Unassociated Document

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2007

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

For the transition period from to

Commission File Number 000-26175

China Water Group, Inc.

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

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

Suite 7A01, Baicheng Building

584 Yingbin Road

Dashi, Panyu District

Guangzhou, Guangdong, China

(Address of principal executive offices)

86-20-3479 9708

(Issuer’s telephone number)

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

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ¨ NO x

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

Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filero Smaller Reporting Company x

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 139,383,450 shares of common stock, par value $.0001 per share, as of March 31, 2009.

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

PART I. - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CHINA WATER GROUP, INC.

CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007 AND 2006

CHINA WATER GROUP, INC.

Table of Contents

	Page

Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm		4

Consolidated Balance Sheets		5

Consolidated Statements of Operations and Comprehensive Income (Loss)		6

Consolidated Statements of Cash Flows		7

Notes to Consolidated Financial Statements		8-16

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

China Water Group, Inc.

We have reviewed the accompanying consolidated balance sheet of China Water Group, Inc. (the “Company”) and its subsidiaries as of June 30, 2007, and the related consolidated statements of operations and comprehensive income, and cash flows for the six months ended June 30, 2007 and 2006. These consolidated financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

Parsippany, New Jersey

March 10, 2009

CHINA WATER GROUP, INC.

Consolidated Balance Sheets

	June 30,		December 31,
	2007		2006
Assets:
Current assets:
Cash and cash equivalents	$	207,696	$	4,144,484
Accounts receivable, net of allowance of doubtful accounts of $-0- and $4,402,743, respectively		2,016,494		2,140,575
Prepayment, deposits and other receivables		1,276,006		1,494,039
Due from related companies		8,882,245		3,423,961
Due from affiliated companies		2,962,315		1,824,529
Deferred tax assets		1,840,599		1,796,377
Total current assets:		17,185,355		14,823,965

Property, plant and equipment, net		4,708,212		4,739,533
Construction in progress		47,669		3,619,559
Interests in affiliated companies		2,060,764		1,080,562

Total assets:	$	24,002,000	$	24,263,619

Liabilities and stockholders’ equity:
Current liabilities:
Warrant liability		1,380,040		2,305,880
Note payable		26,230		25,600
Accounts payable		6,474,521		6,854,174
Accrued liabilities		3,099,957		3,062,829
Due to directors		1,383,155		1,371,627
Due to related companies		1,778,240		1,779,943
Income tax payable		1,721,453		1,680,094
Total current liabilities:		15,863,596		17,080,147

Minority interests		289,316		541,105

Total liabilities:		16,152,912		17,621,252

Stockholders' equity:
Preferred stock, US$0.001 par value, 50,000,000 authorized shares, no shares issued and outstanding		-		-
Common stock, US$0.001 par value, 200,000,000 shares authorized; 135,903,698 and 135,903,698 shares issued and outstanding		103,704		103,704
Additional paid-in capital		4,837,392		4,837,392
Retained earnings		2,093,270		1,249,882
Accumulated other comprehensive income		814,722		451,389

Total stockholders' equity:		7,849,088		6,642,367

Total Liabilities and Stockholders' Equity:	$	24,002,000	$	24,263,619

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

CHINA WATER GROUP, INC.

Consolidated Statements of Operations and Comprehensive Income

For the Three Months and Six Months Ended June 30, 2007 and 2006

	Three months ended June 30,						Six months ended June 30,
	2007			2006			2007			2006

Revenue:
Revenue from turn-key engineering projects	$	-		$	1,930,603		$	-		$	2,745,349
Revenue from BOT wastewater treatment services		223,948			227,150			427,098			466,492
Revenue from sales of bottled water		1,845			-			4,992			-

Total revenue:		225,793			2,157,753			432,090			3,211,841

Cost of revenue:
Cost of revenue for turn-key engineering projects		-			(1,032,362	)		-			(1,427,639	)
Cost of revenue for BOT wastewater treatment services		(81,574	)		(146,145	)		(140,081	)		(271,577	)
Cost of revenue from sale of bottled water		(1,131	)		-			(3,174	)		-
Depreciation and amortization		(74,619	)		(4,704	)		(158,471	)		(15,056	)
Sales taxes		(75	)		(106,183	)		(439	)		(156,456	)

Total cost of revenue:		(157,399	)		(1,289,394	)		(302,165	)		(1,870,728	)

Gross profit:		68,394			868,359			129,925			1,341,113

Operating expenses:
Other general and administrative expenses		(122,980	)		(142,568	)		(311,342	)		(256,142	)

(Loss)/ Income from operations:		(54,586	)		725,791			(181,417	)		1,084,971

Other income (expense):
Other (expenses) /income		171,069			-			171,713			42,609
Interest expense		-			(1,198	)		-			(1,429	)
Penalty for late effectiveness of registration statement		(22,644	)		(287,500	)		(45,737	)		(533,769	)
Gain/(loss) on financial instruments		-			2,718,464			925,840			(1,734,219	)
Share of results in associates - Xin Le and Han Dan		61,664			56,119			122,926			113,916

Total other income (expenses):		210,089			2,485,885			1,174,742			(2,112,892	)

Income/(loss) before income tax and minority interests:		155,503			3,211,676			993,325			(1,027,921	)

Income tax expense:		-			(253,431	)		(213	)		(370,507	)

Income/(loss) before minority interests:		155,503			2,958,245			993,112			(1,398,428	)

Minority interests:		(11,466	)		(62,116	)		(22,613	)		(97,995	)

Net income/(loss):		144,037			2,896,129			970,499			(1,496,423	)

Other Comprehensive income:
Foreign currency translation adjustment:		138,749			18,086			363,333			65,015

Comprehensive income:	$	282,786		$	2,914,215		$	1,333,832		$	(1,431,408	)

Basic net income/(loss) per share:	$	0.00		$	0.02		$	0.01		$	(0.01	)
Diluted net income/(loss) per share:	$	0.00		$	0.02		$	0.01		$	(0.01	)

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

CHINA WATER GROUP, INC.

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2007 and 2006

	2007			2006
Cash flows from operating activities:

Net income/(loss)	$	970,499		$	(1,496,423	)
Adjustments to reconcile net income to net cash provided by operating activities :
Depreciation and amortization		158,471			15,056
(Gain)/loss in financial instruments		(925,840	)		1,734,219
Minority interests		7,495			98,228
Share of results in an associated company - Xin Le		(122,926	)		(113,916	)

Changes in operating assets and liabilities :
Accounts receivable		174,370			(1,387,854	)
Prepayment, deposits and other receivables		199,832			2,182,692
Due from related companies		(4,017,584	)		(111,477	)
Due from affiliated companies		(86,052	)		-
Accounts payable		(322,558	)		864,367
Accruals and other liabilities		1,522			404,648
Due to a related company		(44,901	)		-
Due to directors		(21,935	)		313
Income tax payable		-			590,684
Total adjustments:		(4,117,306	)		2,527,685

Net cash (used in)/provided by operating activities:		(4,029,607	)		2,780,537

Cash flows used in investing activities:
Disposal of interest in a subsidiary		15,119			-
Dividend received from an associated company - Xin Le		90,556			-
Acquisition of property, plant and equipment		(59,921	)		(302,702	)

Net cash provided by/(used in) investing activities:		45,754			(302,702	)

Cash flows from financing activities:
Repayment of unsecured loans		-			(75,041	)

Net cash provided by/(used in) financing activities:		-			(75,041	)

Effect of foreign currency translation on cash and cash equivalents:		47,065			(31,186	)

Net (decrease)/increase in cash and cash equivalents:		(3,936,788	)		2,371,608

Cash and cash equivalents, beginning of period:		4,144,484			175,224

Cash and cash equivalents, end of period:	$	207,696		$	2,546,832

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

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

NOTE 1 - BASIS OF PRESENTATION

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

The condensed consolidated financial statements of CWG included herein have been prepared by CHWG, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in CHWG's Annual Report on Form 10-KSB for the period ended December 31, 2006.

The accompanying unaudited quarterly consolidated financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of CHWG for the periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other quarterly period or for the fiscal year taken as a whole. Factors that affect the comparability of financial data from year to year and for comparable quarterly periods include non-recurring expenses associated with CHWG's costs incurred to reorganize CHWG, raise capital, and issue stock options and awards. Certain financial information that is not required for interim financial reporting purposes has been omitted.

NOTE 2 - DESCRIPTION OF BUSINESS

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

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

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

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

NOTE 2 - DESCRIPTION OF BUSINESS (CONTINUED)

Xinxingmei’s management fees from Xin Le and Tian Jin did not represent a material portion of our revenue during the first two quarters of 2007.

The principal activities of the Group are the research and development of waste water, garbage treatment and aqueous purifying techniques, investment and construction of waste water treatment plant and sales of environment protection related products.

On January 22 2007, the minority shareholder of Han Dan Cheng Sheng Water Affairs Company Limited (“Han Dan”), Guang Dong Xin Sheng Environmental Protection Company Limited (“GDXS”), subscribed all of the remaining capital injection of Han Dan and there was no further injection of share capital from the Company. As a result, the percentage of equity in Han Dan hold by the Company decreased from 90% to 34.32% and Han Dan became an associated company of the Company instead of a subsidiary company.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

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

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

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

Impairment of assets. Our policy is to periodically review and evaluate whether there has been a permanent impairment in the value of long-lived assets. Factors we consider in this evaluation include current operating results, trends and anticipated undiscounted future cash flows that we expect to result from the use of the asset, or other measure of fair value, and whether such factors reflect that the value of the asset has been impaired.

Allowances for accounts receivable. Our provisioning policy for bad and doubtful debt is based on the evaluation of collectibility and aging analysis of accounts receivable and on management's judgment. We do not require collateral or other security to support client receivables. We conduct periodic reviews of our clients' financial condition and customer payment practices to minimize collection risk on accounts receivable. This review is based on a considerable amount of judgment which is required in assessing the ultimate realization of these receivables, including the current creditworthiness and the past collection history of each customer. During the first two quarters of 2007, we made no allowances for doubtful debts.

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

Income per share. Basic income per share is computed by dividing the net income for the year by the weighted average number of common shares outstanding during the year. Diluted income per share is computed by dividing the net income for the year by the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares (which includes incremental common shares issuable upon the exercise of stock options, unvested restricted common stock and shares that may be issued on a contingent basis) are included in diluted income per share to the extent such shares are dilutive. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings Per Share, we use income from continuing operations, net of income taxes, as the “control number” in determining whether common equivalent shares are dilutive or anti-dilutive in periods where discontinued operations are reported.

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recently issued accounting pronouncements

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurement” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This Statement shall be effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The provisions of this statement should be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except in some circumstances where the statement shall be applied retrospectively. The Company is currently evaluating the effect, if any, of SFAS 157 on its financial statements.

In September 2006, the FASB released SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans: an amendment of FASB Statements No. 87, 88, 106, and 132(R)” which requires an employer to recognize the over funded or under funded status of defined benefit and other postretirement plans as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through an adjustment to comprehensive income. This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. The Company is currently evaluating the impact of adopting SFAS No. 158 on its financial statements.

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115” (“SFAS No. 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Adoption is required for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS Statement No. 159. The Company is currently evaluating the impact of adopting SFAS No. 159 on its financial statements.

In December 2007, the FASB issued SFAS No. 141, “Business Combinations” (“SFAS 141”). SFAS 141 defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control, and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the Statement. SFAS 141 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest, and also requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. The requirements of SFAS 160 are effective for our fiscal year beginning January 1, 2009.

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

NOTE 4 - BASIC NET LOSS PER SHARE

(i)

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

	Six months ended June 30,
	2007		2006

Net income/(loss) (US$)	$	970,499	$	(1,496,423	)

Weighted average number of common shares outstanding		135,903,698		135,903,698

Basic net income/(loss) per share (US$)	$	0.01	$	(0.01	)

(ii)

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

	Six months ended June 30,
	2007		2006

Net income/(loss) (US$)	$	970,499	$	(1,496,423	)

Weighted average number of common shares outstanding		135,903,698		135,903,698

Diluted net income/(loss) 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 - PREPAYMENT, DEPOSITS AND OTHER RECEIVABLES

	June 30,		December 31,
	2007		2006

Prepayment	$	160,196	$	106,767
Deposits		41,574		42,303
Other receivables:
Amounts receivable from Beijing Hao Tai		754,427		737,284
Advances and miscellaneous receivables		319,809		607,685

Total	$	1,276,006	$	1,494,039

The management believes that all other receivables are collectible.

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consisted of the following:-

	June 30,			December 31,
	2007			2006
Purchase cost :-

Office equipment	$	33,762		$	31,364
Furniture and fixtures		14,108			14,401
Tools and equipment		3,528			2,393
Motor vehicles		49,575			48,384
Waste water treatment plants		5,207,985			5,072,771

Total		5,308,958			5,169,313

Less : Accumulated depreciation and amortization		(600,746	)		(429,780	)

Property, plant and equipment, net	$	4,708,212		$	4,739,533

Depreciation and amortization expenses for the six months ended June 30, 2007 and 2006 amounted to US$158,471 and US$15,056 respectively.

NOTE 7 - WARRANT LIABILITY

The fair values of the warrant liability as of June 30, 2007 and December 31, 2006 are as below:-

	June 30,		December 31,
	2007		2006

Warrants issued in April, at fair value	$	150,000	$	200,000
Warrants issued in September, at fair value		1,197,840		2,073,680
Shares issued in September, accounted for as liability		32,200		32,200

Total	$	1,380,040	$	2,305,880

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

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

NOTE 7 - WARRANT LIABILITY (CONTINUED)

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

The Group granted to the holders of the April Warrants certain piggy-back and demand registration rights. Pursuant to the agreements surrounding the April Private Placement, in the event that the Group determined to undertake a registration of securities, the Group would include, at the request of the holder of “Registrable Securities”, the Registrable Securities in the registration statement. If the Group did not file a registration statement by the 120th day from the closing of such financing, and the Group shall have received a written request signed by the holders holding the majority of the Registrable Securities, then the Group was obligated to file, at its expense, a registration statement covering the Registrable Securities. Once such registration statement has been filed and declared effective, the Group is obligated to keep such registration statement effective until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to such registration statement, (ii) all Registrable Securities have been otherwise transferred to persons who may trade such shares without restriction under the Securities Act, and the Group has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend, or (iii) all Registrable Securities may be sold at any time, without volume or manner of sale limitations pursuant to Rule 144(k) or any similar provision then in effect under the Securities Act. As of March 31, 2007, the Group has not received any written request signed by the holders holding the majority of the Registrable Securities.

Under EITF No. 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock, the fair value of the April Warrants should be reported as a liability. Pursuant to the related warrant agreement, because there is currently no effective registration statement covering the shares of common stock underlying these warrants, these warrants are currently subject to a cashless exercise whereby the warrant holders may surrender their warrants to the company in exchange for shares of common stock. The number of shares of common stock into which a warrant would be exchangeable in such a cashless exercise depends on both the exercise price of the warrants and the market price of the common stock, each at or near the time of exercise. Because both of these factors are variable, it is possible that we could have insufficient authorized shares to satisfy a cashless exercise. In this scenario, if we were unable to obtain shareholder approval to increase the number of authorized shares, we could be obligated to settle such a cashless exercise with cash rather than by issuing shares of common stock. Further, EITF No. 00-19 requires that we record the potential settlement obligation at each reporting date using the current estimated fair value of the warrants, with any changes being recorded through our statement of operations. We will continue to report the potential settlement obligation as a liability until such time as the warrants are exercised or expire or we are otherwise able to modify the warrant agreement to remove the provisions which require this treatment.

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

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

NOTE 7 - WARRANT LIABILITY (CONTINUED)

On September 14, 2005, the Group closed the private placement sale to accredited investors of units consisting of shares of our common stock and warrants to purchase shares of our common stock for aggregate gross proceeds of US$4.83 million (“September Private Placement”). Pursuant to the subscription agreements entered into with the investors, we issued to the investors 161 units at a price of US$30,000 per unit. Each unit consisted of 200,000 shares of our common stock, priced at US$0.15 per share, and warrants to purchase 200,000 shares of our common stock over a five year period at an exercise price of US$0.20 per share. Pursuant to the terms of the subscription agreements, we granted the investors limited registration rights for all common shares comprising the units, including the common shares issuable on exercise of the warrants. The Group also issued to Westminster Securities Corporation, as partial compensation for their placement agent services 7,728,000 placement agent warrants to purchase one share each of our common shares, a portion of which has been assigned by Westminster Securities Corporation to certain of its officers and employees (the warrants issued in the September Private Placement together with the placement agent warrants are hereinafter referred to as “September Warrants”).

The Group used the Black-Scholes model in calculating the fair market value of the September Warrants and allocated US$4,140,535 of the US$4,172,735 net proceeds to the September Warrants. The difference between the fair value of the September Warrants and the allocated amount is recorded as non-cash financing charges and expensed of at the date of issuance. The principal assumptions used in the computation of the September Warrants are: expected term of 5 years; a risk-free rate of return of 4.24%; dividend yield of zero percent; and a volatility of 70%.

Under the subscription agreement for the September Private Placement, we agreed to prepare and file with the SEC (and did so file), at our own expense, a registration statement covering the registrable securities related to that placement. We agreed that in the event that the registration statement is not declared effective by the SEC within the earlier of 120 days from the final closing, we would pay to the investors in the September Private Placement liquidated damages in the amount of 2.0% of the purchase price of the registrable securities for each month until the registration statement is declared effective. These liquidated damages began accruing on January 12, 2006. We agreed that if we do not remit payment of these liquidated damages, we will pay the investors in the September Private Placement interest at the rate of 12% per year until the liquidated damages are paid in full. The subscription agreement provides that if a registration statement is not effective at any time after one year following the issuance date of the September Warrants, these liquidated damages obligations will stop accruing. As of September 14, 2006 the liquidated damages obligations stopped accruing. As of June 30, 2007, we have made an accrual of $1,064,898 for registration right liability.

Under paragraphs 12–32 of EITF 00-19, contracts that include any provision that could require net-cash settlements cannot be accounted for as equity. Accordingly, the proceeds of the September Private Placement allocated for par value of the common stock and the September Warrants have been recorded as a liability on the balance sheet. Upon the effectiveness of the registration statement, the amount will be recorded as equity.

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

NOTE 8 - INTERESTS IN AFFILIATED COMPANIES

Interests in associated companies as of June 30, 2007 and December 31, 2006 are as below:

	June 30,		December 31,
	2007		2006

Xin Le Sheng Mei Water Purifying Company Limited (“Xin Le”)	$	1,139,978	$	1,080,562
Han Dan Cheng Sheng Water Affairs Company Limited (“Han Dan”)		920,786		-

Total	$	2,060,764	$	1,080,562

NOTE 9 - INCOME TAXES

The income tax benefit consisted of the following:-

	Six Months Ended June 30,
	2007		2006
Current tax :
PRC	$	213	$	370,507
Deferred tax :
PRC		-		-

Total income tax benefit	$	213	$	370,507

The provision for income tax represents the provision for PRC enterprise income tax calculated at the standard income tax rate of 33% on the assessable profits of the PRC’s subsidiaries and the standard withholding income tax rate of 10% on the total revenue generated by Evergreen, a company incorporated in the British Virgin Islands, in the PRC.

NOTE 10 - EMPLOYEE WELFARE PLAN

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

NOTE 11 - CONCENTRATION

Our major customers for the six months ended June 30, 2007 were:

(i) Hai Yang City Zoning and Construction Management Bureau, which accounted for approximately 65% of our total revenue for the six months ended June 30, 2007; the revenues from this customer arose from BOT-waste water treatment service; and

(ii) Tianjin City Wuqing Zone Environment Protection Bureau, which accounted for approximately 34% of our total revenue for the six months ended June 30, 2007; the revenues from this customer arose from BOT-waste water treatment service.

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

FORWARD-LOOKING INFORMATION

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

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

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

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

RESULTS OF OPERATIONS

Quarter Ended June 30, 2007 vs Quarter Ended June 30, 2006

Total revenue. We reported total revenue of $225,793 for the three months ended June 30, 2007 as compared to $2,157,753 for the three months ended June 30, 2006. Nearly all of the difference was the lack of any revenue from turn-key engineering projects during the second quarter 2007 quarter as compared to $1,903,603 of revenue from turn-key engineering projects during the second quarter of 2006. We reported revenue from BOT wastewater treatment services of $223,948 during the second quarter of 2007 as compared to revenue from BOT wastewater treatment services of $227,150 during the second quarter of 2006. We also recognized revenue of $1,845 from the sale of bottled water during the second quarter of 2007. We have determined to leave the field of providing turn-key engineering projects and to concentrate our future efforts on the sale of bottled water. We continue to provide BOT wastewater treatment services in existing facilities, but are not seeking to operate additional facilities and, the Company will from time to time seek to dispose of existing facilities to concentrate on its bottled water business.

Cost of revenue. Our total cost of revenue, exclusive of depreciation, amortization and sales taxes, decreased from $1,289,394 for the three months ended June 30, 2006 to $157,399 for the three months ended June 30, 2007. This was primarily due to our decreased levels of operation during the quarter ended June 30, 2007 as we continued our move away from turn-key engineering projects.

Gross profit. Gross profit, as a percentage of total revenue for the three months ended June 30, 2007 and 2006, was approximately 30%, or $68,394, and approximately 40%, or $868,359, respectively. Decreased gross profits and margins reflect the Company’s transition away from turn-key engineering projects.

General and administrative expenses. Our total general and administrative expenses for the three months ended June 30, 2007 and 2006 were $122,980 and $142,568, respectively. The principal components of general and administrative expenses were administrative salaries and benefits, depreciation and amortization, traveling expenses, rental expenses and other general administration costs. The decrease in general and administrative expenses for the three months ended June 30, 2007 as compared to the three months ended June 30, 2006 was primarily due to the decreased levels of operations.

Penalty for late effectiveness of registration statement This amount represents the liquidated damages payment obligation we accrued in connection with the September Private Placement by missing the deadline we agreed to for effectiveness of the registration statement we filed in connection with that financing. Under the subscription agreement for the September Private Placement, we agreed to prepare and file with the SEC (and did so file), at our own expense, a registration statement covering the registrable securities related to that placement. We agreed that in the event that the registration statement is not declared effective by the SEC within the earlier of 120 days from the final closing, we would pay to the investors in the September Private Placement liquidated damages in the amount of 2.0% of the purchase price of the registrable securities for each month until the registration statement is declared effective. These liquidated damages began accruing on January 12, 2006. We agreed that if we do not remit payment of these liquidated damages, we will pay the investors in the September Private Placement interest at the rate of 12% per year until the liquidated damages are paid in full. The subscription agreement provides that if a registration statement is not effective at any time after one year following the issuance date of the September Warrants, these liquidated damages obligations will stop accruing. As of September 14, 2006 the liquidated damages obligations stopped accruing for a period of time and then other related damages began to accrue. As of September 30, 2006, we had made an accrual of $828,027 for such liquidated damages.

Unrealized gain/(loss) on financial instruments. Unrealized gains or losses on financial instruments represent the change in the fair market value of the financial instruments at each reporting date. Their was no unrealized gain on financial instruments for the three months ended June 30, 2007. The unrealized gain on financial instruments for the three months ended June 30, 2006 was $2,718,464.

Share of results in an associates. CWG holds a 35% interest in the net profits in Xin Lee and a 34.32% interest in Han Dan. Our share of results in Xin Lee and Han Dan for the three months ended June 30, 2007 and 2006 was $61,664 and $56,119, respectively. The increase in our share of net profits in 2007 was as a result of increase in net profit of our associates.

Net (loss)/income. We had a net income, after income tax and minority interests, of $144,037 for the three months ended June 30, 2007, and a net income, after income tax and minority interests, of $2,896,129 for the three months ended June 30, 2006. The smaller net income number reflects our reduced scale of operations has we have exited the turn-key engineering project aspect of our business.

Six Months Ended June 30, 2007 vs Six Months Ended June 30, 2006

Total revenue. We reported total revenue of $432,090 for the six months ended June 30, 2007 as compared to $3,211,841 for the six months ended June 30, 2006. Nearly all of the difference was the lack of any revenue from turn-key engineering projects during the first six months of 2007 quarter as compared to $2,745,349 of revenue from turn-key engineering projects during the first six months of 2006. We reported revenue from BOT wastewater treatment services of $427,098 during the first six months of 2007 as compared to revenue from BOT wastewater treatment services of $466,492 during the first six months of 2006. We also recognized revenue of $4,992 from the sale of bottled water during the first six months of 2007. We have determined to leave the field of providing turn-key engineering projects and to concentrate our future efforts on the sale of bottled water. We continue to provide BOT wastewater treatment services in existing facilities, but are not seeking to operate additional facilities and, the Company will from time to time seek to dispose of existing facilities to concentrate on its bottled water business.

Cost of revenue. Our total cost of revenue, exclusive of depreciation, amortization and sales taxes, decreased from $1,870,728 for the six months ended June 30, 2006 to $302,165 for the six months ended June 30, 2007. This was primarily due our decreased levels of operation during the six months June 30, 2007 as we continued our move away from turn-key engineering projects.

Gross profit. Gross profit, as a percentage of total revenue for the six months ended June 30, 2007 and 2006, was approximately 30%, or $129,925, and approximately 42%, or $1,341,113 respectively. Decreased gross profits and margins reflect the Company’s transition away from turn-key engineering projects.

General and administrative expenses. Our total general and administrative expenses for the six months ended June 30, 2007 and 2006 were $311,342 and $256,142, respectively. The principal components of general and administrative expenses were administrative salaries and benefits, depreciation and amortization, traveling expenses, rental expenses and other general administration costs. The increase in general and administrative expenses for the six months ended June 30, 2007 as compared to the six months ended June 30, 2006 was primarily due to the increase of traveling expenses and general meeting costs as management sought more potential expansion opportunities for the company.

Unrealized gain/(loss) on financial instruments. Unrealized gains or losses on financial instruments represent the change in the fair market value of the financial instruments at each reporting date. There was an unrealized gain on financial instruments for the six months ended June 30, 2007 of $925,840. The unrealized loss on financial instruments for the six months ended June 30, 2006 was $(1,734,219).

Share of results in an associates. CWG holds a 35% interest in the net profits in Xin Le and a 34.32% interest in Han Dan. Our share of results in Xin Le and Han Dan for the six months ended June 30, 2007 and 2006 was $122,926 and $113,916, respectively. The increase in our share of net profits in 2007 was as a result of increase in net profit of our associates.

Net (loss)/income. We had a net income, after income tax and minority interests, of $970,499 for the six months ended June 30, 2007, and a net loss, after income tax and minority interests, of $(1,496,423) for the six months ended June 30, 2006. The loss in the 2006 period as compared to the gain in the 2007 period is entirely attributable to the gain (loss) on financial instruments discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are our cash and cash flow generated from operations. Net cash provided by operating activities during the six months ended June 30, 2007 was a negative $(4,029,607). Net cash provided by operating activities in the six months ended June 30, 2007, consisted of net income of $970,499, principally reduced by an adjustment for non-cash items of $4,117,306. The total decrease in net cash for the six months ended June 30, 2007 was the result of an interest free 30,000,000 RMB ($4,000,000) interst free demand loan to an affiliated entity.

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

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

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

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

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

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

Impairment of assets. Our policy is to periodically review and evaluate whether there has been a permanent impairment in the value of long-lived assets. Factors considered in this evaluation include current operating results, trends and anticipated undiscounted estimated future cash flows that are expected to result from the use of the asset, or other measure of fair value, and whether such factors reflect that the value of the asset has been impaired.

Allowances for accounts receivable. Our provisioning policy for bad and doubtful debt is based on the evaluation of collectibility and aging analysis of accounts receivable and on management's judgment. We do no require collateral or other security to support client receivables. We conduct periodic reviews of our clients' financial condition and customer payment practices to minimize collection risks on accounts receivable. This review is based on a considerable amount of judgment which is required in assessing the ultimate realization of these receivables, including the current creditworthiness and the past collection history of each customer. During the third quarter of 2006, we made no allowances for doubtful debts.

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

New accounting pronouncements

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

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

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

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

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

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 3. CONTROLS AND PROCEDURES

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

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

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

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

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

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

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

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

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

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

Gain on disposal of the XY

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

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

Group reorganization

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

Reclassification of April warrants

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

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

In our June 30, 2005 10-QSB, we did not record any non-cash financing charges and in our September 30, 2005 10-QSB (original filing and Amendment No. 1), we did not properly record the non-cash financing charges. Non-cash financing charges represent the amount by which the fair value of derivative liabilities issued exceeds the amount of proceeds received, as an expense at the date of issuance of the April convertible debenture and the September private placement. We have restated our June 30, 2005 10-QSB and September 30, 2005 10-QSB to record the non-cash financing charges, which represent the amount by which the fair value of derivative liabilities issued exceeds the amount of proceeds received, as an expense at the date of issuance of the April convertible debenture and the September private placement. As a result of the recording of non-cash financing charges, certain expenses which were previously recorded under general and administrative expenses in our September 30, 2005 10-QSB have recently been reclassified under non-cash financing charges.

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

In our June 30, 2005 10-QSB and our September 30, 2005 10-QSB (original filing and Amendment No. 1), we did not record properly the unrealized gains or losses in financial instruments, which represent the change in fair market value of the financial instruments at each reporting date for the April warrants and the bifurcated conversion feature for the convertible debenture. The unrealized gains or losses in financial instruments should have been reported in those filings. We have restated the June 30, 2005 10-QSB and September 30, 2005 10-QSB to record the unrealized gains or losses in financial instruments which represent the change in fair market value of the financial instruments at each reporting date for the April warrants and the bifurcated conversion feature for the convertible debenture.

Interest in associate

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

Prior Restatements

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

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

Material Weaknesses

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

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

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

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

In order to address these material weaknesses our senior management has conducted a thorough review of our US GAAP financial reporting processes and prepared and implemented a US GAAP action plan. This plan was designed to generally improve our US GAAP reporting processes and to strengthen our control processes and procedures in order to prevent a recurrence of the circumstances that resulted in the need to restate our quarterly financial statements. The US GAAP action plan incorporates, among other matters, the following initiatives:

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

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

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

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

Other than those disclosed above, there were no changes in our internal controls, 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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit No.

Description

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

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

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

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

SIGNATURES

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

	CHINA WATER GROUP, INC.
	(Registrant)

Dated: April 3 2009	By:	/s/ Wenge Fang
		Wenge Fang,
		Chief Executive Officer

Dated: April 3, 2009	By:	/s/ Ding Rencai
		Ding Rencai,
		Chief Financial Officer