste water treatment services                                                         |  | 227,150                    |   |  | 69,239                    |   |  | 466,492    |   |  | 137,717    |  
|                                                                                                        |  |                            |   |  |                           |   |  |            |   |  |            |  
|Total revenue                                                                                           |  | 2,157,753                  |   |  | 2,120,882                 |   |  | 3,211,841  |   |  | 4,000,954  |  
|                                                                                                        |  |                            |   | 
|Cost of revenue for turn-key engineering projects                                                       |  | (1,032,362                 | ) |  | (1,274,795                | ) |  | (1,427,639 | ) |  | (2,474,561 | )
|Cost of revenue for BOT waste water treatment services                                                  |  | (146,145                   | ) |  | (30,300                   | ) |  | (271,577   | ) |  | (73,990    | )
|                                                                                                        |  |                            |   |  |                           |   |  |            |   |  |            |  
|Total cost of revenue exclusive of depreciation and amortization and sales taxes shown separately below |  | (1,178,507                 | ) |  | (1,305,095                | ) |  | (1,699,216 | ) |  | (2,548,551 | )
|                                                                                                        |  |                            |   | 
|Depreciation and amortization                                                                           |  | (4,704                     | ) |  | (24,312                   | ) |  | (15,056    | ) |  | (48,624    | )
|Sales taxes                                                                                             |  | (106,183                   | ) |  | (24,362                   | ) |  | (156,456   | ) |  | (84,145    | )
|                                                                                                        |  |                            |   |  |                           |   |  |            |   |  |            |  
|Gross profit                                                                                            |  | 868,359                    |   |  | 767,113                   |   |  | 1,341,113  |   |  | 1,319,634  |  
|                                                                                                        |  |                            |   | 
|General and administrative expenses                                                                     |  | (142,568                   | ) |  | (359,147                  | ) |  | (256,142   | ) |  | (420,181   | )
|                                                                                                        |  |                            |   |  |                           |   |  |            |   |  |            |  
|Income from operations                                                                                  |  | 725,791                    |   |  | 407,966                   |   |  | 1,084,971  |   |  | 899,453    |  
|                                                                                                        |  |                            |   | 
|Other income                                                                                            |  |                           |   |  | 137                       |   |  | 42,609     |   |  | 2,861      |  
|                                                                                                        |  |                            |   | 
|Interest expense                                                                                        |  | (1,198                     | ) |  | (19,412                   | ) |  | (1,429     | ) |  | (23,827    | )
|                                                                                                        |  |                            |   | 
|Penalty for late filing of registration statement                                                       |  | (287,500                   | ) |  |                          |   |  | (533,769   | ) |  |           |  
|                                                                                                        |  |                            |   | 
|Non-cash financing charges                                                                              |  |                           |   |  | (966,539                  | ) |  |           |   |  | (966,539   | )
|                                                                                                        |  |                            |   | 
|Unrealized gains/(losses) on financial instruments                                                      |  | 2,718,464                  |   |  | 550,000                   |   |  | (1,734,219 | ) |  | 550,000    |  
|                                                                                                        |  |                            |   | 
|Share of results in an associate  XL                                                                   |  | 56,119                     |   |  | 51,695                    |   |  | 113,916    |   |  | 87,483     |  
|                                                                                                        |  |                            |   |  |                           |   |  |            |   |  |            |  
|Income/(loss) before income tax and minority interest                                                   |  | 3,211,676                  |   |  | 23,847                    |   |  | (1,027,921 | ) |  | 549,431    |  
|                                                                                                        |  |                            |   | 
|Income tax expense                                                                                      |  | (253,431                   | ) |  | (18,478                   | ) |  | (370,507   | ) |  | (70,867    | )
|                                                                                                        |  |                            |   |  |                           |   |  |            |   |  |            |  
|Income/(loss) before minority interest                                                                  |  | 2,958,245                  |   |  | 5,369                     |   |  | (1,398,428 | ) |  | 478,564    |  
|                                                                                                        |  |                            |   | 
|Minority interests                                                                                      |  | (62,116                    | ) |  | (13,767                   | ) |  | (97,995    | ) |  | (58,955    | )
|                                                                                                        |  |                            |   |  |                           |   |  |            |   |  |            |  
|Net (loss)/income                                                                                       |  | 2,896,129                  |   |  | (8,398                    | ) |  | (1,496,423 | ) |  | 419,609    |  
|                                                                                                        |  |                            |   |  |                           |   |  |            |   |  |            |  

Total revenue. The Company reported total revenue of $2,157,753 for the three-month period ended
June 30, 2006 as compared to $2,120,882 for the three-month period ended June 30, 2005 where as the total revenue for the six-month periods ended June 30, 2006 and 2005 were $3,211,841 and $4,000,954, respectively. The total revenue
for the six-month period ended June 30, 2006 is comprised of revenue from turn-key engineering projects of $2,745,349 and revenue from BOT waste water treatment services of $466,492 while the total revenue for the six-month period ended
June 30, 2005 is comprised of revenue from turn-key engineering projects of $3,863,237 and revenue from BOT waste water treatment services of $137,717. Revenue from turn-key engineering projects for the six-month period ended June 30, 2006
includes revenue recognized for China Environment Industrial Park Wastewater Treatment Plant (approximately $2.09 million) and Yongji Development Zone Wastewater Treatment Plant (Phase 2) (approximately $0.58 million). Revenue from BOT waste water
treatment services for the six-month period ended June 30, 2006 includes revenue from the HY BOT project and TJ BOT project.



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Cost of revenue.

Our total cost of revenue, exclusive of depreciation and amortization and sales taxes, decreased from $1,305,095 for the three-month period ended June 30, 2005 to
$1,178,507 for the three-month period ended June 30, 2006. This is in line with the decrease in total revenue for the three-month period ended June 30, 2006 as compared to the total revenue for the three-month period ended June 30,
2005. Total cost of revenue, exclusive of depreciation and amortization and sales taxes, for the six-month periods ended June 30, 2006 and 2005 are $1,699,216 and $2,548,551, respectively. This is also in line with the decrease in total revenue
for the six-month period ended June 30, 2006 as compared to the total revenue for the six-month period ended June 30, 2005.

Cost of revenue for
the six-month period ended June 30, 2005 comprised of cost of revenue for turn-key engineering projects of $2,474,561 and cost of revenue for BOT waste water treatment services of $73,990 whereas cost of revenue for the six-month period ended
June 30, 2006 comprised of cost of revenue for turn-key engineering projects of $1,427,639 and cost of revenue for BOT waste water treatment services of $271,577.

Gross profit. Gross profit, as a percentage of total revenue for the three-month periods ended June 30, 2006 and 2005 were approximately 40% or $868,359 and approximately 36% or $767,113,
respectively; and as a percentage of total revenue for the six-month periods ended June 30, 2006 and 2005 were approximately 42% or $1,341,113 and approximately 33% or $1,319,634, respectively.

Gross margin, exclusive of depreciation and amortization and sales taxes, for turn-key engineering projects for the six-month periods ended June 30, 2006 and 2005
were approximately 48% or $1,317,710 and approximately 36% or $1,388,676 respectively. The increase is mainly due to better negotiation skills for better pricing and also better cost control with cumulative experience.

Gross margin, exclusive of depreciation and amortization and sales taxes, for BOT waste water treatment services for the six-month periods ended June 30, 2006 and
2005 were approximately 42% or $194,915 and approximately 46% or $63,727. The lower gross margin, exclusive of depreciation and amortization and sales taxes, for BOT waste water treatment services for the six-month period ended June 30, 2006 is
mainly due repair and maintenance cost incurred for that period.

General and administrative expenses. Our total general and administrative
expenses for the three-month periods ended June 30, 2006 and 2005 were $142,568 and $359,147 respectively, while for the six-month periods ended June 30, 2006 and 2005 were $256,142 and $420,181, respectively. The principal components of
general and administrative expenses are administrative salaries and benefits, depreciation and amortization, traveling expenses, rental and other general administration costs. The decrease in general and administrative expenses for the six-month
period ended June 30, 2006 as compared to that for the six-month period ended June 30, 2005 is mainly due to the legal and financing expenses incurred in relation to the convertible debenture issued in April 2005.



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Penalty for late filing of registration statement. This represents the penalty accrued for
late filing of the registration statement for 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
conducted in September 2005 amounted to $533,769. 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 statement is not filed with the Securities and Exchange Commission (the SEC) within thirty (30) days of the final closing,
(ii) such registration statement is not declared effective by the SEC within the earlier of one hundred and twenty (120) days from the final closing or three (3) business days of clearance by the SEC to request effectiveness,
(iii) such registration statement is not maintained as effective by the Company for the effectiveness period or as allowed by 5(k)(ii) below or (iii) the additional registration statement referred to in Section 5(b) is not filed
within thirty (30) days or declared effective within ninety (90) days as set forth therein.

As for the April Warrants, the
Company will cause the warrants to be included in a registration statement within thirty (30) days after receipt of a written request from any investor. As no request for registration has been made, no accrual has been made for the penalty for
late filing of the registration statement. We have however included the shares underlying the warrants in our registration statement.

Non-cash
financing charges. There was no non-cash financing charges for the three-month and six-month periods ended June 30, 2006. As for the three-month period ended June 30, 2005, the non-cash financing charges was $0.97 million
representing discounts on the convertible debenture of $0.35 million, discounts on the bifurcated conversion feature of $0.18 million and discounts on the April Warrant of $0.44 million.

Unrealized loss on financial instruments. Unrealized gains or losses on financial instruments represent the change in fair market value of the financial instruments at each reporting date. The unrealized
loss on financial instruments of approximately $1.73 million for the six-month period ended June 30, 2006. As for the three-month period ended June 30, 2006, the unrealized gain on financial instruments is approximately $2.72 million. The
unrealized gains on financial instruments for the three-month period ended June 30, 2005 was $0.55 million representing the change in fair value of the April Warrants and the bifurcated conversion feature.

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 periods ended June 30, 2006 and 2005 were $56,119 and $51,695, respectively, while share of results in XL for the six-month periods ended June 30, 2006 and 2005 were
$113,916 and $87,483, respectively. The increase in share of net profits was as a result of increase in net profit of XL.



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Net (loss) / income. We had a net income, after income tax and minority interests, of $2,896,129 for the
three-month period ended June 30, 2006 and a net loss, after income tax and minority interests, of $8,398 for the three-month period ended June 30, 2005.

We had a net loss, after income tax and minority interests, of $1,496,423 for the six-month period ended June 30, 2006 and a net income, after income tax and minority interests, of $419,609 for the six-month period ended June 30,
2005.

LIQUIDITY AND CAPITAL RESOURCES

Our principal
sources of liquidity are our cash and cash flow we generate from operations and financing activities. Net cash provided by operating activities during the six-month periods ended June 30, 2006 and 2005 were $2,780,537 and $1,510,341,
respectively. Net cash provided by operating activities in the six-month period ended June 30, 2006 consisted of net loss of $1,496,423, adjustment for non-cash items of $1,733,587 and changes in operating assets and liabilities of $2,543,373.
Cash flow from operating activities consisted mainly of increase in accounts receivable of $1,387,854, decrease in prepayment, deposits and other receivables of $2,184,523, increase in accounts payable of $864,367, increase in amounts due from
related companies of $111,477 and increase in tax payable of $590,684. The net cash used in investing activities during the six-month period ended June 30, 2006 was $302,702 of which $291,155 was used for acquisition of infrastructure assets
while $11,547 was used in acquisition of property, plant and equipment. The net cash used in financing activities during the six-month period ended June 30, 2006 was $75,041 for the repayment of our borrowings. The net increase in cash and cash
equivalents for the six-month period ended June 30, 2006 was $2,371,608, adding that to our cash and cash equivalents at the beginning of the period of $175,224, our cash and cash equivalents at June 30, 2006 was $2,546,832.

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. As a result of the September 2005 private placement, pursuant to Section 5(d) of the warrant agreement, the exercise price has been adjusted to $0.15 per share on September 14, 2005. The
debentures 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



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

Revenues from turn-key engineering projects are recognized on the
percentage of completion method for individual contracts. We follow the guidance of 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 wastewater treatment are recognized based on wastewater treated as recorded daily by meters read at
rates, in RMB/ton, as prescribed under the BOT agreements in accordance with SEC Staff Accounting Bulletin, (SAB) Topic 13 Revenue Recognition. We meet the following four criteria for revenue recognition outlined in SAB Topic
13:

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

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

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

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

Revenues from sale of environment protection related products and provision of technical services 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 second quarter of 2006 financial period, the Group had not made any allowance for doubtful debts.



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

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

New accounting pronouncements



|(i) | The Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS No. 150) was issued in May 2003. This statement affects the classification, measurement and disclosure requirements of the following three types of freestanding financial instruments :-
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 1) | mandatory redeemable shares, which the issuing company is obligated to buy back with cash or other assets;
| | -- | ----------------------------------------------------------------------------------------------------------



| | 2) | instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets, which include put options and forward purchase contracts; and
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the
value of the issuers shares.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In general, SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement had no impact on the Groups results of operations or financial
position.



|(ii) | Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities (VIE) (FIN 46), was issued in
January 2003. FIN 46 requires that if an entity is the primary beneficiary of a variable interest entity, the assets, liabilities and results of operations of the variable interest entity should be included in the consolidated financial statements
of the entity. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In December 2003, the Financial Accounting Standards Board (FASB) completed deliberations on proposed modifications to FIN 46 and re-issued FIN 46 (Revised



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Interpretation) resulting in multiple effective dates based on the nature as well as the creation
date of the VIE. VIEs created after January 31, 2003 but prior to January 1, 2004 may be accounted for either based on the original interpretation or the Revised Interpretation. The adoption of these interpretations had no impact on the
Groups results of operation or financial position.



|(iii) | SFAS No. 132 (revised 2003), Employers Disclosure about Pensions and Other Post-Retirement Benefits was issued in December 2003. SFAS No. 132 (revised)
revised employers disclosure about pension plans and other post-retirement benefit plans. SFAS No. 132 (revised) requires additional disclosures in annual financial statements about the types of plan assets, investment strategy,
measurement dates, plan obligations, cash flows, and components of net periodic benefit cost of defined benefit pension plans and other post-retirement benefit plans. The annual disclosure requirements are effective for fiscal years ended after
December 15, 2003. SFAS No. 132 (revised) also requires interim disclosure of the elements of net periodic benefit cost and the total amount of contributions paid or expected to be paid during the current fiscal year if significantly
different from amounts previously disclosed. The interim disclosure requirements of SFAS No. 132 (revised) are effective for interim periods beginning after December 15, 2003. The adoption of this statement had no impact on the
Groups results of operation or financial position.
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(iv) | In November 2004, the FASB issued SFAS No. 151 Inventory costs  an amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends ARB No. 43, Chapter
4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges. SFAS No. 151 is effective for inventory costs incurred during fiscal year
beginning after June 15, 2005. The adoption of this standard has no impact on the Groups results of operations or financial position.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(v) | In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. This Standard addresses the accounting for transactions in which a company receives employee
services in exchange for (a) equity instruments of the company or (b) liabilities that are based on the fair value of the companys equity instruments or that may be settled by the issuance of such equity instruments. This Standard
eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and requires that such transactions be accounted for using a
fair-value-based method. The Standard is effective for periods beginning after June 15, 2005. The Group is currently assessing the impact of this Standard on its results of operations and financial position.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(vi) | SFAS No. 153, Exchanges of Nonmonetary Assets, issued December 2004, requires nonmonetary exchanges be accounted for at fair value, recognizing any gains or losses, if their
fair value is determinable within reasonable limits and the transaction has commercial substance. A nonmonetary exchange has commercial substance if future cash flows of the entity are expected to change significantly as a result of the exchange.
SFAS No. 153 was effective for nonmonetary asset exchange transactions occurring after July 1, 2005, and did not have a significant impact on the Groups financial statements.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(vii) | In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which replaces APB Opinion No. 20 Accounting Changes and SFAS No. 3 Reporting
Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in an accounting principle. SFAS No. 154 requires retrospective application for voluntary changes in
an accounting principle unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Group will adopt SFAS No. 154 on January 1, 2006 with no
expected material effect on its consolidated financial statements.
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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.

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. As a result, we have restated the amounts and disclosures in those annual financial statements. These restatements did not result in any restatement or revision to our net income for fiscal 2004 and 2005.

As previously disclosed in our report on Form 10KSB/A filed on January 13, 2006, we recorded a gain on disposal of $2,029,720 was recorded in 2004 for the disposal
of our entire 90% attributable interest in XY to True Global Limited (TGL), an independent party, at a consideration of $4,130,435 (RMB34.2 million) pursuant to a tri-party framework agreement between EGAG, TGL and Guang Dong Xin Sheng
Environmental Protection Company Limited (GDXS) in which EGAG transferred 90% of shareholdings in XY to TGL while GDXS continued to own 10% of shareholding in XY. The transaction was consummated on October 26, 2004. The gain
represents the difference between the disposal proceeds and our attributable share of net assets of XY at the date of disposal.

In addition, we also
recognized we also recognized the construction revenue of XY in accordance with guidance in 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



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contracts. Accordingly, an amount of $9,115,942 was recognized as revenue from construction of wastewater treatment plant
in 2004. The amount accounted for 97% of our total revenue in 2004.

As this accounting treatment does not comply with SOP 81-1 or EITF 00-21, we have
adjusted the disclosure in our financial statements for fiscal 2004 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.

In our report on Form 10KSB/A filed on January 13, 2006, we have disclosed the group reorganization transactions in Note 2 (ii) and (iii) to the
consolidated financial statements. Pursuant to Securities and Exchange Commission rules, 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 in substance, 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. As such, we have eliminated references to the group reorganization throughout the financial statements.

As previously disclosed in our report on Form 10KSB filed on April 17, 2006, we recorded the warrants issued in April 2005 as equity. Pursuant to Section 5(a)
of the Subscription Agreement for the April 2005 private placement, upon receipt of a written request from any Investor, within thirty (30) days after receipt of any such notice from the Company, the Company will cause all such Shares and
Warrant Shares (Registrable Securities) requested by the Investor to be included in such registration statement (a Registration Statement), all to the extent required to permit the sale or other disposition by
such Investor, of such shares. Since the effectiveness of the registration statement is not within the control of the issuer, we have reclassified the April Warrants as liability.

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

(a) a lack of sufficient 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 evaluating our 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.



13



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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 to
assist our accounting department and internal audit function in the preparation of our US GAAP consolidated financial statements;

3. seek to recruit
an accounting staff member with US GAAP expertise, which has been implemented; and

4. engage an internationally recognized accounting firm to provide
us with technical advice on US GAAP matters and SEC disclosure requirements on an ongoing basis, which has been implemented.

Other than those
disclosed above, there was no change in our internal controls, which are included within disclosure controls and procedures, during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially
affect, our internal controls.

PART II - OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

As of 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



14



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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. As a result of the September 2005 private placement, pursuant to Section 5(d) of the warrant agreement, the exercise price has been adjusted to $0.15
per share on September 14, 2005. The debentures 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

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: August 21, 2006. |  |                                           |  |                                      
|                        |  |                                          
|                        |  | By                                        |  | /s/ Chong Liang Pu                   
|                        |  |                                           |  | Chong Liang Pu                       
|                        |  |                                           |  | President and Chief Executive Officer



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CHINA EVERGREEN ENVIRONMENTAL CORPORATION

Unaudited Consolidated Balance Sheets



|                                                                                                                                                  |  |              |  |                 
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | ----------------
|                                                                                                                                                  |  | June 30,2006 |  | December 31,2005
|                                                                                                                                                  |  | US$          |  | US$             
|                                                                                                                                                  |  | (Unaudited)  |  | (Audited)       
|ASSETS                                                                                                                                            |  |              |  |                 
|                                                                                                                                                  |  |             
|Current assets                                                                                                                                    |  |              |  |                 
|Cash and cash equivalents                                                                                                                         |  | 2,546,832    |  | 175,224         
|Inventories, net                                                                                                                                  |  | 1,831        |  |                
|Accounts receivable                                                                                                                               |  | 6,657,375    |  | 5,220,940       
|Prepayment, deposits and other receivables                                                                                                        |  | 3,813,526    |  | 5,942,751       
|Amounts due from related companies                                                                                                                |  | 1,007,011    |  | 887,277         
|Amounts due from directors                                                                                                                        |  |             |  |                
|Amount due from an associate                                                                                                                      |  | 1,788,541    |  | 1,772,052       
|Deferred tax assets                                                                                                                               |  | 189,010      |  | 187,267         
|                                                                                                                                                  |  |              |  |                 
|Total current assets                                                                                                                              |  | 16,004,126   |  | 14,185,511      
|                                                                                                                                                  |  |             
|Infrastructure assets, net                                                                                                                        |  | 8,126,705    |  | 7,773,485       
|Property, plant and equipment, net                                                                                                                |  | 343,796      |  | 343,709         
|Deposits paid for acquisition of property, plant and equipment                                                                                    |  | 641,413      |  | 635,500         
|Deposit paid for acquisition of a subsidiary                                                                                                      |  | 2,066,579    |  | 2,047,527       
|Interests in an associate                                                                                                                         |  | 937,470      |  | 815,613         
|                                                                                                                                                  |  |              |  |                 
|Total assets                                                                                                                                      |  | 28,120,089   |  | 25,801,345      
|                                                                                                                                                  |  |              |  |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                              |  |              |  |                 
|                                                                                                                                                  |  |             
|Current liabilities                                                                                                                               |  |              |  |                 
|Financial instruments                                                                                                                             |  | 8,003,017    |  | 6,244,381       
|Unsecured loan                                                                                                                                    |  | 12,507       |  | 86,741          
|Other borrowing                                                                                                                                   |  | 25,014       |  | 24,783          
|Accounts payable                                                                                                                                  |  | 7,732,397    |  | 6,804,711       
|Accruals and other liabilities                                                                                                                    |  | 1,815,710    |  | 1,398,054       
|Amounts due to directors                                                                                                                          |  | 723,579      |  | 716,598         
|Amounts due to related companies                                                                                                                  |  | 232,984      |  | 230,836         
|Income tax payable                                                                                                                                |  | 2,162,341    |  | 1,557,167       
|                                                                                                                                                  |  |              |  |                 
|Total current liabilities                                                                                                                         |  | 20,707,549   |  | 17,063,271      
|                                                                                                                                                  |  |              |  |                 
|Minority interests                                                                                                                                |  | 927,578      |  | 821,704         
|                                                                                                                                                  |  |              |  |                 
|Stockholders equity                                                                                                                              |  |              |  |                 
|Common stock, US$0.001 par value, 200,000,000 shares authorized; 135,903,698 shares issued and outstanding at June 30, 2006 and
December 31, 2005 |  | 103,704      |  | 103,704         
|Additional paid-in capital                                                                                                                        |  | 4,837,392    |  | 4,837,392       
|Retained earnings                                                                                                                                 |  | 1,257,695    |  | 2,754,118       
|Accumulated other comprehensive income                                                                                                            |  | 286,171      |  | 221,156         
|                                                                                                                                                  |  |              |  |                 
|Total stockholders equity                                                                                                                        |  | 6,484,962    |  | 7,916,370       
|                                                                                                                                                  |  |              |  |                 
|Total liabilities and stockholders equity                                                                                                        |  | 28,120,089   |  | 25,801,345      
|                                                                                                                                                  |  |              |  |                 



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CHINA EVERGREEN ENVIRONMENTAL CORPORATION

Unaudited Consolidated Statement of Operations



|                                                                                                        |  |                            |   |  |                           |   |  |            |   |  |            |  
|------------------------------------------------------------------------------------------------------- |  | -------------------------- | - |  | ------------------------- | - |  | ---------- | - |  | ---------- | -
|                                                                                                        |  | Three months endedJune 30, |   |  | Six months ended June 30, |  
|                                                                                                        |  | 2006                       |   |  | 2005                      |   |  | 2006       |   |  | 2005       |  
|                                                                                                        |  | US$                        |   |  | US$                       |   |  | US$        |   |  | US$        |  
|Revenue from turn-key engineering projects                                                              |  | 1,930,603                  |   |  | 2,051,643                 |   |  | 2,745,349  |   |  | 3,863,237  |  
|Revenue from BOT waste water treatment services                                                         |  | 227,150                    |   |  | 69,239                    |   |  | 466,492    |   |  | 137,717    |  
|                                                                                                        |  |                            |   |  |                           |   |  |            |   |  |            |  
|Total revenue                                                                                           |  | 2,157,753                  |   |  | 2,120,882                 |   |  | 3,211,841  |   |  | 4,000,954  |  
|                                                                                                        |  |                            |   | 
|Cost of revenue for turn-key engineering projects                                                       |  | (1,032,362                 | ) |  | (1,274,795                | ) |  | (1,427,639 | ) |  | (2,474,561 | )
|Cost of revenue for BOT waste water treatment services                                                  |  | (146,145                   | ) |  | (30,300                   | ) |  | (271,577   | ) |  | (73,990    | )
|                                                                                                        |  |                            |   |  |                           |   |  |            |   |  |            |  
|Total cost of revenue exclusive of depreciation and amortization and sales taxes shown separately below |  | (1,178,507                 | ) |  | (1,305,095                | ) |  | (1,699,216 | ) |  | (2,548,551 | )
|                                                                                                        |  |                            |   | 
|Depreciation and amortization                                                                           |  | (4,704                     | ) |  | (24,312                   | ) |  | (15,056    | ) |  | (48,624    | )
|Sales taxes                                                                                             |  | (106,183                   | ) |  | (24,362                   | ) |  | (156,456   | ) |  | (84,145    | )
|                                                                                                        |  |                            |   |  |                           |   |  |            |   |  |            |  
|Gross profit                                                                                            |  | 868,359                    |   |  | 767,113                   |   |  | 1,341,113  |   |  | 1,319,634  |  
|                                                                                                        |  |                            |   | 
|General and administrative expenses                                                                     |  | (142,568                   | ) |  | (359,147                  | ) |  | (256,142   | ) |  | (420,181   | )
|                                                                                                        |  |                            |   |  |                           |   |  |            |   |  |            |  
|Income from operations                                                                                  |  | 725,791                    |   |  | 407,966                   |   |  | 1,084,971  |   |  | 899,453    |  
|                                                                                                        |  |                            |   | 
|Other income                                                                                            |  |                           |   |  | 137                       |   |  | 42,609     |   |  | 2,861      |  
|                                                                                                        |  |                            |   | 
|Interest expense                                                                                        |  | (1,198                     | ) |  | (19,412                   | ) |  | (1,429     | ) |  | (23,827    | )
|                                                                                                        |  |                            |   | 
|Penalty for late filing of registration statement                                                       |  | (287,500                   | ) |  |                          |   |  | (533,769   | ) |  |           |  
|                                                                                                        |  |                            |   | 
|Non-cash financing charges                                                                              |  |                           |   |  | (966,539                  | ) |  |           |   |  | (966,539   | )
|                                                                                                        |  |                            |   | 
|Unrealized gains/(losses) on financial instruments                                                      |  | 2,718,464                  |   |  | 550,000                   |   |  | (1,734,219 | ) |  | 550,000    |  
|                                                                                                        |  |                            |   | 
|Share of results in an associate  XL                                                                   |  | 56,119                     |   |  | 51,695                    |   |  | 113,916    |   |  | 87,483     |  
|                                                                                                        |  |                            |   |  |                           |   |  |            |   |  |            |  
|Income/(loss) before income tax and minority interest                                                   |  | 3,211,676                  |   |  | 23,847                    |   |  | (1,027,921 | ) |  | 549,431    |  
|                                                                                                        |  |                            |   | 
|Income tax expense                                                                                      |  | (253,431                   | ) |  | (18,478                   | ) |  | (370,507   | ) |  | (70,867    | )
|                                                                                                        |  |                            |   |  |                           |   |  |            |   |  |            |  
|Income/(loss) before minority interest                                                                  |  | 2,958,245                  |   |  | 5,369                     |   |  | (1,398,428 | ) |  | 478,564    |  
|                                                                                                        |  |                            |   | 
|Minority interests                                                                                      |  | (62,116                    | ) |  | (13,767                   | ) |  | (97,995    | ) |  | (58,955    | )
|                                                                                                        |  |                            |   |  |                           |   |  |            |   |  |            |  
|Net (loss)/income                                                                                       |  | 2,896,129                  |   |  | (8,398                    | ) |  | (1,496,423 | ) |  | 419,609    |  
|                                                                                                        |  |                            |   |  |                           |   |  |            |   |  |            |  
|Basic net income/(loss) per share                                                                       |  | 0.02                       |   |  | (0.00                     | ) |  | (0.01      | ) |  | 0.00       |  
|                                                                                                        |  |                            |   |  |                           |   |  |            |   |  |            |  
|Diluted net income/(loss) per share                                                                     |  | 0.02                       |   |  | (0.00                     | ) |  | (0.01      | ) |  | 0.00       |  
|                                                                                                        |  |                            |   |  |                           |   |  |            |   |  |            |  



17



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CHINA EVERGREEN ENVIRONMENTAL CORP.

Consolidated Statement of Stockholders Equity



|                                                                |  |               |  |         |                          |  |                                       |  |            |                                     |  |                          |  |            |  
|--------------------------------------------------------------- |  | ------------- |  | ------- | ------------------------ |  | ------------------------------------- |  | ---------- | ----------------------------------- |  | ------------------------ |  | ---------- | -
|                                                                |  | Common stock  |  |         | Additionalpaid-incapital |  | Retainedearnings/(accumulateddeficit) |  |            | Accumulatedothercomprehensiveincome |  | Totalstockholdersequity | 
|                                                                |  | No. of shares |  | Amount  |                          |  |                                       |  |           
|                                                                |  |               |  | US$     |                          |  | US$                                   |  | US$        |                                     |  | US$                      |  | US$        |  
|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  |  
|Net income                                                      |  |              |  |        |                          |  |                                      |  | 419,609    |                                     |  |                         |  | 419,609    |  
|                                                                |  |               |  |         |                          |  |                                       |  |            |                                     |  |                          |  |            |  
|At June 30, 2005                                                |  | 99,999,997    |  | 100,000 |                          |  | 3,841,096                             |  | 3,934,231  |                                     |  |                         |  | 7,875,327  |  
|                                                                |  |               |  |         |                          |  |                                       |  |            |                                     |  |                          |  |            |  
|At July 1, 2005                                                 |  | 99,999,997    |  | 100,000 |                          |  | 3,841,096                             |  | 3,934,231  |                                     |  |                         |  | 7,875,327  |  
|Issue of shares in September                                    |  | 32,200,000    |  | 32,200  |                          |  |                                      |  |           |                                     |  |                         |  | 32,200     |  
|Share issued in October for conversion of convertible debenture |  | 3,703,701     |  | 3,704   |                          |  | 996,296                               |  |           |                                     |  |                         |  | 1,000,000  |  
|Shares issued accounted for as liability                        |  |              |  | (32,200 | )                        |  |                                      |  |           |                                     |  |                         |  | (32,200    | )
|Foreign currency translation adjustments                        |  |              |  |        |                          |  |                                      |  |           |                                     |  | 221,156                  |  | 221,156    |  
|Net loss                                                        |  |              |  |        |                          |  |                                      |  | (1,180,113 | )                                   |  |                         |  | (1,180,113 | )
|                                                                |  |               |  |         |                          |  |                                       |  |            |                                     |  |                          |  |            |  
|At December 31, 2005                                            |  | 135,903,698   |  | 103,704 |                          |  | 4,837,392                             |  | 2,754,118  |                                     |  | 221,156                  |  | 7,916,370  |  
|                                                                |  |               |  |         |                          |  |                                       |  |            |                                     |  |                          |  |            |  
|At January 1, 2006                                              |  | 135,903,698   |  | 103,704 |                          |  | 4,837,392                             |  | 2,754,118  |                                     |  | 221,156                  |  | 7,916,370  |  
|Foreign currency translation adjustments                        |  |              |  |        |                          |  |                                      |  |           |                                     |  | 65,015                   |  | 65,015     |  
|Net loss                                                        |  |              |  |        |                          |  |                                      |  | (1,496,423 | )                                   |  |                         |  | (1,496,423 | )
|                                                                |  |               |  |         |                          |  |                                       |  |            |                                     |  |                          |  |            |  
|At June 30, 2006                                                |  | 135,903,698   |  | 103,704 |                          |  | 4,837,392                             |  | 1,257,695  |                                     |  | 286,171                  |  | 6,484,962  |  
|                                                                |  |               |  |         |                          |  |                                       |  |            |                                     |  |                          |  |            |  



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CHINA EVERGREEN ENVIRONMENTAL CORPORATION

Unaudited Consolidated Statements of Cash Flows



|                                                                                          |  |                           |   |  |            |  
|----------------------------------------------------------------------------------------- |  | ------------------------- | - |  | ---------- | -
|                                                                                          |  | Six months ended June 30, |  
|                                                                                          |  | 2006                      |   |  | 2005       |  
|                                                                                          |  | US$                       |   |  | US$        |  
|Cash flows from operating activities:                                                     |  |                           |   |  |            |  
|                                                                                          |  |                          
|Net (loss)/income                                                                         |  | (1,496,423                | ) |  | 419,609    |  
|                                                                                          |  |                          
|Adjustments to reconcile net (loss)/ income to net cash provided by operating activities: |  |                           |   |  |            |  
|Depreciation and amortization                                                             |  | 15,056                    |   |  | 47,406     |  
|Non-cash financing charges                                                                |  |                          |   |  | 966,539    |  
|Unrealized loss/(gain) on financial instruments                                           |  | 1,734,219                 |   |  | (550,000   | )
|Decrease in deferred tax assets                                                           |  |                          |   |  | (9,225     | )
|Increase in minority interests                                                            |  | 98,228                    |   |  | 155,571    |  
|Share of results in an associate                                                          |  | (113,916                  | ) |  | (87,483    | )
|                                                                                          |  |                          
|Changes in operating assets and liabilities:                                              |  |                           |   |  |            |  
|(Increase)/decrease in accounts receivable                                                |  | (1,387,854                | ) |  | 6,692,209  |  
|Increase in inventories                                                                   |  | (1,831                    | ) |  | (2,422     | )
|Decrease/(increase) in prepayment, deposits and other receivables                         |  | 2,184,523                 |   |  | (1,726,126 | )
|Increase/(decrease) in accounts payable                                                   |  | 864,367                   |   |  | (4,311,936 | )
|Increase/(decrease) in accruals and other liabilities                                     |  | 404,648                   |   |  | (65,725    | )
|Increase/(decrease) in amounts due to directors                                           |  | 313                       |   |  | (86,640    | )
|(Increase)/decrease in amounts due from related companies                                 |  | (111,477                  | ) |  | 619,640    |  
|Decrease in amounts due to related companies                                              |  |                          |   |  | (852,085   | )
|Increase in tax payable                                                                   |  | 590,684                   |   |  | 301,009    |  
|                                                                                          |  |                          
|Net cash provided by operating activities                                                 |  | 2,780,537                 |   |  | 1,510,341  |  
|                                                                                          |  |                          
|Cash flows from investing activities:                                                     |  |                           |   |  |            |  
|Acquisition of infrastructure assets                                                      |  | (291,155                  | ) |  | (1,973,942 | )
|Acquisition of property, plant and equipment                                              |  | (11,547                   | ) |  |           |  
|Increase in amount due from an associate                                                  |  |                          |   |  | (4,760     | )
|                                                                                          |  |                          
|Net cash used in investing activities                                                     |  | (302,702                  | ) |  | (1,978,702 | )
|                                                                                          |  |                          
|Cash flows from financing activities:                                                     |  |                           |   |  |            |  
|Proceeds from convertible debenture issued                                                |  |                          |   |  | 500,000    |  
|Repayment of borrowing                                                                    |  | (75,041                   | ) |  | (72,464    | )
|                                                                                          |  |                          
|Net cash used in financing activities                                                     |  | (75,041                   | ) |  |           |  
|                                                                                          |  |                          
|Effect of foreign currency translation on cash and cash equivalents                       |  | (31,186                   | ) |  | 427,536    |  
|                                                                                          |  |                          
|Net increase/(decrease) in cash and cash equivalents                                      |  | 2,371,608                 |   |  | (40,825    | )
|                                                                                          |  |                          
|Cash and cash equivalents, beginning of period                                            |  | 175,224                   |   |  | 336,079    |  
|                                                                                          |  |                          
|Cash and cash equivalents, end of period                                                  |  | 2,546,832                 |   |  | 295,254    |  



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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



20



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(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 second quarter of 2006.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Revenues from turn-key engineering projects are recognized on the percentage of completion method for individual contracts. We follow the guidance of 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 wastewater treatment are recognized based on wastewater treated as
recorded daily by meters read at rates, in RMB/ton, as prescribed under the BOT agreements in accordance with SEC Staff Accounting Bulletin, (SAB) Topic 13 Revenue Recognition. We meet the following four criteria for revenue
recognition outlined in SAB Topic 13:



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



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



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



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

Revenues from sale of environment protection related products and provision of technical services 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 second
quarter of 2006 financial period, the Group had not made any allowance for doubtful debts.

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

Income per share. Basic income per share is computed by dividing the net income for the year by the weighted average number of common shares outstanding
during the year. Diluted income per share is computed by dividing the net income for the year by the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares, composed of incremental common
shares issuable upon the exercise of stock



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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.

New accounting
pronouncements



|(i) | The Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS No. 150) was issued in May 2003. This statement affects the classification, measurement and disclosure requirements of the following three types of freestanding financial instruments :-
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 1) | mandatory redeemable shares, which the issuing company is obligated to buy back with cash or other assets;
| | -- | ----------------------------------------------------------------------------------------------------------



| | 2) | instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets, which include put options and forward purchase contracts; and
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the
value of the issuers shares.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In general, SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement had no impact on the Groups results of operations or financial
position.



|(iv) | Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities (VIE) (FIN 46), was issued in
January 2003. FIN 46 requires that if an entity is the primary beneficiary of a variable interest entity, the assets, liabilities and results of operations of the variable interest entity should be included in the consolidated financial statements
of the entity. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In December 2003, the Financial Accounting Standards Board (FASB) completed deliberations on proposed modifications to FIN 46 and re-issued FIN 46 (Revised Interpretation) resulting in multiple effective dates based
on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003 but prior to January 1, 2004 may be accounted for either based on the original interpretation or the Revised Interpretation. The adoption of these
interpretations had no impact on the Groups results of operation or financial position.



|(v) | SFAS No. 132 (revised 2003), Employers Disclosure about Pensions and Other Post-Retirement Benefits was issued in December 2003. SFAS
No. 132 (revised) revised employers disclosure about pension plans and other post-retirement benefit plans. SFAS No. 132 (revised) requires additional disclosures in annual financial statements about the types of plan assets,
investment strategy, measurement dates, plan obligations, cash flows, and components of net periodic benefit cost of defined benefit pension plans and other
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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post-retirement benefit plans. The annual disclosure requirements are effective for fiscal years ended after December 15, 2003. SFAS No. 132
(revised) also requires interim disclosure of the elements of net periodic benefit cost and the total amount of contributions paid or expected to be paid during the current fiscal year if significantly different from amounts previously disclosed.
The interim disclosure requirements of SFAS No. 132 (revised) are effective for interim periods beginning after December 15, 2003. The adoption of this statement had no impact on the Groups results of operation or financial position.



|(iv) | In November 2004, the FASB issued SFAS No. 151 Inventory costs  an amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends ARB No. 43, Chapter
4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges. SFAS No. 151 is effective for inventory costs incurred during fiscal year
beginning after June 15, 2005. The adoption of this standard has no impact on the Groups results of operations or financial position.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(v) | In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. This Standard addresses the accounting for transactions in which a company receives employee
services in exchange for (a) equity instruments of the company or (b) liabilities that are based on the fair value of the companys equity instruments or that may be settled by the issuance of such equity instruments. This Standard
eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and requires that such transactions be accounted for using a
fair-value-based method. The Standard is effective for periods beginning after June 15, 2005. The Group is currently assessing the impact of this Standard on its results of operations and financial position.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(vi) | SFAS No. 153, Exchanges of Nonmonetary Assets, issued December 2004, requires nonmonetary exchanges be accounted for at fair value, recognizing any gains or losses, if their
fair value is determinable within reasonable limits and the transaction has commercial substance. A nonmonetary exchange has commercial substance if future cash flows of the entity are expected to change significantly as a result of the exchange.
SFAS No. 153 was effective for nonmonetary asset exchange transactions occurring after July 1, 2005, and did not have a significant impact on the Groups financial statements.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(vii) | In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which replaces APB Opinion No. 20 Accounting Changes and SFAS No. 3 Reporting
Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in an accounting principle. SFAS No. 154 requires retrospective application for voluntary changes in
an accounting principle unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Group will adopt SFAS No. 154 on January 1, 2006 with no
expected material effect on its consolidated financial statements.
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 4 - NET (LOSS)/ INCOME PER SHARE



| | (i) | The basic net (loss)/income per share is calculated using the net income and the weighted average number of shares outstanding during the year.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------



|                                                     |  |                                 |   |  |           
|---------------------------------------------------- |  | ------------------------------- | - |  | ----------
|                                                     |  | Six-month period ended June 30,
|                                                     |  | 2006                            |   |  | 2005      
|Net (loss)/income (US$)                              |  | (1,496,423                      | ) |  | 419,609   
|                                                     |  |                                 |   |  |           
|Weighted average number of common shares outstanding |  | 135,903,698                     |   |  | 99,999,997
|                                                     |  |                                 |   |  |           
|Basic net (loss)/income per share (US$)              |  | (0.01                           | ) |  | 0.01      
|                                                     |  |                                 |   |  |           



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| | (ii) | The diluted net (loss)/income per share is calculated using the net income and the weighted average number of shares outstanding during the year together with shares issuable upon
exercise of all warrants issued.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                             |  |                                 |   |  |           
|------------------------------------------------------------ |  | ------------------------------- | - |  | ----------
|                                                             |  | Six-month period ended June 30,
|                                                             |  | 2006                            |   |  | 2005      
|Net (loss)/income (US$)                                      |  | (1,496,423                      | ) |  | 419,609   
|                                                             |  |                                 |   |  |           
|Diluted weighted average number of common shares outstanding |  | 135,903,698                     |   |  | 99,999,997
|                                                             |  |                                 |   |  |           
|Diluted net (loss)/income per share (US$)                    |  | (0.01                           | ) |  | 0.01      
|                                                             |  |                                 |   |  |           

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

NOTE 5  FINANCIAL INSTRUMENTS

The fair values of the financial instruments as of June 30, 2006 are as below:



|                                                       |  |          
|------------------------------------------------------ |  | ---------
|                                                       |  | USD      
|Warrants issued in April, at fair value                |  | 575,000  
|Warrants issued in September, at fair value            |  | 7,341,600
|Shares issued in September, accounted for as liability |  | 32,200   
|Registration right liability                           |  | 54,217   
|                                                       |  |          
|                                                       |  | 8,003,017
|                                                       |  |          

The Group conducted a private placement in April 2005 (April Private Placement) of 20 investment
units, at USD25,000 per unit, for gross proceeds of USD500,000. Each unit consisted of (a) a 12% convertible debenture in the original principal amount of USD25,000, convertible into shares of our common stock at the rate of the lesser of
(i) USD0.20 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 USD0.20 per share, expiring ten years from their date of issuance (April Warrants). As a result of the September 2005 private
placement, pursuant to Section 5(d) of the warrant



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agreement, the exercise price has been adjusted to $0.15 per share on September 14, 2005. The debentures were due
and payable August 1, 2005. The debenture holders, however, extended the payment period to September 30, 2005. The debentures were converted into 3,703,701 shares of common stock on October 1, 2005.

The Group used the Black-Scholes model in calculating the fair market value of the April Warrants and allocated USD148,531, USD74,266 and USD185,664 of the USD408,461
net proceeds to the Convertible Debenture, the Bifurcated Conversion Feature of the Debenture and the April Warrants, respectively. The differences between the fair value of each of the Convertible Debenture, the Bifurcated Conversion Feature of the
Debenture and the April Warrants and the respective allocated amounts are recorded as non-cash financing charges and expensed of at the date of issuance. The principal assumptions used in the computation of the April Warrants are: expected term of
10 years; a risk-free rate of return of 4.24%; dividend yield of zero percent; and a volatility of 70%.

The Group granted to the holders of the April
Warrants certain piggy-back and demand registration rights. Pursuant to the agreements surrounding the April Private Placement, in the event that the Group determined to undertake a registration of securities, the Group would include, at the request
of the holder of Registrable Securities, the Registrable Securities in the registration statement. If the Group did not file a registration statement by the 120th day from the closing of such financing, and the Group shall have received
a written request signed by the holders holding the majority of the Registrable Securities, then the Group was obligated to file, at its expense, a registration statement covering the Registrable Securities. Once such registration statement has been
filed and declared effective, the Group is obligated to keep such registration statement effective until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to such registration statement, (ii) all
Registrable Securities have been otherwise transferred to persons who may trade such shares without restriction under the Securities Act, and the Group has delivered a new certificate or other evidence of ownership for such securities not bearing a
restrictive legend, or (iii) all Registrable Securities may be sold at any time, without volume or manner of sale limitations pursuant to Rule 144(k) or any similar provision then in effect under the Securities Act. As of December 31,
2005, the Group has not received any written request signed by the holders holding the majority of the Registrable Securities.

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. Accordingly, the proceeds of the April Private Placement allocated for the April Warrants have been recorded as a liability on the balance sheet. Upon the effectiveness of the registration
statement, the amount will be recorded as equity.

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



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On September 14, 2005, the Group closed the private placement sale to accredited investors of units consisting of
shares of our common stock and warrants to purchase shares of our common stock for aggregate gross proceeds of USD4.83 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 USD30,000 per unit. Each unit consisted of 200,000 shares of our common stock, priced at USD0.15 per share, and warrants to purchase 200,000 shares of our common stock over a five year period at an
exercise price of USD0.20 per share. Pursuant to the terms of the subscription agreements, we granted the investors limited registration rights for all common shares comprising the units, including the common shares issuable on exercise of the
warrants. The Group also issued to Westminster Securities Corporation, as partial compensation for their placement agent services, 7,728,000 placement agent warrants to purchase one share each of our common shares, a portion of which has been
assigned by Westminster Securities Corporation to certain of its officers and employees (the warrants issued in the September Private Placement together with the placement agent warrants are hereinafter referred to as September
Warrants).

The Group used the Black-Scholes model in calculating the fair market value of the September Warrants and allocated USD4,140,535 of the
USD4,172,735 net proceeds to the September Warrants. The difference between the fair value of the September Warrants and the allocated amount is recorded as non-cash financing charges and expensed of at the date of issuance. The principal
assumptions used in the computation of the September Warrants are: expected term of 5 years; a risk-free rate of return of 4.24%; dividend yield of zero percent; and a volatility of 70%.

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 Group and held by the investors each month (or portion thereof) if the Groups registration statement is not filed with the SEC within thirty
(30) days of the final closing, (ii) such registration statement is not declared effective by the SEC within the earlier of one hundred and twenty (120) days from the final closing or three (3) business days of clearance by SEC
to request effectiveness, (iii) such registration statement is not maintained as effective by the Group for the effectiveness period or as allowed by 5(k)(ii) below or (iii) the additional registration statement referred to in
Section 5(b) is not filed within thirty (30) days or declared effective within ninety (90) days as set forth therein. As of June 30, 2006, the Group has made an accrual of $533,769 for the late filing penalties.

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. Accordingly, the proceeds of the private placement in September allocated for par value of
the common stock and the September Warrants have been recorded as a liability on the balance sheet. Upon the effectiveness of the registration statement, the amount will be recorded as equity.



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NOTE 6  PREPAYMENT, DEPOSITS AND OTHER RECEIVABLES



|                                       |  |               |  |                  
|-------------------------------------- |  | ------------- |  | -----------------
|                                       |  | June 30, 2006 |  | December 31, 2005
|                                       |  | US$           |  | US$              
|Prepayment                             |  | 91,277        |  | 74,624           
|Deposits                               |  | 5,628         |  | 42,939           
|Other receivables:                     |  |               |  |                  
|True Global Limited                    |  | 2,651,458     |  | 2,627,014        
|Hampton Limited                        |  | 399,264       |  | 395,583          
|Zeng Xiangfeng                         |  |              |  | 2,429,988        
|Advances and miscellaneous receivables |  | 665,899       |  | 372,603          
|                                       |  | 3,813,526     |  | 5,942,751        

Amounts due from Zeng Xiangfeng, an independent party, were deposits for acquisition of wastewater treatment
plants. Due to a deferment in the proposed acquisition, the amount has been withdrawn.

Amounts due from True Global Limited represent the remaining amount
receivable from True Global Limited for the disposition of 90% direct interest in XY in 2004.

The management believes
that all other receivables are collectible.

NOTE 7  CONCENTRATION

The Groups major customers for the six-month period ended June 30, 2006 are:



|(i) | Beijing Jinqiao Luyuan Environment Protection Investment Development Company Limited, which accounted for approximately 65% of the Groups total revenue for the six-month
period ended June 30, 2006, in relation to the revenue recognized from turnkey engineering project of China Environment Industrial Park Wastewater Treatment Plant; and
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(ii) | the Management Committee of Yongji Economic Development Zone, which accounted for approximately 18% of the Groups total revenue for the six-month period ended June 30,
2006, in relation to the revenue recognized from turnkey engineering project of Yongji Development Zone Wastewater Treatment Plant.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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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##### Table of Contents

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: August 21, 2006 |  | By:                                       |  | /s/ Chong Liang Pu     
|                       |  |                                           |  | Chong Liang Pu,        
|                       |  |                                           |  | Chief Executive Officer
|                       |  |                                          
|Dated: August 21, 2006 |  | By:                                       |  | /s/ Peh Chung Lim      
|                       |  |                                           |  | Peh Chung Lim,         
|                       |  |                                           |  | Chief Financial Officer



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