SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 
 FORM
10-Q
 
 (Mark
One)
 
 T
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
quarterly period ended September 30, 2008
 
 £
              TRANSITION  REPORT  PURSUANT  TO
      SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF
      1934
 For the
transition period from __________ to __________.
 
 Commission
File No. 0-27929
 
 ETERNAL
TECHNOLOGIES GROUP, INC.
 
 (Exact
name of registrant as specified in its charter)
 
 
 Nevada
                
                62-1655508(State
      or other jurisdiction of  incorporation or
      organization)
                
                (IRS
      Employer Identification No.)
 
 Suite
2007, Main Block
 Jinzhonghuan Commercial Tower
 3037th Jintian Rd. Futian Dist.
 Shenzhen,
Guangdong Province, China 518048
 (Address
of principal executive offices)
 
 011-86-22-2721-7020
 
 (Issuer's
telephone number)
 
 Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES X NO
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a small reporting
company.
 
 Large
      Accelerated Filer £
                Accelerated
      Filer £
                Non-Accelerated
      Filer £
                Small
      Reporting Company T
 
 As of
November 14, 2008, 55,689,634 shares of Common Stock of the issuer were
outstanding.
  
 
  
 ETERNAL
TECHNOLOGIES GROUP, INC.
 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2008
 INDEX
 
 PART
      I - FINANCIAL STATEMENTSItem
      1.
                            
                            Consolidated
      Financial StatementsUnaudited Consolidated Condensed Balance Sheets
      at September 30, 2008 and December 31, 2007
                            
                            3Unaudited Consolidated Condensed Statements of Operations for
      the three months and nine months ended September 30, 2008 and
      2007
                            
                            4Unaudited Consolidated Condensed Statements of Cash Flows for
      the nine months ended September 30, 2008 and 2007
                            
                            5Notes to Unaudited Consolidated Condensed Financial
      Statements
                            
                            6Item
      2.
                            
                            Management Discussion and Analysis of Financial Condition and
      Result of Operations
                            
                            11Item
      3.
                            
                            Quantitative and Qualitative Disclosure About Market
      Risk
                            
                            14Item
      4.
                            
                            Controls and Procedures
                            
                            14PART
      II – OTHER INFORMATIONItem
      1.
                            
                            Legal Proceedings
                            
                            16Item
      2.
                            
                            Unregistered Sale of Equity Securities and Use of
      Proceeds
                            
                            16Item
      3.
                            
                            Defaults Upon Senior Securities
                            
                            16Item
      4.
                            
                            Submission of Matters to a Vote of Security
      Holders
                            
                            16Item
      5.
                            
                            Other Information
                            
                            16Item
      6.
                            
                            Exhibits
                            
                            17Signatures
                            
                            17Certifications
                            
                            18
  Index
  ETERNALTECHNOLOGIES GROUP, INC.
 CONSOLIDATED
CONDENSED BALANCE SHEETS
 September
30, 2008 and December 31, 2007
 (Amounts
in United States Dollars)
 
 
 (Unaudited)
                                            
                                            
                                            (See
      Note)September
      30,
                                            
                                            
                                            December
    31,2008
                                            
                                            
                                            2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                                            
                                            $
                                            28,326,012
                                            
                                            
                                            $
                                            12,692,479Short-term
      investments
                                            
                                            
                                            15,000,997
                                            
                                            
                                            
                                            13,827,174Accounts
      receivable
                                            
                                            
                                            10,290,149
                                            
                                            
                                            
                                            6,274,866Inventories
                                            
                                            
                                            28,430
                                            
                                            
                                            
                                            6,312,236Prepayments
      and deposits
                                            
                                            
                                            15,025
                                            
                                            
                                            
                                            14,082Total
      current assets
                                            
                                            
                                            53,660,613
                                            
                                            
                                            
                                            39,120,837Property
      and equipment, net of accumulated depreciation of $4,627,940 and
      $4,296,083 at September  30, 2008 and December 31, 2007,
      respectively
                                            
                                            
                                            5,862,390
                                            
                                            
                                            
                                            7,161,773Land
      use rights, net of accumulated amortization of $2,405,646 and $2,043,266
      at September 30, 2008 and December 31, 2007, respectively
                                            
                                            
                                            4,859,018
                                            
                                            
                                            
                                            4,765,501Intangible
      assets
                                            
                                            
                                            1,331,490
                                            
                                            
                                            
                                            6,571,098Long
      term Accounts Receivable
                                            
                                            
                                            3,209,289Patent
      held for lease, net of accumulated amortization of $432,768 at September
      30, 2008
                                            
                                            
                                            2,163,839
                                            
                                            
                                            
                                            -Other
      Assets
                                            
                                            
                                            19,748,928
                                            
                                            
                                            
                                            17,433,088Total
      assets
                                            
                                            $
                                            90,835,567
                                            
                                            
                                            $
                                            75,052,297LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Notes
      payable
                                            
                                            $
                                            443,366
                                            
                                            
                                            $
                                            443,366Accounts
      payable and accrued liabilities
                                            
                                            
                                            1,469,227
                                            
                                            
                                            
                                            1,294,310Amounts
      due to related parties
                                            
                                            
                                            215,672
                                            
                                            
                                            
                                            215,295Income
      taxes  payable
                                            
                                            
                                            295,936
                                            
                                            
                                            
                                            167,764Deferred
      Income
                                            
                                            
                                            1,572,665Derivative
      financial instrument liability
                                            
                                            
                                            -
                                            
                                            
                                            
                                            109,300Total
      current liabilities
                                            
                                            
                                            3,996,866
                                            
                                            
                                            
                                            2,230,035Stockholders'
      equity:Preferred
      shares - $0.001 par value, 5,000,000Authorized, none issued or
      outstanding
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Common
      shares - $0.001 par value; 95,000,000Authorized; 55,689,634 shares issued
      and Outstanding
                                            
                                            
                                            55,689
                                            
                                            
                                            
                                            52,137Additional
      paid - in capital
                                            
                                            
                                            23,075,753
                                            
                                            
                                            
                                            21,303,505Retained
      earnings
                                            
                                            
                                            52,259,998
                                            
                                            
                                            
                                            44,848,766Treasury
      shares at cost 1,509,703 shares
                                            
                                            
                                            (882,090
                                            )
                                            
                                            
                                            (882,090
                                            )Accumulated
      other comprehensive income
                                            
                                            
                                            12,329,351
                                            
                                            
                                            
                                            7,499,944Total
      stockholders' equity
                                            
                                            
                                            86,838,701
                                            
                                            
                                            
                                            72,822,262Total
      liabilities and stockholders' equity
                                            
                                            $
                                            90,835,567
                                            
                                            
                                            $
                                            75,052,297
 
 Note: The
balance sheet at December 31, 2007 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principals for complete
financial statements.
 
 The
accompanying notes are an integral part of these unaudited consolidated
condensed financial statements
  Index
  ETERNALTECHNOLOGIES GROUP, INC.
 UNAUDITED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 For the
Three Months and Nine Months ended September 30, 2008 and 2007
 (Amounts inUnited StatesDollars)
 
 Three Months EndedSeptember30,
                                  
                                  
                                  NineMonths
      EndedSep.30,2008
                                  
                                  
                                  2007
                                  
                                  
                                  2008
                                  
                                  
                                  2007Revenue:
                                  
                                  $
                                  
                                  
                                  
                                  $
                                  
                                  
                                  
                                  $
                                  
                                  
                                  
                                  $Agricultural
      and genetics sales
                                  
                                  
                                  4,550,615
                                  
                                  
                                  
                                  1,506,132
                                  
                                  
                                  
                                  22,807,286
                                  
                                  
                                  
                                  16,514,000Medical
      device sales and services
                                  
                                  
                                  3,626,423
                                  
                                  
                                  
                                  2,327,130
                                  
                                  
                                  
                                  8,728,818
                                  
                                  
                                  
                                  5,533,578Leasing
                                  
                                  
                                  299,872
                                  
                                  
                                  
                                  152,595
                                  
                                  
                                  
                                  752,265
                                  
                                  
                                  
                                  601,895Total
      revenue
                                  
                                  
                                  8,476,910
                                  
                                  
                                  
                                  3,985,857
                                  
                                  
                                  
                                  32,288,369
                                  
                                  
                                  
                                  22,649,473Cost
      of sales and servicesAgricultural
      and genetics sales
                                  
                                  
                                  3,802,029
                                  
                                  
                                  
                                  1,226,044
                                  
                                  
                                  
                                  19,217,273
                                  
                                  
                                  
                                  13,481,271Medical
      device sales and services
                                  
                                  
                                  1,243,922
                                  
                                  
                                  
                                  674,294
                                  
                                  
                                  
                                  3,108,634
                                  
                                  
                                  
                                  1,706,211Leasing
                                  
                                  
                                  286,203
                                  
                                  
                                  
                                  68,097
                                  
                                  
                                  
                                  713,542
                                  
                                  
                                  
                                  201,451Total
      cost of sales and services
                                  
                                  
                                  5,332,154
                                  
                                  
                                  
                                  1,968,435
                                  
                                  
                                  
                                  23,039,449
                                  
                                  
                                  
                                  15,388,933Gross
      profit
                                  
                                  
                                  3,144,756
                                  
                                  
                                  
                                  2,017,422
                                  
                                  
                                  
                                  9,248,920
                                  
                                  
                                  
                                  7,260,540Depreciation
      and amortization expenses
                                  
                                  
                                  85,847
                                  
                                  
                                  
                                  146,072
                                  
                                  
                                  
                                  687,174
                                  
                                  
                                  
                                  566,172Selling,
      general and administrative expenses
                                  
                                  
                                  882,500
                                  
                                  
                                  
                                  628,280
                                  
                                  
                                  
                                  3,389,950
                                  
                                  
                                  
                                  2,584,950Research
      and development expense
                                  
                                  
                                  -
                                  
                                  
                                  
                                  132,117
                                  
                                  
                                  
                                  285,761
                                  
                                  
                                  
                                  260,561Income
      from operations
                                  
                                  
                                  2,176,409
                                  
                                  
                                  
                                  1,110,953
                                  
                                  
                                  
                                  4,886,035
                                  
                                  
                                  
                                  3,848,857Other
      income (expense)Interest
      income
                                  
                                  
                                  57,190
                                  
                                  
                                  
                                  416,015
                                  
                                  
                                  
                                  163,460
                                  
                                  
                                  
                                  866,250Gain
      on Sale of Assets
                                  
                                  
                                  (103,244
                                  )
                                  
                                  
                                  481,444
                                  
                                  
                                  
                                  171,399
                                  
                                  
                                  
                                  473,897Investment
      Income
                                  
                                  
                                  901,076
                                  
                                  
                                  
                                  99,088
                                  
                                  
                                  
                                  2,646,860
                                  
                                  
                                  
                                  293,131Change
      in value of derivativeFinancial
      instruments
                                  
                                  
                                  37,383
                                  
                                  
                                  
                                  57,992
                                  
                                  
                                  
                                  109,300
                                  
                                  
                                  
                                  19,881Other
      income (expense), net
                                  
                                  
                                  892,405
                                  
                                  
                                  
                                  1,054,539
                                  
                                  
                                  
                                  3,091,019
                                  
                                  
                                  
                                  1,653,159Income
      before provision forIncome
      taxes
                                  
                                  
                                  3,068,814
                                  
                                  
                                  
                                  2,165,492
                                  
                                  
                                  
                                  7,977,054
                                  
                                  
                                  
                                  5,502,016Provision
      for income taxes
                                  
                                  
                                  265,651
                                  
                                  
                                  
                                  175,330
                                  
                                  
                                  
                                  565,821
                                  
                                  
                                  
                                  380,039Net
      income
                                  
                                  
                                  2,803,163
                                  
                                  
                                  
                                  1,990,162
                                  
                                  
                                  
                                  7,411,233
                                  
                                  
                                  
                                  5,121,977Net
      income per common shareBasic
      and diluted
                                  
                                  $
                                  0.05
                                  
                                  
                                  $
                                  0.04
                                  
                                  
                                  $
                                  0.14
                                  
                                  
                                  $
                                  0.11Weighted
      average number ofCommon
      shares outstanding,Basic
      and diluted
                                  
                                  
                                  53,751,215
                                  
                                  
                                  
                                  47,073,579
                                  
                                  
                                  
                                  53,751,215
                                  
                                  
                                  
                                  47,073,579
 
 The
accompanying notes are an integral part of these unaudited consolidated
condensed financial statements
  Index
  ETERNALTECHNOLOGIES GROUP, INC.
 UNAUDITED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 For
the Nine Months Ended September 30, 2008 and 2007
 (Amounts inUnited
StatesDollars)
 
 
 2008
                        
                        
                        2007Cash
      flows from operating activitiesNet
      income
                        
                        $
                        7,411,233
                        
                        
                        $
                        5,121,977Adjustments
      to reconcile net income to net cashProvided
      by operating activities:Depreciation
      and amortization
                        
                        
                        1,400,716
                        
                        
                        
                        767,623Loss/(Gain)
      on sales of fixed assets
                        
                        
                        101,092
                        
                        
                        
                        (473,897
                        )Loss/(Gain)
      on sales of intangible assets
                        
                        
                        (272,491
                        )
                        
                        
                        -Investment
      income
                        
                        
                        (2,646,860
                        )
                        
                        
                        (293,131
                        )Change
      in value of derivative financial instruments
                        
                        
                        (109,300
                        )
                        
                        
                        (156,686
                        )Common
      stock issuances
                        
                        
                        710,320
                        
                        
                        
                        -Changes
      in operating assets and liabilities:Inventories
                        
                        
                        6,706,458
                        
                        
                        
                        5,521,048Accounts
      receivable
                        
                        
                        (3,348,570
                        )
                        
                        
                        2,916,266Prepayments
      and deposits
                        
                        
                        466,806
                        
                        
                        
                        202,460Accounts
      payable and accrued expenses
                        
                        
                        205,192
                        
                        
                        
                        478,798Net
      cash provided by operating activities
                        
                        
                        10,624,596
                        
                        
                        
                        14,084,458Cash
      flows from investing activities:Dispositions
      of property, plant and equipment
                        
                        
                        1,097,358
                        
                        
                        
                        1,376,770Redemption/(Purchase)
      of short-term investment
                        
                        
                        -
                        
                        
                        
                        15,962,541Proceeds
      from sales of intangible assets
                        
                        
                        1,064,901
                        
                        
                        
                        -Long
      term investments
                        
                        
                        436,567
                        
                        
                        
                        (3,885,342
                        )Proceeds
      from investment income from short term investments
                        
                        
                        494,776
                        
                        
                        
                        -Net
      cash provided by /(used in) investing activities
                        
                        
                        3,093,602
                        
                        
                        
                        13,453,969Cash
      flows from financing activities:Capital
      contributed
                        
                        
                        -
                        
                        
                        
                        2,304,615Repurchase
      of common stock
                        
                        
                        -
                        
                        
                        
                        (882,090
                        )Proceeds
      from collection of common stock receivable
                        
                        
                        -
                        
                        
                        
                        10,176Proceeds
      from sales of common stocks
                        
                        
                        1,065,480
                        
                        
                        
                        -Net
      cash provided by financing activities
                        
                        
                        1,065,480
                        
                        
                        
                        1,432,701Effect
      of exchange rate changes on cash
                        
                        
                        849,855
                        
                        
                        
                        639,252Net
      increase (decrease) in cash and cash equivalents
                        
                        
                        15,633,533
                        
                        
                        
                        29,610,380Cash
      and cash equivalents, beginning of period
                        
                        
                        12,692,479
                        
                        
                        
                        16,024,123Cash
      and cash equivalents, end of period
                        
                        $
                        28,326,012
                        
                        
                        $
                        45,634,503Supplemental
      disclosure of cash flow information:Interest
      paid
                        
                        $
                        -
                        
                        
                        $
                        -Income
      taxes paid
                        
                        $
                        269,885
                        
                        
                        
                        380,039Non-cash
      investing and financing activitiesReceivable
      from sale of intangible assets
                        
                        $
                        3,201,490
                        
                        
                        $
                        -Deferred
      gain from sale of intangible assets
                        
                        $
                        1,099,059
                        
                        
                        $
                        -
 
 The
accompanying notes are an integral part of these unaudited consolidated
condensed financial statements
  Index
  ETERNALTECHNOLOGIES GROUP, INC.NOTES
      TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS(Amounts
      in United States Dollars)
 
 
 1.
              REPORTING
      ENTITY
 
 Pursuant
to an exchange agreement, Eternal Technologies Group, Inc., ("Company") formerly
known as Waterford Sterling Corporation, completed its acquisition of 100%
interest of Eternal Group Limited and Subsidiaries on December 12, 2002. The
Company treated the transaction as a reverse merger for accounting purposes.
Following the acquisition, the former shareholders of Eternal Technology Group
Limited, a British Virgin Islands limited liability company, now owns
approximately 85% of the issued and outstanding common shares of Eternal
Technologies Group Inc.
  Eternal -
BVI was incorporated in the British Virgin Islands in March 2000. In May 2000,
Eternal - BVI acquired 100% of Willsley Company Limited. Willsley is a holding
company that owns 100% of Inner Mongolia Aershan Agriculture & Husbandry
Technology Co., Ltd. ("Aershan Agriculture"). Aershan Agriculture owns a cattle
herd, conducts breeding operations and owns a farm in Inner Mongolia which it
leases to a Chinese company for approximately $579,000 per year.
  As of the
fourth quarter of 2005 we acquired certain assets, subject to certain
liabilities of E-Sea Biomedical Engineering Co. International, Ltd. E-Sea's
principal activities are the manufacture, sale and licensing of medical devices
used to detect breast cancer.
  2.
              CONDENSED
      FINANCIAL STATEMENTS AND FOOTNOTES
  The
interim consolidated condensed financial statements presented herein have been
prepared by the Company and include the unaudited accounts of the Company and
its subsidiaries. All significant inter-company accounts and transactions have
been eliminated in the consolidation.
  These
consolidated condensed financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain
information and footnote disclosures normally included in financial statements
presented in accordance with generally accepted accounting principles have been
condensed or omitted. The Company believes the disclosures made are adequate to
make the information presented not misleading. The unaudited condensed
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements for the year ended December 31, 2007
and notes thereto included in the Company's Form 10-KSB.
  In the
opinion of management, the unaudited condensed consolidated financial statements
reflect all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position of the Company as of
September 30, 2008, and the results of operations and cash flows for the three
months ended September 30, 2008 and 2007, respectively. Interim results are not
necessarily indicative of full year performance because of the impact of
seasonal and short-term variations.
  Significant
Estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the consolidated condensed financial statements and the reported amounts of
revenues and expenses during the periods. Actual results could differ from
estimates making it reasonably possible that a change in the estimates could
occur in the near term.
  Principles
of Consolidation
  The
unaudited consolidated condensed financial statements include the accounts of
the Company and its wholly- owned subsidiaries after elimination of all
significant inter-company accounts and transactions.
  Reclassifications
 
 Certain
prior year amounts have been reclassified to conform with the presentation for
the current year.  Such reclassifications have no impact on net income
or shareholders’ equity as previously reported.
 
 
 3.
              CASH AND CASH
      EQUIVALENTS
  Index
  
 At
September 30, 2008, substantially all of the Company's cash is to be exclusively
used for operations in the PRC.
 
 4.
              OTHER
      ASSETS
 
 During
the three months ended March 31, 2007, the Company entered into an Exchange
Agreement (“the Agreement”) by which it expended $14,850,000 RMB in cash
(approximately $1,900,000 USD) and 2,719,730 shares of common stock valued at
$.70 USD ($14,850,000 RMB or approximately $1,900,000 USD) for a total
investment of $29,700,000 RMB (approximately $3,800,000 USD) in exchange
for a 22% interest in the common stock of Changsha Hong Yuan Aquatic Product,
Inc. (“Hong Yuan”).  Hong Yuan is a corporation duly organized,
validly existing, and in good standing under the laws of the PRC and currently
its operations focus on the breeding and sale of turtles.  In
accordance with the Agreement, Hong Yuan has committed to pay the Company a
guaranteed return on its investment of $3,000,000 RMB (approximately $380,000
USD) per year either in cash or the equivalent in additional shares of its
common stock.
 
 On
October 15, 2007, the Company acquired a 30% equity interest, respectively, in
Hainan Futian Green Agriculture Ltd. ("Hainan") a mango farm, and Maoming
Huatang Orchard Trading Co., Ltd. ("Maoming") a Lychee farm. The Mango farm has
a guaranteed minimum annual return on investment of $6,800,000 RMB
(approximately $980,000 USD) and will increase by a minimum of 1% for ten years.
The Lychee farm has a guaranteed minimum annual return on investment of
$7,800,000 RMB (approximately $1,120,000 USD) and will increase by 1% for five
years.  If the farms are unable to meet the guaranteed minimum annual
returns on investment with cash flows from their operation, they must meet
the obligations by returning an equivalent amount of the Company's shares
originally issued to them as part of the investment purchase.  Based
on these quarterly minimums, the Company accrues one-quarter of each guaranteed
amount each calendar quarter, or $1,700,000 RMB approximately $245,000 USD and
$1,950,000 RMB (approximately $280,000 USD) respectively.
 
 In
addition to the foregoing, during the three-months ended September 30, 2008, the
Company received a payment of $3,000,000 RMB (approximately $432,000 USD)
for its share of the 2007 earnings of Hong Yuan.
 
 5.
              INCOME
      TAXES
 
 The
Company operates in several jurisdictions and may be subject to taxation in
those jurisdictions.
  It
is  management's  intention  to reinvest all the
income  attributable  to the Company  earned by
its  operations  outside  of
the  United  States of  America. Accordingly, no
United  States  corporate  taxes  have
been  provided  in these
consolidated  condensed financial  statements.  The
Company has a U.S. net operating loss
carry  forward  of  $3,432,167 which will
begin  expiring  in 2017.  However a valuation
allowance  has been  provided
as  management  does not expect the tax benefits to be
realized.  No
other  significant  deferred  assets or
liabilities existed at December 31, 2007.  The Company's net
operating  loss carry  forwards
may  be  subject  to  annual  limitations,  which  could  reduce  or  defer  the
utilization  of the  losses as a result of
an  ownership  change as  defined  in
section 382 of the Internal Revenue Code.
  Under
current law of the British Virgin Islands (BVI), any dividends and capital gains
arising from the Company's investments are not subject to income tax in the
British Virgin Islands.
  Companies  with  operations  in
the Peoples  Republic of China may be subject to taxes for
income  therein.  The Income Tax Law of the
Peoples Republic of China for Enterprises with Foreign Investment and
Foreign Enterprises provides certain exemptions from taxation.
  Under
current PRC law, all taxes on agriculture have been eliminated. Previously (from
July,  2000  through  2005)  Aershan  enjoyed
a tax  holiday.  Therefore, Aershan's business activities
are not and have not been subject to tax.
  The
agricultural tax exemption resulted in tax savings of $206,588 and $172,143 for
the three months ended, and savings of $813,889 and $581,462 for the nine months
ended September 30, 2008 and 2007 respectively.  Net income per share
did not change on either a basic or diluted basis for the three and nine months
ended September 30, 2008 or 2007, respectively, as a result of the tax
holiday.
  E-Sea is
subject to Enterprise Income Tax at the PRC rate of 15% on net profits. The
provisions  for taxes on  earnings  of the
PRC  subsidiary  for the nine months ending September 30,
2008 and 2007 were $565,821 and $380,039, respectively
 
 A
reconciliation of tax at the approximate U.S. statutory rates to the Company’s
effective rate are as follows:
  Index
 
 5.
              INCOME
      TAXES, continued
 
 2008
                  
                  
                  2007Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  PercentIncome
      taxes at federal statutory rate
                  
                  
                  1,477,356
                  
                  
                  
                  34
                  %
                  
                  
                  1,005,631
                  
                  
                  
                  34
                  %Effect
      of United States and British Virgin Island
losses
                  
                  
                  170,416
                  
                  
                  
                  4
                  %
                  
                  
                  136,199
                  
                  
                  
                  5
                  %Income
      tax exemption in the Peoples Republic of China
                  
                  
                  (813,889
                  )
                  
                  
                  (19
                  %)
                  
                  
                  (581,462
                  )
                  
                  
                  (20
                  %)Difference
      in United States and foreign tax rates
                  
                  
                  (268,062
                  )
                  
                  
                  (6
                  %)
                  
                  
                  (180,329
                  )
                  
                  
                  (6
                  %)Income
      tax expense
                  
                  
                  565,821
                  
                  
                  
                  13
                  %
                  
                  
                  380,039
                  
                  
                  
                  13
                  %
 
  6.
              SEGMENT
      INFORMATION
 
 The
operating  segments  presented are the segments for which
separate financial information  is  available  and
for
which  operating  performance  is  evaluated
regularly by  management  to decide how to
allocate  resources  and in to assess
performance.  The Company evaluates the performance of the operating
segments based on income from operations that is defined as total revenues less
operating expenses.
 
 The
Company has identified three reportable segments; agricultural genetics, medical
devices, and leasing. The agricultural genetics segment activities include a
breeding center, embryo-transplantation, and propagating quality sheep meat and
other livestock breeds in Inner Mongolia, PRC. Medical devices' operations
include the manufacture, development, sales, marketing and delivery of medical
devices in the PRC.  Leasing includes the land lease of the farm and
the leasing of certain patents.  Included in "Other" are
corporate-related items, insignificant operations and costs that are not
allocated to the reportable segments.
 
 Information
regarding our reportable segments for the nine months ended September 30, 2008
and 2007 is as follows:
 
 Agricultural
                  
                  
                  
                  
                  
                  Medical2008
                  
                  Genetics
                  
                  
                  Leasing
                  
                  
                  Devices
                  
                  
                  Other
                  
                  
                  TotalRevenues
                  
                  $
                  22,807,286
                  
                  
                  $
                  752,265
                  
                  
                  $
                  8,728,818
                  
                  
                  $
                  -
                  
                  
                  $
                  32,288,369Income
      from operations
                  
                  
                  2,604,733
                  
                  
                  
                  38,723
                  
                  
                  
                  3,487,982
                  
                  
                  
                  (1,245,403
                  )
                  
                  
                  4,886,035Depreciation
      and amortization
                  
                  
                  -
                  
                  
                  
                  713,542
                  
                  
                  
                  687,174
                  
                  
                  
                  -
                  
                  
                  
                  1,400,716Total
      assets
                  
                  
                  56,561,499
                  
                  
                  
                  12,730,115
                  
                  
                  
                  15,738,253
                  
                  
                  
                  5,805,700
                  
                  
                  
                  90,835,567Agricultural
                  
                  
                  
                  
                  
                  
                  Medical2007
                  
                  Genetics
                  
                  
                  Leasing
                  
                  
                  Devices
                  
                  
                  Other
                  
                  
                  TotalRevenues
                  
                  $
                  16,514,000
                  
                  
                  $
                  601,895
                  
                  
                  $
                  5,533,578
                  
                  
                  $
                  -
                  
                  
                  $
                  22,649,473Income
      from operations
                  
                  
                  2,071,502
                  
                  
                  
                  183,177
                  
                  
                  
                  2,522,053
                  
                  
                  
                  (927,875
                  )
                  
                  
                  3,848,857Depreciation
      and amortization
                  
                  
                  134,408
                  
                  
                  
                  418,718
                  
                  
                  
                  214,497
                  
                  
                  
                  -
                  
                  
                  
                  767,623Total
      assets
                  
                  
                  45,198,431
                  
                  
                  
                  10,205,144
                  
                  
                  
                  10,810,992
                  
                  
                  
                  1,250,106
                  
                  
                  
                  67,464,67337
 
 
 Information
regarding our reportable segments for the three months ended September 30, 2008
and 2007 is as follows:
 
 Agricultural
                  
                  
                  
                  
                  
                  Medical2008
                  
                  Genetics
                  
                  
                  Leasing
                  
                  
                  Devices
                  
                  
                  Other
                  
                  
                  TotalRevenues
                  
                  $
                  4,550,615
                  
                  
                  $
                  299,872
                  
                  
                  $
                  3,626,423
                  
                  
                  $
                  -
                  
                  
                  $
                  8,476,910Income
      from operations
                  
                  
                  415,786
                  
                  
                  
                  13,669
                  
                  
                  
                  1,863,780
                  
                  
                  
                  (116,826
                  )
                  
                  
                  2,176,409Depreciation
      and amortization
                  
                  
                  -
                  
                  
                  
                  286,203
                  
                  
                  
                  85,847
                  
                  
                  
                  -
                  
                  
                  
                  372,050Agricultural
                  
                  
                  
                  
                  
                  
                  Medical2007Rolex9988
                  
                  Genetics
                  
                  
                  Leasing
                  
                  
                  Devices
                  
                  
                  Other
                  
                  
                  TotalRevenues
                  
                  $
                  1,506,132
                  
                  
                  $
                  152,595
                  
                  
                  $
                  2,327,130
                  
                  
                  $
                  -
                  
                  
                  $
                  3,985,857Income
      from operations
                  
                  
                  (62,968
                  )
                  
                  
                  84,498
                  
                  
                  
                  1,164,005
                  
                  
                  
                  (74,582
                  )
                  
                  
                  1,110,953Depreciation
      and amortization
                  
                  
                  73,443
                  
                  
                  
                  68,097
                  
                  
                  
                  72,629
                  
                  
                  
                  -
                  
                  
                  
                  214,169
  Index
 
 7.
              LEASES
 
 The
Company’s lease activity consists of a land lease and the lease of a
patent.  The land lease is for the lease of approximately 104 square
kilometers of the company’s farm in Inner Mongolia and the facilities located on
the land.  The lease began on May 1, 2006 and ends on April 30,
2026.  The lessee pays the Company an annual rate of $4,620,000 RMB
(or approximately $578,810 USD) on April 1 and October 1 of each
year.
 
 On March
20, 2008 E-Sea leased its patent in its SSB Dissemination to an unrelated
Chinese entity for five years.  The Chinese entity will develop goods
under the patent and manufacture and market them during this
period.  For the use of the patent, the Company will receive
$18,000,000 RMB, (approximately $2,550,000 USD) of which $5,000,000 RMB
(approximately $1,841,000 USD) was received upon the execution of the
lease.  The remaining $13,000,000 RMB (approximately
$425,000 USD) will be paid in four installments; $3,000,000 RMB
(approximately $425,000 USD) in October 2009, 2010 and 2011 and $4,000,000
RMB (approximately $566,000 USD) in October 2012.
 
 8.
              FAIR
      VALUE MEASUREMENTS
 
 The
Company adopted Statements of Financial Accounting Standards No. 157 “Fair Value
Measurement” (SFAS 157) on January 1, 2008.  SFAS 157, 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.  SFAS 157 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, SFAS 157 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 for identical assets or
      liabilities;Level
      2.
                  
                  Inputs,
      other than quoted prices included within Level 1, that are observable
      either directly or indirectly; andLevel
      3.
                  
                  Unobservable
      inputs in which there is little or no market data, which require the
      reporting entity to develop its own
assumptions.
 
 As
of September 30, 2008, the Company’s assets and liabilities that are measured at
fair value on a recurring basis.
 
 9.
              SHARE
      ISSUANCE
 
 On May
29, 2008, the Company issued 3,551,600 shares of its common stock to its
employees under the amended 2007 Stock Option Plan.  The exercise
price of the stock option was $0.50 per share, the approximate average of the
high/low of the company’s stock on the date of issuance.  The shares were
purchased at the price of $.30 USD per share.  The Company has
recorded the difference between the purchase price and the exercise price
$710,320 USD as employee compensation in its statement of
operations.
  10.
                LEGAL
      PROCEEDINGS
 
 
 As of
August 10, 2008, we were a party to three legal proceeding. The first proceeding
involves a lawsuit brought by Western Securities  Corporation seeking
principal payment of $500,942 on two outstanding promissory notes, one to Market
Management, Inc. and  one to Thomas L. Tedrow plus
accrued  interest  since July 11,
2004,  attorney's fees,  cost
of  collection  and
other  court  costs.  On August 23, 2007, the
Federal Court in Houston, Texas awarded Western Securities Corporation the sum
of $636,757 plus accrued interest since May 22, 2007 and attorney fees in an
amount to be determined which totaled $797,584 as of June 30,
2008.  This judgment became final on October 31, 2007.  In
April, 2008 this case was appealed by the Company to the 5th  Circuit Court of
Appeals in New Orleans. On November 3, 2008 the court of Appeals heard oral
arguments in this matter. A decision is not expected until early next
year.
 
 Because
the Company did not post a bond pending the Appeal, collection efforts by the
Plaintiff’s have been ongoing. Pursuant to these efforts, the Court granted
Plaintiff’s motion for the appointment of a Receiver. Because of this, a “Q” has
been added to the Company’s trading symbol.
 
 On the
4th of September 2007, the
Company was served with a lawsuit from International Capital Advisors LLC, as
assignee of Market Management, Inc. seeking repayment of the sum of $250,000
alleged paid by Market Management, Inc. on behalf of the
  Index
  10.
              LEGAL
      PROCEEDINGS, continued
 
 Company.  On
the 26th of
October, 2007 the Plaintiff amended its petition, adding several additional
causes of action and are now seeking $960,000 plus accrued interest and
attorney’s fees.  On September 18, 2007, the Company filed a general
denial to this claim.
 
 On July
7, 2008 the Company filed a Counter Claim and Third Party Petition in this
action against Thomas Tedrow, Joseph D. Jordan, Market Management
LLC, International Capital Advisors LLC. Market Management International, Inc.,
Global Business Networks, Inc., Merchant Marketing, Inc., Piranha, Inc. and
Western Securities Corporation alleging  securities fraud, fraudulent
inducement, fraud, and Breach of Contract.  The case has been
scheduled for trial in March, 2009.
 
 The third
cause of action involves a convertible promissory note payable to Bristol
Investments Limited.  On December 27, 2007, a New York Court rendered
a decision in favor of Bristol Investments Limited.    On
November 10, 2008, the Court entered a judgment for Bristol totaling $75,378.21.
The Company has escrowed $30,000.00 of this amount with New York
counsel.
 
  Item2. Management’s Discussion and Analysis or Plan of
Operation
 
 The
Company’s business is seasonal.  Accordingly, the results of
operations for the three and nine month periods ended September 30, 2008 are not
indicative of the results for any other quarter, period or for the fiscal
year.
 
 The
following is derived from, and should be read in conjunction with, our unaudited
condensed consolidated financial statements, and related notes, as of and for
the three and nine months ended September 30, 2008 and 2007.
 
 Three
Months Ended September 30, 2008 Compared to Three Months Ended September 30,
2007
 
 Revenues
-
 Revenues
for the three months ended September 30, 2008 increased by $4,491,053 or 112.7%
to $8,476,910 from $3,985,857 for the corresponding period of the prior year.
The following table indicates the changes in sales by category for the two
periods.
 
 
 Three months endedSeptember30Source of Revenue
                  
                  2008
                  
                  
                  2007
                  
                  
                  DifferenceCattle
      Embryo Transfers
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Mutton
                  
                  
                  4,550,615
                  
                  
                  
                  1,506,132
                  
                  
                  
                  3,044,483Leasing
                  
                  
                  299,872
                  
                  
                  
                  152,595
                  
                  
                  
                  147,277E-Sea
                  
                  
                  3,626,423
                  
                  
                  
                  2,327,130
                  
                  
                  
                  1,299,293Totals
                  
                  $
                  8,476,910
                  
                  
                  $
                  3,985,857
                  
                  
                  $
                  4,491,053
 
 Cost
of Sales and Services
 
 Cost of
sales and services for the three months ended September 30, 2008 increased
$3,363,719 or 170.9% to $5,332,154 from $1,968,435 for the corresponding
period of the prior year. The following table indicates the changes in cost of
sales and services for the two periods:
 
 Source
      of Cost of
                  
                  Three
      Months Ended September 30,Sales and Services
                  
                  2008
                  
                  
                  2007
                  
                  
                  Difference
                  
                  
                  Profit MarginCattle
      Embryo Transfer
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -Leasing
                  
                  
                  286,203
                  
                  
                  
                  68,097
                  
                  
                  
                  218,106
                  
                  
                  
                  4.8
                  %Feeding
      fee
                  
                  
                  -
                  
                  
                  
                  29,066
                  
                  
                  
                  (29,066
                  )
                  
                  
                  -
                  %Mutton
                  
                  
                  3,802,029
                  
                  
                  
                  1,196,978
                  
                  
                  
                  2,605,051
                  
                  
                  
                  19.7
                  %E-Sea
                  
                  
                  1,243,922
                  
                  
                  
                  674,294
                  
                  
                  
                  569,628
                  
                  
                  
                  191.5
                  %Totals
                  
                  $
                  5,332,154
                  
                  
                  $
                  1,968,435
                  
                  
                  $
                  3,363,719
                  
                  
                  
                  59
                  %
 
 Depreciation
and Amortization -
 
 Depreciation
and amortization expenses decreased by $60,225 or 41.2% to $85,847 from $146,072
for the corresponding period of the prior year.  This decrease is due
to fixed assets sold by E-Sea during the current quarter of
2008.
  Index
  Selling
and Administrative Expenses -
 
 Selling
and administrative expenses increased by $254,220 or 40.5% to $882,500 from
$628,280 for the corresponding period of the prior year.  The
following table indicates the changes in selling, general and administrative
expenses by category for the two periods:
 
 Three Months EndedSeptember30,Category
                  
                  2008
                  
                  
                  2007
                  
                  
                  DifferenceMarketing
      Expense
                  
                  $
                  
                  
                  
                  $
                  
                  
                  
                  $Office
      charges
                  
                  
                  20,438
                  
                  
                  
                  24,259
                  
                  
                  
                  (3,821)Salaries
                  
                  
                  449,476
                  
                  
                  
                  369,019
                  
                  
                  
                  80,457Distributor
      Commissions
                  
                  
                  260,473
                  
                  
                  
                  144,668
                  
                  
                  
                  115,805Travel
                  
                  
                  7,583
                  
                  
                  
                  4,973
                  
                  
                  
                  2,610Entertainment
                  
                  
                  6,457
                  
                  
                  
                  2,043
                  
                  
                  
                  4,414Legal
      & Professional
                  
                  
                  106,445
                  
                  
                  
                  65,453
                  
                  
                  
                  40,992Rent
                  
                  
                  28,402
                  
                  
                  
                  15,950
                  
                  
                  
                  12,452Telephone
                  
                  
                  2,997
                  
                  
                  
                  1,705
                  
                  
                  
                  1,292Miscellaneous
                  
                  
                  229
                  
                  
                  
                  210
                  
                  
                  
                  19$
                  882,500
                  
                  
                  $
                  628,280
                  
                  
                  $
                  254,220
  Research
and Development Expense -
 
 Research
and development expense decreased by $132,117 or 100 % to $0 from $132,177 for
the corresponding period of the prior year. These expenses were paid to
a  third party, Sheng Zheng Au Ke Wei Technology Development Company
(“TDC”) pursuant to a contract dated October 17, 2007 under which TDC agreed to
perform certain research for the Company.
 
 Other
Income (Expense)
 
 For the
three months ended September 30, 2008 the company experienced a decrease in
interest income of $358,825 or 86.25% to $57,190 from $416,015 for the
corresponding period of the prior year.
 
 For the
three months ended September 30, 2008, the company had investment income of
$901,076 from both long and short-term investments. Investment income for the
corresponding period of the prior year was $99,088 all from the turtle
farm.
 
 For the
three months ended September 30, 2008 the company had a change in loss on sale
of assets of $103,244 as compared to gain on sale of assets of $481,444
during the three months ended September 30, 2007
 
 As a
result of the foregoing, the company’s other income decreased by $162,134 to
$892,405 from $1,054,539 for the corresponding period of 2007.
 
 Income
Taxes
 
 For the
three months ended September 30, 2008, the Company’s income tax expense on its
income from its E-Sea operations was $265,651.  This compares to a tax
expense of $175,330 for the corresponding period of the prior year.
 
 As a
result of the foregoing, the company had net income of $2,803,163 or $.05 per
share for the three months ended September 30, 2008 compared to net income of
$1,990,162 or $.04 per share for the corresponding period of the prior
year.
 
 Nine
Months Ended September 30, 2008 As Compared to Nine Months Ended September 30,
2007
 
 Revenues­
 
 Revenues
for the nine months ended September 30, 2008 increased by $9,638,896 or 42.6% to
$32,288,369 from $22,649,473 for the corresponding period of the prior year. The
following table indicates the changes in sale by category for the two
periods:
 
 Nine
      Months ended September 30,Source of Revenue
                
                2008
                
                
                2007
                
                
                DifferenceLamb
      meat
                
                $
                2,720,443
                
                
                $
                1,746, 407
                
                
                $
                974,036Cattle
      Embryo Transfers
                
                
                3,635,592
                
                
                
                4,507,697
                
                
                
                (872,105
                )Embryo
                
                
                5,229,423
                
                
                
                4,051,716
                
                
                
                1,177,707Mutton
                
                
                11,221,828
                
                
                
                6,208,180
                
                
                
                5,013,648E-Sea
                
                
                8,728,818
                
                
                
                5,533,578
                
                
                
                3,195,240Leasing
                
                
                752,265
                
                
                
                601,895
                
                
                
                150,370Total
                
                $
                32,288,369
                
                
                $
                22,649,473
                
                
                $
                9,638,896
  Index
  Cost
of Sales and Services
 
 Cost of
sales and services for the nine months ended September 30, 2008 increased by
$7,650,516 or 49.7% to $23,039,449 from $15,388,933 for the corresponding period
of the prior year. The following table indicates the changes in cost of sales
and services by category for the two periods:
 
 Nine
      Months Ended September 30,Source of
      Cost of Sales & Services
                
                2008
                
                
                2007
                
                
                Difference
                
                
                2008 Gross Profit MarginLamb
      meat
                
                $
                2,009,470
                
                
                $
                1,220,205
                
                
                $
                789,265
                
                
                
                35.4
                %Cattle
      Embryo Transfer
                
                
                2,717,585
                
                
                
                3,226,912
                
                
                
                (509,327
                )
                
                
                33.8
                %Embryo
                
                
                5,143,695
                
                
                
                3,986,575
                
                
                
                1,157,120
                
                
                
                1.7
                %Sheep
                
                
                -
                
                
                
                129,499
                
                
                
                (129,499)
                
                
                
                -
                %Mutton
                
                
                9,346,523
                
                
                
                4,918,080
                
                
                
                4,428,443
                
                
                
                20
                %Feeding
      fee
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                %E-Sea
                
                
                3,108,634
                
                
                
                1,706,211
                
                
                
                1,402,423
                
                
                
                181
                %Leasing
                
                
                713,542
                
                
                
                201,451
                
                
                
                512,091
                
                
                
                5.1
                %Total
                
                $
                23,039,449
                
                
                $
                15,388,933
                
                
                $
                7,650,516
                
                
                
                42
                %
 
 Depreciation and Amortization
-
 
 Depreciation
and amortization expenses increased by $121,002 or 21.4% to $687,174 from
$566,172 for the corresponding period of the prior year. This increase is due to
patents and fixed assets acquired by E-Sea during the fourth quarter of
2007.
 
 Selling, General and Administrative
Expenses -
  Selling,
General and Administrative expenses increased by $805,000 or 31.14% to
$3,389,950 from  $2,584,950 for the corresponding period of the prior
year.  The following table indicates the changes in Selling, General
and Administrative Expenses by category for the two periods.
 
 NineMonths EndedSeptember30,Category
                  
                  2008
                  
                  
                  2007
                  
                  
                  DifferenceOffice
      changes
                  
                  $
                  110,347
                  
                  
                  $
                  75,952
                  
                  
                  $
                  34,395Salaries
                  
                  
                  1,331,552
                  
                  
                  
                  1,091,668
                  
                  
                  
                  239,884Commissions
      to distributors
                  
                  
                  620,815
                  
                  
                  
                  341,986
                  
                  
                  
                  278,829Travel
                  
                  
                  17,917
                  
                  
                  
                  24,314
                  
                  
                  
                  (6,397
                  )Entertainment
                  
                  
                  14,918
                  
                  
                  
                  51,750
                  
                  
                  
                  (36,832
                  )Legal
      & Professional
                  
                  
                  395,410
                  
                  
                  
                  342,859
                  
                  
                  
                  52,551Rent
                  
                  
                  83,560
                  
                  
                  
                  61,244
                  
                  
                  
                  22,316Telephone
                  
                  
                  5,678
                  
                  
                  
                  4,510
                  
                  
                  
                  1,168Miscellaneous
                  
                  
                  433
                  
                  
                  
                  667
                  
                  
                  
                  (234
                  )Marketing
      Expense
                  
                  
                  35,000
                  
                  
                  
                  30,000
                  
                  
                  
                  5,000US
      Office Expense
                  
                  
                  774,320
                  
                  
                  
                  60,000
                  
                  
                  
                  714,320Litigation
      Reserve
                  
                  
                  -
                  
                  
                  
                  500,000
                  
                  
                  
                  (500,000
                  )Totals
                  
                  $
                  3,389,950
                  
                  
                  $
                  2,584,950
                  
                  
                  $
                  805,000
 
 Research
and Development Expense -
 
 Research
and development expense decreased by $25,200 or 9.7 % to $285,761 from $260,561
for the corresponding period of the prior year. These expenses were paid to
a  third party, Sheng Zheng Au Ke Wei Technology Development Company
(“TDC”) pursuant to a contract dated October 17, 2007 under which TDC agreed to
perform certain research for the Company
 
 Other
Income (Expense)
 
 For the
nine months ended September 30, 2008 the company experienced an increase in
other income of $1,437,860.  This resulted from a decrease in interest
income of $702,790, a decrease in the gain on the sale of assets of $302,498, an
increase in investment income of $2,353,729 and a benefit from the impact of the
changes in value of our derivative financial instruments of
$89,419.
  Index
 
 Income
Taxes
 
 The
Company income tax expense on its income from the E-Sea operations was $565,821
for the nine-month ended September 30, 2008.  This compares with an
income tax expense for the prior year period of $380,039.
 
 As a
result of the foregoing, the Company had net income of $7,411,233 or $.14 per
share for the nine months ended September 30, 2008 compared to net income of
$5,121,977 or $.11 per share for the corresponding period of the prior
year.
 
 Liquidity
and Capital Resources
 
 As of
September 30,
2008, the Company had cash and cash equivalents of $28,326,012 and working
capital of $49,663,746 This compares with cash and cash equivalents of
$12,692,479 and working capital of $36,890,802 as of December 31,
2007.
 
 Cash
provided by operating activities totaled $10,624,596 for the nine months ended
September 30, 2008. This compares with cash provided by operating activities of
$14,084,458 for the corresponding period of the prior year. This increase
resulted from an increase in net income of $2,289,256, an increase in
depreciation and amortization of $633,093, an increase in compensatory stock
issuance of $710,320 and a net decrease in changes in the current accounts of
$5,088,686 which were partially offset by a gain in the sale
of  intangible assets of $272,491, a decrease on sales of fixed assets
of $574,989, an increase in investment income of a long term investment of
$2,353,729,  and  net decrease in the change of value of
derivative financial instruments of $47,386.
 
 Cash
provided by/(used in) investing activities was $3,093,602 during the nine
months ended September 30, 2008 compared to $13,453,969 for the nine months
ended September 30, 2007. This decrease resulted from a decrease in redemption
of short term investment of $15,962,541, an increase on short term investment
interest of $494,776, an increase in sales of intangible assets of $1,064,901, a
decrease in disposition of fixed assets of $279,412 and a decrease cash used in
long term investment of $4,321,909.
 
 Cash
provided from financing activities for the nine months ended September 30, 2008,
totaled $1,065,480 from the sale of common stock to its employees.
 
 At
September 30, 2008, the Company listed notes payable of $443,366. These notes
are currently the subject of litigation which is now on appeal. (See legal
proceedings, supra).
 
 The
Company has a cash and bank balances of $28,326,012 and short term liquid
investments of $15,000,997 which is more than sufficient to cover its PRC
operations.  However, if the Company is to expand outside the PRC, as
it anticipates doing, or pay its non-PRC obligation, it will have to sell
additional shares of its stock or borrow funds from third parties. Unless it is
able to either borrow funds or sell additional shares, it will have insufficient
resources to carry out is business objectives outside the PRC for the next
twelve (12) months.
 
 Item3.     Quantitative and Qualititative
Disclosures About Market Risk
 
 In the
ordinary course of business, we are exposed to various market risk factors,
including  changes in general  economic conditions, domestic
competition  and foreign currency  exchange
rates.
 
 Because
we operate in the People’s Republic of China, but report the results of our
operations in U.S. dollars and pay certain of our obligations in US dollars we
are exposed to foreign  currency exchange rate gains and
losses.  Volatility in these markets could impact our net
income.
 
 Item4.    Controls and Procedures
 
 We strive
to maintain  disclosure  controls and
procedures  that are designed to ensure that
information  required to be disclosed in our Exchange Act reports is
recorded,  processed,  summarized and reported within the
time periods specified in the SEC's  rules and forms,  and
that
such  information  is  accumulated  and
communicated to our management,  including our chief executive officer
and chief
financial  officer,  as  appropriate,  to
allow for timely  decisions  regarding
required  disclosure.  In designing and
evaluating  the disclosure  controls and
procedures,  management  recognizes that any controls and
procedures,  no matter how
well  designated  and  operated,  can
provide only  reasonable  assurance of achieving the desired
control objectives and management  necessarily is required to apply
its judgment in evaluating
the  cost-benefit  relationship  of possible
controls.
  Our  independent  registered  public  accounting  firm,  Ham
Langston & Brezina, L.L.P. ("HLB") conducted an audit of our financial
statements for 2007 and
2006.  In  connection  with the issuance of its
report to the Board of  Directors,  HLB reported
two  material  weaknesses  under  standards  established  by
the Public
Company  Accounting  Oversight  Board  regarding  some
elements of our system of internal controls. They noted the following specific
material deficiencies.
 
 (i)  
We lacked the required expertise needed to properly account for non-routine
transactions, (such as the acquisition of other businesses and preparation
of  its  required  financial   statement   disclosure  in  accordance  with
U.S. GAAP. and SEC rules and regulations.
 
 (ii)   Accounting
for derivative instruments under FASB 133
  Index
  Item
4.    Controls and Procedures, continued
 
 To
address the weaknesses, we had previously hired an
independent  accounting firm to assist with accounting for derivatives
.. Therefore we believe that this deficiency had been address for all reporting
periods since December 31, 2007 As of the accounting for non-routine
transactions, we will seek outside accounting assistance on any further
acquisition.
 
 Other
than the foregoing initiatives,  there were no significant
changes in our internal controls or to our knowledge, in other factors that
could significantly affect such internal controls subsequent to the date of
their evaluation. With this assistance, we believe that these deficiencies have
been remedied.
 
 As  required  by
SEC
rule  13a-15(b)  we  conducted  an  evaluation,  under  the
supervision and with the  participation  of our
management,  including our Chief Executive Officer, President and Vice
President of Finance, regarding the effectiveness of the design and operation of
our disclosure  controls and procedures.  Based upon that
evaluation,  the Chief
Executive  Officer,  President and Vice President of
Finance  concluded that our disclosure  controls and
procedures are effective in timely  alerting  them to
material  information  relating to
us  (including  our subsidiaries) required to be included in
our periodic SEC filings.
  Index
  PART
II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 
 As
of August 10, 2008, we were a party to three legal proceeding. The first
proceeding involves a lawsuit brought by Western
Securities  Corporation seeking principal payment of $500,942 on two
outstanding promissory notes, one to Market Management, Inc. and  one
to Thomas L. Tedrow plus accrued  interest  since July 11,
2004,  attorney's fees,  cost
of  collection  and
other  court  costs.  On August 23, 2007, the
Federal Court in Houston, Texas awarded Western Securities Corporation the sum
of $636,757 plus accrued interest since May 22, 2007 and attorney fees in an
amount to be determined which totaled $784,566 as of June 30,
2008.  This judgment became final on October 31, 2007.  In
April, 2008 this case was appealed by the Company to the 5th  Circuit Court of
Appeals in New Orleans. Oral arguments in this case were heard by the Court of
Appeals on November 3, 2008. A decision is not expected until the first quarter
of next year.
 
 Because
the Company did not post a bond pending the Appeal, collection efforts by the
Plaintiff’s have been ongoing. Pursuant to these efforts, the Court granted
Plaintiff’s motion for the appointment of a Receiver. Because of this, a “Q” has
been added to the Company’s trading symbol.
 
 On the
4th of September 2007, the
Company was served with a lawsuit from International Capital Advisors LLC, as
assignee of Market Management, Inc. seeking repayment of the sum of $250,000
alleged paid by Market Management, Inc. on behalf of the Company.  On
the 26th of October,
2007, the Plaintiff amended its petition, adding several additional causes of
action and are now seeking $960,000 plus accrued interest and attorney’s
fees.  On September 18, 2007, the Company filed a general denial to
this claim.
 
 On July
7, 2008 the Company filed a Counter Claim and Third Party Petition in this
action against Thomas Tedrow, Joseph D. Jordan, Market Management
LLC, International Capital Advisors LLC. Market Management International, Inc.,
Global Business Networks, Inc., Merchant Marketing, Inc., Piranha, Inc. and
Western Securities Corporation alleging  securities fraud, fraudulent
inducement, fraud, and Breach of Contract.  The case has been
scheduled for trial in March, 2009.
 
 The third
cause of action involves a convertible promissory note payable to Bristol
Investments Limited.  On December 27, 2007, a New York Court rendered
a decision in favor of Bristol Investments Limited.    On
November 10, 2008, the Court entered a judgment in favor of  Bristol
for $75,378.21. The Company has escrowed $30,000.00 of this amount with New
York counsel.
 
 
 Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds.
 
 During
the three months ended September 30, 2008, the Company did not issue any
unregistered securities.  However, on May 29, 2008, the Company issued
3,551,600 shares of its common stock to its employees under its amended 2007
Stock Option Plan.  The shares were issued at $0.50 per share, the
approximate average of the high/low price of the company’s common stock on that
day.
 
 Item. 3. Defaults Upon Senior Securities
 
 None
 
 Item4.  Submissions of Matters to a Vote of Security
Holders
 
 None
 
 Item5.  Other Information
 None
  Index
  Item6. Exhibits
 
 EXHIBIT NO.
                  
                  IDENTIFICATION OF
EXHIBITSchedule
      I
                  
                  Condensed
      Financial Information of Registrant31.1
                  
                  Certification
      Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200231.2
                  
                  Certification
      Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200232.1
                  
                  Certification
      Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 200232.2
                  
                  Certification
      Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002
  
 SIGNATURES
 
 Pursuant  to
the  requirement  of
the  Securities  Exchange  Act  of  1934,  the
registrant  has
duly  caused  this  report  to
be  signed  on its  behalf by the undersigned
thereunto authorized.
 
 
 ETERNAL
      TECHNOLOGIES GROUP, INC.November
      14, 2008
                /s/
      Jiansheng WeiJiansheng Wei,
      Chief Executive OfficerNovember
      14, 2008
                /s/
      Zheng ShenZheng Shen,
      Chief Financial Officer
  Index
  SCHEDULE
I
 ETERNAL
TECHNOLOGIES GROUP, INC.
 CONDENSED
FINANCIAL STATEMENTS OF REGISTRANT
 (NOT
CONSOLIDATED)
 BALANCE
SHEETS
 September
30, 2008 and December 31, 2007
 (Amounts inUnited StatesDollars)
 
 September
      30,
                                          
                                          
                                          December
      31,2008
                                          
                                          
                                          2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                                          
                                          $
                                          12,986
                                          
                                          
                                          $
                                          9,023Intercompany
      receivable
                                          
                                          
                                          254,810
                                          
                                          
                                          
                                          -Total
      current assets
                                          
                                          
                                          267,796
                                          
                                          
                                          
                                          9,023Investment
      in subsidiaries
                                          
                                          
                                          8,152,932
                                          
                                          
                                          
                                          8,152,932Other
      assets
                                          
                                          
                                          5,558,763
                                          
                                          
                                          
                                          5,558,763Total
      assets
                                          
                                          $
                                          13,979,491
                                          
                                          
                                          $
                                          13,720,718LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Notes
      Payable
                                          
                                          $
                                          443,366
                                          
                                          
                                          $
                                          443,366Accounts
      payable and accrued liabilities
                                          
                                          
                                          1,361,475
                                          
                                          
                                          
                                          1,191,540Intercompany
      payable
                                          
                                          
                                          -
                                          
                                          
                                          
                                          441,558Derivative
      financial instrument liability
                                          
                                          
                                          -
                                          
                                          
                                          
                                          109,300Total
      current liabilities
                                          
                                          
                                          1,804,841
                                          
                                          
                                          
                                          2,185,764Stockholders'
      equity:Preferred
      shares - $0.001 par value, 5,000,000authorized, none issued or
      outstanding
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Common
      shares - $0.001 par value; 95,000,000authorized; 55,689,634 shares issued
      and outstanding
                                          
                                          
                                          55,689
                                          
                                          
                                          
                                          52,137Additional
      paid - in capital
                                          
                                          
                                          21,571,992
                                          
                                          
                                          
                                          19,799,744Retained
      earnings
                                          
                                          
                                          (8,570,941
                                          )
                                          
                                          
                                          (7,434,837
                                          )Treasury
      shares at cost 1,509,703 shares
                                          
                                          
                                          (882,090
                                          )
                                          
                                          
                                          (882,090
                                          )Total
      stockholders' equity
                                          
                                          
                                          12,174,650
                                          
                                          
                                          
                                          11,534,954Total
      liabilities and stockholders' equity
                                          
                                          $
                                          13,979,491
                                          
                                          
                                          $
                                          13,720,718The
      accompanying notes are an integral part of these condensed financial
      statements.
  Index
  SCHEDULE
I
 ETERNAL
TECHNOLOGIES GROUP, INC.
 CONDENSED
FINANCIAL STATEMENTS OF REGISTRANT
 (NOT
CONSOLIDATED)
 STATEMENTS
OF OPERATIONS
 For
nine months ended September 30, 2008 and 2007
 (Amounts inUnited StatesDollars)
 
 9
      Months Ended September 30,2008
                                    
                                    
                                    2007Revenue:
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -Total
      revenue
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Cost
      of sales and services
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Total
      cost of sales and services
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Gross
      profit
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Selling,
      general and administrative expenses
                                    
                                    
                                    1,245,404
                                    
                                    
                                    
                                    927,874Income
      from operations
                                    
                                    
                                    (1,245,404
                                    )
                                    
                                    
                                    (927,874
                                    )Other
      income (expense)Change
      in value of derivative financial instruments
                                    
                                    
                                    109,300
                                    
                                    
                                    
                                    19,881Other
      income (expense), net
                                    
                                    
                                    109,300
                                    
                                    
                                    
                                    19,881Income
      before provision for income taxes
                                    
                                    
                                    (1,136,104
                                    )
                                    
                                    
                                    (907,993
                                    )Provision
      for income taxes
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Net
      income
                                    
                                    $
                                    (1,136,104
                                    )
                                    
                                    $
                                    (907,993
                                    )
 
 The
accompanying notes are an integral part of these condensed financial
statements
  Index
  (NOT
CONSOLIDATED)
 STATEMENTS
OF CASH FLOWS
 For
the nine months ended September 30, 2008 and 2007
 (Amounts inUnited StatesDollars)
 
 2008
                          
                          
                          2007Cash
      flows from operating activitiesNet
      income
                          
                          $
                          (1,136,104
                          )
                          
                          $
                          (907,993
                          )Adjustments
      to reconcile net income to net cash provided by operating
      activities:Change
      in value of derivative financial instruments
                          
                          
                          (109,300
                          )
                          
                          
                          (156,686
                          )Common
      Stock in Service
                          
                          
                          710,320
                          
                          
                          
                          -Changes
      in operating assets and liabilities:Intercompany
                          
                          
                          (696,368
                          )
                          
                          
                          978,413Accounts
      payable and accrued expenses
                          
                          
                          169,935
                          
                          
                          
                          521,264Net
      cash provided by operating activities
                          
                          
                          (1,061,517
                          )
                          
                          
                          434,998Cash
      flow from investing activities:Long
      Term investment
                          
                          
                          -
                          
                          
                          
                          (1,903,811
                          )Net
      cash provided by/(used in) investing activities
                          
                          
                          -
                          
                          
                          
                          (1,903,811
                          )Cash
      flows from financing activities:Capital
      contributed
                          
                          
                          -
                          
                          
                          
                          2,304,615Purchases
      of ETLT shares for treasury
                          
                          
                          -
                          
                          
                          
                          (882,090
                          )Common
      stock receivable
                          
                          
                          -
                          
                          
                          
                          10,176Proceeds
      from sales of common stocks
                          
                          
                          1,065,480
                          
                          
                          
                          -Net
      cash provided by financing activities
                          
                          
                          1,065,480
                          
                          
                          
                          1,432,701Net
      increase (decrease) in cash and cash equivalents
                          
                          
                          3,963
                          
                          
                          
                          (36,112
                          )Cash
      and cash equivalents, beginning of period
                          
                          
                          9,023
                          
                          
                          
                          51,125Cash
      and cash equivalents, end of period
                          
                          $
                          12,986
                          
                          
                          $
                          15,013
 
 The
accompanying notes are an integral part of these unaudited consolidated
financial statements