China Water 10Q 2008 Q3 Quarterly report

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 September 30, 2008

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

For the transition period from ————— to ——————

Commission File Number 000-26175

China Water Group, Inc.

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

Nevada	88-0409151
(State or other jurisdiction of	(IRS 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 ¨ Accelerated Filer ¨ Non-Accelerated Filer¨ Smaller Reporting Company x

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 139,383,450 shares of common stock, par value $.0001 per share, as of June 22, 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

SEPTEMBER 30, 2008 AND 2007

(UNAUDITED)

CHINA WATER GROUP, INC.

Consolidated Financial Statements

September 30, 2008 and 2007

(Unaudited)

Table of Contents

	Page

Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm	1

Consolidated Balance Sheets	2

Consolidated Statements of Operations and Comprehensive Income (Loss)	3

Consolidated Statements of Cash Flows	4

Notes to Consolidated Financial Statements	5

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

China Water Group, Inc.

We have reviewed the accompanying consolidated balance sheet of China Water Group, Inc. (the “Company”) and its subsidiaries as of September 30, 2008, and the related consolidated statements of operations and comprehensive income (loss) for the three months and nine months ended September 30, 2008 and 2007, and cash flows for the nine months ended September 30, 2008 and 2007. These consolidated financial statements are the responsibility of the Company's management.

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

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

We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of China Water Group, Inc. as of December 31, 2007, and the related consolidated statements of income, retained earnings and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated March 10, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2007, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Parsippany, New Jersey

March 15, 2009

CHINA WATER GROUP, INC.

Consolidated Balance Sheets

	September 30,		December 31,
	2008		2007
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	421,069	$	341,575
Accounts receivable, net of allowance for doubtful accounts of $-0- for
September 30, 2008 and December 31, 2007		111,193		518,066
Prepayments, deposits and other receivables		247,443		8,531,742
Due from related companies		513,546		1,940,670
Due from affiliated companies		2,924,052		3,166,470
Deferred expenses		1,227,826		-
Deferred tax assets		14,875		1,928,186
Total current assets		5,460,004		16,426,709

Property, plant and equipment, net		4,468,274		4,752,192
Construction in progress		57,105		95,309
Intangible assets		136,355		-
Goodwill		7,155,324		-
Interests in affiliated companies		1,312,711		2,180,947

Total assets	$	18,589,773	$	23,455,157

Liabilities and stockholders’ equity
Current liabilities:
Warrant liability		137,941		1,179,965
Note payable		-		27,344
Accounts payable		664,372		6,923,872
Accrued expenses		1,732,306		3,168,841
Due to directors		771,190		1,454,372
Due to related companies		4,545,063		1,853,779
Income tax payable		1,362,912		1,794,580
Total current liabilities		9,213,784		16,402,753

Minority interests		154,609		313,986

Total liabilities		9,368,393		16,716,739

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;
139,383,450 and 139,217,550 shares issued and outstanding at
September 30, 2008 and December 31, 2007, respectively		139,383		139,218
Additional paid-in capital		6,361,263		6,131,697
Retained earnings		1,045,194		(670,851	)
Accumulated other comprehensive income		1,675,540		1,138,354

Total stockholders' equity		9,221,380		6,738,418

Total Liabilities and Stockholders' Equity	$	18,589,773	$	23,455,157

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

CHINA WATER GROUP, INC.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007

Revenue:
Revenue from BOT wastewater treatment services	$	212,636		$	214,223		$	570,317		$	641,286
Revenue from sales of bottled water		65,148			-			169,928			5,027

Total revenue		277,784			214,223			740,245			646,313

Cost of revenue:
Cost of revenue for BOT wastewater treatment services		(61,158	)		(82,038	)		(169,988	)		(222,094	)
Cost of revenue from sale of bottled water		(68,882	)		-			(104,131	)		(3,196	)
Depreciation and amortization		(71,264	)		(75,817	)		(209,368	)		(234,288	)
Sales taxes		(1,993	)		-			(2,675	)		(442	)

Total cost of revenue		(203,297	)		(157,855	)		(486,162	)		(460,020	)

Gross profit		74,487			56, 368			254,083			186,293

Operating expenses:
Selling and distribution expenses		(214,554	)		-			(644,317	)		-
Other general and administrative expenses		(137,746	)		(1,593,402	)		(444,697	)		(1,904,744	)

Loss from operations		(277,813	)		(1,537,034	)		(834,931	)		(1,718,451	)

Other income (expense):
Other income (expenses)		(55,307	)		1,205			(56,391	)		172,920
Interest income (expense), net		98			-			(339	)		-
Penalty for late effectiveness of registration statement		(23,072	)		(22,382	)		(68,123	)		(68,119	)
Gain (loss) on financial instruments		(44,316	)		(77,280	)		1,042,024			848,560
Share of results in associates - Xinxingmei and Han Dan		51,116			61,854			282,611			184,780

Total other income (expenses)		(71,481	)		(36,603	)		1,199,782			1,138,141

Income (loss) before income tax and minority interests		(349,294	)		(1,573,637	)		364,851			(580,310	)

Income tax expense		(8,394	)		-			(21,069	)		(215	)

Income (loss) before minority interests		(357,688	)		(1,573,637	)		343,782			(580,525	)

Minority interests		(5,794	)		(10,396	)		(14,512	)		(33,008	)

Net income (loss)		(363,482	)		(1, 584,033	)		329,270			(613,533	)

Other Comprehensive income
Foreign currency translation adjustment		21,069			99,584			537,186			462,917

Comprehensive income (loss)	$	(342,413	)	$	(1,484,449	)	$	866,456		$	(150,616	)

Basic earnings (loss) per share	$	(0.01	)	$	(0.01	)	$	0.00		$	(0.00	)
Diluted earnings (loss) per share	$	(0.01	)	$	(0.01	)	$	0.00		$	(0.00	)

Weighted average number of common shares outstanding
Basic and Diluted		139,383,450			135,903,698			139,383,450			135,903,698

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

CHINA WATER GROUP, INC.

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2008			2007
Cash flows from operating activities:
Net income (loss)	$	329,270		$	(613,533	)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities :
Depreciation and amortization		209,368			234,288
Gain in financial instruments		(1,042,024	)		(848,560	)
Deferred expenses		(1,202,606	)		(1,166	)
Minority interests		(176,696	)		17,783
Share of results in affiliated companies - Xinxingmei and Han Dan		(282,611	)		(184,780	)

Changes in operating assets and liabilities:
Accounts receivable		(48,671	)		1,764,858
Prepayments, deposits and other receivables		6,581,961			(6,628,402	)
Due from related companies		3,751,809			2,896,008
Due from affiliated companies		(4,895,549	)		(115,738	)
Accounts payable		184,195			(437,026	)
Accrued expenses		211,550			28,475
Due to directors		108,406			(22,090	)
Due to related companies		3,611,655			(45,218	)
Income tax payable		12,053			(215	)
Total adjustments		9,517,409			(2,559,348	)

Net cash provided by (used in) operating activities		7,352,110			(3,955,316	)

Cash flows from investing activities:
Acquisition of interest in a subsidiary - Aba and Xinchen		(6,736,877	)		-
Disposal of interest in a subsidiary - Xinxingmei and Han Dan		508,940			15,226
Dividend received from an affiliated company - Xin Le		-			91,196
Acquisition of property, plant and equipment		(935,160	)		(75,837	)
Acquisition of intangible assets		(133,555	)		-

Net cash provided by (used in) investing activities		(7,296,652	)		30,585

Effect of foreign currency translation on cash and cash equivalents		24,036			80,009

Net increase (decrease) in cash and cash equivalents		79,494			(3,844,722	)

Cash and cash equivalents, beginning of period		341,575			4,144,484

Cash and cash equivalents, end of period	$	421,069		$	299,762

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

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

September 30, 2008 and 2007

(Unaudited)

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 CHWG included herein have been prepared by CHWG, and are unaudited, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with US generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in CHWG's Form 10-K for the year ended December 31, 2007.

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

NOTE 2 – Organization and Description of Business

We were organized as a Nevada corporation on September 10, 1996 under the name “Discovery Investments, Inc.” and were previously engaged in the business of seeking, investing and, acquiring an interest in various business opportunities.

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

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

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

September 30, 2008 and 2007

(Unaudited)

NOTE 2 - Organization and DESCRIPTION OF BUSINESS (CONTINUED)

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

On January 8, 2008, the Chinese government approved the sale of Evergreen’s 58% of the total equity interest in Guang Dong Xin Xing Mei Biology Company Limited (“Xinxingmei”) to Wenming Pu at a total consideration of RMB 7,308,600. After completing the transfer formalities, Evergreen possesses 32% of total equity of Xinxingmei, instead of the previous 90% interest.

On January 23, 2008, the Chinese government approved China Water Group Inc.’s acquisition of 90 percent equity interest in Aba Xinchen Dagu Glacier Spring Co., Limited from Fortune Luck Global International Limited through its subsidiary Guangzhou Xinchen Water Company. The acquisition was completed for a consideration of $13.45 million, of which $7.5 million was paid in cash, and the remaining $5.95 million was paid in common shares.

NOTE 3 - Summary of Significant Accounting Policies

Revenue recognition

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

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

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

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

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

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

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

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

September 30, 2008 and 2007

(Unaudited)

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

Impairment of assets

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

Allowance for doubtful accounts

Our policy for bad debt is based on the evaluation of collectibility, and analysis of accounts receivable aging and on management's judgment. We do not require collateral or other security to support client receivables. We conduct periodic reviews of our clients' financial condition and customer payment practices to minimize collection risk on accounts receivable. This review is based on a considerable amount of judgment which is required in assessing the ultimate realization of these receivables, including the current credit worthiness and the past collection history of each customer. During the three quarters of 2008, we made no allowances for doubtful accounts.

Financial instruments

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

Earnings per share

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

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

September 30, 2008 and 2007

(Unaudited)

NOTE 3 - Summary of Significant Accounting Policies (continued)

Recently issued accounting pronouncements

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141R”). SFAS 141(R) 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(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

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

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.

Note 4 – Earnings (Loss) Per Share

(i)

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

	Three months ended September 30,
	2008			2007

Net loss	$	(363,482	)	$	(1,584,033	)

Weighted average number of common
shares outstanding		139,383,450			135,903,698

Basic loss per share	$	(0.01	)	$	(0.01	)

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

September 30, 2008 and 2007

(Unaudited)

Note 4 – Earnings (Loss) Per Share (continued)

	Nine months ended September 30,
	2008		2007

Net income (loss)	$	329,270	$	(613,533	)

Weighted average number of common
shares outstanding		139,383,450		135,903,698

Basic earnings (loss) per share	$	0.00	$	(0.00	)

(ii)

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

	Three months ended September 30,
	2008			2007

Net loss	$	(363,482	)	$	(1,584,033	)

Weighted average number of common
shares outstanding		139,383,450			135,903,698

Diluted loss per share	$	(0.01	)	$	(0.01	)

	Nine months ended September 30,
	2008		2007

Net income (loss)	$	329,270	$	(613,533	)

Weighted average number of common
shares outstanding		139,383,450		135,903,698

Diluted earnings (loss) per share	$	0.00	$	(0.00	)

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

Note 5 – Prepayments, Deposit And Other Receivables

	September 30,		December 31,
	2008		2007

Prepayments	$	54,406	$	7,329,100
Deposits		-		2,119
Other receivables:
Amounts receivable from Beijing Hao Tai		-		792,041
Advances and miscellaneous receivables		193,037		408,482

Total	$	247,443	$	8,531,742

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

September 30, 2008 and 2007

(Unaudited)

Note 6 – Property, Plant And Equipment, Net

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

	September 30,			December 31,
	2008			2007

Office equipment	$	12,464		$	35,197
Furniture and fixtures		3,248			14,707
Tools and equipment		-			3,678
Motor vehicles		38,502			51,681
Waste water treatment plants		5,095,994			5,429,945

Total		5,150,208			5,535,208

Less : Accumulated depreciation and amortization		(681,934	)		(783,016	)

Property, plant and equipment, net	$	4,468,274		$	4,752,192

Depreciation and amortization expenses for the three months ended June 30, 2008 and 2007 amounted to $71,264 and $75,817 respectively. Depreciation and amortization expenses for the nine months ended September 30, 2008 and 2007 amounted to $209,368 and $234,288 respectively.

Note 7 - Warrant Liability

The fair values of the warrant liability as of September 30, 2008 and December 31, 2007 are as following:

	September 30,		December 31,
	2008		2007

Warrants issued in April 2005, at fair value	$	37,485	$	154,350
Warrants issued in September 2005, at fair value		68,256		993,415
Shares issued in September 2005, accounted for as liability		32,200		32,200

Total	$	137,941	$	1,179,965

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

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

September 30, 2008 and 2007

(Unaudited)

Note 7 - Warrant Liability (continued)

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

The Group granted to the holders of the April Warrants certain piggy-back and demand registration rights. Pursuant to the agreements surrounding the April Private Placement, in the event that the Group determined to undertake a registration of securities, the Group would include, at the request of the holder of “Registrable Securities”, the Registrable Securities in the registration statement. If the Group did not file a registration statement by the 120th day from the closing of such financing, and the Group shall have received a written request signed by the holders holding the majority of the Registrable Securities, then the Group was obligated to file, at its expense, a registration statement covering the Registrable Securities. Once such registration statement has been filed and declared effective, the Group is obligated to keep such registration statement effective until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to such registration statement, (ii) all Registrable Securities have been otherwise transferred to persons who may trade such shares without restriction under the Securities Act, and the Group has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend, or (iii) all Registrable Securities may be sold at any time, without volume or manner of sale limitations pursuant to Rule 144(k) or any similar provision then in effect under the Securities Act. As of June 30, 2008, the Group has not received any written request signed by the holders holding the majority of the Registrable Securities.

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

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

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

September 30, 2008 and 2007

(Unaudited)

Note 7 - Warrant Liability (continued)

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

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

Under the subscription agreement for the September Private Placement, we agreed to prepare and file with the SEC (and did so file), at our own expense, a registration statement covering the registrable securities related to that placement. We agreed that in the event that the registration statement is not declared effective by the SEC within the earlier of 120 days from the final closing, we would pay to the investors in the September Private Placement liquidated damages in the amount of 2.0% of the purchase price of the registrable securities for each month until the registration statement is declared effective. These liquidated damages began accruing on January 12, 2006. We agreed that if we do not remit payment of these liquidated damages, we will pay the investors in the September Private Placement interest at the rate of 12% per year until the liquidated damages are paid in full. The subscription agreement provides that if a registration statement is not effective at any time after one year following the issuance date of the September Warrants, these liquidated damages obligations will stop accruing. As of September 14, 2006 the liquidated damages obligations stopped accruing. As of September 30, 2008, we have made an accrual of $1,234,211 for registration right liability.

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

During October 2007, 295,000 April Warrants, 7,200,000 September Private Placement and 1,642,615 placement agent warrants were exercised for 3,479,752 shares of common stock in total.

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

September 30, 2008 and 2007

(Unaudited)

Note 8 - Interests in Affiliated Companies

Interests in associated companies as of September 30, 2008 and December 31, 2007 are as following:

	September 30,		December 31,
	2008		2007

Xin Le Sheng Mei Water Purifying Company Limited (“Xin Le”)	$	-	$	1,221,046

Han Dan Cheng Sheng Water Affairs Company Limited (“Han Dan”)		1,312,711		959,901

Total	$	1,312,711	$	2,180,947

Note 9 - Income Taxes

The income tax expense consisted of the following:

	Nine Months Ended September 30,
	2008		2007
Current tax :
PRC	$	21,069	$	215
Deferred tax :
PRC		-		-

Total income tax expense	$	21,069	$	215

The provision for income tax represents the provision for PRC enterprise income tax calculated at the standard income tax rate of 25% on the assessable profits of the PRC’s subsidiaries and the standard withholding income tax rate of 10% on the total revenue generated by Evergreen, a company incorporated in the British Virgin Islands, in the PRC.

Note 10 - Employee Welfare Plan

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

Note 11 - Concentration

One major customer, Hai Yang City Zoning and Construction Management Bureau, accounted for approximately 77% of our total revenue for the nine months ended September 30, 2008. The source of the revenue from this customer was 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 September 30, 2008 vs. Quarter Ended September 30, 2007

Total revenue. We reported total revenue of $277,784 for the three months ended September 30, 2008 as compared to $214,223 for the three months ended September 30, 2007 as increased revenue from sales of bottled water ($65,146 in Q3 2008 vs. $-0-in Q3 2007) more than offset slightly decreased revenues from BOT wastewater treatment services ($212,636 in Q3 2008 vs. $214,223 in Q3 2007). We have determined to leave the field of providing turn-key engineering projects and to concentrate our future efforts on the sale of bottled water. Revenues from these efforts should be significant in future periods. We continue to provide BOT wastewater treatment services in existing facilities, but are not seeking to operate additional facilities and, the Company will from time to time seek to dispose of existing facilities to concentrate on its bottled water business. The results for the quarter reflect these new directions as there were no revenues from turn-key engineering projects, revenues from BOT wastewater treatment services continued to decline and sales of bottled water increased reflecting the commercial rollout of the Company’s branded bottled water.

Cost of revenue. Our total cost of revenue increased during the three months ended September 30, 2008 as compared to the three months ended September 30, 2007, increasing from $157,855 in Q3 2007 to $203,297 in Q3 2008, an increase of $45,422 or 29%. This result was primarily due to our incurring $68,882 of costs of revenue from branded bottled water and $1,993 of sales taxes related to branded bottled water decreased while the other categories of costs of sales declined.

Gross profit. Gross profit, as a percentage of total revenue for the three months ended September 30, 2008 and 2007, was 26.8%, or $74,487, and 26.3%, or $56,368, respectively. The expected increase in gross profits and margins reflecting the Company’s transition away from turn-key engineering projects and BOT waste water treatment services and into sales of branded bottled water was not realized in this quarter because of relatively high unit cost for relatively low production volume in the market development stage.

General and administrative expenses. Our total general and administrative expenses, inclusive of selling and distribution expenses, for the three months ended September 30, 2008 and 2007 were $352,300 and $1,593,402, respectively. The higher expense in the prior period reflects our write off of a loan of approximately $1,500,000 to a third party. 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 selling and distribution expense from $-0- in the quarter ended September 30, 2007 to $214,554 in the quarter ended September 30, 2008 reflects our selling effort for branded bottled water.

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 March 31, 2006, we had made an accrual of $828,027 for such liquidated damages.

Unrealized gain on financial instruments. Unrealized gains or losses on financial instruments represent the change in the fair market value of the financial instruments at each reporting date. The unrealized loss on financial instruments for the three months ended September 30, 2008 was $44,316. The unrealized loss on financial instruments for the three months ended September 30, 2007 was $77,280.

Share of results in associates. CHWG holds a 35% interest in the net profits in Xin Le and a 34.32% interest in Han Dan. Our share of results in these companies for the three months ended September 30, 2008 and 2007 was $51,116 and $61,854, respectively. The decrease in our share of net profits in the third quarter of 2008 was as a result of a decrease in net profit of our associates.

Net loss. We had a net loss, after income tax and minority interests, of $363,482 for the three months ended September 30, 2008, and a net loss, after income tax and minority interests, of $1,584,033 for the three months ended September 30, 2007. The decreased net loss as compared to the prior period reflects the various factors described above, particularly the recording of a write off of a loan to an affiliate in the prior period.

Nine Months Ended September 30, 2008 vs. Nine Months Ended September 30, 2007

Total revenue. We reported total revenue of $740,245 for the nine months ended September 30, 2008 as compared to $646,313 for the nine months ended September 30, 2007 as increased revenue from sales of bottled water ($169,928 in the nine months of 2008 vs. $5,027 in the nine months of 2007) offset decreased revenues from BOT wastewater treatment services ($570,317 in the nine months of 2008 vs. 641,286 in the nine months of 2007). We have determined to leave the field of providing turn-key engineering projects and to concentrate our future efforts on the sale of bottled water. Revenues from these efforts should be significant in future periods. We continue to provide BOT wastewater treatment services in existing facilities, but are not seeking to operate additional facilities and, the Company will from time to time seek to dispose of existing facilities to concentrate on its bottled water business. The results for the nine months reflect these new directions as there were no revenues from turn-key engineering projects, revenues from BOT wastewater treatment services continued to decline and sales of bottled water increased reflecting the commercial rollout of the Company’s branded bottled water as opposed to a test marketing effort during nine months of 2007.

Cost of revenue. Our total cost of revenue increased moderately during the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007, increasing from $460,020 in the first nine months of 2007 to $486,162 in the first nine months of 2008, an increase of approximately 5%. This result was primarily due to our decreased BOT wastewater treatment services which resulted in reduced cost of revenue for these services ($169,988 in the nine months of 2008 vs. $222,094 in the nine months of 2007) and reduced depreciation and amortization ($209,368 in the nine months of 2008 vs. $234,288 in the nine months of 2007), as we seek to dispose of these operations, being offset by an increase in cost of sales related to bottled water to 104,131 in the nine months of 2008 from $3,196 in the nine months of 2007.

Gross profit. Gross profit, as a percentage of total revenue for the nine months ended September 30, 2008 and 2007, was 34.3%, or $254,083, and 28.9%, or $186,293, respectively. Increased gross profits and margins reflect the Company’s transition away from turn-key engineering projects and BOT waste water treatment services and into sales of branded bottled water which have higher margins.

General and administrative expenses. Our total general and administrative expenses, inclusive of selling and distribution expenses, for the nine months ended September 30, 2008 and 2007 were $834,931 and $1,718,451, 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 nine months ended September 30, 2008 of $883,520 as compared to the nine months ended September 30, 2007 was due to a write of a loan to a third party of approximately $1,500,000 in the earlier period and the decreased levels of operations in BOT waste water treatment services during the 2008 period being partly offset by our incurring $644,317 of costs related to our selling and distributing branded bottled water. The increase relates to the commercial introduction of the Company’s branded bottled water in 2008.

Unrealized gain on financial instruments. Unrealized gains or losses on financial instruments represent the change in the fair market value of the financial instruments at each reporting date. The unrealized gain on financial instruments for the nine months ended September 30, 2008 was $1,042,024. The unrealized gain on financial instruments for the nine months ended September 30, 2007 was $848,560.

Share of results in associates. CHWG holds a 35% interest in the net profits in Xin Le and a 34.32% interest in Han Dan. Our share of results in these companies for the nine months ended September 30, 2008 and 2007 was $282,611 and $184,780, respectively. The increase in our share of net profits in the first nine months of 2008 was as a result of an increase in net profit of our associates.

Net income (loss). We had a net income, after income tax and minority interests, of $329,270 for the nine months ended September 30, 2008, and a net loss, after income tax and minority interests, of $613,533 for the nine months ended September 30, 2007. The decreased net income as compared to the prior period reflects the various factors described above.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are our cash and cash flow generated from operations. Net cash used by operating activities during the nine months ended September 30, 2008 was $7,296,652. The primary factor in the decrease was increased amounts recorded as prepayments, deposits and other receivables $6,581,961. This amount relates in large part to the working capital requirements of the branded bottled water business. At the end of the period cash and cash equivalents were $421,069. We plan to secure bank loans to support our future projects. Our Chairman, the majority shareholder, has also promised to provide additional funds when needed. However, this promise is not a legally binding commitment. Furthermore, we do not have any commitments for bank loans. If bank loans are not obtained and our majority shareholder does not provide funding, we could be required to severely curtail our operations.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. Critical accounting policies include revenue recognition, impairment of assets and accounting for allowance of accounts receivable.

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

Revenues 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 2008, 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 SFAS 128, Earnings Per Share, we use income from continuing operations, net of income taxes, as the “control number” in determining whether common equivalent shares are dilutive or anti-dilutive in periods where discontinued operations are reported.

Recently issued accounting pronouncements

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

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 3. CONTROLS AND PROCEDURES

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

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as this term is defined under the rules of the SEC) as of August 10, 2006. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer and Executive Chairman concluded that, as of August 10, 2006, our disclosure controls and procedures were not effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the US Securities Exchange Act of 1934 as a result of material weaknesses in our internal control over financial reporting described below.

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

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

(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 September 30, 2005 (the “September 30, 2005 10-QSB”), filed with the SEC on August 15, 2005;

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

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

Gain on disposal of the XY

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

Group reorganization

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

Reclassification of April warrants

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

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

In our September 30, 2005 10-QSB, we did not record any non-cash financing charges and in our September 30, 2005 10-QSB, as amended to date, we did not properly record the non-cash financing charges. Non-cash financing charges represent the amount by which the fair value of derivative liabilities issued exceeds the amount of proceeds received, as an expense at the date of issuance of the April convertible debenture and the September private placement. We will restate our September 30, 2005 10-QSB and our September 30, 2005 10-QSB to record the non-cash financing charges, which represent the amount by which the fair value of derivative liabilities issued exceeds the amount of proceeds received, as an expense at the date of issuance of the April convertible debenture and the September private placement. As a result of the recording of non-cash financing charges, certain expenses which were previously recorded under general and administrative expenses in our September 30, 2005 10-QSB will be reclassified under non-cash financing charges.

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

In our September 30, 2005 10-QSB and our September 30, 2005 10-QSB, as amended to date, we did not record properly the unrealized gains or losses in financial instruments, which represent the change in fair market value of the financial instruments at each reporting date for the April warrants and the bifurcated conversion feature for the convertible debenture. The unrealized gains or losses in financial instruments should have been reported in those filings. We will restate the September 30, 2005 10-QSB and September 30, 2005 10-QSB, as amended to date, to record the unrealized gains or losses in financial instruments which represent the change in fair market value of the financial instruments at each reporting date for the April warrants and the bifurcated conversion feature for the convertible debenture.

Interest in associate

In our September 30, 2005 10-QSB and our September 30, 2005 10-QSB, as amended to date, the comparative figures for our interest in associate as of December 31, 2004 were recorded based on an effective percentage of equity attributable to the group of 31.5% instead of a direct interest of 35%. We will restate the comparative figures for our interest in associate as of December 31, 2004 in the September 30, 2005 10-QSB and September 30, 2005 10-QSB to include our interest in associate based on a direct interest of 35%.

Prior Restatements

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

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

Material Weaknesses

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

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

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

( c) insufficient emphasis by management on compliance with US GAAP requirements.

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

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

1. arrange for our senior management and certain accounting and finance-related personnel to attend training sessions on US GAAP and financial reporting responsibilities and SEC disclosure requirements; we are in the process of searching for a CFO who is competent with US GAAP and familiar with SEC disclosure requirements;

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

3. recruit an accounting staff member with US GAAP expertise and who is not affiliated with our auditors, Patrizio & Zhao,LLC; and

4. engage an internationally recognized accounting firm, which is not affiliated with our auditors, Patrizio & Zhao,LLC, to provide us with technical advice on US GAAP matters and SEC disclosure requirements on an ongoing basis.

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

Other than those disclosed above, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the quarter ended September 30, 2008.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

None.

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: June 22, 2009	By:	/s/ Wenge Fang
		Wenge Fang,
		Chief Executive Officer

Dated: June 22, 2009	By:	/s/ Ding Rencai
		Ding Rencai,
		Chief Financial Officer

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China Water (CEEC) Inactive 10-Q2008 Q3 Quarterly report

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