China Water Group, Inc. - FORM 10-K

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EX-32.2 - China Water Group, Inc.	v227308_ex32-2.htm
EX-32.1 - China Water Group, Inc.	v227308_ex32-1.htm
EX-31.2 - China Water Group, Inc.	v227308_ex31-2.htm
EX-31.1 - China Water Group, Inc.	v227308_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2009

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No.: 000-26175

CHINA WATER GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

Nevada		88-0409151
(State or Other Jurisdiction of Incorporation		(I.R.S. Employer Identification No.)
or Organization)

SUITE 7A01, BAICHENG BUILDING

584 YINGBIN ROAD

DASHI, PANYU DISTRICT

GUANGZHOU, GUANGDONG, CHINA

(Address of Principal Executive Offices)

(86-20) 3479 9768

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (s 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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 Act). Yes ¨ No x

Aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, March 31, 2011, was $3,599,888. The registrant has no non-voting common stock.

As of December 31, 2009, there were 139,383,450 shares of our common stock issued and outstanding.

INDEX TO FORM 10-K ANNUAL REPORT

		Page
PART I		4
Item 1.	Business	4
Item 1A.	Risk Factors	21
Item 1B.	Unresolved Staff Comments	26
Item 2.	Properties	26
Item 3.	Legal Proceedings	28
Item 4.	Submission of Matters to a Vote of Security Holders	28
PART II		28
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	28
Item 6.	Selected Financial Data	29
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	36
Item 8.	Financial Statements and Supplementary Data	36
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	36
Item 9A(T)	Controls and Procedures	36
Item 9B	Other Information	44
PART III		44
Item 10.	Directors, Executive Officers and Corporate Governance	44
Item 11.	Executive Compensation	46
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	47
Item 13.	Certain Relationships and Related Transactions, and Director Independence	49
Item 14.	Principal Accountant Fees and Services	50
PART IV		50
Item 15.	Exhibits and Financial Statement Schedules	50
	Signatures	53
	Financial Statements	F-1

EXPLANATORY NOTE

We, China Water Group, Inc., is filing this Annual Report on Form 10-K for the year ended December 31, 2009 during calendar 2011, as a step towards becoming current in our filing obligations under the Securities Exchange Act of 1934. We will endeavor to file additional periodic reports to become current in our filings as expeditiously as the limited size of our staff allows.

Unless otherwise indicated, all references to our company include our wholly and majority owned subsidiaries.

All of our sales and nearly all our expenses are denominated in renminbi (“RMB”), the national currency of the People’s Republic of China (the “PRC”). For SEC reporting purposes, the balance sheet items are translated into US dollars using the exchange rate at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the period. All exchange differences are recorded within equity.

Statements contained in this Annual Report on Form 10-K, which are not historical facts, are forward-looking statements, as the term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, whether expressed or implied, are subject to risks and uncertainties which can cause actual results to differ materially from those currently anticipated, due to a number of factors, which include, but are not limited to:

Competition within our industry;

Seasonality of our sales;

Success of our acquired businesses;

Our relationships with our major customers;

The popularity of our products;

Relationships with suppliers and cost of supplies;

Financial and economic conditions in Asia, Japan, Europe and the U.S.;

Anticipated effective tax rates in future years;

Regulatory requirements affecting our business;

Currency exchange rate fluctuations;

Our future financing needs; and

Our ability to attract additional investment capital on attractive terms.

Forward-looking statements also include the assumptions underlying or relating to any of the foregoing or other such statements. When used in this report, the words “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “continue,” and similar expressions are generally intended to identify forward-looking statements.

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the factors described in the Section of this report entitled “Risk Factors” and other documents we file from time to time with the Securities and Exchange Commission (‘SEC’), including the Quarterly Reports on Form 10-Q to be filed by us in the fiscal year 2010.

Part I

Item 1. Description of Business.

We are a bottled water company based in the PRC. We also continue to operate various waste water treatment facilities. Through our majority-owned subsidiaries, we were engaged in the design, construction, implementation and management of industrial and municipal waste water treatment facilities throughout the PRC. We are now seeking to dispose of those operations. We also provide high quality bottled water in China by using 9000-Year Old Glacier Spring Water. Our bottled water has been marketed in many big cities in China such as Shanghai, Beijing, Guangzhou, Chengdu and others.

We also previously provided turn-key waste water treatment engineering design and contracting. From 2000 through 2008, we completed the following turn-key projects: Yongji Development Zone Wastewater Treatment Plant (Phase 1), Guangdong Nanhai City Jinsha Town Wastewater Treatment Plant, Guangdong Sanshui Baini Wastewater Treatment Plant and Guangzhou Yantang Wastewater Treatment Plant, Tianjin City Meichang Town Wastewater Treatment Plant,Yongji Development Zone Wastewater Treatment Plant (Phase 2), China Environment Industrial Park Wastewater Treatment Plant, Huangzhuang Industrial Park Wastewater Treatment Plant and Tian Jin WuQing No.1 Waste Water Treatment Factory. We have left this business and no longer provide turn-key waste water services.

We hold 28.8%and 11.2%, respectively, of the equity interest in 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 (“TianJin”), which commissioned water treatment in November 2003 and has a daily treatment capacity of approximately 10,000 tons; and (ii) Xin Le Sheng Mei Water Purifying Company Limited (“XinLe”), which also commissioned water treatment in November 2003 and has a daily treatment capacity of 40,000 tons. We have been retained as the manager to manage both TianJing and XinLe. The fees from XinLe and TianJing did not represent a significant portion of our revenue during 2008.

We also developed a BOT water treatment facility project in Hai Yang City under our subsidiary Hai Yang City Sheng Shi Environment Protection Company Limited (“HaiYang”) with capacity of 20,000 tons per day. We began construction of this project in April 2004 and completed the project and commenced water treatment in June 2005. We also developed another BOT water treatment facility project in Beijing under our subsidiary Bei Jing Hao Tai Shi Yuan Water Purifying Company Limited (“Beijing HaoTai”) with planned capacity of 20,000 tons per day. We began construction of this project in July 2004 completed approximately 90% till December, 2006. We retained a 90% interest in this facility until we disposed of it in December 2006 for a total consideration of US$1,442,567, and realized a gain of $44,872. In July 2005, we started construction of a BOT water treatment facility project for the Handan Fengfeng Mining Area in the Hebei Province under our subsidiary Han Dan Cheng Sheng Water Affairs Company Limited (“HanDan”) with capacity of 33,000 tons per day. The project was completed in December 2007. The fees from these projects are expected to increase our net sales in the future. We are in the process of discontinuing our waste water engineering operations to concentrate on our bottled water operations and the presentation of our financial statements reflects that these assets relate to our “discontinued division”.

Our predecessor in interest, Discovery Investments, Inc. (“Discovery”) was incorporated on September 10, 1996, under the laws of the State of Nevada to engage in any lawful corporate activity. Discovery had been in the development stage and was not active until October 26, 1999.

On December 10, 1999, Discovery entered into a Plan and Agreement of Reorganization (the “Plan”) with LLO-Gas, Inc. and John Castellucci. On October 26, 1999, LLO-Gas had acquired certain ARCO facilities and a so-called card lock facility and commenced operations. LLO-Gas was incorporated in July 1998 under the laws of the State of Delaware. On December 20, 1999, there was a closing under the Plan and LLO-Gas, Inc. became a wholly-owned subsidiary of Discovery and there was a change of control of Discovery. Between December 20, 1999 and August 10, 2000, differences of opinion as to matters of fact and as to matters of law had arisen by and between certain of the shareholders of Discovery, who were shareholders prior to the closing, and between Discovery, John Castellucci and LLO-Gas, Inc.

On June 7, 2000, LLO-Gas, Inc. filed a Voluntary Petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court, Central District of California, San Fernando Valley Division, case number SV 00-15398-AG. On December 1, 2000, the United States Bankruptcy Court converted the pending matter into a Chapter 7 liquidation. Said Chapter 7 effected LLO-Gas, Inc. and not Discovery.

On August 10, 2000, Discovery entered into a Mutual Rescission Agreement and Mutual Release with John Castellucci which provided, inter alia, that Discovery consented and agreed to rescind said Plan with John Castellucci consenting and agreeing to the rescission. The parties mutually agreed to forego all rights and benefits provided to each other thereunder.

On August 9, 2001, Discovery filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court, District of Nevada, Case Number BK-S-01-18156-RCJ. On September 24, 2001, the Bankruptcy Court confirmed the Disclosure Statement and Plan of Reorganization submitted by Discovery and Discovery was thereafter released from Bankruptcy.

On April 29, 2002, Discovery entered into a Plan and Agreement of Reorganization with Bycom Media Inc., an Ontario, Canada corporation (“Bycom”). Pursuant to this agreement, Discovery acquired all the outstanding shares of Bycom for 4,800,000 shares of Common Stock. On October 5, 2002, Bycom became a wholly-owned subsidiary of Discovery and there was a change of control.

Bycom was engaged in multimedia applications for internet-based business. Utilizing business search tools and databases, Bycom intended to be able to locate and access global business information for a fee, or was to act as an “out-source provider” of information. Bycom currently is an inactive, wholly owned subsidiary of the Company.

On September 4, 2002, Discovery completed a transaction set out in a Plan and Agreement of Reorganization dated June 13, 2002, pursuant to which Discovery acquired all of the outstanding shares of Cavio Corporation, a Washington corporation, (“Cavio”) in exchange for 14 million share of Discovery common stock. Due to poor market conditions and Discovery’s inability to seek adequate financing from third parties to properly finance the operations of Cavio, on December 2, 2002 Discovery’s board of directors approved, subject to receiving the approval of a majority of the shareholders, to unwind the acquisition of Cavio in cancellation of the shares of common stock issued.

On December 2, 2002, Discovery unanimously approved the disposition of its interest in Cavio and thereafter received the consent of a majority of the outstanding shares of the company’s common stock. Discovery determined the effective date for the divestiture to be June 30, 2003.

For the two years prior to a reverse acquisition in September 2004, we had not generated significant revenues and were considered a development stage company as defined in Statement of Financial Accounting Standards No. 7. We were seeking business opportunities or potential business acquisitions. Pursuant to a securities purchase agreement and plan of reorganization dated September 9, 2004, as amended, between our company, Evergreen Asset Group Limited, an International Business Company organized under the laws of the British Virgin Islands (“Evergreen” or “EGAG”), and the stockholders of Evergreen, we acquired 100% of the issued and outstanding shares of Evergreen’s capital stock. We issued 83,500,000 shares of our common stock in exchange for all the 300 issued and outstanding shares of Evergreen capital stock which had an estimated value of $4.24 million at the time of such issuance, valued based on the fair market value of the net assets of Evergreen. Since the stockholders of Evergreen acquired approximately 83.5% of our outstanding shares and the Evergreen management team and board of directors became the management team and board of directors of our company, according to FASB Statement No. 141 - “ Business Combinations ”, this acquisition has been treated as a recapitalization for accounting purposes, in a manner similar to reverse acquisition accounting. In accounting for this transaction:

•

Evergreen is deemed to be the purchaser and surviving company for accounting purposes. Accordingly, its net assets are included in the balance sheet at their historical book values and the results of operations of Evergreen have been presented for the comparative prior period;

•

Control of the net assets and business of our company was acquired effective October 15, 2004. This transaction has been accounted for as a purchase of the assets and liabilities of our company by Evergreen. The historical cost of the net liabilities assumed was $0.00.

As a result of the transaction described above we changed our name from Discovery Investments, Inc. to China Evergreen Environmental Corporation.

Due to the reverse acquisition mentioned above, EGAG, pursuant to a group reorganization which was completed in July 2004, acquired 90% equity interests in each of XinXingmei, XianYang, HaiYang and BeijingHaoTai for cash consideration of RMB12,601,000 (approximately $1,521,860), RMB18,000,000 (approximately $2,173,913), RMB2,700,000 (approximately $326,087) and RMB1,800,000 (approximately $217,391), respectively, all of which are domestic incorporated companies established in the PRC with limited liability.

In March 2003, GDXS entered into a BOT agreement with Xian Yang City Environment Protection Bureau. The BOT agreement was later transferred to Xian Yang Bai Sheng Water Purifying Company Limited (“XianYang”), after XianYang was incorporated. The construction of the wastewater plant of XianYang started in the beginning of 2004. Due to the group reorganization in July 2004, 90% of GDXS’s interest in XianYang was transferred to EGAG. In October 2004, EGAG entered into a tri-party framework agreement with True Global Limited (“TGL”), an independent party and Guang Dong Xin Sheng Environmental Protection Company Limited (“GDXS”) for the disposal of its 90% interest in XianYang to TGL at a total consideration of $13,246,377. A gain on disposal of $5,220,299 was recorded in 2004 for the disposal of our entire 90% attributable interest in XianYang to TGL.The gain represents the difference between the disposal proceeds and our attributable share of net assets of XianYang at the date of disposal.

In April 2005, we conducted a private placement of 20 investment units, at $25,000 per unit, for gross proceeds of $500,000. Each unit consisted of (a) one 12% convertible debenture in the original principal amount of $25,000, convertible into shares of our common stock at the rate of the lesser of (i) $0.20 per share or (ii) a 10% discount to the price per share of common stock (or conversion price per share of common stock) of the next private placement conducted by us prior to any conversion of the debenture, and (b) 125,000 detachable warrants to purchase one share each of our common stock at an exercise price of $0.20 per share, expiring ten years from their date of issuance. The debentures were due and payable August 1, 2005. The debenture holders, however, extended the payment period to September 30, 2005. We granted the investors limited registration rights for the common shares underlying their debentures and warrants. Westminster Securities Corporation acted as placement agent for this offering on our behalf. All the debenture holders have converted the debentures into 3,703,701 shares of our common stock on October 1, 2005.

On September 14, 2005, we closed the private placement sale to accredited investors of units consisting of shares of our common stock and warrants to purchase shares of our common stock for aggregate gross proceeds of $4.83 million. Pursuant to the subscription agreements entered into with the investors, we issued to the investors 161 units at a price of $30,000 per unit. Each unit consisted of 200,000 shares of our common stock, priced at $0.15 per share, and warrants to purchase 200,000 shares of our common stock over a five-year period at an exercise price of $0.20 per share. Pursuant to the terms of the subscription agreements, we granted the investors limited registration rights for all common shares comprising the units, including the common shares issuable on exercise of the warrants.

On November 7, 2006, China Evergreen Environmental Corporation changed its name to China Water Group, Inc. to reflect its focus on China’s water treatment and supply needs and on build-operate-transfer(BOT), Transfer-operate-transfer(TOT), and turnkey wastewater treatment facilities in China, at the same time, bottled water is considered.

On December 29, 2007, we entered into an Equity Transfer Agreement, pursuant to which we transferred a 58% out of our 90% interest in our subsidiary Guangdong Xinxingmei Water Affairs Co, Ltd. (“GXWA”) to Wenning Pu, a 10% minority sharehoulder of GXWA for RBM7,308,600 (approximately $1,000,000). After the transaction, our ownership of GXWA was reduced from 90% to 32% and Wenning Pu’s ownership of GXWA was increased from 10% to 68%. The proceeds of the sale will be used for our working capital.

On December 31, 2007, China Water Group Inc. signed a contract with Fortune Luck Global International Limited to acquire 90 percent of the equity interest of Aba Xinchen Dagu Glacier Spring Co., Limited through its subsidiary Guangzhou Xinchen Water Company. The consideration for the acquisition is $13.45 million dollars, of which $7.5 million will be paid in cash, and the remaining $5.95 million will be paid in our common stock. As of November 20, 2009, we have paid a total of $ 7.5 million cash, but hadn’t issued any shares towards the purchase price. Acquiring this asset has allowed us to enter the bottled water business with our own high quality water source.

On December 30, 2008, we entered into an Equity Transfer Agreement, pursuant to which China Water Group Inc transferred 100% interest in Evergreen Asset Group Limited to Whole Treasure Investment Ltd. , a BVI company. The proceeds of the sale will be used for our working capital , mainly to develop the bottled water market and trademark building.

On February 26, 2009, Guangzhou Xinchen Water Company established a subsidiary, Chengdu Jiuqiannian Water Company, in the PRC as a wholly-owned limited liability company with registered capital of RMB 500,000 (approximately $73,250).

On August 24, 2009, Guangzhou Xinchen Water Company established a subsidiary, Beijing Jiuqiannian Trading Company Ltd., in the PRC as a wholly-owned limited liability company with registered capital of RMB 300,000 (approximately $43,971).

Our Corporate headquarters is located in Guangzhou, Guangdong, China

Our Business

General

We were a PRC based waste water engineering company and are engaged in repositioning ourselves to be a bottled water production, sales and marketing company . Through our majority-owned subsidiaries, we have been engaged in the design, construction, implementation and management of industrial and municipal waste water treatment facilities throughout the PRC. Starting in 2007 we repositioned our business focus to bottled water production, sales and distribution in the PRC.

Our waste water engineering business was originally established in 1999 by our Chairman, Mr. Chong Liang Pu, with a focus on developing innovative biochemical technologies and processes for waste water treatment. We have the exclusive rights to MHA biological treatment processes technologies (“MHA”) and GM Bio-carriers. Both are the subject of patents owned by our Chairman, Mr. Pu, and we have acquired the exclusive rights pursuant to a license agreement with Mr. Pu. Both technologies were developed to improve the efficiency and effectiveness of waste water treatment processes and reduce the initial investment and on-going operating cost of waste water treatment facilities.

We have applied biotechnological processes to waste water treatment and have developed relationships with the PRC environmental authorities at both national and provincial levels throughout the PRC. Since 2000, we have successfully completed the design and construction of over 15 waste water facilities across China with total daily capacity of over 130,000 tons (inclusive of five BOT waste water treatment facilities with daily capacity of 123,000 tons). Our customers include municipal governments, food processing and beverage companies and industrial companies.

As a result of these achievements, we have been recognized as a “Key Enterprise in Environmental Industry in the PRC” by the General Bureau of Environmental Protection of China and are viewed as a “High-Tech Enterprise” by the Bureau of Science and Technology of Guangzhou, PRC.

BOTTLED WATER OPERATIONS

In 2007 we entered into an agreement with Fortune Luck Global International Limited to secure a high quality source of natural drinking water from the Dagu glacier. During the calendar years 2007 and 2008 we conducted a limited test market of bottled water in Guangzhou. Management was satisfied with the results and intends to expand this business to make it the main business of the Company in the future. At the beginning of 2008, we started developing the bottled water business. The Company established development and branding strategies for the bottled water business, managed to set up four regional sales centers in the cities of Shanghai , Beijing, Chengdu and Guangzhou, as part of the strategy to promote our products in China’s major cities. The May 12th earthquake in Sichuan, however, had a severe impact on our marketing efforts, as the earthquake damaged the roads between Aba, where our production is located, and Chengdu. The roads did not reopen until November 2008. Nearly two years rebuilt after disaster of earthquake in Sichuang. The public infrastructures are recovered as well as we endeavor in sales promotion to bottled wate ,our sales are increased duing 2009.

The Global Industry for Bottled Water.

According to Datamonitor, the global bottled water market reached a value of $61.0 billion in 2006 and is forecasted to have a value of $86.4 billion in 2011, an increase of 41.6%. In 2006, global volume of bottled water was 115.4 billion liters and is expected to be 174.2 billion liters in 2011, an increase of 51.0%. On a consumption per capita basis, United Arab Emirates holds the leading position with 260 liters of bottled water consumption per capita in 2007, followed by Mexico and Italy. The global average consumption per capita is 29 liters, but China consumes only approximately 14 liters of bottled water per capita. If China's consumption per capita grew to the global average of 29 liters, it would represent a 110% increase (or an additional 20 billion liters) in consumption of bottled water. If China's consumption per capita grew to the average consumption per capita of the top 10 countries, it would represent over a 1,000% increase (or an additional 184 billion liters) in consumption of bottled water.

The Chinese Bottled Water Industry.

In China, water resources per capita are only 28% of the world average. Compounding the lack of water resources, the State Environment Protection Administration of China estimated in 2007 that tap water in one-half of China's major cities was polluted by industrial chemicals and agriculture fertilizers. A large amount of wastewater is directly discharged into water bodies, and industrial wastewater treatment has not been completely established, resulting in serious water pollution problems. Safe drinking water is a priority in China, and given the lack of wastewater treatment plants, the drinking water issues are not likely to be solved in the near future. China's bottled water industry started to grow as drinking water quality in China began to deteriorate. The market grew at a compound rate of around 37% yearly from 1994 to 2005. According to the Beverage Marketing Corporation, China was the fastest growing consumer of bottled water in the world with a 17.5% compounded annual growth rate from 2002 to 2007, double the next fastest growing country, the United States. Although China was the fastest growing and third largest consumer of bottled water, it represented less than one-half of the world's per capita average of liters consumed and only 11% of the per capita average of liters consumed of the top 20 countries.

Industry Background

Waste Water Treatment Markets in the PRC . The waste water treatment business is in a developmental stage in China. Following decades of rapid industrialization and urbanization resulting from PRC’s breakneck economic expansion, demands for urban and industrial waste water treatment are immense. In 2002, total volume of municipal and industrial waste water produced reached 23 billion and 26 billion tons, respectively, of which only approximately 25% was treated in some form. The PRC government, which views environmental issues as a priority policy, has targeted a 90% treatment ratio by 2030. This targeted growth, combined with a policy of privatizing all existing government facilities, is resulting in extraordinarily high levels of expansion in an industry that did not effectively exist until the 1980s.

In order to promote investment in the waste water treatment industry, the central government has created incentives such as tax relief and higher throughput fees which can improve the profitability of certain municipal projects.

Under the tax regulations in the PRC, companies providing water purification are exempted from business tax on the collection of waste water treatment fees. The PRC government also gives tax relief in the form of reduction in or exemption from value-added tax and income tax to encourage treated water to be reused in residential, agricultural, commercial and industrial sectors.

The PRC government introduced a policy in relation to water supply tariff management methods for the water-resource system which became effective in January 2004. The new policy prescribes a water tariff approach, comprising of water production costs, expenses, profit, and tax. Pertinent pricing is expected to be in accord with local market demand.

Before the 1990s, water tariffs were extremely low, and there were no wastewater discharge fees. People were more concerned with water quality than with the price and quantity they used. As citizens now pay closer attention to water quality, they expect higher prices to accompany water quality improvements. Therefore, water tariff and wastewater treatment throughput fees, especially in the cities, are rising to levels that potentially allow our business to operate profitably.

Fresh Water Markets . Before 2003, the facilities for fresh water supply in the PRC were owned and operated by the agencies of local governments. As industrial, economic and population growth and chronic pollution have placed intense demands on the water supply in China, the fresh water supply has had serious shortages. Similar to the waste water treatment industry, the PRC government has opened up the fresh water supply business to private sector and international operators.

Bottled Water Markets . The bottled water industry in PRC is in the stage of rapid and continuous growth and development. Globally, according to recently published data from consultancy firm Beverage Marketing Corporation (BMC), from 2002 to 200 PRC was the fastest growing country in the world in terms of consumption of bottled water, showing a compound annual growth rate of 17.5%, doubling the next fastest growing country, the United States. With the growth in demand and addition of new industry participants offering new and varied bottled water products, management believes that the Chinese bottled water industry is posed for significant growth.

Our Business Waste Water Related Activities

There are different types and quantities of pollutants in water due to the environment, conditions and purpose for which the water is used. Municipal water has organic matters including nitrogen and phosphorus. The composition of such municipal wastewater is relatively stable. In contrast, pollutants in water discharged from industries include organic pollutants, inorganic matters, metal ions and salt ion. We adopt varying treatment processes for different industrial wastewater.

We provided turn-key engineering, equipment and chemical sales for industrial and municipal waste water treatment facilities in the PRC. We also invest in, manage and operate our own water treatment facilities through BOT arrangements in the PRC.

The following chart describes the waste water treatment process that we service:

Turn-Key Waste Water Engineering. We provide turn-key waste water treatment engineering services to both public and private sectors. Our public sector clients include municipal governments at the city, district and town levels. Our private sector clients include heavy industries, such as steel, car manufacturing, electronic; light industries, such as chemical, food and beverage, paper, printing and breweries; and others, including hospitals and the pharmaceutical industry. The industrial wastewater qualities differ due to the different industrial products and manufacturing processes.

These contracts are awarded either by public tender or by direct contract. A typical turn-key waste water treatment project can be classified into three phases; (1) survey and design, (2) construction and equipment installation, and (3) operation and management services. However, commencing in 2007, we discontinued initiating new turn-key projects.

From 2000 to 2007, we completed the following turn-key projects: Yongji Development Zone Wastewater Treatment Plant (Phase 1), Guangdong Nanhai City Jinsha Town Wastewater Treatment Plant, Guangdong Sanshui Baini Wastewater Treatment Plant and Guangzhou Yantang Wastewater Treatment Plant, Tianjin City Meichang Town Wastewater Treatment Plant,Yongji Development Zone Wastewater Treatment Plant (Phase 2), China Environment Industrial Park Wastewater Treatment Plant ,Huangzhuang Industrial Park Wastewater Treatment Plant and Tian Jin WuQing No.1 Waste Water Treatment Factory.

We financed our turn-key projects through progressive payments from our customers as stipulated in the agreements for these projects.

Investment in BOT Waste Water Treatment Facilities. We also invest in waste water treatment facilities through BOT arrangements. BOT projects provide us with a stable income source under a long-term (usually 20-30 year) contract granted by municipal governments to build and operate waste water plants. BOT project land is typically contributed by the municipal government with the operator providing investment and daily management. After the contract period, the project is transferred to the local government. After we secure a contract for a BOT project from a municipal government and the financing for such project is in place, we will proceed to construct the facility. After the completion of construction and testing and commissioning, we will operate the waste water treatment facility for a period of 20-25 years as stipulated in the BOT contract.

The following table sets forth the BOT projects which we have completed:

BOT Projects	Cost of Investment		Capacity/ Per Day	Operation Period	Date of commencement of operation
WWaste water treatment plant of TianJing	$	1.09 million	10,000 tons	20 years	November 2003
WWaste water treatment plant of XinLe	$	4.11 million	40,000 tons	22 years	October 2003
WWaste water treatment plant of HaiYang	$	3.62 million	20,000 tons	22 years	June 2005
WWaste water treatment plant of HanDan	$	3.53 million	33,000 tons	22 years	December 2007

As of December 31, 2008, the waste water treatment plants of TianJin, XinLe and HaiYang were operational and have been providing waste water treatment services. The HanDan waste water treatment plant began to operate during January 2008.

We have been financing the BOT projects of TianJing, XinLe and HaiYang through capital injectionsand funds generated from our operations. We will finance the remaining capital expenditure of HanDan of approximately $2 million through funds generated from our operations.

Our Production Process

Waste Water treatment Though the chemicals used for treating municipal and industrial wastewater qualities are different due to the different sources of wastewater for municipal wastewater treatment and different industrial product and manufacturing process for industrial wastewater treatment, the treatment processes are largely similar.

During the wastewater treatment process, the wastewater is first collected by a pipeline network system and then transported to a sand sedimentation pool. The wastewater will then go through the MHA waste water treatment process, which is a natural, chemical-free, biological and mineral-based process that facilitates the rapid growth of bacteria in order to improve the efficiency of degrading the micro-organism materials in the wastewater and for more efficient operation and reduced energy consumption. After the MHA waste water treatment process, the wastewater is then transported to the sedimentation pool to remove the fine particles in the wastewater. The wastewater will then be sterilized in the sterilization pool and be transported to the water outlet.

Bottled Water Raw water flows into water processing workshop through a stainless steel pipe. After sand filtration, carbon filtration, membrane filtration and ozone sterilizing, the water is placed into containers. Then the water will be poured into PET bottles automatically by an aseptic operation. Then these filled PET products are packed and transported to the market.

Our Project Management Process

The following is the flow chart of our project management process for both turn-key wastewater engineering projects and BOT projects:

Market Intelligence . The starting point for all our projects was market intelligence so that our management was able to decide which projects they wished to secure for the benefit of the company. Our marketing personnel were in charge of market information on potential projects on a regular and ad-hoc basis. Our management was able to identify and decide on projects which we might potentially bid for.

Project Tracking . Based on the information gathered through market intelligence and the subsequent comprehensive analysis conducted on such information, our management decided which projects to pursue. We carried out internal evaluations which consist of three steps: initial evaluation, revaluation and valuation by professionals. We also engaged external advisors to carry out external evaluation. We then embarked on determining what the tender rules and conditions are and the capital requirements and technologies used for the project. Project tracking allowed us to plan ahead and make the necessary cost planning.

Tender Process . Once we decided to proceed to tender for a particular project, we formed a tender committee comprising marketing personnel and technical personnel, who were responsible for compiling the tender documents to be submitted for tender within the stipulated deadline. The tender committee compiled internal costing and budgetary estimates of labor and material costs based on quotations from the relevant suppliers and factor in a suitable profit margin in determining our tender pricing.

Design and Development. After signing of the contract, we appointed a project team to be responsible for the execution of the project, including an ad-hoc research and development team to handle the design and development of that particular project. The research and development team followed our overall guidelines to analyze, assess and determine the design and specifications of a system which ensured that all of our customers’ requirements were met. The design and development process included collection of information, site survey, key design concept, design specification, individual design, evaluation, revaluation and issue for construction. In addition to our own design and development capabilities, we have also entered into collaboration arrangements with other parties to test our equipment to ensure its suitability and effectiveness.

Procurement. After the necessary design and analysis, the specifications of the system were confirmed, and our procurement department proceeded to purchase all the materials and equipment required or appoint appropriate sub-contractors to carry out certain parts of the project.

Construction . The construction process included sub-contracting and site supervision. During construction, we sent site representatives to control and supervise the construction.

Assembly and Installation . We will carried out assembly and installation of equipment and/or system and coordinate the assembly and installation fully with the construction process to ensure all equipment and/or system were properly assembled and installed. We sent technical staff to assist and guide the assembly and installation.

Testing . After the equipment and/or system was assembled and installed, we tested the system in accordance with industrial and national rules and regulations formulated by the relevant PRC authorities.

Commissioning and Fine-Tuning . For turn-key projects, should the system pass all tests, we proceeded to hand over the system to our customers. 5%-10% of the total contract value was be treated as retention monies during the warranty period of up to 12 months requirement. Our technical personnel carried out fine-tuning and on-site services. After successful commissioning of the entire system, the retention monies were paid by our customers to us after the warranty period of up to 12 months. For BOT projects, the plant started operation after passing all tests. The technical team carried out fine-tuning and on-site services. The operation team followed the operational guidelines and monitor the quality of treated water.

Competition

We believe our main competitor in waste water treatment business was Beijing Capital Co., Ltd. (“Beijing Capital”), a subsidiary of Capital Group, which has identified investment, development, operation and management in the PRC water industry as its core business. Beijing Capital provides environment management services. We also competed with many other regional environmental and water treatment companies. We believe that we compete primarily on the basis of contract pricing and capital. Though many of our competitors offer similar but less cost-effective services, they may have greater financial resources and hence be able to secure contracts with reduced operating margins but more competitive pricing. However, we believed that as a result of our cost efficiency through our patented technologies, we were able to offer much more competitive pricing. In addition, having access to the capital markets in the United States through our public listing helped us to differentiate ourselves from our competitors. Another area of competition came from local protectionism where local governments wish to protect local environmental businesses. In order for us to overcome this kind of competition, we relied on our financial and technical resources.

We believe our main competitor in bottled water business is Evian, a French bottled water company which entered China more than 10 years ago and occupied the biggest share of the Chinese market for branded bottled water. Several other local brands of high level bottled water companies recently entered the market and have relatively small market shares. We believe that acquiring a 90% equity interest in a high quality water source within China will give us a competitive advantage in the bottled water business as we seek to expand this business.

Our Competitive Strengths

Key elements of our competitive strengths include:

Capital Resources On one hand, the threshold of capital requirements for entering the waste water treatment segment and the initial capital investment of waste water treatment facilities and projects, especially BOT projects, is relatively high. On the other hand, the bottled water business requires capital to build a marketing network and brand image in the targeted market. We believe we are capable of obtaining sufficient capital resources to fund our operation of an expanded bottled water business. We also believe that additional capital will be available to us on a time to time basis as we dispose of our remaining waste water treatment facilities..

We place great emphasis on high quality bottled water marketing and brand building also concentrate more on technical research and development, and typically set up research and development teams for specific projects to handle the design, development and improvement of such projects.

We are building our bottled water market network in China’s principal cities such as Beijing, Shanghai, Guangzhou and Chengdu, and have developed more than 300 distribution channels to sell our 9000-Year Old Glacier Spring Water, mainly luxury hotels, restaurants, chain stores and supermarkets, chambers of commerce, beauty parlors and other outlets.

Customers, Sales and Marketing

Many of our principal customers in our waste water treatment business were local governments, food and beverage processing companies and industrial companies that used our technologies to treat their waste water. In our bottled water business, the main customers are the retail stores our wholesale distributors and our ultimate customers are middle class, and wealthy families, large companies and government offices as they are more sensitive to and will pay a premium for food and water that is perceived to be safer.

Two major customers accounted for approximately 61% of the net revenue for the whole year ended December 31, 2009. The source of revenue from these customers is the sales of bottled water. One major customer, Guangzhou ShengRen Water Co. Ltd, accounted for approximately 23% of the net revenue. The other major customer, Shanghai KeKejia Water Ltd, accounted for approximately 38% of the net revenue. These two major customers are our authorized regional distributors.

Research and Development

Waste Water treatment Our research and development efforts were directed toward enhancing our existing technology and products and developing our next generation of technology. We are no longer engaged in Research and Development with respect to waste water treatment.

Bottled Water Given high market demand for bottled water, we have established an R&D department responsible for expanding product lines and putting in market a series of products to meet different demands of market segments so as to increase the market coverage.

Quality Control

In connection with our waste water treatment business, our quality control department was headed by Luo Huizhong, who has more than 16 years of relevant experience. Mr. Luo has been a chief engineer at several companies, and vice general engineer of our company, and he is familiar with resource allocation, quality control and environmental facility management control. We no longer have a quality control department for waste water treatment.

Quality Control during production for bottled water . We have established at the factory a department and laboratory facilities to ensure the high quality of our products. Specific procedures include testing at each stage such as water source, water treatment, bottling, packaging, and finished products to ensure our products are meeting all healthy water standards and the expectations of our customers.

Cooperative Partners and Suppliers for Waste Water Treatment

We outsourced the design and construction of our subsystems to a number of cooperative partners and key suppliers and maintain close relationships with them. Our cooperative partners include North-Eastern Environmental Protection Design Institute, Guangdong Province Environmental Protection Design Institute, and the 20 Group of China Railway Company. We have signed cooperative agreements with these cooperative partners. North-Eastern Environmental Protection Design Institute provides technical support in the design of waste water treatment facilities and preparation for the tendering of projects, 20 th Group of China Railway Company evaluates all documents and information required for tendering while Guangdong Province Environmental Protection Design Institute evaluates feasibility and acceptability of the blue prints of the facilities. Compensation for our cooperative partners were based on amount of work done.

North-Eastern Environmental Protection Design Institute was established in 1961 in the city of Changchun. The institute focuses on design of, research in and provision of consultancy services for municipal infrastructure construction works including water supply, waste water treatment, waste treatment, energy supply, construction of road and bridges, public transport and reforestation of cities etc. The institute also provides other services in relation to civil construction works for municipal projects like feasibility studies for projects, evaluation of projects, project management and project supervision.

The Guangdong Province Environmental Protection Design Institute was established in 1990. Over the years, the institute has gained experiences in the design, management, treatment and turn-key engineering of waste water, air pollution, noise pollution and waste residue. The institute has achieved remarkable results especially in waste water treatment for the printing and dyeing, electroplating, brewing, pharmaceutical, chemical and food & beverages industries.

The 20 th Group of China Railway is a large-scale construction company in the PRC. The history of the 20 th Group of China Railway dated back to the year 1949. The company has enormous experience in the construction of railway systems in the PRC and related infrastructure including road construction, water supply, energy supply, waste water treatment, urban and rural planning, municipal projects etc. The company is also involved in many large scale construction projects overseas.

There are three main types of equipment for our waste water treatment and potable water projects: (i) electrical equipment which includes various types of sewage pumps, slush pumps and other water pumps, separators, sludge scrapers, mixers, air compressors, filters, dehydrators, blow fans, etc; (ii) automated control systems and electrical parts; and (iii) various test, analysis, detection and monitoring instruments. All purchases from foreign companies are made through their authorized dealers/agents in the PRC. We adhere closely to the principles of total quality management. Our customers, suppliers and employees are encouraged to provide feedback and suggestions for improvements in products and services.

The following table sets forth our major suppliers of equipment and materials in waste water treatment:

Component, Raw Materials and Equipment		Our Major Suppliers
Waste water treatment analytical instruments		Hach Company

Blow fan systems		HV-Turbo A/S

Sewage pumps, slush pumps, other water pumps and mixers		Nanjing Airs Pump Industry Group

PLC automated control systems		Mitsubishi Electric

Electrical parts		Schneider Electric Low Voltage (Tianjin) Co.

Automated systems		GuangZhou SaiDi Automated Engineering Company

The following table sets forth our major suppliers of equipment and materials in bottled water:

Component, Raw Materials and Equipment		Our Major Suppliers
Bottle blowing machine		Fogang Guozhu Blowing Equipment Co., Ltd

Racking machine		Jiangsu XinMeixin Water Purifying Equipment Co.,Ltd

Air compressor		Nanjing Hengda Compressor Co.,Ltd

Packing machinery		Jiangsu XinMeichen Packing Machinery Co.,Ltd

Water treating equipment		Zhejiang Deqing Water Treating Co.,Ltd

Bottle base, top		Yibing PuLaisi Packing Material Co.,Ltd

Bottle bag, label		Guangzhou Rongshun Packing Co.,Ltd

Bottled Water

We have entered into a 50-year exclusive contract to use the glacier spring water at the Aba area with the Aba Municipal Government of Sichuan province. According to the contract, during the first 10 years, we have the right to exclude any competitor for the water source. Currently, we have established a bottling facility in the area, primarily for 350 ML and 500 ML bottled water. A 3L facility is under construction with expected completion the end of 2010. Our current production capacity is 120 tons per day. We intend to increase the capacity to 200 tons per day in the future. In addition to Aba, we are in the process of exploring new water sources.

Intellectual Property

Waste Water treatment We seek to protect our intellectual property by way of our license rights to patents on proprietary features of our advanced bio-chemical treatment technology and processing systems for waste water treatment and by challenging third parties that we believe infringe on our licensed patents. We have obtained the exclusive right to use two patents owned by our Chairman, Mr. Pu, for our MHA and GM Bio-carriers technologies. We also protect our intellectual property rights with nondisclosure and confidentiality agreements with employees, consultants and key customers.

Specifically, we have registered the following patents with the State Intellectual Property Office of the PRC:

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MHA biological treatment process technology (PRC Patent No. ZL 01 1 07637.2) applied on March 14, 2001, declared effective on March 3, 2004 with a duration of 20 years from the date of application; and

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GM Bio carriers (PRC Patent No. ZL 01 1 07624.0) applied on March 8, 2001, declared effective on September 10, 2003 with a duration of 20 years from the date of application.

Bottled water We are the only bottled water company in China that has registered with the State Industrial and Commercial Bureau our “9000-year” trade mark

Employees

As of December 31, 2008, we had 78 employees, of whom 31 were in bottled water operations of whom 28 were engaged in sales, marketing and services, the others in accounting and administration. We also had no employees in our waste water treatment at the end of 2009 None of our employees is represented by a collective bargaining agreement, and we believe that we have satisfactory relations with our employees.

Environmental Regulation

One of our core values is protecting the environment in which we operate and the environment in which our equipment operates. Compliance with laws and regulations regarding the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had any material effect on our capital expenditures, earnings or competitive position. We do not anticipate any material capital expenditures for environmental control facilities in 2009.

Regulation

The PRC’s numerous ongoing water reforms are moving toward a user-pay, market-driven sector. Legislation serves as the basis to regulate and enforce these reforms. The Water Resource Law, amended and put into effect on October 1, 2002, significantly changes water resource management systems, water resource protection, water conservation, and legal responsibilities.

Environmental Laws and Regulations

In the PRC, environmental laws and regulations are stipulated and implemented through legislation and through administrative authorities at various levels of government. Current environmental laws and regulations can be classified into two categories: environmental management and environmental pollution prevention and control. All environmental laws and regulations are stipulated on the basis of the Environmental Protection Law (EPL). EPL, effective in December 1989, sets the framework for environmental management and pollution control legislation in the PRC.

Environmental Management Laws and Regulations. The PRC’s environmental management measures include environmental impact assessment (EIA), the Three Synchronies Policy, permitting requirements, and reporting requirements. Each of these is described below:

Environmental impact assessment . The 1989 Environmental Impact Assessment Law was revised in October 2002. These revisions became effective in September 2003 and apply to all construction projects that may negatively impact the environment. An EIA must be prepared during the project feasibility stage to assess the project’s environmental impact. EIA approval is necessary to secure a construction and operating permit.

Three Synchronies Policy . Article 26 of the EPL defines the Three Synchronies Policy as the installation of pollution prevention and control facilities in a construction project to be undertaken concurrently with the main construction phase. The pollution prevention and control facilities are to be installed and commissioned only after they are inspected and approved by the Environmental Protection Bureau (EPB).

Permitting requirements . Pollution discharges in the PRC are subject to registration and permitting requirements. The EPL defines requirements for pollution discharge registration and permits. Pollution discharges must be registered with the relevant environmental authority. A pollution discharge permit is issued after registration. The Management Regulation on the Registration of Discharged Pollutants, issued by the State Environmental Protection Administration (SEPA), effective Oct. 1, 1992, details requirements for pollution discharge registration. At the state level, the Department of Pollution Control under SEPA implements pollution discharge registration and permitting policies. Pollution control departments under local EPBs are in charge of the registration procedures and issue a pollution discharge permit.

Reporting requirements. According to Article 31 of the EPL, any organization that causes or has a potential to cause an accident resulting in environmental pollution must promptly take measures to prevent and control the pollution hazard and notify the relevant authorities. In addition, enterprises and institutions that have a greater likelihood to cause severe pollution accidents must adopt effective pollution prevention measures.

Environmental Pollution Laws and Regulations. Environmental pollution prevention and control measures in the PRC apply to various environmental media, including water, water supply, wastewater discharge, air emissions, hazardous waste management, noise, and soil and groundwater. In November 2004, the management rules regarding environmental pollution prevention facilities operation permit was enacted and it set forth the requirements for getting a permit and how the facilities must be operated.

The following is a summary of environmental pollution laws and regulations regarding water, water supply and waste water discharge in the PRC:

Three laws apply to the water sector:

The Water Resources Law emphasizes the uniform management of river basins and the macro-management of water distribution and consumption. In addition, the law identifies a water quality management system.

The 1984 Water Pollution Prevention and Control Law (WPL) applies to discharges to rivers, lakes, canals, reservoirs, and groundwater. The WPL contains sections pertaining to water quality and discharge standards, pollution prevention, surface water, and groundwater. Amendments in 1996 introduced further controls on river basins, including requirements for cities and towns to establish central sewage treatment plants and to set treatment fees, mass-loading controls, provisions for strengthening the supervision and management of water pollution, and non-point-source pollution controls.

The Implementation Regulation of Water Pollution Prevention and Control Law was enacted on March 20, 2000. This law regulates the supervision and management of surface and ground water pollution, prevention, and control measures.

Water supply. In urban areas, water is usually supplied by the municipal water utility companies, which are responsible for ensuring that water quality complies with the National Drinking Water Standard (GB5749-85). A groundwater abstraction permit is required if any company intends to use groundwater directly. In the northern part of the PRC, however, the use of groundwater is strictly controlled because of significant water shortages and ground settlement issues. Users must apply to provincial or higher level administrative committees for a groundwater abstraction permit.

Wastewater discharge. Two types of wastewater discharge systems are defined in the PRC: (1) polluted wastewater discharges (typically industrial and domestic wastewater) and (2) non-polluted wastewater discharges (for example, storm water). Separate drainage systems for polluted and non-polluted discharges are required for a facility in which a municipal sewer system is available.

Bottled water sales For a company to sell bottled water products, the company must obtain a State issued certificate for water source, and meets the State QA standard and State requirements of the Food Safety Law and Drinking Natural Mineral Water Standard. We have obtained the necessary certificates and believe that we meet all standards.

Environmental Enforcement

In the PRC, methods of enforcing environmental legislation include discharge fees, surcharge fees, fines, and administrative sanctions. Pollutant discharge activity is subject to a discharge permit, which must be registered and obtained before the pollutants are generated.

In major pollution control areas, such as Shanghai and Beijing, mass-loading targets are established and allocated to major emission facilities by the local EPB. In some pilot locations, emission quotas can be traded among facilities.

In areas with significant pollution problems, such as those impacted by sulfur dioxide emissions, acid rain, and water quality deterioration, specific discharge limitations are adopted to prevent further degradation.

There are specific items within the Constitution of the People’s Republic of China and the PRC Criminal Law to strengthen the enforcement of environmental legislation by disciplinary sanction, civil liability, and even criminal liability. Disciplinary sanctions may come in the form of a warning, a fine, a requirement to install environmental protection equipment, or a requirement to cease operations. Criminal liability can also be passed on to the legal representative of an enterprise if the polluting activity caused severe damage to property, health, or interests of the state or its citizens. In these cases, the individual deemed responsible may be prosecuted. Civil liability also exists and is aimed at activities that may result in civil disputes. Generally, the dispute may be settled through financial compensation by the facility that caused the damage.

Currently, the industry of waste water treatment is facing more intense competition. The industry itself requires large investment in capital coupled with low rates of return over long periods. We have determined that we lack the available capital resources and support to expand our business in waste water treatment. Management believes it is in the shareholders’ interest to switch our business line from waste water treatment to bottled water mining, distribution and sales as there is currently no premium national bottled glacier water brand in the PRC creating a market opportunity for the Company.

Our transition from a waste water treatment company with a BOT model to a premium bottled water production, distribution and marketing company will occur over several years as our BOT operations are disposed of from time to time as opportunities present themselves to us and our capital resources and efforts are devoted to expanding bottled water operations.

Item 1A. Risk Factors.

You should carefully consider the risks described below, which constitute the material risks facing us. If any of the following risks actually occur, our business could be harmed. You should also refer to the other information about us contained in this Form 10-K, including our financial statements and related notes.

Risks Related to Our Business

We are dependent on economic conditions in the PRC’s as all of our business is conducted in the PRC. All of our business operations are conducted in the PRC and all of our customers are also located in the PRC. We operate our new bottled water business internally in the PRC. Accordingly, any significant slowdown in the PRC economy may cause the waste water treatment industry to reduce expenditure or delay the building of new facilities or projects for waste water treatment. This may in turn lead to a decline in the demand for our BOT products and services, and may reduce our profitability and the return on your investment. Also, a general economic slowdown has is currently underway may reduce demand for premium bottled water and limit the growth of those operations.

Failure to retain services of key personnel will affect our operations and results. Our success to date has been largely due to the contributions of our executive officers. The continued success of our business is very much dependent on the goodwill that they have developed in the industry over the past several years.

Our continued success is dependent, to a large extent, on our ability to retain the services of our executive officers. The loss of any of our executive officers’ services due to resignation, retirement, illness or otherwise without suitable replacement or the inability to attract and retain qualified personnel would affect our operations and may reduce our profitability and the return on your investment.

We may not be able to protect our processes, technologies and systems against claims by other parties. Although we have two registered patents in respect of the processes, technologies and systems we use frequently in our systems, we have not purchased or applied for any patents other than these as we are of the view that it may not be cost-effective to do so. For such other processes, technologies and systems for which we have not applied for or purchased or been licensed to use patents, we may have no legal recourse to protect our rights in the event that they are replicated by other parties. If our competitors are able to replicate our processes, technologies and systems at lower costs, we may lose our competitive edge and our profitability may be reduced.

We may face claims for infringement of third-party intellectual property rights. We may face claims from third parties in respect of the infringement of any intellectual property rights owned by such third parties. There is no assurance that third parties will not assert claims to our processes, technologies and systems. In such an event, we may need to acquire licenses to, or to contest the validity of, issued or pending patents or claims of third parties. There can be no assurance that any license acquired under such patents would be made available to us on acceptable terms, if at all, or that we would prevail in any such contest. In addition, we would incur substantial costs and spend substantial amounts of time in defending ourselves in or contesting suits brought against us for alleged infringement of another party’s patent rights. As such, our operations and business may be adversely affected by such civil actions.

We rely on trade secrets, technology and know-how, which we seek to protect, in part, by confidentiality provisions in contracts with our customers and our employees. There can be no assurance that these agreements will not be breached, or that we will have adequate remedies for any breach, or that other parties may not obtain knowledge of our trade secrets and processes, technology and systems. Should these events occur, our business would be affected and hence, our profitability, may be reduced.

We may require additional funding for our future growth. Our future growth will depend, to a large extent, on our ability to establish our bottled water products through advertising and to develop a manufacturing and distribution network which requires a high amount of capital investment. In order to obtain additional capital to develop these growth opportunities, we may issue additional shares of our equity securities. If new shares placed to new and/or existing shareholders are issued, they may be priced at a discount to the then prevailing market price of our shares, in which case, existing shareholders’ equity interests may be diluted. If we fail to utilize the new equity to generate a commensurate increase in earnings, our earnings per share will be diluted, and this could lead to a decline in our share price. Any additional debt financing may, apart from increasing interest expense, contain restrictive covenants with respect to dividends, future fund-raising exercises and other financial and operational matters.

Our customers may make claims against us and/or terminate our services, in whole or in part, prematurely should we fail to implement projects that fully satisfy their requirements and expectations. Failure to implement projects that fully satisfy the requirements and expectations of our customers or defective system structure or products as a result of design or workmanship or due to acts of nature may lead to claims against us and/or termination of our services, in whole or in part, prematurely. This may arise from a variety of factors including unsatisfactory design or implementation, staff turnover, human errors or misinterpretation of and failure to adhere to regulations and procedures. This may adversely affect our reputation and may reduce our profitability.

Our Waste Water Treatment Operations rely on a few major suppliers. We are dependent on our major suppliers for the timely delivery of materials and equipment that we require for the waste water treatment systems we operate. Should our major suppliers fail to deliver the materials and equipment on time, and if we are unable to source these materials and equipment from alternative suppliers on a timely basis, our operations could be adversely affected. This, in turn, would adversely affect our reputation if our customers lose confidence in our services and as a result, reduce our revenue and profitability.

BOT projects require high capital commitments. We have invested capital in BOT projects which require high up-front capital expenditures. Our returns from BOT projects are derived from fees paid by the PRC and other governmental customers and such BOT projects are able to generate a steady and recurring source of income for us over a sustained period of time between 20 and 25 years. However, our BOT projects are exposed to risks such as the occurrence of natural disasters or the imposition of more stringent government regulations, which may result in the disruption of our BOT projects. Our investment returns from these BOT projects may thus be reduced should any of such risks materialize.

We rely on subcontractors for our BOT projects. As we may, from time to time, subcontract some parts of our projects to subcontractors, such as engineering, assembly and integration works, we face the risk of unreliability of work performed by our subcontractors. Should our subcontractors default on their contractual obligations and work specifications, our ability to deliver the end product or service to our customers in accordance with quality and/or timing specifications may, in turn, be compromised. Furthermore, if we are unable to secure competitive rates from our subcontractors, our profitability may be reduced.

We are subject to foreign exchange risks. Our dominant transactional currency is the Chinese RMB, including the cost of materials which are imported by our suppliers. With costs mainly denominated in RMB, our transactional foreign exchange exposure for the past few years has been insignificant. However, as our suppliers take into account the fluctuations in foreign exchange rates when they price the imported materials which we procure from them, such fluctuations in foreign exchange rates may result in changes in the purchase price of imported materials. Any future significant fluctuations in foreign exchange rates may have a material impact on our financial performance in the event that we are unable to transfer the increased costs to our customers.

Since our subsidiaries, operations and significant assets are located in the PRC, shareholders may find it difficult to enforce a U.S. judgment against the assets of our company, our directors and executive officers. Our subsidiaries’ operations and significant assets are located in the PRC. In addition, all of our executive officers and our directors are non-residents of the U.S., and substantially all the assets of these persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons.

Our operations could be adversely affected by changes in the political and economic conditions in the PRC. The PRC is our main market and accounted for all of our revenue in 2006. Therefore, we face risks related to conducting business in the PRC. Changes in the social, economic and political conditions of the PRC may adversely affect our business. Unfavorable changes in government policies, political unrest and economic developments may also have a negative impact on our operations.

Since the adoption of the “open door policy” in 1978 and the “socialist market economy” in 1993, the PRC government has been reforming and is expected to continue to reform its economic and political systems. Any changes in the political and economic policies of the PRC government may lead to changes in the laws and regulations or the interpretation of the same, as well as changes in the foreign exchange regulations, taxation and import and export restrictions, which may, in turn, adversely affect our financial performance. While the current policy of the PRC government seems to be one of imposing economic reform policies to encourage foreign investments and greater economic decentralization, there is no assurance that such a policy will continue to prevail in the future.

Introduction of new laws or changes to existing laws by the PRC government may adversely affect our business. The PRC legal system is a codified legal system made up of written laws, regulations, circulars, administrative directives and internal guidelines. Unlike common law jurisdictions like the U.S., decided cases (which may be taken as reference) do not form part of the legal structure of the PRC and thus have no binding effect. Furthermore, in line with its transformation from a centrally-planned economy to a more free market-oriented economy, the PRC government is still in the process of developing a comprehensive set of laws and regulations. As the legal system in the PRC is still evolving, laws and regulations or the interpretation of the same may be subject to further changes. For example, the PRC government may impose restrictions on the amount of tariff that may be payable by municipal governments to waste water treatment service providers like us. Also, more stringent environmental regulations may also affect our ability to comply with, or our costs to comply with, such regulations. Such changes, if implemented, may adversely affect our business operations and may reduce our profitability.

We may be subject to foreign exchange controls in the PRC . Our PRC subsidiaries are subject to PRC rules and regulations on currency conversion. In the PRC, the State Administration for Foreign Exchange (“SAFE”) regulates the conversion of the RMB into foreign currencies. Currently, foreign investment enterprises (“FIEs”) are required to apply to SAFE for “Foreign Exchange Registration Certificate for FlEs”. All of our subsidiaries are FIEs. With such registration certifications (which need to be renewed annually), FlEs are allowed to open foreign currency accounts including the “recurrent account” and the “capital account”. Currently, conversion within the scope of the “recurrent account” can be effected without requiring the approval of SAFE. However, conversion of currency in the “capital account” (e.g. for capital items such as direct investments, loans, securities, etc.) still requires the approval of SAFE. Our operations and business may be adversely affected if conversion of currency in the “capital account” is not approved by the SAFE.

We have recently entered the bottled water business and will be subject to all of the risks of a new business enterprise. Based on the results of a limited test marketing effort during calendar 2007 and 2008 we intend to devote our future efforts to producing and marketing branded bottled water in the PRC. This is a new line of business for us and there are many risks attendant to entering a new line of business such as cost uncertainties, delays in production and acceptance of our product. If we mismanage our production of branded bottled water or if we are unable to obtain market acceptance of our product at proposed price levels we are likely to fail in this business and this will negatively impact the value of our stock.

We may require additional financing. In order to enter into the business of marketing premium branded bottled water we will require capital resources not currently available to us. To raise the necessary funds we must obtain debt financing, sell an existing asset or issue additional shares to investors. We do not have any agreements or commitments to do any of the foregoing. Nor can we predict when or if funding will be available to us or if it will be available on terms that are beneficial to our current shareholders.

Our bottled water business may face increased competition. We believe that there is a pressing need for a premium, pure, drinkable bottled water in the PRC. Other companies with greater resources and other advantages over us, such as established distribution networks, may also perceive the need for premium bottled water in the PRC, enter our market and compete with us successfully and cause our results to suffer.

The success of our bottled water business is dependant on out preserving a reputation for purity. Our premium bottled water will only be purchased by consumers if they can trust that it is pure and beneficial. Accordingly, if we experience any quality control problems, our reputation might be tarnished and our proposed new business could fail.

Chong Liang Pu, our Chairman of the Board, is our controlling stockholder. Chong Liang Pu, our Chairman of the Board owns 49,635,000 shares or 35.6% of the issued and outstanding shares of our company. Due to his ownership of shares, Mr. Pu will be able to control the affairs of the Company for the foreseeable future.

Risks Related to Our Securities

A purchaser of our stock is purchasing penny stock which limits his or her ability to sell the stock.

Our shares of common stock are considered penny stock under the Exchange Act. The shares will remain penny stock for the foreseeable future. The classification of penny stock makes it more difficult for a broker-dealer to sell the stock into a secondary market, thus limiting investment liquidity. Any broker-dealer engaged by the purchaser for the purpose of selling his or her shares in our Company will be subject to rules 15g-1 through 15g-10 of the Exchange Act. Rather than creating a need to comply with those rules, some broker-dealers will refuse to attempt to sell penny stocks such as ours.

We do not intend to pay dividends and there will be less ways in which you can make a gain on any investment in our Company.

We have never paid any cash dividends and currently do not intend to pay any dividends for the foreseeable future. To the extent that we require additional funding currently not provided for in our financing plan, our funding sources may likely prohibit the payment of a dividend.

Our board of directors is authorized to issue shares of preferred stock, which may have rights and preferences detrimental to the rights of the holders of our common shares.

We are authorized to issue up to 50,000,000 shares of preferred stock, $.001 par value. To date we have not issued any shares of preferred stock and have no plans to do so. Our preferred stock may bear such rights and preferences, including dividend and liquidation preferences, as the board of directors may fix and determine from time to time. Any such preferences may operate to the detriment of the rights of the holders of our common shares.

Our Articles of Incorporation provide for indemnification of officers and directors at our expense and limit their liability which may result in a major cost to us and hurt the interests of our shareholders because corporate resources may be expended for the benefit of officers and/or directors.

Our Articles of Incorporation and applicable Nevada law provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on our behalf. We will also bear the expenses of such litigation or any of our directors, officers, employees, or agents, upon such person's promise to repay us, therefore, if it is ultimately determined that any such person should not have been entitled to indemnification this indemnification policy could result in substantial expenditures by us, which we will be unable to recoup.

We have been advised that, in the opinion of the SEC, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against these types of liabilities, other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding, is asserted by a director, officer or controlling person in connection with the securities registered in our SB-2, we will (unless in the opinion of our counsel, the matter has been settled by controlling precedent) submit to a court of appropriate jurisdiction, the question whether indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The legal process relating to this matter if it were to occur is likely to be very costly and may result in us receiving negative publicity, either of which factors is are likely to materially reduce the market and price for our shares, if such a market ever develops.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None

Item 2. Description of Property

Our principal executive office consists of approximately 400 square meters of office space that we lease and which are located at Suite 7A01, Baicheng Building, 584 Yingbin Road, Dashi, Panyu District, Guangzhou, Guangdong, China. We lease this space pursuant to a four year lease at a rate of approximately $19,000 per year commencing April 1, 2006.

Commencing May 1 , 2009, we leased about 300 square meters of office space for the bottled water marketing development team at Suite 4D, Yijing Building, NO.119,Guanghzou Dadao Rd, Yuexiu District, Guanghzou City, P.R.China. We lease this space pursuant to a five year lease at a rate of approximately $43,000 per year with yearly increases of approximately 5% per annum during the term of the lease. The office is located at Zhujiang New Town, CBD of Guangzhou

Our remaining BOT facilities are located at the following locations:

BOT Facilities		Location
Waste water treatment plant of TJ		Dinan Road, Wuqing Development Zone, Tianjin, PRC.

Waste water treatment plant of XL		South west of Matoupu Village, Xinle City, Hebei, PRC.

Waste water treatment plant of HY		Hexi, Zangjia Village, Yaiyang Touring and Vacationing Area, Haiyang City, Shandong, PRC.

Each of the above BOT facilities consists of waste water treatment plants, office buildings and staff facilities.

Our bottled water facilities, other than the office described above, are located at the following locations:

Bottled water Facilities		Location

Aba Xinchen Dagu Glacier Spring Water Co.,Ltd		Zegai Village, Luhua Town, Heishui County, Aba Zang and Qiang Autonomous Region, Sichuan Province, PRC.

Beijing 9000 Year Commercial and Trading Co.,Ltd		Rm1109, Building 2, Henji Center, No.18 JianGuoMennei Dajie Street, East District, Beijing, P.R.C.

Chengdu 9000 Year Water Co., Ltd		Suite E, Floor 16, Building 2, Ruijin Plaza, No.2,GaoShenqiao, Chengdu City, P.R.C.

Each of the above Bottled water facilities consists of bottled water treatment plants, office buildings and staff facilities.

Item 3. Legal Proceedings.

Neither our company nor any of our properties are currently subject to any pending legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of shareholders during the fourth quarter of the year ending December 31, 2009.

PART Ⅲ

Part II

Item 5. Market for Common Equity and Related Shareholder Matters.

Market Information

Our common stock was traded on the OTC Bulletin Board (“OTCBB”) under the symbol “CEEC” until November 13, 2006 when our symbol was changed to “CHWG”. On April 4, 2007, our symbol was changed to CHWGE and on May 7, 2007 our shares were removed from the OTCBB and listed on the “Pink Sheets” maintained by the National Quotation Bureau under the Symbol “CHWG”. The following table sets forth, for the periods indicated, the high and low sale prices of our common stock as reported on the OTCBB. We consider our common stock to be thinly traded and that any reported bid or sale prices may not be a true market-based valuation of the common stock.

Quarter Ended	High		Low

March 31, 2007	$	0.13	$	0.08
June30, 2007	$	0.11	$	0.08
September. 30, 2007	$	0.14	$	0.09
December. 31, 2007	$	0.35	$	0.08
March. 31, 2008	$	0.10	$	0.05
June 31, 2008	$	0.039	$	0.033
September 30, 2008	$	0.03	$	0.029
December 31, 2008	$	0.008	$	0.008
March 31, 2009	$	0.017	$	0.013
June 30, 2009	$	0.03	$	0.03
December 31,2009	$	0.08		0.06

Holders

As of May 12, 2009, there were 72 record holders of our common stock. The number of holders does not include the shareholders for whom shares are held in a "nominee" or "street" name.

Dividend Policy

We have not declared or paid any dividends on our common stock to date. We anticipate that any future earnings will be retained as working capital and used for business purposes. Accordingly, it is unlikely that we will declare or pay any such dividends in the foreseeable future.

Securities Authorized for Issuance under Equity Compensation Plans

None

Recent Sales of Unregistered Securities

We did not sell any unregistered securities during the year ended December 31, 2009

ITEM 6. SELECTED FINANCIAL DATA.

Not applicable

ITEM 7. MANAGEMENTS DISCUSSION and ANALYSIS of FINANCIAL CONDITIONS and REULTS OF OPERATION.

Year ended December 31, 2009 vs. Year ended December 31, 2008.

Revenues Revenues from our bottled water operations increased from $207,318 in 2008 to $1,260,729 in 2009. This was primarily due to our increased sales of bottled water during the period as we repositioned our distribution efforts .Management anticipates that all future revenues will be from bottled water operations.

Cost of Revenues. Cost of revenues from our bottled water operations increased from $151,334 in 2008 to $435,505 in 2009. This was primarily due to our increased sales of bottled water during the period as we repositioned our distribution efforts Costs related to our BOT business which we are discontinuing, were not included in costs of revenues.in 2009 .

Gross profit from bottled water operations was $825,224 in 2009 as compared to $55,984 in 2008, reflecting our having repositioned and expanded our bottled water operations. Increased gross profit and margins mainly resulted from increased sales volume as well as a reduction in unit costs because company enhanced its cost controls for production and improved work efficiency.

Operating (General and Administrative) Expenses. Our General administrative expenses increased during 2009 to $1,409,828 as compared to $1,322,124 in 2008 which reflected the start up costs of our bottled water operations. The increase in operating expenses was primarily due to the increased levels of selling and distribution expense as sales effort was increased during this period of repositioning of our branded bottled water and the provision for bad debts. The operating expenses related to our BOT business, which we are discontinuing, are no longer included in our general administrative expenses in 2009

Other Income. The change on Other Income from a gain of $991,900 in 2008 to a loss of ($158,453) principally due to a gain on derivative instruments of $1,143,355 in 2008 as compared to a loss of ($107,265) in 2009. .

Net income (loss). We had a net loss of ($863,355) for the year ended December 31, 2009, and a net loss of ($2,702,694) for the year ended December 31, 2008. Decrease of our net loss primarily resulted from improved operating results as sales and gross profits increased. However, this was partly offset by loss attributable to derivative instruments.

Liquidity.

General. As of December 31, 2009, we had cash and cash equivalents of $30,497. The following table provides detailed information about our net cash flow for all financial statements periods presented in this report.

	The Year Ended December 31,
	2009			2008

Net cash provided by (used in) operating activities		(1,947,710	)		26,475
Net cash provided by/(used in) investing activities		2,420,585			(5,093,551	)
Net cash provided by/(used in) financing activities		(451,135	)		4,927,433
Net cash inflow(outflow)		21,918			8,579

Investing activities. Net cash provided by investing activities was $2,420,585 for the year ended December 31, 2009, which is a increase of $7,514,136 from $(5,093,551) net cash used in investing activities for the same period in 2008. The net inflow from the investing activities was mainly due to was mainly attributable to the proceeds from sale of Evergreen

Our future liquidity will be dependent on our ability to either obtain financing or proceeds from the sale of our remaining BOT plants to fund our bottled water operations or our obtaining loans. None of these events are entirely within our control. If we do not receive additional cash resources, the scope of our production, marketing and distribution effort for our bottled water will be reduced.

Critical Accounting Policies

The following is a discussion of those accounting policies that we deem to be “critical”— that is, they are important to the portrayal of our financial condition and results, and they reflect management’s reliance on estimates regarding matters that are inherently uncertain.

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

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

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

There is sufficient evidence to support that sales arrangements exist;

The price to the buyer is fixed through signed contracts;

Meter readings illustrate that delivery of treated waste water has occurred; and

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

Revenues from sale of environment protection related products and bottled water and provision of technical services are recognized when goods are delivered or as services are performed. The contractual terms of the purchase agreements or consultancy agreements dictate the recognition of revenues by us. We recognize revenue in accordance with Staff Accounting Bulletin No.104. Accordingly, four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2 )delivery has occurred; (3)the selling price is fixed and determinable; and (4 ) collectability 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 collectability 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 the evaluation include current operating results, trends and whether the anticipated undiscounted estimated future cash flows are less than the carrying value.

Allowances for accounts receivables. Our provisioning policy for bad and doubtful debt is based on the evaluation of collectability and aging analysis of accounts receivables and on management’s judgment. We do not require collateral or other security to support clients’ receivables. We conduct periodic review of our clients’ financial condition and customer payment practice to minimize collection risk on accounts receivables. This review is based on 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. As of December 31, 2008, we had not made any allowance for doubtful debts.

Credit Policy. As of December 31, 2008 and 2007, our accounts receivables were $18,172 and US $0 million, respectively. The increase in accounts receivables in 2008 was due to the new bottled water operation in 2008.. There is no allowance for doubtful amounts for 2007 or 2008

For turn-key projects, we billed our customers based on the percentage of completion as set forth in the contract signed with our customers whereas for BOT projects, we start billing our customers monthly once the wastewater treatment facilities start operation for the operating period as stipulated in the BOT agreements.

Financial Instruments. The Company conducted a private placement in April 2005 (“April Private Placement”) of 20 investment units, at $25,000 per unit, for gross proceeds of $500,000. Each unit consisted of (a) a 12% convertible debenture in the original principal amount of $25,000, convertible into shares of our common stock at the rate of the lesser of (i) $0.20 per share or (ii) a 10% discount to the price per share of common stock (or conversion price per share of common stock) of the next private placement conducted by us prior to any conversion of the debenture, and (b) 125,000 detachable warrants to purchase one share each of our common stock at an exercise price of $0.20 per share, expiring ten years from their date of issuance (“April Warrants”). 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.

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

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.

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.

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

The Company used the Black-Scholes model in calculating the fair market value of the September Warrants and allocated $4,140,535 of the $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%.

The September Warrants were issued pursuant to the agreements surrounding the September Private Placement. The subscription agreement contains a liquidated damages clause which requires cash penalties equal to two percent (2.0%) of the purchase price of the registrable securities purchased from the Group and held by the investors each month (or portion thereof) if the Group’s registration statement is not filed with the SEC within thirty (30) days of the final closing, (ii) such registration statement is not declared effective by the SEC within the earlier of one hundred and twenty (120) days from the final closing or three (3) business days of clearance by the SEC to request effectiveness, (iii) such registration statement is not maintained as effective by the Group for the effectiveness period or as allowed by 5(k)(ii) below or (iii) the additional registration statement referred to in Section 5(b) is not filed within thirty (30) days or declared effective within ninety (90) days as set forth therein. As of December 31, 2005, the Group has estimated a registration right liability of $94,981.

Since the liquidated damages are payable in cash, under paragraphs 12-32 of EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock”, contracts that include any provision that could require net-cash settlement cannot be accounted for as equity. Accordingly, the proceeds of the private placement in September allocated for par value of the common stock and the September Warrants have been recorded as a liability on the balance sheet. Upon the effectiveness of the registration statement, the amount will be recorded as equity.

ITEM 7A. QUANTITATIVE and QUALITATIVE DISCLOSURES about MARKET RISK.

Not applicable.

ITEM 8. FINANCIAL STATEMENTS and SUPPLEMENTARY DATA.

Our financial statements for the years ended December 31, 2008 and 2009, and the reports thereon of Patrizio & Zhao, LLC, respectively are included in this annual report.

ITEM 9. CHANGES in and DISAGREEMENTS with ACCOUNTANTS on ACCOUNTING and FINANCIAL DISCLOSURE.

None.

ITEM 9A(T). CONTROLS and PROCEDURES.

a) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, China Water Group’s management, with the participation of Wenge Fang, our principal executive officer, and Ding Rencai, our principal financial officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based upon that evaluation, Messrs.Fang and Rencai concluded that these disclosure controls and procedures were effective as of the end of the period covered in this report and that they provided reasonable assurance that the goals of the disclosure controls were met.

(b) Management’s Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate

There was no change in internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the fourth quarter of our year ended December 31, 2009 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

Material Weaknesses identified Prior to Fiscal 2008

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 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 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 June 30, 2005 10-QSB and September 30, 2005 10-QSB.

Group reorganization

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

Reclassification of April warrants

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

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

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

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

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

Interest in associate

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

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.

Steps Undertaken with respect to Material Weaknesses Prior to 2008

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

(a)

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

(b)

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

(c)

insufficient emphasis by management on compliance with US GAAP requirements.

We have communicated with our auditors,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

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;

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 experience accountant familiar with USGAAP which is not affiliated with ,Patrizio & Zhao,LLC, to assist our accounting department and internal audit function in the preparation of our US GAAP consolidated financial statements;

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

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

We have fully implemented items 1, 2, and 3, while item 4 remains in the planning stage.

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

Other than those disclosed above, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the fiscal year ended December 31, 2008

(

ITEM 9B. OTHER INFORMATION.

We do not have any information that was required to be reported on Form 8-K during the fourth quarter.

PART 1II

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS and CORPORATE GOVERNANCE.

Our directors and officers as of April 30, 2009 and November 20 2009 are:

Name	Age	Position
Chong Liang Pu	48	Chairman of the Board
Wenge Fang	39	Chief Executive Officer and a Director
Ding Rencai	49	Chief Financial Officer and a Director

Mr. Pu served as our chief executive officer, president and a director since October 2004 until December 2008. He has resigned as an officer, but continues as Chariman of the Board. Mr. Pu founded Evergreen and has acted as its chairman and president since April 2004. From May 1999 until April 2004, Mr. Pu was the chief executive officer and general manager of Guang Dong Xin Xing Mei Biology Company Limited, a majority-owned subsidiary of Evergreen.

Wenge Fang, age 39. Prior to joining the Company as director,CEO ＆ President in December 2008 Mr. Fang ha been a consultant to the Company since August 2007. Before this Mr. Fang founded Shenzhen Golden Lexicon Investment Consulting Co.,Ltd (a business consulting firm)and had acted as its executive director and general manager since April 2002. In July 1997, Mr. Fang joined MingHua Group a company engaged in the real estate，hotel and hi-tech business as secretary of the board of directors. In 1998, he was appointed as vice general manager of the group. In August 2001 he became the director and vice general manager of MingHua International Holding Group(mgha.ob) untill his resignation in October 2002. Mr Fang owned MBA degree from Business School of FuDan University in ShangHai, P.R.China.

Ding Rencai, age 49, has been the the Chief Financial Officer of the Company since July 1, 2008. From December 2005 to July 2008, Mr. Ding was a senior advisor to the Company and chief financial officer and financial manager of Guangdong Xinxinmei Environmental Protection Company, a majority-owned subsidiary of the Company.He was also the acting CFO of the company from April 30, 2007 until his appointment as Chief Financial Officer in July 2008. He previously served as our Chief Financial Officer from October 16,2004 to December 29,2005. From January 2000 until December 2003, Mr. Ding was a financial manager of Guangzhou Yitao Group Co., Ltd., a real estate development company in the PRC. In 1999, Mr. Ding was the chief financial officer and head of the auditing department of Shenzhen Wei Ang Appliance Development Co., Ltd., a household appliance manufacturer in the PRC.

Audit Committee Financial Expert

We do not have an audit committee nor do we have a financial expert associated with an audit committee. Our entire board of directors performs the functions of our audit committee.

Code of Ethics

We have adopted a code of ethics that applies to the principal executive officer and principal financial and accounting officers. A copy of our code of ethics was filed as an exhibit to our annual report on Form 10-KSB for the year ended December 31, 2005. We will provide to any person without charge, upon request, a copy of our code of ethics. Requests may be directed to our principal executive offices at Suite 7A01, Baicheng Building, 584 Yingbin Road, Dashi, Panyu District, Guangzhou, Guangdong, China.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers, directors and persons who beneficially own more than 10% of a registered class of our equity securities to file reports of securities ownership and changes in such ownership with the Securities and Exchange Commission (the “SEC”). Officers, directors and greater than 10% beneficial owners are also required by rules promulgated by the SEC to furnish us with copies of all Section 16(a) forms they file.

All of our officers, directors or 10% shareholders have filed the reports required to be filed under Section 16(a), except for Mr. Peh Chung Lim and Mr. Jia H Li. These persons have since resigned their positions with the Company.

Item 11. Executive Compensation.

Compensation of Executive Officers. The following table sets forth certain information relating to the compensation paid by the company to its highest paid executive officersfor services rendered during the fiscal years ended December 31, 2008 and 2007.

Compensation of Directors. Members of our board of directors do not receive cash compensation for their services as directors, although some Directors are reimbursed for reasonable expenses incurred in attending board or committee meetings. In the future, we may have to consider compensating any outside directors that become members of our board of directors.

Employment Agreements

We have annual employment agreements with our Messrs Fang and Ding which provide for the cash compensation in the amount of $44,100 in the case of Mr. Fang and $40,000 in the case of Mr. Ding. Mr. Pu was paid $16,400 for his services as Chairman without an agreement. All officers and directors are reimbursed for reasonable out of pocket expenses.These agreements are renewable on a yearly basis by us.

Termination of Employment

There are no compensatory plans or arrangements, including payments to be received from the Company, with respect to any person named in the Summary Compensation Table set forth above that would in any way result in payments to any such person because of his or her resignation, retirement or other termination of such person’s employment with us.

Employee Benefit Plans

None

Indemnification of Directors and Executive Officers and Limitation of Liability

Pursuant to Nevada Law our Certificate of Incorporation provides that no director will have any personal liability to us or to any of our shareholders for monetary damages for breach of fiduciary duty as a director; provided, however, that this exclusion may not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to us or our shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or (iii) for any transaction from which the director derived an improper personal benefit.

ITEM 12. SECURITY OWNERSHIP of CERTAIN BENEFICIAL OWNERS and MANAGEMENT and RELATED STOCKHOLDER MATTERS.

Security Ownership of Certain Beneficial Owners

The following table sets forth, as of November 20, 2009, the stock ownership of (i) each of our named executive officers and directors, (ii )all executive officers and directors as a group, and (iii) each person known by us to be a beneficial owner of 5% or more of our common stock. No person listed below has any option, warrant or other right to acquire additional securities from us, except as may be otherwise noted. We believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them except as stated therein.

Name (1)	Number of Shares of Common Stock Beneficially Owned (2)		Percentage Owned
Chong Liang Pu		49,635,000		35.61	%
Shi Rong Jiang*		5,101,000		3.75	%
Jia He Li*		-0-		0	%
Lin Hong Ye*		-0-		0	%
Peh Chung Lim*		-0-		0	%
Wenge Fang		-0-		0	%
Ding Rencai		-0-		0	%
Gao Yongping		10,145,250		7.47	%
Vision Opportunity Fund (3)		13,600,000		9.53	%
All directors and executive officers as a group (3 persons		49,635,000		35.61	%

* Not currently an oficer or director.

(1)	The addresses of Chong Liang Pu, Shi Rong Jiang, Jia He Li, Lin Hong Ye, Peh Chung Lim and Gao Yongping are Suite 7A01, Baicheng Building, 584 Yingbin Road, Dashi, Panyu District, Guangzhou, Guangdong, China.

(2)

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Ordinary shares relating to options currently exercisable or exercisable within 60 days of the date of this table, are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.

(3)

Vision Opportunity Master Fund Ltd. is the beneficial owner of the shares held of record by Vision Opportunity Master Fund Ltd. The common shares beneficially owned by Vision Opportunity Fund Ltd. include (i) 6,800,000 common shares, and (ii) 6,800,000 common shares issuable upon exercise of outstanding warrants. The address for Vision Opportunity Fund Ltd. is 253 East 77th St., PH-F, New York, NY 10021.

Beneficial ownership is determined in accordance with the Rule 13d-3(a) of the Securities Exchange Act of 1934, as amended, and generally includes voting or investment power with respect to securities. Except as subject to community property laws, where applicable, the person named above has sole voting and investment power with respect to all shares of our common stock shown as beneficially owned by him.

This table is based upon information derived from our stock records. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the shareholders named in this table has sole or shared voting and investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based upon 139,383,450 shares of common stock outstanding as of November 20, 2009.

Summary Compensation Table

The following table sets forth certain information regarding our executive compensation:

Name and principal position	Year	Salary ($)		Bonus ($)		Stock awards ($)		Option awards ($)		Non-equity incentive plan compensation ($)		Change in pension value and nonqualified deferred compensation earnings ($)		All other compensation ($)		Total ($)
Chong
Liang Pu.	2008		16,400-		-0-		-0-		-0-		-0-		-0-		-0-		16,400-
Chairman
	2009		16,400		-0-		-0-		-0-		-0-		-0-		-0-		16,400
Wenge
Fang,	2008		44,100		-0-		-0-		-0-		-0-		-0-		-0-		44,100-
CEO
	2009		44,100		-0-		-0-		-0-		-0-		-0-		-0-		44,100
Ding
Rencai,	2008		40,000-		-0-		-0-		-0-		-0-		-0-		-0-		40,000-
CFO
	2009		40,000		-0-		-0-		-0-		-0-		-0-		-0-		40,000

Changes in Control

We know of no contractual arrangements which may at a subsequent date result in a change of control in the Company.

ITEM 13. CERTAIN RELATIONSHIPS and RELATED TRANSACTIONS, and DIRECTOR INDEPENDENCE.

Certain Relationships and Transactions with Related Persons

We have the following related party transactions for the years ended December 31, 2009

“BJZC” - Bei Jing Zhao Cheng Chuang Zhan Investment Company Limited

“GDXS” - Guang Dong Xin Sheng Environmental Protection Company Limited

“Xinxingmei” - Guang Dong Xin Xingmei Biology Company Limited

We hold the exclusive rights to use MHA biological treatment processes technologies and GM Bio-carriers. Both are the subject of patents owned by our Chairman, Mr. Pu, and we have acquired the exclusive rights pursuant to a license agreement with Mr. Pu.

As at December 31, 2009 we owed GDXS $2,495,572 and BJZC $285,384 on and interest free basis. These loans are payable on demand. Mr. Pu, Chairman of the Board holds and equity interest in both BJZC and GDXS.

As at December 31, 2009, our subsidiaries Aba and Xinchen owed Xinxingmei $1,722,159 on an interest free demand basis.

As at December 31, 2009, we owed Chonglaing Pu, the Chairman of the Board $4,284 and lent $1,467 to Tingli Pu, a shareholder ,on an interest free on demand basis.

)

Director Independence

Our current directors are Messrs. Pu, Fang and Ding. We are not currently subject to corporate governance standards defining the independence of our directors. We have not yet adopted an independence standard or policy, although we intend to do so in the future. Accordingly, the Company’s Board currently determines the independence of each Director and nominee for election as a Director. The Board has determined that none of the Company’s directors currently qualifies as an independent director.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees

The aggregate fees billed by the Company’s auditors for professional services rendered in connection with the audit of the Company’s annual financial statements and reviews of the financial statements included in the Company’s Form 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for fiscal years 2008 and 2007 were $55,000 and $55,000, respectively.

Audit Related Fees

None

Tax Fees

None

All Other Fees

None

Pre-Approval Policies and Procedures

The board of directors has not adopted any pre-approval policies and approves all engagements with the Company’s auditors prior to performance of services by them.

PART 1V

ITEM 15. EXHIBITS and FINANCIAL STATEMENT SCHEDULES

The following exhibits are filed with this report, except those indicated as having previously been filed with the Securities and Exchange Commission and are incorporated by reference to another report, registration statement or form. As to any shareholder of record requesting a copy of this report, we will furnish any exhibit indicated in the list below as filed with this report upon payment to us of our expenses in furnishing the information.

Exhibit Number Exhibit Description

2.1 Securities Purchase Agreement and Plan of Reorganization (1)

2.2 Amendment No. 1 to Securities Purchase Agreement and Plan of Reorganization (1)

3.3 Certificate of Amended and Restated Articles of Incorporation (3)

3.4 Bylaws (4)

3.5 Amendments to Bylaws (3)

10.1 BOT Investment and Operation Contract for Sewage Treatment Plant between Guangdong Xinsheng Environmental Protection Co., Ltd. and City Administration of Feng Feng Mining Area of Handon City, Hebei Province (5)

10.2 Investment Management Contract dated August 14, 2002 between Guangdong Xinxingmei Environmental Protection Science and Technology Investment Co., Ltd. and The People’s Government of Wuqing District, Tianjin City (5)

10.3 BOT Investment Contract dated July 4, 2003 between Guandong Xinsheng Environmental Co., Ltd. and People’s Government of Shunyi District, Beijing (5)

10.4 Contract for BOT Project Investment and Operation between Guandong Xinsheng Environmental Co., Ltd. and Shandong Haiyang Planning and Construction Administration (5)

10.5 Agreement with Shenzhen Jukeyuan Industry Development Co., Ltd. dated July 28, 2005(5)

10.6 Agreement with Tianjin Wuqing Huangzhuang Industrial Zone dated July 20, 2005(5)

10.7 Agreement with Tianjin Wuqing Fuyuan Economic Development Co., Ltd. dated May 28, 2005(5)

10.8 Agreement with Beijing Jinqiao Luyuan Environmental Protection Investment and Development Co., Ltd. dated August 4, 2005(5)

10.9 Agreement with Yongji Economic Development Zone Land Planning and Construction Bureau dated August 6, 2005(5)

10.10 License Agreement with Chong Liang Pu(6)

10.11 Equity Assignment Agreement with Fortune Luck Global International Limited, dated December 31, 2007 (10)

10.12 Equity Transfer Agreement between the Evergreen Asset Group Ltd., a subsidiary of the Registrant, and Wenning Pu (7)

10.13 Employment Agreement with Ding Rencai (8)

10.14 Employment Agreement with Wenge Fang (9)

16 Letter re Change in Certified Registered Public Account (2)

21.1 List of Subsidiaries

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

(1) Previously filed as part of the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on October 21, 2004.

(2) Previously filed as part of the Company’s current report on Form 8-K/A filed with the Securities and Exchange Commission on December 30, 2004.

(3) Previously filed as part of the Company’s annual report on Form 10-KSB filed with the Securities and Exchange Commission on April 15, 2005.

(4) Previously filed as part of the Company’s Form 10-SB filed with the Securities and Exchange Commission on May 24, 1999.

(5) Previously filed as part of Amendment Number 1 to Registration Statement on Form SB-2, filed January 12, 2006, 1933 Act Number : 333-129064.

(6) Previously filed as Exhibit 10.5 to the Company’s annual report on Form 10-KSB/A filed with the Securities and Exchange Commission on July 15, 2005.

(7) Previously filed as exhibit 10.1 to Current Report on Form 8-K, dated December 29, 2007

(8) Previously filed as exhibit 10.1 to Current Report on Form 8-K, dated July 1, 2008.

(9) Previously filed as exhibit 10.1 to Current Report on Form 8-K, dated December 11, 2008

(10) Previously filed as exhibit 10.11 to amendment number 1 to form 10-K for the year ended December 31, 2008.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, July 11, 2011

CHINA WATER GROUP, INC

By	/s/ Chongliang Pu
Chongliang Pu
Chairman of the board
(Principal Executive Officer)

By	/s/ Wenge Fang
Wenge Fang
CEO and President
(Principal Executive Officer)

By	/s/ Ding Rencai
Ding Rencai
CFO (Principal Accounting and Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/s/ Chong Liang Pu	Chairman of the Board	July 11, 2011
Chong Liang Pu

/s/ Wenge Fang	Director, CEO and President	July 11, 2011
Wenge Fang

/s/ Ding Rencai	Director and CFO	July 11, 2011
Ding Rencai

CHINA WATER GROUP, INC.

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND 2008

CHINA WATER GROUP, INC.

Consolidated Financial Statements

December 31, 2009 and 2008

Table of Contents

	Page

Report of Independent Registered Public Accounting Firm	F-1

Consolidated Balance Sheets	F-2

Consolidated Statements of Operations	F-3

Consolidated Statements of Changes in Equity	F-4

Consolidated Statements of Cash Flows	F-5

Notes to Consolidated Financial Statements	F-6

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

China Water Group, Inc.

We have audited the accompanying consolidated balance sheets of China Water Group, Inc. (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of China Water Group, Inc. as of December 31, 2009 and 2008, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Parsippany, New Jersey

July 11, 2011

F-1

CHINA WATER GROUP, INC.

Consolidated Balance Sheets

	December 31,			December 31,
	2009			2008
Assets
Current assets
Cash and cash equivalents	$	30,497		$	8,579
Accounts receivable, net		179,373			18,172
Inventory		282,999			393,178
Receivable for sale of Evergreen		1,173,600			-
Other current assets		170,728			41,283
Total current assets		1,837,196			461,212

Property, plant and equipment, net		1,017,202			882,824
Intangible assets, net		209,886			135,649
Goodwill		13,178,494			13,106,263
Assets of discontinued division		-			10,158,905

Total assets	$	16,242,779		$	24,744,853

Liabilities
Current liabilities
Warrant liability	$	143,875		$	36,610
Accounts payable		188,105			187,033
Accrued expenses		2,071,961			1,822,203
Due to directors		2,817			251,554
Due to related companies		2,780,956			3,169,152
Due to affiliated companies		1,722,159			1,758,281
Total current liabilities		6,909,873			7,224,833

Long-term liabilities:
Other payables for acquisition of a subsidiary		5,950,000			5,950,000
Total long-term liabilities		5,950,000			5,950,000

Liabilities of discontinued division		-			7,386,647

Total liabilities		12,859,873			20,561,480

Equity
Stockholders' equity
Preferred stock, $0.001 par value, 50,000,000 shares authorized, no shares issued and outstanding		-			-
Common stock, $0.001 par value, 200,000,000 shares authorized; 139,383,450 shares issued and outstanding at December 31, 2009 and 2008		139,383			139,383
Additional paid-in capital		6,131,532			6,131,532
Accumulated deficit		(4,045,147	)		(3,252,804	)
Accumulated other comprehensive income		1,468,759			1,404,509
Total stockholders' equity		3,694,527			4,422,620

Noncontrolling interest		(311,621	)		(239,247	)

Total equity		3,382,906			4,183,373

Total liabilities and equity	$	16,242,779		$	24,744,853

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

F-2

CHINA WATER GROUP, INC.

Consolidated Statements of Operations

	For the Years Ended December 31,
	2009			2008


Sales	$	1,260,729		$	207,318

Cost of Sales		435,505			151,334

Gross profit		825,224			55,984

Operating expenses:
Selling and distribution expenses		164,755			894,459
General and administrative expenses		1,245,073			427,665
Total operating expenses		1,409,828			1,322,124

Loss from operations		(584,604	)		(1,266,140	)

Other income (expense):
Interest income (expense)		(174	)		33
Penalty for late effectiveness of registration statement		-			(91,297	)
Gain (loss) on financial instruments		(107,265	)		1,143,355
Other expense		(51,014	)		(60,191	)
Total other income (expense)		(158,453	)		991,900

Loss from continuing operations before income taxes		(743,057	)		(274,240	)

Provision for income taxes		120,298			509

Loss from continuing operations		(863,355	)		(274,749	)

Discontinued operations:

Loss from discontinued operations of Evergreen Asset Group (including Loss on disposal of approximately $3,844,000 in 2008)		-			(2,400,298	)
Income taxes		-			(27,647	)
Loss from discontinued operations		-			(2,427,945	)

Net loss		(863,355	)		(2,702,694	)

Less: Net loss attributable to noncontrolling interest		(71,012	)		(120,741	)

Net loss attributable to CHWG		(792,343	)		(2,581,953	)

Basic loss per share	$	(0.00	)	$	(0.02	)
Diluted loss per share	$	(0.00	)	$	(0.02	)

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

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

F-3

CHINA WATER GROUP, INC.

Consolidated Statements of Changes in Equity

										Accumulated
					Additional					Other
	Common Stock				Paid in		Accumulated			Comprehensive		Total			Noncontrolling			Total
	Number		Par Value		Capital		deficit			Income		CHWG			Interest			Equity

Beginning balance, January 1st, 2008		139,383,450	$	139,383	$	6,131,532	$	(670,851	)	$	1,138,354	$	6,738,418		$	-		$	6,738,418

Comprehensive income (loss):
Net Loss		-		-		-		(2,581,953	)		-		(2,581,953	)		(120,741	)		(2,702,694	)
Other comprehensive income:
Foreign currency translation adjustment		-		-		-		-			266,155		266,155			(1,903	)		264,252
Comprehensive income (loss)		-		-		-		-			-		(2,315,798	)		(122,644	)		(2,438,442	)
Noncontrolling interest for acquisition of Xinchen		-		-		-		-			-		-			(116,603	)		(116,603	)

Ending balance, December 31st,2008		139,383,450	$	139,383	$	6,131,532	$	(3,252,804	)	$	1,404,509	$	4,422,620		$	(239,247	)	$	4,183,373

Comprehensive income (loss):
Net Loss:		-		-		-		(792,343	)		-		(792,343	)		(71,012	)		(863,355	)
Other comprehensive income:
Foreign currency translation adjustment		-		-		-		-			64,250		64,250			(1,362	)		62,888
Comprehensive income (loss)		-		-		-		-			-		(728,093	)		(72,374	)		(800,467	)

Ending balance, December 31st, 2009		139,383,450	$	139,383	$	6,131,532	$	(4,045,147	)	$	1,468,758	$	3,694,527		$	(311,621	)	$	3,382,906

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

F-4

CHINA WATER GROUP, INC.

Consolidated Statements of Cash Flows

	For the Years Ended December 31,
	2009			2008

Cash flows from operating activities:
Net loss	$	(863,355	)	$	(2,702,694	)
Adjustments to reconcile net income to net cash provided by (used in)
Operating activities:
Depreciation and amortization		162,012			36,347
Provision for bad debt		668,065			-
Gain (loss) on financial instruments		107,265			(1,143,355	)
Changes in operating assets and liabilities :
Accounts receivable		(829,055	)		(18,172	)
Inventory		112,262			(393,178	)
Receivable for sale of Evergreen		(1,172,720	)		-
Other current assets		(129,119	)		6,757,349
Assets of discontinued division		-			3,379,515
Accounts payable		41			187,033
Accrued expenses		246,831			612,143
Due to directors		(249,937	)		133,505
Liabilities of discontinued division		-			(6,822,018	)
Total adjustments		(1,084,355	)		2,729,169

Net cash provided by (used in) operating activities		(1,947,710	)		26,475

Cash flows from investing activities:
Due from related companies		-			271,691
Acquisition of property, plant and equipment		(288,517	)		(919,744	)
Acquisition of intangible assets		(76,344	)		(7,291,912	)
Assets of discontinued division		-			2,846,414
Sale of subsidiary – Evergreen, net of cash		2,785,446			-

Net cash provided by (used in) investing activities		2,420,585			(5,093,551	)

Cash flows from financing activities:
Due to related companies		(405,357	)		3,169,152
Due to affiliated companies		(45,778	)		1,758,281

Net cash provided by (used in) financing activities		(451,135	)		4,927,433

Effect of foreign currency translation on cash and cash equivalents		178			148,222

Net increase in cash and cash equivalents		21,918			8,579

Cash and cash equivalents, beginning of period		8,579			-

Cash and cash equivalents, end of period	$	30,497		$	8,579

Supplemental schedule of non-cash activities
Outstanding obligation for acquisition of a subsidiary - Xinchen	$	-		$	5,950,000

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

F-5

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

Note 1 – Organization and Nature of Business

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

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.

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. The company is now engaged in the production, sales and marketing of the bottled water.

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% equity interest in Guangzhou Xinchen Water Company Limited from Fortune Luck Global International Limited. Guangzhou Xinchen Water Company Limited owns 100% equity interest of Aba Xinchen Dagu Glacier Spring Co., Limited. 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 will be paid in the future. The primary reason for the acquisition was to enter into the bottled water industry. The results of operations for the period from January to December 2008 were included in the combined income statement. The Company recorded a liability of $5.9, which represented the fair value of stock calculated based on US$ 0.2 per share, with reference to contemporaneous prices of the Company’s common stock on the Pink Quote, with total of 29.75 million shares. This liability does not represent a contingent liability as defined under paragraph 25 of SFAS 141. Approximately $13 million of the purchase price of $13.45 million was assigned to goodwill as the net asset of Aba Xinchen Dagu Glacier Spring Co., Limited. was minimum at the acquisition date. The consolidated statement of operations for the twelve months ended December 31, 2008 included the twelve-month results of operations of Aba Xinchen Dagu Glacier Spring Co., Limited.

F-6

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

Note 1 – Organization and Description of Business (continued)

In January, 2009, the Group sold 100% of the equity interest in Evergreen to Whole Treasure Investment Ltd. at a total consideration of RMB 19,000,000 (approximately $2,784,450). After completing the transfer formalities, the Group no longer possesses any share in Evergreen.

On August 24, 2009, Guangzhou Xinchen Water Company established a subsidiary, Beijing Jiuqiannian Water Company Ltd., in the PRC as a wholly-owned limited liability company with registered capital of RMB 300,000.

Note 2 – Summary of Significant Accounting Policies

Basis Of Presentation and Consolidation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The consolidated financial statements include the financial statements of CHWG and its subsidiaries. All significant intercompany balances and transactions have been eliminated on consolidation.

In preparing the accompanying consolidated financial statements, the Company evaluated the period from December 31, 2009 through the date when the financial statements were issued for material subsequent events requiring recognition or disclosure. No such events were identified for this period.

Use of Estimates

The preparation of consolidated financial statements in conformity with US GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of these consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

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

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

F-7

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

Note 2 – Summary of Significant Accounting Policies (continued)

Revenue Recognition (continued)

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

There is sufficient evidence to support that sales arrangements exist;

The price to the buyer is fixed through signed contracts;

Meter readings illustrate that delivery of treated waste water has occurred; and

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

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

Cash and Cash Equivalents

In accordance with ASC 230-10 (formerly SFAS No. 95, “Statement of Cash Flows”), the Company considers all cash balances and highly liquid investments with an original maturity of three months or less. Because of the short maturity of these investments, the carrying amounts approximate their fair value. Restricted cash is excluded from cash and cash equivalents.

Accounts Receivable

Accounts receivable are stated at historical cost, net of allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectibility of accounts receivables and other receivables. A considerable amount of judgment is required in assessing the amount of the allowance; the Group considers the historical level of credit losses and applies percentages to aged receivable categories. The Group makes judgments about the creditworthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a larger allowance may be required.

Bad debts are written off when identified. The Group extends unsecured credit to customers ranging from three to six months in the normal course of business. The Group does not accrue interest on accounts receivables.

Historically, losses from uncollectible accounts have not significantly deviated from the general allowance estimated by the management and no significant additional bad debts have been written off directly to the profit and loss.

F-8

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

Note 2 – Summary of Significant Accounting Policies (continued)

Accounts Receivable (conitnued)

The balance of allowance for doubtful accounts amounted to $668,520 and $-0- as of December 31, 2009 and 2008, respectively.

Inventory

Inventories are stated at the lower of cost, determined on a weighted average basis, or market. Costs of inventories include purchase and related costs incurred in bringing the products to their present location and condition. Market value is determined by reference to selling prices after the balance sheet date or to management’s estimates based on prevailing market conditions. The management will write down the inventories to market value if it is below cost. The management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if valuation allowance is required.

Cost of Sales

Cost of revenues comprises labor and other cost of personnel directly engaged in providing the services, subcontracting and attributable overhead costs.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and amortization and impairment loss. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are capitalized. Depreciation and amortization are provided using the straight-line method over the following estimated useful lives:-

Estimated Useful Life
Office equipment	5 years
Furniture and fixtures	5 years
Tools and equipment	5 years
Motor vehicles	10 years
Waste water treatment plant	20 years

Long-Lived Assets

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” codified in ASC Topic 360-10-35, the Company reviews the recoverability of its long-lived assets on a periodic basis in order to identify business conditions, which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future discounted cash flows. If the total of the expected future discounted cash flows is less than the total carrying value of the assets, a loss is recognized for the difference between the fair value (computed based upon the expected future discounted cash flows) and the carrying value of the assets.

Intangible Assets

Intangible assets are stated at cost. Intangible assets with finite life are amortized over their estimated useful life using straight-line method. Estimated useful life of intangible assets is as follows:

Estimated Useful Life
Land use right	50 years

F-9

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

Note 2 – Summary of Significant Accounting Policies (continued)

Goodwill

The Company accounts for business acquisitions in accordance with ASC 805-10 (formerly SFAS No. 141 “Business Combinations”), which may result in the recognition of goodwill. Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for under the purchase method. Goodwill is not subject to amortization but will be subject to periodic evaluation for impairment. Goodwill is stated in the consolidated balance sheet at cost less accumulated impairment loss, if any.

FAIR Value Measurement And Financial Instruments

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”) on January 1, 2008. SFAS 157 has been codified as ASC 820-10, “Fair Value Measurements.” ASC 820-10, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820-10 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, other current assets; accounts payable, accrued expenses, short-term bank loans and other current liabilities. As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented due to the short maturities of these instruments and that the interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective year ends.

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes whereby deferred taxes are determined based on the temporary differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Earnings Per Share

Basic earnings (loss) per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed similarly to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.

F-10

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

Note 2 – Summary of Significant Accounting Policies (continued)

Comprehensive Income

The Company has adopted SFAS No. 130, “Reporting Comprehensive Income”, codified in FASB ASC Topic 220, which establishes rules for the reporting and display of comprehensive income, its components and accumulated balances. SFAS No. 130 (ASC 220) defines comprehensive income to include all changes in equity, including adjustments to minimum pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on available-for-sale marketable securities, except those resulting from investments by owners and distributions to owners.

Foreign Currency Translation and Transactions

The Company has evaluated the determination of its functional currency based on the guidance in ASC Topic, “Foreign Currency Matters,” which provides that an entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash. On its own, the Company raises financing in the U.S. dollar, pays its own operating expenses primarily in the U.S. dollar, paid dividends to its shareholders of common stock and expects to receive any dividends that may be declared by its subsidiaries in U.S. dollars.

Therefore, it has been determined that the Company’s functional currency is the U.S. dollar based on the expense and financing indicators, in accordance with the guidance in ASC 830-10-85-5.

The Company uses United States dollars (“U.S. Dollar” or “US$” or “$”) for financial reporting purposes. The subsidiaries within the Company maintain their books and records in RenMinBi (“RMB”), the primary currency of the economic environment in which their operations are conducted. Assets and liabilities of the subsidiaries in RMB are translated into U.S. Dollars using the applicable exchange rates prevailing at the balance sheet date. Items on the statements of income and comprehensive income and cash flows are translated at average exchange rates during the reporting period. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the Company’s financial statements are recorded as accumulated other comprehensive income.

The exchange rates used to translate amounts in RMB into US Dollars for the purposes of preparing the condensed combined financial statements were as follows:

	December 31, 2009	December 31, 2008
Balance sheet items, except for shareholders’ equity items	RMB 1: US$0.14670	RMB 1: US$0.14589

	December 31, 2009	December 31, 2008
Amounts included in the statements of income, and statements of cash flows for the years then ended	RMB 1: US$0.14661	RMB 1: US$0.14363

Shareholders’ equity items	Historical rate	Historical rate

Recent Accounting Pronouncements

In January 2010, the FASB issued the following ASC Updates:

ASU No. 2010-01— Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash. This Update clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this Update are effective for interim and annual periods ending on or after December 15, 2009 with retrospective application.

F-11

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

Note 2 – Summary of Significant Accounting Policies (continued)

Recent Accounting Pronouncements (continued)

ASU No. 2010-02— Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This Update amends Subtopic 810-10 and related guidance to clarify that the scope of the decrease in ownership provisions of the Subtopic and related guidance applies to (i) a subsidiary or group of assets that is a business or nonprofit activity; (ii) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture; and (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity, but does not apply to: (i) sales of in substance real estate; and (ii) conveyances of oil and gas mineral rights. The amendments in this Update are effective beginning in the period that an entity adopts FAS 160 (now included in Subtopic 810-10).

ASU No. 2010-06— Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This Update amends Subtopic 820-10 that requires new disclosures about transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements. This Update also amends Subtopic 820-10 to clarify certain existing disclosures. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010.

The Company expects that the adoption of the above Updates issued in January 2010 did not and will not have any significant impact on its financial position and results of operations.

In January 2010, the FASB expanded the disclosure requirements for fair value measurements relating to the transfers in and out of Level 2 measurements and amended the disclosure for the Level 3 activity reconciliation to be presented on a gross basis. In addition, valuation techniques and inputs should be disclosed for both Levels 2 and 3 recurring and nonrecurring measurements. The new requirements are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about the Level 3 activity reconciliation which are effective for fiscal years beginning after December 15, 2010. The Company adopted the new disclosure requirements on January 1, 2010 except for the disclosure related to the Level 3 reconciliation, which will be adopted on January 1, 2011. The adoption will not have an impact on its consolidated financial condition, results of operations or cash flows.

In October 2009, the FASB issued an amendment to the accounting and disclosure for revenue recognition. The amendment modifies the criteria for recognizing revenue in multiple element arrangements. Under the guidance, in the absence of vendor-specific objective evidence (“VSOE”) or other third party evidence (“TPE”) of the selling price for the deliverables in a multiple-element arrangement, this amendment requires companies to use an estimated selling price (“ESP”) for the individual deliverables. Companies shall apply the relative-selling price model for allocating an arrangement’s total consideration to its individual deliverables. Under this model, the ESP is used for both the delivered and undelivered elements that do not have VSOE or TPE of the selling price. The guidance is effective for the fiscal year beginning on or after June 15, 2010, and will be applied prospectively to revenue arrangements entered into or materially modified after the effective date. The Company intends to adopt the new guidance prospectively beginning January 1, 2011 and is currently evaluating the impact the adoption will have on its consolidated financial statements.

On July 1, 2009, the Financial Accounting Standards Board (“FASB”) officially launched the FASB Accounting Standards Codification (“ASC”), which has become the single official source of authoritative nongovernmental US GAAP, in addition to guidance issued by the Securities and Exchange Commission. The ASC is designed to simplify US GAAP into a single, topically ordered structure. All guidance contained in the ASC carries an equal level of authority. The ASC is effective for all interim and annual periods ending after September 15, 2009.

F-12

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

Note 2 – Summary of Significant Accounting Policies (continued)

Recent Accounting Pronouncements (continued)

On July 1, 2009, the Company adopted the accounting and disclosure requirements of Statement of Financial Accounting Standard (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51, which is now included with ASC Topic 810 Consolidation. This standard establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. On a prospective basis, any changes in ownership will be accounted for as equity transactions with no gain or loss recognized on the transactions unless there is a change in control.

Reclassification

Certain amounts as of December 31, 2008 were reclassified for presentation purposes.

Note 3 – Inventory

Inventory as of December 31, 2009 and December 31, 2008 consisted of the following:

	December 31,		December 31,
	2009		2008

Raw materials	$	139,077	$	200,754
Finished goods		143,922		192,424

Total	$	282,999	$	393,178

Note 4 – Property, Plant And Equipment, Net

Property, plant and equipment, net as of December 31, 2009 and December 31, 2008 consisted of the following:

	December 31,		December 31,
	2009		2008

Office equipment	$	31,448	$	16,858
Furniture and fixtures		5,468		-
Motor vehicles		249,323		59,362
Building and structure		179,674		170,785
Bottled water production equipment		729,945		664,492
Subtotal		1,195,858		911,497
Less : Accumulated depreciation		196,345		36,921
		999,513		874,576
Add: Construction in progress		17,689		8,248
Total	$	1,017,202	$	882,824

Depreciation expenses for the year ended December 31, 2009 and 2008 amounted to $159,101 and $33,451 respectively.

F-13

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

Note 5 – Intangible Assets, Net

Intangible assets at December 31, 2009 and 2008 consist of the following:

	December 31,		December 31,
	2009		2008

Land use rights	$	222,021	$	144,822
Less : Accumulated amortization		12,135		9,173
Total	$	209,886	$	135,649

Amortization expense for the years ended December 31, 2009 and 2008 amounted to $2,911 and $2,896 respectively.

Note 6 - Goodwill

On January 23, 2008, the Group completed its acquisition of 90% equity interest in Guangzhou Xinchen Water Company Limited from Fortune Luck Global International Limited for a consideration of $13.45 million. Goodwill, which is equal to the excess of cost over the fair value of acquired assets, has been recorded in conjunction with the acquisition. Goodwill is accounted for in accordance with ASC 350 (formerly SFAS 142). Under ASC 350, goodwill is not amortized and is subject to impairment test, at least annually. The test consists of two steps. First, the identification of potential impairment is performed by comparing the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered impaired. Second, if there is impairment identified in the first step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with ASC 450-10 (formerly SFAS No 141(R)), “Business Combinations”. As of December 31, 2009, no impairment was noted or recorded.

Balance as of December 31, 2008	$	13,106,263
Foreign currency exchange adjustment		72,231
Adjusted balance as of December 31, 2009	$	13,178,494

Note 7 - Warrant Liability

The fair values of the warrant liability as of December 31, 2009 and 2008 were as following:

	December 31,		December 31,
	2009		2008

Warrants issued in April 2005, at fair value	$	68,153	$	4,410

Warrants issued in September 2005, at fair value		43,522		-
Shares issued in September 2005, accounted for as liability		32,200		32,200

Total	$	143,875	$	36,610

F-14

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

Note 7 - Warrant Liability (continued)

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.

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 at the date of issuance. The principal assumptions used in the computation of the April Warrants are: expected term of 10 years; a risk-free rate of return of 4.24%; dividend yield of zero percent; and a volatility of 70%.

The Group granted to the holders of the April Warrants certain piggy-back and demand registration rights. Pursuant to the agreements surrounding the April Private Placement, in the event that the Group determined to undertake a registration of securities, the Group would include, at the request of the holder of “Registrable Securities”, the Registrable Securities in the registration statement. If the Group did not file a registration statement by the 120th day from the closing of such financing, and the Group shall have received a written request signed by the holders holding the majority of the Registrable Securities, then the Group was obligated to file, at its expense, a registration statement covering the Registrable Securities. Once such registration statement has been filed and declared effective, the Group is obligated to keep such registration statement effective until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to such registration statement, (ii) all Registrable Securities have been otherwise transferred to persons who may trade such shares without restriction under the Securities Act, and the Group has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend, or (iii) all Registrable Securities may be sold at any time, without volume or manner of sale limitations pursuant to Rule 144(k) or any similar provision then in effect under the Securities Act. As of December 31, 2009, the Group has not received any written request signed by the holders holding the majority of the Registrable Securities.

Under ASC 815-40-05, 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, ASC 815-40-05 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.

F-15

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

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 $4,140,535 of the $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 December 31, 2009, we have made an accrual of $1,324,735 for registration right liability.

The fair value of the warrants liability as of December 31, 2009 was $143,875, which was calculated by Binominal Option Pricing model.

Under ASC 815-40-05, 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.

F-16

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

Note 8 - Accrued Expenses

Accrued expenses consisted of the following:

	Year Ended December 31,
	2009		2008

City maintenance construction tax and value added tax	$	39,466	$	1,219
Contribution for employee welfare plan		39,650		47,562
Other payables		507,210		116,251
Other accruals		-		254,059
Registration right liability		1,324,735		1,324,735
Income taxes payable		65,875		162
Deferred revenue		95,025		78,215

Total	$	2,071,961	$	1,822,203

Note 9 - Due to Related Companies

As of December 31, 2009, the balance due to related companies represents financing obtained from Guang Dong Xin Sheng Environmental Protection Company Limited (“GDXS”) and Beijing Zhao Cheng Chuang Zhan Investment Company Limited (“BJZC”) in which Mr. Pu, the Chairman of the Board, has equity interests. All amounts are non-interest-bearing, unsecured and repayable on demand.

Note 10 - Due to Affiliated Companies

As of December 31, 2009, the balance due to affiliated companies represents financing obtained from Guang Dong Xin Xing Mei Biology Company Limited (“Xinxingmei”) in which the Company has equity interests. All amounts are non-interest-bearing, unsecured and repayable on demand.

Note 11 - Income Taxes

The Company was incorporated in the State of Nevada and therefore, is not subject to any income tax according to the rules and regulations of the State of Nevada. Before January 1, 2008, the Company’s subsidiaries in the PRC were generally subject to PRC enterprise income tax at 33%. On March 16, 2007, the PRC government promulgated a new tax law, China’s Unified Corporate Income Tax Law (“New CIT Law”), which took effect from January 1, 2008. Under the New CIT Law, foreign-owned enterprises as well as domestic companies are subject to a unified tax rate of 25%. Accordingly, the Company’s subsidiaries in the PRC have been subject to the PRC corporate statutory tax rate of 25% on their taxable income arising in the PRC commencing from January 1, 2008.

The Company’s provision for income taxes consists of the following:

	For the Years Ended December 31,
	2009		2008

Current	$	120,298	$	509
Deferred		-		-
Total provision for income taxes	$	120,298	$	509

A reconciliation of the provision for income taxes with amounts determined by applying the statutory income tax rate to income before income taxes is as follows:

F-17

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

Note 11 - Income Taxes (continued)

	For the Years Ended December 31,
	2009			2008
Computed tax @ statutory rate of 25% ($(80,680)25% and $(274,240)25% for December 31, 2009 and 2008, respectively)	$	(20,170	)	$	(68,560	)

Current year losses		140,468			69,069

Total provision for income taxes	$	120,298		$	509

Note 12 - Earnings (Loss) Per Share

The Company presents earnings per share on a basic and diluted basis. Basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are computed by dividing income available to common shareholders by the weighted average number of shares outstanding plus the dilutive effect of potential securities. All shares and per share data have been adjusted retroactively to reflect the recapitalization of the Company pursuant to the Securities Exchange Agreement with China Water Group, Inc.

A summary of our calculations of the numbers of dilutive shares is set forth below.

	For the Year Ended December 31
	2009			2008

Loss from continuing operations, net of tax	$	(863,355	)	$	(274,749	)

Loss from discontinued operations, net of tax		-			(2,427,945	)

Net loss	$	(792,343	)	$	(2,581,953	)

Effect of Dilutive Securities		-			-

Loss available to common stockholders		(792,343	)		(2,581,953	)

Weighted average common shares		139,383,450			139,383,450
(denominator for basic earnings per share)

Effect of dilutive securities:		-			-

Weighted average common shares		139,383,450			139.383.450
(denominator for diluted earnings per share)

Loss per share—Basic:
Loss from continuing operations	$	(0.00	)	$	(0.00	)
Discontinued operations	$	0.00		$	(0.02	)
Net loss	$	(0.00	)	$	(0.02	)

Loss per share—Diluted:
Loss from continuing operations	$	(0.00	)	$	(0.00	)
Discontinued operations	$	0.00		$	(0.02	)
Net loss	$	(0.00	)	$	(0.02	)

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

F-18

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements

Note 13 - 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 14 – Risk Factors

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general state of the PRC’s economy. The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Note 15 - Concentration

Two major customers accounted for approximately 61% of the net revenue for the whole year ended December 31, 2009. The source of revenue from these customers is the sales of bottled water. One major customer, Guangzhou ShengRen ShuiYe Ltd, accounted for approximately 23% of the net revenue. The other major customer, Shanghai Kekejia ltd, accounted for approximately 38% of the net revenue. The main suppliers for production materials are Sichuan Yibin Pulasi Package Material Ltd, Chengdu Rongshun Package Ltd and Guangzhou Huihua Package Ltd, accounted for approximately 21%, 19%, and 29% respectively.

Note 16 - SUPPLEMENTAL CASH FLOW DISCLOSURES

The following is the supplemental information relating to the consolidated statements of cash flows:

	For the Years Ended December 31,
	2009		2008

Cash paid for interest	$	174	$	56

Cash paid for income taxes	$	120,298	$	509

F-19

Attached files

China Water Group, Inc. Reports

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