SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF
     1934

                   For the Fiscal Year Ended December 31, 2005

[  ] TRANSITION  REPORT UNDER 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.
       ------------------------------------------------------------------
       ------------------------------------------------------------------
                 (Name of Small Business Issuer in its charter)

            Nevada                                     62-1655508
-------------------------------           -------------------------------------
 (State or other jurisdiction             (I.R.S. Employer Identification No.)
              of
incorporation or organization)

              Suite D 5/F, Block A, Innotec Tower, 235 Nanjing Road
                      Heping District, Tianjin, PRC 300052
       ------------------------------------------------------------------
       --- -- ---------------------------------------------------- -- ---
               (Address of principal executive offices)(Zip code)

Issuer's telephone number, including area code:            011-86-22-2721-7020

Securities to be registered pursuant to Section 12(b) of the Act:

  Title of each class       Name of each exchange on which each is registered
  --------------------  --------------------------------------------------------
         None                                     None

Securities to be registered pursuant to Section 12(g) of the Act:

                         Common Stock, $0.001 par value
                   -------------------------------------------
                   -------------------------------------------
                                (Title of Class)

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         [ ]

Check if disclosure  of delinquent  filers in response to Item 405 of Regulation
S-B is not  contained in this form,  and will not be  contained,  to the best of
registrant's   knowledge,   in  definitive   proxy  or  information   statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB.

The  Issuer's  revenues  for the  fiscal  year  ended  December  31,  2005  were
$23,032,965.

The  number of  shares of the  registrant's  common  stock,  $.001 par value per
share, outstanding as of May 16, 2006 was 40,567,300. The aggregate market value
of the  voting  and  non-voting  common  equity  held by  non-affiliates  of the
registrant  on May 16,  2006,  based on the last sales price on the OTC Bulletin
Board as of such date, was approximately $1,063,240.

                       DOCUMENTS INCORPORATED BY REFERENCE

None

        Transition Small Business Disclosure Format:   Yes  [ ]    No     [X]
<PAGE>


                                TABLE OF CONTENTS

                                                                        Page

                                                      PART I

         ITEM 1.      DESCRIPTION OF BUSINESS..........................    3
         ITEM 2.      DESCRIPTION OF PROPERTY..........................    6
         ITEM 3.      LEGAL PROCEEDINGS................................    6
         ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF
                      SECURITY HOLDERS.................................    6

                                                      PART II

         ITEM 5.      MARKET FOR COMMON EQUITY AND
                      RELATED STOCKHOLDER MATTERS......................    7
         ITEM 6.      MANAGEMENT'S DISCUSSION AND ANALYSIS.............    8
         ITEM 7.      FINANCIAL STATEMENTS.............................   12
         ITEM 8.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                      ON ACCOUNTING AND FINANCIAL DISCLOSURE...........   39
         ITEM 8A.     CONTROLS AND PROCEDURES..........................   39

                                                     PART III

         ITEM 9.      DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
                      CONTROL PERSONS; COMPLIANCE WITH
                      SECTION 16(a) OF THE EXCHANGE ACT................   41
         ITEM 10.     EXECUTIVE COMPENSATION...........................   42
         ITEM 11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                      OWNERS AND MANAGEMENT............................   45
         ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...   45
         ITEM 13.     EXHIBITS AND REPORTS OF FORM 8-K.................   46
         ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES...........   47

SIGNATURES            .................................................   48



<PAGE>

                           FORWARD-LOOKING STATEMENTS

This annual report on Form 10-KSB contains forward-looking statements within the
meaning of the federal  securities  laws.  These  forwarding-looking  statements
include without  limitation  statements  regarding our  expectations and beliefs
about the market and industry,  our goals, plans, and expectations regarding our
operations and properties and results,  our intentions and strategies  regarding
future  operations,  acquisitions  and sales of  properties,  our intentions and
strategies  regarding  the  formation  of strategic  relationships,  our beliefs
regarding the future success of our  operations,  our  expectations  and beliefs
regarding competition,  competitors, the basis of competition and our ability to
compete,  our beliefs and expectations  regarding our ability to hire and retain
personnel,  our beliefs  regarding  period to period results of operations,  our
expectations  regarding revenues,  our expectations  regarding future growth and
financial  performance,  our beliefs and expectations  regarding the adequacy of
our  facilities,  and our  beliefs  and  expectations  regarding  our  financial
position,  ability to finance  operations and growth and the amount of financing
necessary  to support  operations.  These  statements  are  subject to risks and
uncertainties  that could cause actual results and events to differ  materially.
We undertake  no  obligation  to update  forward-looking  statements  to reflect
events or  circumstances  occurring after the date of this annual report on Form
10-KSB.

As used in this  annual  report on Form  10-KSB,  unless the  context  otherwise
requires,  the terms "we," "us," "the Company," and "Eternal Technologies" refer
to Eternal Technologies Group, Inc., a Nevada corporation.

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

General

Eternal Technologies Group, Inc. is engaged in agricultural genetics and medical
equipment  manufacturing and distribution  operating in the People's Republic of
China. We focus on the development and application of advanced animal  husbandry
techniques to produce improved food products, the development, manufacturing and
marketing  of medical  equipment  and  technologies  used in the  detection  and
prevention of breast cancer in humans.

Our agricultural  genetics/animal  husbandry  operations are concentrated in the
application of advanced  embryonic  biotechnology  techniques with the objective
being to shorten  the  development  time for  animal  development  resulting  in
increased output and  profitability  and reduced use of animal feed. Since 2000,
we have utilized our advanced breeding  techniques and marketed fine bred animal
embryos,  breeding stock and breeding  services to develop larger,  stronger and
healthier sheep. In the fourth quarter of 2003, we began the production and sale
of lamb meat and began  application of our advanced  breeding  techniques to the
breeding of higher-yielding purebred Holstein dairy cattle.

Our development,  manufacturing  and marketing of medical  equipment and medical
technologies   are  focused  in  the  development  of  breast  cancer  detection
technology with the objective of earlier detection.  The Company  manufactures a
device which , if widely accepted,  could  substantially  decrease the costs and
therefore  increase the availability of breast cancer detection in many areas in
Asia.  We entered this industry in October of 2005 with the  acquisition  of the
assets of E-Sea Biomedical Engineering Co. International, Ltd.

Our principal  executive  offices are located at Suite D, 5/F,  Block A, Innotec
Tower, 235 Nanjing Road Heping District,  Tianjin,  PRC 300052 and our telephone
number is 011-86-22-2721-7020.

History and Development of the Company

Our  operations are conducted  through our  wholly-owned  subsidiaries,  Eternal
Technology Group Ltd.  ("Eternal - BVI"), a British Virgin Islands company,  and
its subsidiaries and E-Sea Biomedical Engineering Co. International Ltd., also a
BVI company.

We acquired  Eternal - BVI in December  2002 (the  "Reorganization").  Under the
terms of the Exchange Agreement, we issued 22,050,000 shares of our common stock
to the  shareholders  of Eternal  Technologies  - BVI in exchange for all of the
issued  and  outstanding  shares  of  Eternal  - BVI.  In  conjunction  with the
Reorganization  our common  shares were  reverse  split on a one (1) for six (6)
basis and we changed our name from  Waterford  Sterling  Corporation  to Eternal
Technologies Group, Inc.,  ("Eternal") We ceased our prior operations and caused
the officers and directors of Eternal  Technologies - BVI to be appointed as the
officers and  directors of Eternal in place of the  pre-Reorganization  officers
and  directors.  As a result of the  Reorganization,  we adopted as our  primary
business the operations of Eternal - BVI and the  shareholders  of Eternal - BVI
acquired approximately 85% of our post-Reorganization outstanding shares.

                                       3
<PAGE>

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 Innner Mongolia which it
leases to a Chinese company for approximately $572,000 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.

Our current agricultural operations are focused on developing superior livestock
breeds in order to improve the quality and yield of  livestock  in China as well
as the profitability of livestock operations. We initially imported embryos from
Australia and the United States,  but are utilizing our facilities and expertise
to develop a herd of "carrier  animals" to produce a domestic supply of embryos,
hereby  eliminating  our dependence on third party foreign embryo  suppliers and
reducing the cost of embryos.  Under this program,  we transfer fine-breed sheep
and dairy cattle embryos into recipient animals and sell the pregnant animals to
customers with the offspring serving as breeding or commercial stock.

We utilize  our  fine-breed  livestock  embryos  and our  breeding  and  biotech
expertise  to  offer  a range  of  livestock  breeding  services  and  products,
including  sale  of  embryos,  artificial  insemination  and  embryo  transplant
services,  both at our facilities and on-site, and related products and services
designed to improve  production,  quality and profitability of Chinese livestock
operators.

In late 2003, we began  implementation  of a mutton  production and sale program
focused on the  processing and sale of mutton from our higher  yielding,  higher
quality genetically engineered stock. Because of changes in government relations
to plowing in Inner Mongolia,  we have concluded that we have impediments to the
ongoing  economic use of our farm for grazing.  Accordingly,  we have leased the
farm to a Chinese firm for fifteen  years.  This firm intends to raise trees for
lumber on the property.

Our current  medical  operations  are centered  around E-Sea and  expanding  our
market in China,  both  through the sales of our medical  detection  devices and
leasing them on a per usage basis. We are also exploring  acquisitions to expand
and complement the E-Sea line of medical equipment.

Historically,  our  business  has been  highly  seasonal  with nearly all of our
revenues being generated in the fourth  quarter.  While our business will remain
seasonal it should be less  cyclical  in the future  because of the sale of lamb
meat,  embryo  transfers to dairy cattle and the  acquisition  of E-Sea  thereby
making our overall business less seasonal.

Medical Equipment Operations E-Sea

The Company  manufactures and sells a medical device known as a  "Three-operator
Mammary  Gland  Detecting  System."  This device is used to examine  persons and
detect early stage breast cancer.  The Company  anticipates  wide  acceptance of
this  product  as it is a low cost  alternative  to  expensive  and often  times
unavailable mammography.

Facility.  The  company  manufactures  and sells the  medical  equipment  from a
facility in Shenzhen,  PRC. The facility is approximately  nine-thousand  square
feet  and  contains  manufacturing  machinery,   workspace,  and  administrative
offices.

Marketing.  Our senior  management  team  handles  sales and  marketing  for our
medical  equipment  products.  Our  management  team  communicates  with medical
service  providers,  clinics and other  institutions  to assure  that  potential
clients are aware of our product and the product  capabilities.  We may evaluate
the  adoption  of more  formal  marketing,  advertising  and sales  programs  as
necessary in the future.


                                       4
<PAGE>




Potential Acquisitions

We intend to evaluate various potential acquisitions of companies and facilities
in order to expand  the  scope of our  operations  and  accelerate  our  growth.
Specifically,  we intend to evaluate the  acquisition of companies or facilities
to provide feedlot, dairy processing, slaughterhouse and meat processing, animal
fattening and similar capabilities.  However, there are no current agreements to
purchase any companies or facilities.

Competition

Both the agriculture and medical industries are highly competitive. While animal
genetics is a relatively new field in China several large foreign companies such
as Smithfield Foods, Inc. of the United States and Sumitomo Corporation of Japan
have entered the market and compete with us in the  development  and delivery of
advanced animal husbandry products and services.  Likewise in the medical device
field,  companies  such as Siemens and General  Electric have entered the market
and competed with us. These companies have a substantial  advantage due to their
size and the name recognition each enjoys.

Increased  competition in the agriculture industry could have a material adverse
effect  on us,  as our  competitors  may have far  greater  financial  and other
resources  available to them and possess extensive  manufacturing,  distribution
and marketing capabilities far greater than those we possess.

Intellectual Property

There can be no  assurance  that  third  parties  will not  assert  intellectual
property infringement claims against us in the future with respect to current or
future  products and  technologies.  We are  responsible  for defending  against
charges of  infringement  of third  party  intellectual  property  rights by our
actions and products and such  assertion may require us to refrain from the sale
of our products, enter into royalty arrangements or undertake costly litigation.
Further,  challenges  may be  instituted  by third  parties as to the  validity,
enforceability and infringement of our patents.

Our  adherence to industry  standards  with  respect to our products  limits our
opportunities  to  provide  proprietary  features  that  may  be  protected.  In
addition,  the laws of various  countries  in which our products may be sold may
not protect our products and intellectual  property rights to the same extent as
the laws of the United States of America.

Governmental Regulation

Our  business  and the  agriculture  industry in general is subject to extensive
laws and regulations,  including environmental laws and regulations. As such, we
may be required to make large  expenditures  to comply  with  environmental  and
other governmental regulations.

Under  these laws and  regulations,  we could be liable for  personal  injuries,
property  damage,  discharge of hazardous  materials,  remediation  and clean-up
costs and other  environmental  damages.  Failure to comply  with these laws and
regulations  also may result in the  suspension or termination of our operations
and subject us to administrative,  civil and criminal penalties. Moreover, these
laws and  regulations  could  change in ways  that  substantially  increase  our
operating costs.

The Chinese regulatory scheme, in general, and the regulation of the agriculture
and medical  equipment  industries  in  particular,  is not well  defined and is
subject to  substantial  uncertainty.  With China's entry in the WTO,  China has
implemented numerous changes to its existing laws and regulations.

Chinese laws  impacting  our animal  husbandry  operations  relate  primarily to
health  and  safety   regulations   covering  food  products  and  environmental
regulations covering waste products and other land use regulations. Food product
regulations  generally  govern the safety of  products in the food chain and the
handling  of those  products.  We  believe  that we are in  compliance  with all
existing food and environmental  regulations  applicable to our animal husbandry
operations.  Because many of those  regulations  are new and  evolving,  we must
continually  monitor the  interpretation,  enforcement and modification to those
regulations to assure ongoing compliance.

Our medical  equipment  operations  are subject to extensive  regulation  by the
Chinese  government  and,  to the extent  that we may market our  pharmaceutical
products  outside  of  China,  other  governments.   Chinese  medical  equipment
regulation  is  evolving  and  subject  to  much   uncertainty.   Under  current
regulations,   the  Chinese  equivalent  of  the  United  States  Food  An  Drug
Administration is responsible for monitoring,  and promulgating regulations with
respect to, the review of clinical safety and efficacy trial, market approval of
equipment  and  effectiveness  claims,   manufacturing  practices,  and  similar
matters. Failure to comply with market rules could result in fines, penalties or
other adverse consequences. Employees

                                       5
<PAGE>

As of December 31,  2005,  we had 68 full-time  employees,  including  employees
performing  administrative  functions and animal husbandry  services and farming
functions.  Third parties perform bioscience  research and related services on a
contract  basis.  The  employees  are not  covered  by a  collective  bargaining
agreement,  and we do not  anticipate  that any of our future  employees will be
covered by any such agreement.

ITEM 2.  DESCRIPTION OF PROPERTY

The Company operates three separate  facilities,  our administrative  offices in
Tianjin,  PRC, a manufacturing  facility in Shenzhen,  PRC and our farm in Inner
Mongolia, PRC.

The   administrative   offices   occupy   approximately   97.8   square   meters
(approximately 1,053 square feet) in a commercial building in Tianjin,  PRC. The
Company rents this facility under a two-year lease, running through December 31,
2006, at $964 per month.

The leased facility in Shenzhen is an approximately 120,000 square foot facility
containing  machinery for the manufacture of medical  equipment,  administrative
offices, and storage space for raw materials.  The lease expires August 15, 2007
and requires monthly payments of approximately $4,640 until expiration.

The farm  consists of  approximately  2.8 million  acres and is located in Inner
Mongolia,  PRC. The Company  purchased the land use rights to this farm in April
2000.  Land use rights with respect to our farm were  purchased from the Chinese
government for $6,000,000.  Such rights extend through 2025. The farm is located
in the Wulagai  Development  Area in Inner  Mongolia.  The farm,  one of the few
naturally preserved grassland areas in China, is organized into various breeding
sub-pastures.  Each sub-pasture  includes haciendas,  stables and farm equipment
such as wells,  mowing  machines  and  tractors.  A supply  of  forage  grass is
reserved for winter and for snowstorms.

The farm is equipped with a 60-kilovolt  electric  transmission line,  telephone
and transportation facilities,  including a 200 kilometer road system connecting
all sub-pastures.  A railway station is located 80 kilometers south of the farm,
facilitating distribution of products throughout China. Also located on the farm
is a 35,000 square foot embryo  transfer  facility  including  operating  rooms,
equipment  rooms,  offices,  conference  rooms,  lecture  halls and guest rooms.
Because  of recent  changes in Chinese  land use  regulations,  in April 2006 we
reached an  agreement to lease the farm to a Chinese  company for fifteen  years
for approximately $570,000 per year.


ITEM 3.  LEGAL PROCEEDINGS

As of May 16,  2006,  we were a party to one legal  proceeding.  The  proceeding
involves a lawsuit brought by Western Securities  Corporation seeking 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.  This  cause of action  was
initially filed in Federal  District Court in the Eastern District of Louisiana.
The  Company  filed a Motion to Dismiss  for lack of  personal  jurisdiction  or
alternatively a Motion to Dismiss for lack of venue.

In October 2005,  the Court  granted the Company's  motion for a change of venue
and the  case was  moved to the  Southern  District  Court of Texas in  Houston,
Texas.  The Company believes that the case is without merit and the basis of the
promissory  note  involves  expenditures  not  made  on  the  company's  behalf.
Furthermore,  the Company has significant  counterclaims that it plans to assert
against Mr. Tedrow and Market  Management,  Inc.. The Company believes that this
matter will be resolved  during  2006 and that the Company  will  prevail on all
counts.

The  State  Court in New York  dismissed  a cause of  action,  filed by  Bristol
Investments Limited against the Company, on February 14, 2006. On March 30, 2006
without stating a new cause of action,  Bristol Investments Limited re-filed the
cause of action against the Company.

As of May 16,  2006,  there are no other  causes of action  pending  against the
Company.

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

During the quarter ended  December 31, 2005, no matters were submitted to a vote
of security holders.

                                       6
<PAGE>


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Since the  acquisition of Eternal  Technology  Group Ltd. and  Subsidiaries  and
adoption of our current  business  plan in December  2002,  our Common Stock has
been listed on the  over-the-counter  electronic  bulletin board ("OTCBB") under
the symbol "ETLT".  The following table sets forth the range of high and low bid
prices for each quarter during the past two fiscal years.

                                            High              Low

Calendar Year 2004

         Fourth Quarter.............        $0.60             $0.34
         Third Quarter..............         0.60              0.32
         Second Quarter.............         0.96              0.41
         First Quarter..............         1.13              0.79

Calendar Year 2005

         Fourth Quarter.............        $0.79             $0.37
         Third Quarter..............         0.57              0.04
         Second Quarter.............         0.52              0.20
         First Quarter..............         0.58              0.40



The quotations reflect inter-dealer prices without retail mark-up,  mark-down or
commission and may not represent actual transactions.

At May 16, 2006, the closing bid price of the Common Stock was $0.40.

As of May 16,  2006,  we estimate  that there were in excess of 2000  beneficial
holders of our Common Stock.

Between March 2003 and August 2003, we issued  979,505 shares of common stock to
various  non-U.S.  investors  for  $277,304.  In September  and October 2003, we
issued  1,749,288  shares  of  common  stock  and  1,181,205  warrants  to seven
accredited  investors  for  $1,316,643.  The  warrants  issued  during 2003 were
exercisable  to  purchase  common  stock at $1.11 to $1.54 per share and  expire
between September 4 and October 8, 2008. On November 5, 2004 the Company amended
the warrants to reduce the exercise price to $0.40.

On May 24,  2005,  in  satisfaction  of all  penalties  and  interest  which had
accrued, we issued the  afore-referenced  seven investors a non-interest bearing
convertible  note,  convertible  into 1,486,867  shares of our common stock.  To
date,  1,154,389  of  these  shares  have  been  issued.   Non-interest  bearing
convertible notes remain for conversion into 332,478 shares of our common stock.

The  issuance  of all  other  shares of our  common  stock  described  above was
pursuant to the  exemption  from  registration  provided by Section  4(2) of the
Securities  Act  of  1933,  as  amended  and  related  state  private   offering
exemptions.  All of the investors  were  Accredited  Investors as defined in the
Securities Act who took their shares for investment  purposes  without a view to
distribution  and had  access to  information  concerning  the  Company  and its
business prospects, as required by the Securities Act.

In addition,  there was no general  solicitation or advertising for the purchase
of our shares.  All  certificates for our shares issued pursuant to Section 4(2)
contain  a  restrictive  legend.  Finally,  our  stock  transfer  agent has been
instructed not to transfer any of such shares, unless such shares are registered
for resale or there is an exemption with respect to their transfer.

We paid  commissions of $198,981 and issued warrants to purchase  174,931 shares
of our common stock,  to First Montauk  Securities  Corp. in connection with the
issuances described above.

                                       7
<PAGE>

In 2005,  we also issued  31,225  shares to an  individual  who had assisted the
Company  in  a  prior  funding;  560,000  shares  were  issued  to  professional
consultants in lieu of compensation and 2,500,000 shares were issued pursuant to
the 2005 Stock Option Plan.

Effective  October 1, 2005,  we issued  5,709,876  shares to the prior owners of
E-Sea as partial payment for the acquisition of certain assets and assumption of
certain liabilities of their company.

We have not paid dividends in the past and we intend to retain earnings, if any,
and  will  not  pay  cash  dividends  in  the  foreseeable  future.  Any  future
determination  to pay cash  dividends  will be at the discretion of the board of
directors  and  will be  dependent  upon our  financial  condition,  results  of
operations,  capital  requirements,  general business  conditions and such other
factors as the board of directors may deem relevant.


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The Company

Our  current  operations  are  conducted  through our wholly  owned  subsidiary,
Eternal Technology Group Ltd.  ("Eternal  Technologies - BVI"), a British Virgin
Islands company,  and its subsidiaries.  For a more detailed  description of our
business please see "Item 1. Description of Business" on page 3.

Historically,  our  business  has been  highly  seasonal  with nearly all of our
revenues being generated in the fourth quarter.  This seasonality occurs because
the  embryo  sales  occur  only  during  the fourth  quarter  when  animals  are
impregnated  as  births  occur in the  spring.  While we have had sale of forage
grasses in the past,  we do not expect it to continue  in the future  because of
certain government  restrictions on the mowing of grasses.  Other periods, other
than the fourth quarter, should benefit in the future from the sale of lamb meat
and embryo  transplants  into dairy cattle;  thereby making our overall business
less seasonal.  We believe the acquisition of E-Sea  Biomedical  Engineering Co.
International,  Ltd. provides further diversification of our operations, thereby
reducing the seasonality of our revenues.

Critical Accounting Policies

The  preparation  of  financial  statements  in  conformity  with United  States
generally accepted  accounting  principles requires management to make estimates
and  assumptions  that affect the reported  amount of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting  period.  Actual  results  could  differ  from  those  estimates.  Our
management  routinely makes judgments and estimates about the effects of matters
that are inherently uncertain.

Our  critical  accounting  policies  are  those  where  we have  made  the  most
difficult,  subjective or complex  judgments in making  estimates,  and/or where
these estimates can  significantly  impact our financial results under different
assumptions and conditions. Our critical accounting policies are:

Inventory Valuation

Management reviews inventory balances to determine if inventories can be sold at
amounts equal to or greater than their  carrying  amounts.  The review  includes
identification   of  slow  moving   inventories,   obsolete   inventories,   and
discontinued products or lines of products.  The identification process includes
historical  performance  of the  inventory,  current  operational  plans for the
inventory,  as well as industry  and  customer  specific  trends.  If our actual
results differ from management  expectations  with respect to the selling of our
inventories at amounts equal to or greater than their carrying amounts, we would
be required to adjust our inventory balances accordingly.

Impairment of  Long-Lived  Assets  (including  Property,  plant and  equipment),
Goodwill and Identifiable Intangible Assets

In accordance  with  applicable  accounting  literature,  we reduce the carrying
amounts of long-lived  assets,  goodwill and identifiable  intangible  assets to
their fair values when the fair value of such  assets is  determined  to be less
than their carrying amounts (i.e., assets are deemed to be impaired). Fair value
is typically estimated using a discounted cash flow analysis,  which requires us
to estimate the future cash flows  anticipated to be generated by the particular
asset(s)  being  tested  for  impairment  as well as select a  discount  rate to
measure the present value of the anticipated cash flows. When determining future
cash flow estimates,  we consider historical results adjusted to reflect current
and  anticipated  operating  conditions.  Estimating  future cash flows requires
significant  judgment  by  us in  such  areas  as  future  economic  conditions,
industry-specific   conditions,    product   pricing   and   necessary   capital
expenditures.  The use of different  assumptions  or  estimates  for future cash
flows could produce different impairment amounts (or none at all) for long-lived
assets, goodwill and identifiable intangible assets.

                                       8
<PAGE>

Among our long-lived  assets subject to review for impairment are our land lease
rights  in the PRC  that  are  stated  at cost  less  accumulated  amortization.
Amortization of land lease rights was calculated on the straight-line basis over
the lesser of its estimated  useful life or the lease term. The principal annual
rate used for amortization is 4%.

Stock-Based Compensation

In December 2004, the Financial  Accounting  Standards Board (the "FASB") issued
Statement of Financial  Accounting  Standard  ("SFAS") No.  123(R),  Share-Based
Payment.  SFAS 123(R) requires compensation costs related to share-based payment
transactions  to  be  recognized  in  the  financial  statements.  With  limited
exceptions,  the  amount of  compensation  cost is to be  measured  based on the
grant-date  fair  value  of the  equity  or  liability  instruments  issued.  In
addition,   liability  awards  are  to  be  remeasured  each  reporting  period.
Compensation  cost will be recognized over the period that an employee  provides
service in  exchange  for the  award.  SFAS  123(R) is a  revision  of SFAS 123,
Accounting for Stock-Based Compensation,  as amended by SFAS 148, Accounting for
Stock-Based  Compensation-Transition  and  Disclosure and supersedes APB No. 25,
Accounting for Stock Issued to Employees. SFAS 123(R) is effective for companies
as of the  beginning  of the first  annual  reporting  period that begins  after
December 15, 2005. The Company  adopted SFAS 123(R)  effective  January 1, 2006,
using the modified  prospective method. This method applies the fair value based
method to new awards and to awards modified,  repurchased or cancelled after the
required  effective date. Also,  compensation cost for the portion of awards for
which the requisite service has not been rendered that are outstanding as of the
required  effective  date shall be  recognized  as the service is rendered on or
after the required  effective date. Any options issued  subsequent to January 1,
2006 will be accounted for under SFAS 123(R).

Contingencies

We account for  contingencies  in accordance  with SFAS No. 5,  "Accounting  for
Contingences".  SFAS No. 5 requires that we record an estimated loss from a loss
contingency  when  information  available  prior to  issuance  of our  financial
statements  indicates  that it is probable  that an asset has been impaired or a
liability  has been  incurred at the date of the  financial  statements  and the
amount of the loss can be reasonably estimated.

Revenue recognition

In  accordance  with  Staff  Accounting  Bulletin  ("SAB")  No. 104 , revenue is
recorded when  persuasive  evidence of an arrangement  exists;  the price to the
buyer is fixed or determinable; the merchandise is delivered to the customer and
title passes; and collection is reasonably assured.

Derivative instruments

In connection with the sale of debt or equity  instruments,  we may sell options
or  warrants to  purchase  our common  stock.  In certain  circumstances,  these
options or warrants may be classified as derivative liabilities,  rather than as
equity.  Additionally,  the debt or  equity  instruments  may  contain  embedded
derivative   instruments,   such  as  conversion   options,   which  in  certain
circumstances  may  be  required  to be  bifurcated  from  the  associated  host
instrument and accounted for separately as a derivative instrument liability.

The  identification of, and accounting for,  derivative  instruments is complex.
Our derivative instrument liabilities are re-valued at the end of each reporting
period,  with changes in the fair value of the derivative  liability recorded as
charges  or credits to income,  in the period in which the  changes  occur.  For
options,  warrants and bifurcated  conversion  options that are accounted for as
derivative  instrument  liabilities,  we  determine  the  fair  value  of  these
instruments  using the  Black-Scholes  option pricing model. That model requires
assumptions related to the remaining term of the instruments and risk-free rates
of return,  our current common stock price and expected  dividend yield, and the
expected  volatility of our common stock price over the life of the option.  The
identification   of,  and  accounting  for,   derivative   instruments  and  the
assumptions  used  to  value  them  can   significantly   affect  our  financial
statements.

                                       9
<PAGE>


Results of Operations

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Revenues

Revenues  increased by  $6,198,206  or 36.8% to  $23,032,965  for the year ended
December 31, 2005 from  $16,834,759  for the year ended  December 31, 2004.  The
increase was primarily due to the acquisition of E-Sea, $1,193,674,  an increase
in cattle embryo  transfers of  $1,734,230,  the sale of live sheep of $141,432,
sheep embryo transfers of $253,142, transfer service of $438,848 and the sale of
mutton of $6,169,256.  These  increases  were partially  offset by a decrease of
$3,726,353 in the sale of lamb meat and $6,024 in the sale of sheep embryos.

Cost of Sales

Cost of sales increased by $5,322,486 or 51.6% to $15,628,000 for the year ended
December 31, 2005 from  $10,305,514  for the year ended  December 31, 2004.  The
increase in cost of sales is  attributable  to increased sales and a much higher
percentage  of sales being the sale of mutton,  which has a lower  gross  profit
margin.  Gross  profit as a percent of sales  decreased by 6.7% to 32.1% for the
year ended December 31, 2005 from 38.8% for the year ended December 31, 2004.

Depreciation and Amortization

Depreciation  and amortization  increased by $80,104 or  approximately  10.5% to
$840,795 during 2005 from $760,691  during 2004. The increase  resulted from the
acquisition of additional assets as a result of the E-Sea acquisition.

General, Selling and Administrative Expenses

General,  selling and administrative expenses increased by $769,556 or 48.7 % to
$2,350,556  during 2005 as compared to $1,580,990  during 2004. This increase is
primarily due to an increase in salaries of $211,503 and in professional fees of
$439,113,  and an increase in various other general and administrative  expenses
of $191,050.  These  increases were  partially  offset by decreases in marketing
expense of $20,501 and $194,764 in penalty expense.

Other Income (Expense)

Other income  (expense)  decreased  by $ 330,267 from income of $237,742  during
2004 to expense of $92,525  during 2005.  The change  resulted from a derivative
valuation charge of $245,172 for 2005 compared to a derivative valuation gain of
$192,444  for 2004 and an  increase in  interest  expense of $27,527  which were
partially  offset by an  $18,889  gain on the sale of  assets,  an  increase  in
interest income of $62,470 and a reduction in impairment losses of $53,517.  The
change  in  value  of  derivative  financial  instruments   represents  the  net
unrealized (non-cash) change during the year in the fair value of our derivative
instrument  liabilities  related to certain warrants,  common stock and embedded
derivatives in our convertible  debt that have been bifurcated and accounted for
separately.  As a result of the foregoing,  the Company's net income declined by
$374,575 to $4,050,731 from $4,425,306 for 2004 (restated).

Liquidity and Capital Resources

As of December 31, 2005, the Company had cash of $18,224,488 and working capital
of  $33,710,273   compared  to  cash  of  $27,473,354  and  working  capital  of
$27,073,492 at December 31, 2004.

Cash  provided  by  operating  activities  totaled  $237,023  for the year ended
December 31, 2005.  This compares with cash provided by operating  activities of
$10,471,737  for the year ended  December 31,  2004.  The decrease in cash flows
from operations  primarily resulted from a decrease in net income and changes to
the current  accounts  which were  periodically  offset by increases in non-cash
charges.

Cash used by  investing  activities  during  2005 was  $11,623,919  compared  to
$620,482 of cash provided by investing activities during 2004, all of which came
from the sale of fixed assets. For 2005, we expended $9,909,084 for the purchase
of a short-term investment, $810,858 for the purchase of a long-term investment,
$1,225,759 for the purchase of fixed assets and received  proceeds from the sale
of a patent for $321,782.

                                       10
<PAGE>

Cash flows from  financing  activities  totaled  $1,410,399 for 2005 compared to
$78,671 for 2004.  All cash flows from  financing  activities for 2005 were from
the sale of the  Company's  common  stock.  For 2005,  the  Company  issued  the
equivalent of  $2,283,950  in stock as part of the purchase  price for E-Sea and
issued the equivalent of $332,104 in stock for the conversion of notes payable.

At December 31,  2004,  the Company had notes  payable of $443,366  that are due
December 11, 2005. Interest on the notes is payable semi-annually commencing 180
days after the date of the note  (December  11,  2002) at 8% per  annum.  During
2004,  the Company  issued  109,984  shares  against the notes which reduced the
balance on the notes by $60,491.  The Company  ceased  accruing  interest on the
notes  during  2004 as they are the subject of current  litigation.  The company
disputes the  validity of the notes.  See Note 8 of the  Company's  Consolidated
Financial Statements under Item 7.

Although the Company has a cash and cash equivalents  balance of $18,224,488 and
short-term  investments of $9,909,084,  management believes that the best return
for such cash and short-term  investments is in the People's  Republic of China.
Therefore, if the Company is to expand outside the PRC, as it anticipates doing,
it will have to sell  additional  shares of its stock or borrow funds from third
parties.  However, because of the loosening of currency restrictions in the PRC,
it can pay its non-PRC obligations from its funds held in China.  Therefore,  in
the opinion of  management,  it has  sufficient  funds to carry out its business
plans for the next twelve months.

Capital Expenditures and Commitments

Our only material contractual obligations requiring determinable future payments
on our  part are a note  payable  to our  principal  shareholder  and our  lease
relating to our executive offices.

The following table details our contractual obligations as of December 31, 2005:

                                -----------------------------------------------
                                            Payments Due by Period
                                ---------- ------------ ----------- -----------
                                Total        2006        2007       Thereafter
Operating lease commitments     $ 102,048     $ 67,248    $ 34,800     $ -
Other contractual obligations      18,050       18,050     -              -
                                ---------- ------------ ----------- -----------
                                ---------- ------------ ----------- -----------

                                        $
     Total                        120,098     $ 85,298    $ 34,800     $ -
                                ========== ============ =========== ===========


Off-Balance Sheet Arrangements

We  had  no  off-balance  sheet   arrangements  or  guarantees  of  third  party
obligations at December 31, 2005.

Inflation

We believe that  inflation  has not had a significant  impact on our  operations
since inception.


Outlook

For calendar year 2006, the Company will focus on three areas:

1.       Acquiring a cattle  facility  in the PRC to increase  its embryo
         transplant  revenues  from cattle and to
         produce cattle for sale
2.       Acquiring a facility in the U.S. to harvest dairy cattle embryos
3.       A possible acquisition to compliment or expand the operations of E-Sea.

If the Company is successful in  implementing  this strategy it should  increase
both the Company's revenues and profit margins.



                                       11
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS




                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------



     Reports of Independent Registered Public Accounting Firm             13

     Consolidated Balance Sheets as of December 31, 2005 and 2004         15

     Consolidated Statements of Income for the years ended
        December 31, 2005 and 2004                                        16

     Consolidated Statements of Changes in Shareholders' Equity for the
        for the years ended December 31, 2005 and 2004                    17

     Consolidated Statements of Cash Flows for the years ended
        December 31, 2005 and 2004                                        19

     Notes to Consolidated Financial Statements                           20



                                       12
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders
of Eternal Technologies Group, Inc.

We  have  audited  the  accompanying   consolidated  balance  sheet  of  Eternal
Technologies  Group,  Inc. and  Subsidiaries  as of December  31, 2005,  and the
related consolidated  statements of income, changes in shareholders' equity, and
cash flows for the year then ended. These consolidated  financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audit  to  obtain  reasonable  assurance  about  whether  the
consolidated  financial statements are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the  consolidated  financial  statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly in all material respects,  the financial position of Eternal Technologies
Group,  Inc. and  Subsidiaries as of December 31, 2005, and the results of their
operations  and their  cash  flows for the year then  ended in  conformity  with
accounting principles generally accepted in the United States of America.

/s/ Ham Langston Brezina, LLP

Ham Langston Brezina, LLP
Houston, Texas
May 18, 2006

                                       13
<PAGE>






             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders
of Eternal Technologies Group, Inc.

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Eternal
Technologies  Group,  Inc. and  Subsidiaries  as of December  31, 2004,  and the
related consolidated  statements of income, changes in shareholders' equity, and
cash flows for the year then ended. These consolidated  financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audit  to  obtain  reasonable  assurance  about  whether  the
consolidated  financial statements are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the  consolidated  financial  statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly in all material respects,  the financial position of Eternal Technologies
Group,  Inc. and  Subsidiaries as of December 31, 2004, and the results of their
operations  and their  cash  flows for the year then  ended in  conformity  with
accounting principles generally accepted in the United States of America.

As discussed in Note 20 to the consolidated  financial  statements,  the Company
has restated its consolidated  financial  statements for the year ended December
31, 2004 related to derivative  financial  instruments  issued by the Company in
2003.


/s/ Thomas Leger & Co., L.L.P.

Thomas Leger & Co., L.L.P.
Houston, Texas
May 6, 2005 (except for the effect of the matters discussed in Note 20, as to
which the date is May 19, 2006).




                                       14
<PAGE>


                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2005 AND 2004
                             (UNITED STATES DOLLARS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>


                                                                                 2005                     2004
                                                                         ----------------------   ----------------------
                                                                         ----------------------
                                 ASSETS                                                               (As Restated)
<S>                                                                        <C>                     <C>


Current assets:
     Cash and cash equivalents                                           $          18,224,488    $          27,473,354
     Short-term investment                                                           9,909,084                        -
     Accounts receivable                                                             7,137,018                1,538,313
     Inventories                                                                       135,341                  621,307

     Prepayments and deposits                                                          257,624                      602
                                                                         ----------------------   ----------------------
                                                                         ----------------------   ----------------------

        Total current assets                                                        35,663,555               29,633,576

Advances to distributors                                                               520,227                        -
Property and equipment, net                                                          7,317,502                5,904,050
Land use rights, net                                                                 4,828,051                4,944,639
Intangible assets                                                                    1,263,409                        -
                                                                         ----------------------   ----------------------

            Total assets                                                 $          49,592,744    $          40,482,265
                                                                         ======================   ======================

                  LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
     Notes payable                                                       $             443,366    $             443,366
     Accounts payable and accrued expenses                                             706,717                1,526,595
     Amounts due to related parties                                                    240,368                  272,465
     Derivative financial instrument liabilities                                       562,830                  317,658
                                                                         ----------------------   ----------------------

        Total current liabilities                                                    1,953,281                2,560,084
                                                                         ----------------------   ----------------------

Commitments and contingencies

Unregistered common stock subject to registration rights; $0.001 par
     value, 790,827 shares issued and outstanding at December 31, 2004                       -                  563,991

Shareholders' equity:
     Preferred stock - $0.001 par value, 5,000,000 shares authorized,
        none issued or outstanding                                                           -                        -
     Common stock - $0.001 par value, 95,000,000 shares authorized,
        39,854,026 and 29,888,803 shares issued and outstanding
        at December 31, 2005 and 2004, respectively                                     39,854                   29,888
     Additional paid-in capital                                                     13,217,874                8,173,468

     Stock subscription receivable                                                    (10,176)                 (10,176)
     Retained earnings                                                              33,215,741               29,165,010
     Accumulated other comprehensive income                                          1,176,170                        -
                                                                         ----------------------   ----------------------

        Total shareholders' equity                                                  47,639,463               37,358,190
                                                                         ----------------------   ----------------------

            Total liabilities and shareholders' equity                   $          49,592,744    $          40,482,265
                                                                         ======================   ======================
</TABLE>

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

                                       15
<PAGE>

                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
                             (UNITED STATES DOLLARS)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<TABLE>

                                                                       2005                     2004
                                                               ----------------------   ----------------------
                                                               ----------------------
                                                                                            (As Restated)
<S>                                                              <C>                     <C>


Sales                                                          $          23,032,965    $          16,834,759

Cost of sales                                                             15,628,000               10,305,514
                                                               ----------------------   ----------------------

     Gross profit                                                          7,404,965                6,529,245

Selling, general and administrative expenses                               2,350,556                1,580,990
Depreciation and amortization                                                840,795                  760,691
                                                               ----------------------   ----------------------
                                                               ----------------------   ----------------------

        Income from operations                                             4,213,614                4,187,564
                                                               ----------------------   ----------------------

Other income (expenses):
     Gain on sale of asset                                                    18,889                        -
     Interest income                                                         188,519                  126,049
     Interest expense                                                       (54,761)                 (27,234)

     Impairment loss                                                               -                 (53,517)
     Change in value of derivative financial instruments                   (245,172)                  192,444
                                                               ----------------------   ----------------------
                                                               ----------------------   ----------------------

        Total other income and expenses, net                                (92,525)                  237,742
                                                               ----------------------   ----------------------

            Income before provision for income taxes                       4,121,089                4,425,306

Provision for income taxes                                                    70,358                        -
                                                               ----------------------   ----------------------

               Net income                                      $           4,050,731    $           4,425,306
                                                               ======================   ======================
Net income per common share


     Basic and diluted                                         $                0.12    $                0.15
                                                               ======================   ======================

Weighted average number of common shares outstanding

     Basic                                                                33,253,761               29,551,485
                                                               ======================   ======================

     Diluted                                                              33,275,289               29,563,297
                                                               ======================   ======================
</TABLE>


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

                                       16
<PAGE>

                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
                             (UNITED STATES DOLLARS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>


                                                                                                            Accumulated
                                                       Additional       Stock                                Other
                               Common Stock            Paid - In     Subscription       Retained        Comprehensive
                           -----------------------
                            Shares       Amount         Capital       Receivable        Earnings            Income         Total
                           ---------   ------------   ------------  -------------     -------------   -----------------  -----------
<S>                        <C>         <C>             <C>          <C>                <C>              <C>               <C>

Balance at
December 31, 2003
as previously reported    29,177,396    $  29,177    $ 8,955,570    $  (10,176)    $  24,245,643       $       -      $  33,220,214

Prior period adjustment
(See Note 20)             (1,749,288)      (1,749)    (2,249,946)            -           494,061               -         (1,757,634)
                        ---------------  ------------ ------------   --------------  --------------   --------------   -------------
                        ---------------  ------------ ------------   --------------  --------------   --------------   -------------
Balance at
December 31, 2003,
as restated               27,428,108       27,428      6,705,624       (10,176)       24,739,704               -          31,462,580


Net income, as restated            -            -              -             -         4,425,306               -           4,425,306

Notes payable conversion     109,984          110         60,381             -                 -               -              60,491

Stock issued for public
relation services            100,000          100         89,900             -                 -               -              90,000

Stock issued for employee
compensation               1,292,250        1,292        515,608             -                 -               -             516,900


Capital contributed                -            -        119,372             -                 -               -             119,372

Reclassification of
unregistered
common stock to paid-in
capital                      958,461          958        682,583             -                 -               -             683,541
                        ---------------   -------------------------   ------------  --------------   --------------   --------------
                        ---------------   -------------------------   ------------  --------------   --------------   --------------
Balance at
December 31, 2004
(as restated)             29,888,803     $ 29,888     $8,173,468    $  (10,176)     $  29,165,010   $          -    $     37,358,190
                        ===============   =========== ============   ============  ==============   ==============   ===============
                        ===============   =========== ============   ============  ==============   ==============   ===============
</TABLE>


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

                                       17
<PAGE>

                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
                             (UNITED STATES DOLLARS)
<TABLE>

---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------

                                                                                                       Accumulated
                                                    Additional        Stock                              Other
                              Common Stock          Paid - In      Subscription     Retained          Comprehensive
                            -----------------
                            -----------------
                            Shares      Amount      Capital        Receivable       Earnings            Income            Total
                            -------   ---------   --------------   ------------    -----------       -------------   --------------
<S>                          <C>       <C>         <C>             <C>             <C>               <C>              <C>



Balance at
December 31, 2004        29,888,803    $29,888    $  8,173,468     $  (10,176)   $  29,165,010       $        -      $  37,358,190


Net income                        -          -               -              -       4,050,731                 -          4,050,731

Foreign currency
translation
adjustment                        -          -               -              -               -         1,176,170          1,176,170
                                                                                                                      -------------
                                                                                                                      -------------

Other comprehensive
income                                                                                                                   5,226,901
                                                                                                                      -------------


Notes payable
conversion                  373,295        374         356,045              -               -                 -           356,419

Common stock issued
for services                591,225        591         239,022              -               -                 -           239,613

Common stock issued
for cash
and as compensation to
employees                 2,500,000      2,500       1,197,500              -               -                 -         1,200,000

Common stock
issued under
acquisition agreement     5,709,876      5,710       2,278,240              -               -                 -         2,283,950


Capital contributed               -          -         410,399              -               -                 -           410,399

Reclassification of
unregistered
common stock to paid-in
capital                     790,827        791         563,200              -               -                 -           563,991
                        --------------  ---------   -----------  ----------------  --------------   -----------------  -----------
                        --------------  ---------   -----------  ----------------  --------------   -----------------  -----------

Balance at
December 31, 2005        39,854,026    $39,854    $ 13,217,874    $   (10,176)   $  33,215,741       $1,176,170       $47,639,463
                        ==============  =========   ===========  ================  ==============   =================  ===========
</TABLE>

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

                                       18
<PAGE>

                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
                             (UNITED STATES DOLLARS)
<TABLE>

----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------

                                                                              2005                     2004
                                                                         -------------------   ----------------------
                                                                         -------------------
                                                                                                   (As Restated)
<S>                                                                         <C>                  <C>


Cash Flows From Operating Activities
     Net income                                                          $        4,050,731    $           4,425,306
     Adjustments to reconcile net income to net cash
        provided by operating activities:
        Depreciation and amortization                                               840,795                  760,691
        Gain on sale of asset                                                      (18,889)                        -

        Provision for impairment                                                          -                   53,517
        Derivative valuation adjustment                                             245,172                (192,444)
        Compensatory stock issuances                                                439,613                  647,600
        Changes in operating assets and liabilities:
            Inventories                                                             493,356                2,110,947
            Accounts receivable                                                 (4,988,866)              (1,538,313)
            Other receivables                                                             -                3,399,995

            Receivables from related companies                                            -                  617,825
            Prepaid expenses and deposits                                         (137,156)                  144,588
            Accounts payable and accrued expenses                                 (649,705)                  393,134

            Accounts payable to related parties                                    (38,028)                (145,152)
            Accounts payable to a related company                                         -                (205,957)
                                                                         -------------------   ----------------------
                                                                         -------------------   ----------------------

               Net cash provided by operating activities                            237,023               10,471,737
                                                                         -------------------   ----------------------
                                                                            ----------------      -------------------

Cash Flows From Investing Activities

     Purchase of current investments                                            (9,909,084)                        -
     Purchase of property and equipment                                         (1,225,759)                        -

     Purchase of E-Sea                                                            (810,858)                        -
     Proceeds from sale of patent                                                   321,782                        -
     Proceeds from property held for sale                                                 -                  620,482
                                                                         -------------------   ----------------------
                                                                         -------------------   ----------------------


               Net cash provided by (used in) investing activities             (11,560,446)                  620,482
                                                                         -------------------   ----------------------
                                                                            ----------------      -------------------

Cash Flows From Financing Activities
     Proceeds from sale of common stock                                           1,000,000                        -

     Capital contributed                                                            410,399                   78,671
                                                                         -------------------   ----------------------
                                                                         -------------------   ----------------------


               Net cash provided by (used in) financing activities                1,410,399                   78,671
                                                                         -------------------   ----------------------
                                                                            ----------------      -------------------

Effect of exchange rate changes on cash                                             727,631                        -
                                                                         -------------------   ----------------------


Net (decrease) increase in cash and cash equivalents                            (9,248,866)               11,170,890

Cash and cash equivalents at beginning of year                                   27,473,354               16,302,464
                                                                         -------------------   ----------------------

Cash and cash equivalents at end of year                                 $       18,224,488    $          27,473,354
                                                                         ===================   ======================

Supplemental Disclosure of Cash Flow Information

     Cash paid for interest expense                                      $                -    $                   -
                                                                         ===================   ======================


     Cash paid for income taxes                                          $           70,358    $                   -
                                                                         ===================   ======================
</TABLE>

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

                                       19
<PAGE>

                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

Pursuant to an exchange agreement, Eternal Technologies Group, Inc., ("Company")
formerly known as Waterford Sterling  Corporation,  completed its acquisition of
100% interest of Eternal  Technology Group LTD. and Subsidiaries on December 12,
2002. The Company has treated the transaction as a reverse merger for accounting
purposes.  To facilitate the reverse  merger,  the Company's  common shares were
reverse split on a one for six basis,  and 95,000,000  post reverse split common
shares, $.001 par value were authorized.  Following the acquisition,  the former
shareholders of Eternal  Technology Group LTD., a British Virgin Islands limited
liability  company,  now own  approximately  85% of the issued  and  outstanding
common shares of Eternal Technologies Group Inc.

Eternal Phoenix  Company Limited was  incorporated in the British Virgin Islands
with limited liability on March 3, 2000. Pursuant to a resolution passed on June
17, 2000 Eternal Phoenix Company Limited changed its name to Eternal  Technology
Group  Ltd.,  ("Eternal").  Eternal  is a holding  company  for  investments  in
operating companies.

Eternal acquired a 100% equity interest in Willsley Company Limited ("Willsley")
on July 15, 2000.  Willsley was  incorporated  in the British Virgin Island with
limited liability on May 16, 2000.

Willsley's  principal  activity is  investments  and owns 100% of Inner Mongolia
Aershan Agriculture & Husbandry Technology Co., Ltd ("Aershan").

Aershan  was  incorporated  in the  People's  Republic of China ("the PRC") with
limited  liability on July 11, 2000 and its  principal  activities  are to run a
breeding center,  transplant  embryos,  and to propagate  quality sheep meat and
other livestock breeds in Inner Mongolia.

E-Sea Biomedical  Engineering Co. International Ltd. was incorporated on October
20, 2004 under the laws of the British Virgin Islands. (E-Sea) E-Sea owns all of
the issued and outstanding stock of E-Sea Shenzhen,  which owns a Chinese patent
for dialysis  tehnology  and produces  and markets a series of  instruments  for
detecting  breast  disease,  specifically  breast  cancer by applying  its image
processing  technology.  E-Sea  was  acquired  as of the  close of  business  on
September 30, 2005.


2. BASIS OF PRESENTATION

The consolidated  financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America.


3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

Basis of consolidation

The consolidated financial statements of the Company include the Company and its
wholly owned subsidiaries.  All material  intercompany balances and transactions
have been eliminated.

Economic and political risks

The Company faces a number of risks and challenges since its main operations are
in the PRC.

Cash and cash equivalents

The Company  considers  cash and cash  equivalents  to include  cash on hand and
demand deposits with banks with an original maturity of three months or less.

                                       20
<PAGE>




                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES, continued

Accounts receivable

No allowance for doubtful accounts has been established,  as management believes
all amounts are collectible.

Inventory

Livestock  inventories that are purchased for embryo  transplanting,  resale, or
meat  processing  are recorded at  historical  cost.  Estimated  costs of raised
livestock, prior to use for embryo transplanting,  sale, or meat processing, are
accumulated  and  capitalized  as  inventory at the balance  sheet date.  Embryo
inventories are recorded at historical cost.

Inventories  are  measured at lower of cost and net  realizable  value using the
first-in  first-out  ("FIFO") or weighted  average  cost  formulas.  The Company
reviews its inventory  quarterly to identify slow moving,  obsolete or otherwise
impaired inventory.  The identification  process includes historical performance
of the  inventory,  current  operational  plans  for the  inventory,  as well as
industry and customer  specific trends. If actual results differ from management
expectations  with respect to the selling of  inventories at amounts equal to or
greater than their carrying amounts, an adjustment to inventories would be made.

Fixed assets and depreciation

Fixed assets are stated at cost less accumulated  depreciation.  Depreciation of
fixed assets is  calculated  on the  straight-line  basis to write off the cost,
less estimated residual value, of each asset over its estimated useful life. The
Estimated useful lives used for this purpose are as follows:

     Buildings                                                         25 years
     Furniture and fixtures                                             5 years
     Office equipment                                                   5 years
     Motor vehicles                                                     5 years

In accordance with the Statement of Financial  Accounting Standards ("SFAS") No.
144,  "Accounting  for the  Impairment  or Disposal of Long-Lived  Assets",  the
Company  examines the possibility of decreases in the value of fixed assets when
events or changes in  circumstances  reflect the fact that their  recorded value
may not be recoverable.

Land lease rights and amortization

Land  lease  rights  in  were  stated  at  the  amount  of the  prepayment  less
accumulated  amortization.  Amortization  of land lease rights was calculated on
the  straight-line  basis over the term of the lease of  approximately 25 years.
The land  lease  rights  with  respect  to the  Company's  farm were  originally
purchased  from the Chinese  government  for  $6,000,000  and such rights extend
through 2025. The farm is located in Wulagai Development Area in Inner Mongolia.

Amortization   expense   during  2005  and  2004  was  $251,328  and   $248,400,
respectively.

Intangible Assets

The  Company  adopted  the  provisions  of  Statement  of  Financial  Accounting
Standards  (SFAS)  No.142,  "Goodwill  and  Other  Intangible  Assets,"  at  the
beginning  of 2002.  In  accordance  with  SFAS  No.  144,  "Accounting  for the
Impairment  or  Disposal  of  Long-Lived   Assets,"  the  Company  examines  the
possibility  of decreases in the value of  finite-lived  intangible  assets when
events or changes in  circumstances  reflect the fact that their  recorded value
may not be recoverable.


                                       21
<PAGE>


                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES, continued

Income taxes

Income taxes are determined  under the liability method as required by Statement
of Financial Accounting Standard No.109, "Accounting for Income Taxes".

Foreign currency translation

The Company's  reporting  currency is the US$. The Company maintains no material
accounts in currency of the United  States of America.  All of the  subsidiaries
maintain  their books and accounts in the People's  Republic of China  currency,
which is called Renminbi ("RMB").  Translation of the balance sheet amounts from
RMB into US$ has been made at the single rate of  exchange on December  31, 2005
and 2004 of 8.07 and 8.30 RMB/US$,  respectively.  The income statement has been
translated  at the average  rate of  exchange in effect  during the year of 8.20
RMB/US$  and 8.30  RMB/US$  for the  years  ended  December  31,  2005 and 2004,
respectively. No representation is made as to whether the RMB amounts could have
been, or could be,  converted into US$ at that rate on December 31, 2005 or 2004
or at any other date.

The quotation of the exchange rates does not imply free convertibility of RMB to
other foreign  currencies.  All foreign exchange  transactions  continue to take
place either through the Bank of China or other banks authorized to buy and sell
foreign  currencies at the exchange  rates quoted by the People's Bank of China.
Approval of foreign currency payments by the Bank of China or other institutions
requires submitting a payment application form together with invoices,  shipping
documents and signed contracts.

On July 21, 2005, China effectively  revalued its currency by removing its "peg"
against the U.S. dollar at 8.3:1 and measuring it against a basket of currencies
of which the U.S. dollar is only one.

Revenue recognition

In accordance with Staff  Accounting  Bulletin No. 104, revenue from the sale of
livestock,  embryos, and raw materials is recognized when persuasive evidence of
an  arrangement  exists;  the price to the buyer is fixed or  determinable;  the
merchandise  is delivered to the customer and title  passes;  and  collection is
reasonably assured.

Advertising

Indirect-response advertising costs are charged to operations the first time the
advertising  takes  place.  The  cost  of  direct-response  advertising  is  not
significant.

Research and development

Research and development costs are charged to operations as incurred.

Stock-based compensation

Stock  compensation   expense  for  stock  granted  to  non-employees  has  been
determined in accordance  with Statement of Financial  Accounting  Standards No.
123,  "Accounting  for Stock-Based  Compensation"  ("SFAS 123") and the Emerging
Task Force consensus in Issue No. 96-18, "Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or in conjunction with Selling
Goods  or  Services  ("EITF  96-18"),  as the fair  value  of the  consideration
received or the fair value of the equity instruments  issued,  whichever is more
reliably measured.

Stock compensation expense for stock granted to employees has been determined in
accordance with SFAS 123.

                                       22
<PAGE>

                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES, continued

Employees' benefits

Mandatory contributions are made to the Government's health,  retirement benefit
and  unemployment  schemes at the  statutory  rates in force  during the period,
based on gross  salary  payments.  The cost of these  payments is charged to the
statement of income in the same period as the related salary cost.

Non-monetary transactions

The Company  accounts  for  non-monetary  transactions  in  accordance  with APB
Opinion No. 29.

Derivative financial instruments

The Company does not use derivative instruments to hedge exposures to cash flow,
market, or foreign currency risks.

We  review  the  terms of  convertible  debt and  equity  instruments  issued to
determine whether there are embedded derivative instruments,  including embedded
conversion  options,  that are  required  to be  bifurcated  and  accounted  for
separately as a derivative  financial  instrument.  In  circumstances  where the
convertible  instrument contains more than one embedded  derivative  instrument,
including  the  conversion  option,  that  is  required  to be  bifurcated,  the
bifurcated  derivative  instruments  are  accounted  for as a  single,  compound
derivative instrument. Also, in connection with the sale of convertible debt and
equity instruments,  the Company may issue freestanding options or warrants that
may,  depending  on their  terms,  be  accounted  for as  derivative  instrument
liabilities,  rather  than as equity.  The  Company  may also  issue  options or
warrants to  non-employees  in connection with consulting or other services they
provide.

Certain instruments,  including  convertible debt and equity instruments and the
freestanding  options and warrants issued in connection  with those  convertible
instruments,  may be subject to  registration  rights  agreements,  which impose
penalties for failure to register the underlying common stock by a defined date.
These  potential  cash penalties may require the Company to account for the debt
or equity  instruments  or the  freestanding  options and warrants as derivative
financial instrument  liabilities,  rather than as equity. In addition, when the
ability to physical or net-share settle the conversion option or the exercise of
the  freestanding  options or warrants is deemed to be not within the control of
the company,  the embedded conversion option or freestanding options or warrants
may be  required  to be  accounted  for  as a  derivative  financial  instrument
liability.

Derivative financial instruments are initially measured at their fair value. For
derivative  financial  instruments  that are accounted for as  liabilities,  the
derivative  instrument  is  initially  recorded  at its fair  value  and is then
re-valued at each  reporting  date,  with changes in the fair value  reported as
charges or credits to income. For option-based derivative financial instruments,
the Company uses the Black-Scholes  option pricing model to value the derivative
instruments.  To the extent  that the initial  fair  values of the  freestanding
and/or bifurcated  derivative  instrument  liabilities exceed the total proceeds
received,  an immediate  charge to income is  recognized,  in order to initially
record the derivative instrument liabilities at their fair value.

The discount from the face value of the convertible  debt or equity  instruments
resulting  from  allocating  some  or  all  of the  proceeds  to the  derivative
instruments,  together with the stated interest on the instrument,  is amortized
over the life of the  instrument  through  periodic  charges to income,  usually
using  the  effective  interest  method.  When  the  instrument  is  convertible
preferred  stock,  the  dividends  payable  are  recognized  as they accrue and,
together with the periodic amortization of the discount, are charged directly to
retained earnings.

The classification of derivative instruments, including whether such instruments
should be recorded as  liabilities or as equity,  is  re-assessed  periodically,
including at the end of each reporting period. If re-classification is required,
the fair value of the derivative  instrument,  as of the determination  date, is
re-classified. Any previous charges or credits to income for changes in the fair
value of the  derivative  instrument  are not  reversed.  Derivative  instrument
liabilities are classified in the balance sheet as current or non-current  based
on whether or not net-cash  settlement  of the  derivative  instrument  could be
required within 12 months of the balance sheet date.

                                       23
<PAGE>

                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES, continued

Registration rights agreements

In  connection  with the sale of debt or equity  instruments  (including  common
stock), the Company may enter into Registration  Rights  Agreements.  Generally,
these agreements require us to file registration  statements with the Securities
and  Exchange  Commission  to  register  common  shares  that may be  issued  on
conversion  of debt or  preferred  stock,  to permit  re-sale  of common  shares
previously  sold under an  exemption  from  registration  or to register  common
shares that may be issued on exercise of outstanding options or warrants.

The Agreements  usually  require the Company to pay penalties for any time delay
in  filing  the  required  registration  statements,   or  in  the  registration
statements  becoming effective,  beyond dates specified in the agreement.  These
penalties  are  usually  expressed  as a fixed  percentage,  per  month,  of the
original amount the Company received on issuance of the debt or preferred stock,
common shares,  options or warrants. The Company accounts for these penalties as
an  accrued  liability  and  not as a  derivative  instrument.  Accordingly,  we
recognize the  penalties as they are  incurred.  Any penalties are expensed over
the period to which they relate.

Use of estimates

The preparation of consolidated financial statements requires management to make
estimates and assumptions  that affect the amounts  reported in the consolidated
financial  statements and accompanying  notes.  Actual results could differ from
those estimates.

Earnings per share

The  Company  adopted  SFAS No. 128,  "Earnings  Per Share"  effective  December
31,1997. Under SFAS 128, basic earnings per share is computed by dividing income
available to common shareholders by the weighted-average number of common shares
assumed to be outstanding during the period of computation. Diluted earnings per
share  is  computed  similar  to  basic  earnings  per  share  except  that  the
denominator is increased to include the number of additional  common shares that
would have been  outstanding if the potential  common shares had been issued and
if the additional common shares were dilutive.

Recent accounting pronouncements

In December 2004, the Financial  Accounting  Standards Board ("the FASB") issued
SFAS No. 123(R),  Share-Based Payment.  SFAS 123(R) requires  compensation costs
related to share-based  payment  transactions  to be recognized in the financial
statements.  With limited  exceptions,  the amount of compensation cost is to be
measured  based  on the  grant-date  fair  value  of  the  equity  or  liability
instruments  issued.  In addition,  liability  awards are to be remeasured  each
reporting  period.  Compensation cost will be recognized over the period that an
employee  provides service in exchange for the award.  SFAS 123(R) is a revision
of SFAS 123,  Accounting for Stock-Based  Compensation,  as amended by SFAS 148,
Accounting for Stock-Based Compensation-Transition and Disclosure and supersedes
APB NO. 25,  Accounting for Stock Issued to Employees.  SFAS 123(R) is effective
for private  companies as of the beginning of the first annual  reporting period
that begins after  December 15, 2005.  The Company  adopted SFAS 123R  effective
January 1, 2006, using the modified  prospective method. This method applies the
fair value based  method to new awards and to awards  modified,  repurchased  or
cancelled after the required  effective date.  Also,  compensation  cost for the
portion of awards for which the requisite service has not been rendered that are
outstanding as of the required effective date shall be recognized as the service
is  rendered  on or after  the  required  effective  date.  Any  options  issued
subsequent to January 1, 2006 will be accounted for under SFAS 123R.

In  November  2004,  the FASB  issued SFAS No.  151,  Inventory  Costs.  The new
Statement  amends  ARB No. 43,  Chapter 4,  Inventory  Pricing,  to clarify  the
accounting  for abnormal  amounts of idle facility  expense,  freight,  handling
costs  and  wasted  material.  This  Statement  requires  that  those  items  be
recognized  as current  period  charges and requires  that  allocation  of fixed
production overhead to the cost of conversion be based on the normal capacity of
the  production  facilities.  This  Statement  is  effective  for  fiscal  years
beginning after June 15, 2005. The

                                       24
<PAGE>

                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES, continued

Recent accounting pronouncements, continued

adoption of this  statement  is not  expected  to have a material  impact on the
Company's financial position or results of operations.

In December 2004, the FASB issued SFAS No. 153,  Exchanges of Nonmonetary Assets
- An  Amendment of APB Opinion No. 29. SFAS No. 153 amends APB Opinion No. 29 to
eliminate the exception for exchanges of similar  productive assets and replaces
it with a general exception for exchanges of nonmonetary assets that do not have
commercial  substance.   SFAS  No.  153  is  to  be  applied  prospectively  for
nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005.
The Company's adoption of SFAS No. 153 is not expected to have a material impact
on its financial position or results of operations.

In May  2005,  the FASB  issued  SFAS No.  154,  Accounting  Changes  and  Error
Corrections--a  replacement of APB Opinion No. 20 and FASB Statement No. 3. This
Statement replaces APB Opinion No.20, Accounting Changes, and FASB Statement No.
3, Reporting Accounting Changes in Interim Financial Statements, and changes the
requirements  for the  accounting  for and  reporting of a change in  accounting
principle.  This  Statement  applies  to all  voluntary  changes  in  accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions.  This  Statement  is  effective  for fiscal  years  beginning  after
December  15,  2005.  The  adoption of this  statement is not expected to have a
material impact on the Company's financial position or results of operations.

4. INVENTORY

Inventory consists of the following at December 31:

                                                2005               2004
                                             --------------   --------------
                                             --------------   --------------

     Sheep and cows                          $                $
                                                         -          231,325
     Sheep and cow embryos                          12,882          364,126
      Other raw materials products                 122,459           25,856
                                             --------------   --------------
                                             --------------   --------------

        Total inventory                      $     135,341          621,307
                                             ==============   ==============


5. PROPERTY HELD FOR SALE AND IMPAIRMENT

During the fourth quarter of 2003, the Company began formal  negotiations with a
local  government  entity  for the sale of the  Company's  reception  center and
certain  equipment.  The Company had included the reception center and equipment
as  "Construction  In Progress" as construction of the building and installation
of the equipment had not been completed. On February 29, 2004, the Company and a
local  government  entity signed a letter of intent to sell the reception center
to the  local  government  entity no later  than  April 30,  2004.  The  Company
recorded an impairment loss of  approximately  or $300,000 and  reclassified the
remaining  "Construction  In Progress" of $2,192,071 to "Property held for sale"
for the year ended  December 31, 2003,  based on the book value of the reception
center and equipment of approximately $2,492,000. On April 30, 2004, the Company
and the local government entity reached an agreement on the final purchase price
of  $2,138,554  and  terms  related  to the  sale of the  reception  center  and
equipment and recorded an additional  impairment loss of $53,517.  The agreement
calls for cash payments of $620,482 and the remainder to be paid in livestock of
$1,518,072. All cash and livestock related to the agreement were received during
2004. The Company accounts for non-monetary  transactions in accordance with APB
Opinion No. 29.



                                       25
<PAGE>



                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.  PROPERTY AND EQUIPMENT

Fixed assets are comprised of the following at December 31:

                                                      2005             2004
                                                ----------------   -------------
                                                ----------------   -------------

     Office equipment in the United States      $                  $
                                                         40,761               -
     Infrastructure                                     232,863
                                                                        226,506
     Building                                         6,419,830       6,244,561
     Equipment                                        1,868,498
                                                                      1,221,837
     Cows                                             1,277,875
     Other                                              644,090         626,507
                                                ----------------   -------------

        Total property and equipment                10,483,917       8,319,411

        Less accumulated depreciation               (3,166,415)     (2,415,361)
                                                ----------------   -------------

                                                $    7,317,502       5,904,050
                                                ================   =============

Depreciation   expense   during  2005  and  2004  was   $552,236   and  $471,531
respectively.


7.  INTANGIBLE ASSETS

The Company had amortized identifiable  intangible assets as follows at December
31, 2005. These  intangible  assets were obtained as a result of the acquisition
described in Note 18.

                                                    2005
                                            ---------------------
                                            ---------------------

     Patented dialysis technology           $         1,331,040

     Less accumulated amortization                      (67,631)
                                            ---------------------

        Total                               $         1,263,409
                                            =====================

Amortization expense during 2005 was $37,159. The estimated amortization expense
related to identifiable intangible assets for the next five years is as follows:

      Year
     -------
     -------

       2006                      $
                                              148,636
       2007
                                              148,636
       2008
                                              148,636
       2009
                                              148,636
       2010
                                              148,636
     Thereafter                               520,229
                                 ---------------------

                                 $          1,263,409
                                 =====================


                                       26
<PAGE>

                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. NOTES PAYABLE

Notes payable consisted of the following at December 31, 2005 and 2004:

                                                          2005           2004
                                                       ------------   ----------
                                                       ------------   ----------

     Promissory note to Market Management LLC, due
     December 11, 2005, interest payments are due semi-
     annually commencing 180 days after the date of the
     note (December 11, 2002) at 8% per year.          $              $
                                                           401,942      401,942

     Promissory note to Thomas Tedrow due December
     11, 2005 interest payments are due semi-annually
     commencing 180 days after the date of the note
     (December 11, 2002) at 8% per year.
                                                            41,424       41,424
                                                       ------------   ----------
                                                       ------------   ----------

                                                       $              $
                                                           443,366      443,366
                                                       ============   ==========

Each of the notes listed above are  repayable  from the first  dollars  received
from any  proceeds of any  offering  subsequent  to the  acquisition  of Eternal
Technology  Group Ltd.  or at the option of the  Lender,  convertible  into post
reverse  split  common  shares  at a rate  equal to the mean of the high and low
share price as of the first date that the shares begin trading subsequent to the
acquisition.

The Company's  Board of Directors  elected to stop accruing  interest  effective
October 1, 2004 and at December 31, 2004 the notes payable were in default.  The
Company is performing  additional  detailed review of all expenditures  prior to
the merger.  The  balances of the notes and related  interest are the subject of
current  litigation  and may change  pending  the outcome of the  litigation  as
described further in note 19.


9. STOCK OPTION AND STOCK COMPENSATION PLAN

The Company provides stock compensation to eligible  employees,  consultants and
directors through a stock compensation plan and a stock option plan.

Stock Compensation Plan

On October 6, 2004, the Company adopted Eternal  Technologies  Group,  Inc. 2004
Compensation Plan ("Plan"). The purpose of the Plan is to encourage ownership of
common stock of the Company by eligible employees,  consultants and directors of
the Company and its Affiliates  and to provide an incentive for such  employees,
consultants  and directors who render  services to exert maximum  effort for the
business success of the Company and strengthen the  identification of employees,
consultants and directors with the shareholders.  The aggregate number of shares
of Common Stock that may be issued under this Plan is  1,300,000.  In connection
with the Plan,  the Company issued  1,292,250  shares of common stock at a price
per share of $0.40 on November 12, 2004. The aggregate value of these shares was
$516,900.

Stock Option Plan

In 2004,  the  Company  adopted the 2004 Stock  Option  Plan (the "2004  Plan"),
approved by  shareholders  on July 27, 2004.  The purpose of the 2004 Plan is to
provide a means whereby  directors  and selected  employees,  officers,  agents,
consultants  and  independent  contractors  of the  Company  or of any parent or
subsidiary  thereof,  each  as  defined  through  reference  to a 50%  ownership
threshold,  may be granted  incentive  stock options and/or  nonqualified  stock
options to  purchase  shares of Common  Stock in order to attract and retain the
services or advice of such directors,  employees, officers, agents, consultants,
and  independent  contractors  and to provide an  additional  incentive for such
persons  to  exert  maximum  efforts  for the  success  of the  Company  and its
affiliates by encouraging stock ownership in the Company.

                                       27
<PAGE>


                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9. STOCK OPTION AND STOCK COMPENSATION PLAN, continued

The maximum number of shares of Common Stock with respect to which awards may be
granted pursuant to the 2004 Plan will be 500,000 shares.  Shares issuable under
the 2004 Plan may be either treasury  shares or authorized but unissued  shares.
The number of shares  available  for issuance  will be subject to  adjustment to
prevent dilution in the event of stock splits,  stock dividends or other changes
in the capitalization of the Company.

As of December  31,  2005,  the  Company  has not  granted any stock  options in
connection  with the 2004 Plan and  therefore  recorded no expense for this plan
for the year ended December 31, 2004 or December 31, 2005.

On September 20, 2005, the Company  approved the 2005 Stock  Compensation  Plan.
This Plan  provided  for stock  grants of up to  560,000  shares  and  2,500,000
options.  Pursuant to this plan, the Company issued  2,500,000  shares of common
stock and received  $1,000,000  and awarded  560,000  shares as stock grants for
services rendered.


10. INCOME TAXES

The companies operate 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  financial  statements.  The Company has a U.S. net operating  loss
carry  forward  of  $1,756,960  which  will begin  expiring  in 2022.  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, 2005.  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 provide certain
exemptions from taxation. Under current PRC law, Aershan is exempt from taxation
as Aershan's  operations  currently benefit from a tax holiday. The tax holiday,
granted by Xilingol League,  which is the local government,  and the central PRC
government, commenced on the incorporation of Inner Mongolia Aershan Agriculture
and Husbandry Technology Co., Ltd., in July 2000. The Company has benefited from
this holiday  since  inception and because of the repeal of  agricultural  taxes
will not be subject to tax on agricultural income in the future.

The tax holiday  resulted in tax savings of $1,404,098  and  $1,548,604  for the
years  ended  December  31,  2005 and 2004  respectively.  Net  income per share
increased  approximately  $0.05 and $0.05 on a basic and  diluted  basis for the
years  ended  December  31,  2005 and 2004  respectively  as a result of the tax
holiday

E-Sea  Shenzhen,  a 100% owned  subsidiary  in the PRC, is subject to Enterprise
Income Tax at the PRC rate of 15% on net  profits.  The  provision  for taxes on
earnings of the PRC subsidiary for the period since it was acquired  during 2005
was $70,358.


                                       28
<PAGE>


                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. INCOME TAXES, continued

A reconciliation of tax at the approximate U.S. statutory rates to the Company's
effective rate are as follows:
<TABLE>

                                                 2005                                  2004
                                   ----------------------------------   -----------------------------------
                                   ---------------------   ----------   -----------------------------------
                                        Amount              Percent           Amount              Percent
                                   ------------------                   -------------------      ----------
                                   ------------------      ----------   -------------------
<S>                                <C>                     <C>          <C>                      <C>

     Income taxes at federal
        statutory rate              $      1,377,249             34%     $       1,504,604             34%
     Effect of United States
        and British Virgin
        Island losses                        267,552              7%               309,771              7%
     Income tax exemption in
        the Peoples Republic
        of China                         (1,404,098)           (35)%           (1,548,857)           (35)%
     Difference in United
        States and foreign
        rates                              (170,345)            (4)%                                  (6)%
                                                                                 (265,518)
                                   ------------------      ----------      ----------------      ----------
                                   ------------------      ----------   -------------------      ----------

        Income tax expense         $          70,358              2%    $                -              0%
                                   ==================      ==========   ===================      ==========
</TABLE>


11. PUBLIC RELATIONS AGREEMENTS

During  January  2004,  the Company  entered into a six-month  public  relations
agreement  with PMR and  Associates,  LLC  (PMR).  As  consideration  for public
relations  services,  the Company  compensates  PMR the equivalent of $90,000 in
shares  subject to Rule 144.  During  February  2004, the Company issued 100,000
shares to PMR for these services.  The Company expensed $90,000  associated with
this agreement in 2004.

On August 1,  2004,  the  Company  entered  into a  six-month  public  relations
agreement with Empire Relations Group,  Inc.  ("Empire").  As consideration  for
public relations services, the Company compensates Empire with 100,000 shares of
the Company's common stock.  The Company  expensed $40,700  associated with this
agreement in 2004 and expressed $79,500 in 2005.


12. CONCENTRATION OF CREDIT RISKS

Financial  instruments which potentially  subject the Company to a concentration
of credit risk principally  consist of cash deposits,  trade receivables,  other
receivables  and the amounts due from related  companies.  The Company  performs
ongoing  evaluations  of  its  cash  position  and  credit  evaluations  at  the
subsidiary level to ensure collections and minimize losses.

(i) Cash deposits.  The Company places its significant  cash deposits with banks
in the PRC.

(ii)  Receivables and amounts due from related  companies.  The Company does not
have a policy of requiring collateral.


13.  FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values of financial instruments are set out as follows:

(i) Cash  deposits.  The cash  deposits are stated at cost,  which  approximates
market value.



                                       29
<PAGE>


                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.  FAIR VALUE OF FINANCIAL INSTRUMENTS, continued

(ii) Trade   receivables,   other  receivables  and  amounts  due  from  related
     companies.  Trade  receivables,  other receivables and the amounts due from
     related  companies  are  stated at their  book  value  less  provision  for
     doubtful debts, which approximates the fair value.

(iii) Accounts payable,  accrued expenses,  and amounts due to related companies
     and directors are stated at their book value which  approximates their fair
     value.


14.  ISSUANCE OF COMMON STOCK, WARRANTS AND CONVERTIBLE NOTES

Common stock and warrants  were sold to investors in September and October 2003.
Both the common stock and the warrants  are subject to the  Registration  Rights
Agreement and associated  penalties.  The warrants have a ratchet exercise price
(i.e.,  the price is adjusted if the Company  sells stock or warrants at a lower
exercise price). Because this makes the number of shares the Company may have to
issue  "indeterminate",  the  warrants do not meet the tests in Emerging  Issues
Task Force  ("EITF")  Issue 00-19 for  classification  as equity (in addition to
also  failing  the  tests  because  of  the  registration   rights   penalties).
Accordingly,  they have been  accounted for as derivative  financial  instrument
liabilities,  initially  valued  at fair  value and then  marked-to-market  each
quarter  thereafter.  On exercise of any of the warrants,  the fair value of the
derivative  financial  instrument  as of the date of  conversion  is credited to
equity as part of the proceeds.

The registration  rights penalties through May 24, 2005 were settled by issuance
to the investors of convertible  notes (see below).  Because of the registration
rights and associated penalties,  the proceeds allocated to the common stock are
classified as non-equity up until the time the penalties were settled.  Although
the common  stock  itself is not a  derivative,  this  treatment is analogous to
redeemable  preferred  stock that is classified  outside equity in the so-called
"mezzanine" in accordance  with SEC Accounting  Series Release  ("ASR") 268. The
effectiveness of the required registration statement is not within the Company's
control.

Warrants issued in payment of placement  agent/finders'  fees have  registration
rights and a ratchet  exercise price and  accordingly  fail the EITF Issue 00-19
tests for classification as equity. Accordingly, they have been accounted for as
derivative financial instrument liabilities,  initially valued at fair value and
then  marked-to-market  each  quarter  thereafter.  On  exercise  of  any of the
warrants,  the fair value of the derivative  financial instrument as of the date
of conversion is credited to equity as part of the proceeds.

None of the warrants have been exercised.  By action of the Board,  the exercise
price of the  warrants  was  reduced  from  $1.54,  1.34  and  $1.11 to $0.40 on
November 5, 2004.

On  May  24,  2005,  convertible  notes  were  issued  to  investors  to  settle
registration  rights  penalties  due through that date.  By  agreement  with the
investors,  no further  penalties  are due.  The  convertible  notes do not bear
interest, have no stated due date and are payable "without demand". The majority
of the notes have been  converted  (and the  shares  received  by the  investors
sold).  At  December  31,  2005,  the  balance  of  the  convertible  notes  was
$113,271.This  balance is  considered  in the  derivative  financial  instrument
liabilities in the accompanying balance sheet.

The  conversion  price of the notes is  subject to a full  ratchet  for sales of
common stock, etc. at a lower price. Accordingly, as the number of shares is not
"fixed" (as that term is used in EITF Issue 00-19 and  05-02),  the  convertible
notes are not considered to be "conventional  convertible  debt" as that term is
used  in  EITF  00-19.  Accordingly,  the  embedded  conversion  option  must be
bifurcated  and accounted for separately as a derivative  instrument  liability,
unless it meets all the tests in EITF 00-19 for equity  classification.  Because
of the  ratchet  exercise  price,  the number of shares the  Company may have to
issue is "indeterminate" and,  accordingly,  the embedded conversion option does
not meet the tests in EITF  Issue  00-19.  The notes also  extend  the  existing
registration rights to the shares issued on conversion.


                                       30
<PAGE>



                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.  ISSUANCE OF COMMON STOCK, WARRANTS AND CONVERTIBLE NOTES, continued

The initial fair value of the bifurcated embedded conversion option in the notes
exceeded  the face  amount of the notes and  therefore  an  immediate  charge to
income has been  recognized for the difference (as the derivative  instrument is
marked-to-market).  As a result,  the convertible  notes are initially  recorded
with a carrying value of zero. Ordinarily,  this initial carrying value would be
accreted  up to the face  amount  (repayment  amount) of the notes,  by periodic
interest  accruals  (using an  effective  interest  method) over the life of the
instruments.  In this case,  the notes  have no stated due date and no  apparent
means of being  liquidated,  other than by conversion  in accordance  with their
terms.  The  notes are  mandatorily  convertible  if  certain  price and  volume
criteria are met. Since most of the notes have been converted within nine months
of issuance  (and that the entire  proceeds of the notes have been  allocated to
the bifurcated embedded conversion option), no accretion has been recognized.


15. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS

The Company's  operations are conducted in the PRC.  Accordingly,  the Company's
business, financial condition and results of operations may be influenced by the
political,  economic and legal environments in the PRC, and by the general state
of the PRC economy.

The Company's  operations in the PRC are subject to special  considerations  and
significant  risks not typically  associated with companies in North America and
Western  Europe.   These  include  risks  associated  with,  among  others,  the
political,  economic and legal environments and foreign currency  exchange.  The
Company's  results may be  adversely  affected by changes in the  political  and
social  conditions  in the PRC,  and by changes in  governmental  policies  with
respect to laws and regulations, anti-inflationary measures, currency conversion
and remittance abroad, and rates and methods of taxation, among other things.


16. ADDITIONAL RELATED PARTY BALANCES AND TRANSACTIONS

The Company's amounts due from/(to) directors and related parties are unsecured,
interest-free and are repayable on demand.

Eternal  acquired 100% interest in Willsley  Company  limited,  which had a 100%
interest in Aershan in a transaction valued at $6,000,000 from Shang Jia Ji. The
$6,000,000 represents Shang Jia Ji's cost.

The Company has a payable to Ji Jun Wu, Chairman of the Board, of  approximately
$50,708 at December 31, 2005 and 2004. The balance  represents  advances made to
the Company for various expenses in previous years.

China  Continental,  Inc.  ("CCI") is a related  company.  One of the  Company's
former  officers,  directors and current major  shareholder  (Shang Jia Ji) owns
more than 10% of CCI and Towering International Trade (US) Corp. The Company had
a  receivable  from CCI of  approximately  $618,000 at December  31,  2003.  The
balance  represented  payments  made by the Company on behalf of CCI in previous
year for various operating expenses.  The Company had a net payable to Shang Jia
Ji of  approximately  $123,000 at December 31, 2003. The Company had payables of
approximately  $210,000 at December  31, 2003 to other  entities  controlled  by
Shang Jia Ji.  These  balances  represented  advances  made to the  Company  for
various operating expenses. These balances were settled and paid during 2004.

The Company  has a payable to a former  employee  of  approximately  $160,000 at
December 31, 2005 and 2004. The balance represents  advances made to the Company
for various expenses in previous  years.During January 2003, the Company entered
into a  consulting  agreement  with  Market  Management,  LLC  pursuant to which
consulting  services  were  to be  provided  over a  twenty-four  month  period.
Payments  for those  services  total  $10,000  per month.  Thomas L. Tedrow also
controls  Market  Management,  LLC. The total amount expensed in 2004 related to
the contract  with Market  Management,  LLC is $60,000.  On July 12,  2004,  the
Company's  Board of Directors  determined  the services to be provided under the
agreement  were no longer being  rendered and cancelled the agreement  effective
July 1, 2004.  The Company  believes it has  meritorious  defenses to any claims
related to this agreement.

                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16. ADDITIONAL RELATED PARTY BALANCES AND TRANSACTIONS, continued

There were no related party transactions in 2005.


17. MAJOR CUSTOMERS AND SUPPLIERS

The Company  purchases and sells livestock.  Companies whose purchases and sales
exceed 10% of total purchases and sales are as follows.

                                   2005                    2004
                           ---------------------   ---------------------
                           ---------------------   ---------------------

      Purchases:
     --------------
     --------------

     Company A                              37%                      -%
     Company B                              16%                     30%
     Company C                              19%                     16%
     Company D                              24%                      5%

        Sales:
     --------------
     --------------

     Company E                              27%                     16%
     Company F                              26%                     24%
     Company G                              23%                     39%
     Company H                              16%                      -%
     Company I                               -%                     20%


         18.  ACQUISITION OF E-SEA BIOMEDICAL ENGINEERING CO. INTERNATIONAL LTD.

On October 1, 2005, the Company  acquired  certain assets from E-Sea  Biomedical
Engineering Co. International,  Ltd. ("E-Sea Int'l") for 5,709,876 shares of the
Company's  common  stock )  representing  approximately  14% of the total shares
outstanding as of October 1, 2005) and $8,500,000 RMB.

E-Sea Int'l,  a British Virgin Island  company was  incorporated  on October 20,
2004 with limited  liability.  E-Sea Int'l owns a Chinese  Patent for a dialysis
technology.  It  also  invests  and  owns  100%  interest  in  E-Sea  Biomedical
Engineering Co. (Shenzhen) Ltd. ("E-Sea Shenzhen").

E-Sea Shenzhen was  incorporated in the People's  Republic of China with limited
liability on July 8, 2004 and its principal activities are to produce and market
a series of medical instruments for detecting breast disease, especially mammary
cancer, by applying its unique image processing technology.

Since the date of  acquisition,  the operating  results of E-Sea Int'l have been
included in the Company's  consolidated  financial statements for the year ended
December 31, 2005.  The Company  accounted for the  acquisition  using  purchase
accounting  as prescribed  by SFAS No. 141  "Business  Combinations".  The table
below summarizes the fair values of the assets and liabilities assumed as of the
date of acquisition.


                                       31
<PAGE>



                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18.  ACQUISITION  OF  E-SEA  BIOMEDICAL   ENGINEERING  CO.  INTERNATIONAL  LTD.,
     continued


            Assets Acquired                      U. S. Dollars          RMB

     Cash                                   $     1,473,092        11,932,005
     Current assets                                 551,295         4,465,493
     Property and equipment, net                    528,972         4,284,674
     Amortizable intangible assets                1,585,185        12,840,000
     Other                                          518,513         4,200,000
                                            ----------------   ---------------
                                            ----------------   ---------------

        Total assets acquired                     4,657,057        37,722,172
                                            ----------------   ---------------

            Liabilities Assumed


     Current liabilities                             89,157           722,172
                                            ----------------   ---------------


        Total liabilities assumed                    89,157           722,172
                                            ----------------   ---------------


     Net assets acquired                          4,567,900        37,000,000

            Consideration Given

     Cash                                         2,283,950        18,500,000
     Common stock                                 2,283,950        18,500,000
                                            ----------------   ---------------


        Total consideration given            $    4,567,900        37,000,000
                                            ================   ===============

     Net cash paid                           $      810,858
                                            ================


The  results of this  acquisition  are  included in the  consolidated  financial
statements from the date of acquisition.  Unaudited  proforma  operating results
for the Company  assuming the  acquisition  occurred on January 1, 2005,  are as
follows:

     Service revenue                                       $    24,962,983
                                                          =================


     Net income                                            $     6,040,339
                                                          =================


     Basic and diluted earnings per common share           $          0.18
                                                          =================


The proforma results are not necessarily  indicative of what would have occurred
if the  acquisition had been in effect for the periods  presented.  In addition,
they are not  intended to be a projection  of future  results and do not reflect
any synergies that might be achieved by combining the operations.

19.  COMMITMENTS AND CONTINGENCIES

Legal Proceedings

As of March 1, 2006, we were a party to a single legal proceeding.  This lawsuit
brought by Western Securities Corporation. This cause of action seeks 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.  This cause of action was filed
in Federal  Court in the Eastern  District  of  Louisiana.  The Company  filed a
Motion to Dismiss for lack of personal jurisdiction or alternatively a Motion to
Dismiss for

                                       32
<PAGE>

                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19.  COMMITMENTS AND CONTINGENCIES, continued

lack of venue.  This  motion was  granted  as of  October  2005 and the case was
transferred  to Federal  Court in Houston,  Texas.  At December  31,  2005,  the
Company has recorded  $443,366 plus accrued  interest of $77,234  related to the
promissory  notes.  In  management's  opinion,  after  taking  into  account the
liabilities  accrued,  no further liabilities should be accrued and the ultimate
outcome  of the  lawsuit  should  not  have a  material  adverse  effect  on the
Company's consolidated financial statements in any given year.

Penalties

In conjunction with certain  subscription  agreements  entered into during 2003,
the  Company  has  agreed  to  register  the  shares  issued  under a Form  SB-2
registration  statement.  There are penalties for not timely  meeting filing and
effectiveness  deadlines,  and the Company has received  claims related to these
penalties.  As of December  31,  2004,  the Company  has  accrued  expenses  for
penalties of $276,768.

Other Contingencies

The Company is subject to other contingencies not mentioned elsewhere, including
various claims for  compensation and  reimbursement  submitted by third parties.
The Company's Board of Directors have received these claims and the Company does
not believe it has any  obligations  to compensate or reimburse for any of these
claims. There have been no lawsuits against the Company related to these claims.
The ultimate outcome of this matter cannot be predicted with certainty,  however
the Company believes based on advice from legal counsel,  these matters will not
have  a  material  adverse  effect  on  the  Company's   consolidated  financial
statements.

Lease Contracts

The Company leases its corporate  facility under a lease  contracts  expiring at
the end of March, 2006 and another through March 15, 2007. Future annual minimum
lease payments under non-cancellable operating leases are as follows at December
31, 2005:

      Year
     -------
       2006                      $
                                               11,807
       2007
                                                2,966
                                 ---------------------
                                  $             14,773
                                 =====================

Rent  expense  under  operating  lease  obligations  $11,807 for the years ended
December 31, 2005 and 2004, respectively.

20.  RESTATEMENT

The Company has restated its 2004 financial  statements from amounts  previously
reported.  The Company has determined that certain financial  instruments issued
by the Company  contain  features  that require the Company to account for these
features as  derivative  instruments.  Accordingly,  warrants  issued to certain
investors and brokers have been accounted for as derivative instruments. Note 14
was added to  disclose  the  derivative  financial  instrument  liabilities  and
provide information on subsequent changes.

The Company is required to record the fair value of the conversion  features and
the  warrants on the balance  sheet at fair value with  changes in the values of
these derivatives reflected in the consolidated statement of operations as "Gain
(loss) on derivative instrument liabilities." The effect of the non-cash changes
related to accounting separately for these derivative instrument liabilities and
modifying the estimated volatility,  on the consolidated statement of operations
for the fiscal year ended  December 31, 2004,  was an increase in the net income
of $192,444.  Basic and diluted net income  attributable to common  shareholders
per share for the fiscal year ended December 31, 2004

                                       33
<PAGE>


                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

20.  RESTATEMENT, continued

increased by $0.01. The effect on the consolidated  balance sheet as of December
31, 2004 was a decrease in stockholders'  equity of $881,649.  In addition,  the
related  unregistered  shares of common stock have been  classified as temporary
equity due to the  liquidated  damages  provision in the Company's  registration
rights agreements.  In all other material respects, the financial statements are
unchanged. Following is a summary of the restatement adjustments:
<TABLE>

                 Balance Sheet
                                                    As Previously
                                                       Reported                Adjustment               As Restated
                                                -----------------------  -----------------------   ----------------------
<S>                                              <C>                     <C>                       <C>

                     ASSETS

Current assets                                  $           29,633,576   $                    -    $          29,633,576

Property and equipment, net                                  5,904,050                        -                5,904,050

Land use rights, net                                         4,944,639                        -                4,944,639
                                                -----------------------  -----------------------   ----------------------
                                                -----------------------  -----------------------   ----------------------


            Total assets                        $           40,482,265   $                    -    $          40,482,265
                                                =======================  =======================   ======================

       LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
     Notes payable                              $              443,366   $                         $             443,366
     Accounts payable and accrued expenses                   1,526,595                                         1,526,595
     Payable to related company                                272,465                                           272,465

     Amounts due to related parties                                  -                                                 -
     Derivative financial instruments
     liabilities                                                     -                  317,658                  317,658
                                                -----------------------  -----------------------   ----------------------
                                                -----------------------  -----------------------   ----------------------

        Total current liabilities                            2,242,426                  317,658                2,560,084
                                                -----------------------  -----------------------   ----------------------

Common stock subject to registration rights
penalties                                                            -                  563,991                  563,991

Shareholders' equity:

     Preferred stock                                                 -
     Common stock                                               30,679                    (791)                   29,888
     Additional paid-in capital                              9,740,830              (1,567,362)                8,173,468

     Stock subscription receivable                            (10,176)                                          (10,176)
     Retained earnings                                      28,478,506                  686,504               29,165,010
                                                -----------------------  -----------------------   ----------------------
                                                -----------------------  -----------------------   ----------------------

        Total shareholders' equity                          38,239,839                (881,649)               37,358,190
                                                -----------------------  -----------------------   ----------------------

            Total liabilities and
            shareholders' equity                 $          40,482,265    $                   -    $          40,482,265
                                                =======================  =======================   ======================

            Statement of Operations
                                                    As Previously
                                                       Reported                Adjustment               As Restated
                                                -----------------------  -----------------------   ----------------------
                                                -----------------------  -----------------------


Sales                                           $           16,834,759   $                    -    $          16,834,759


Income from operations                                       4,187,564                        -                4,187,564

Other income (expenses)

     Interest income                                           126,049                        -                  126,049

     Interest expense                                         (27,234)                        -                 (27,234)

     Impairment loss                                          (53,517)                        -                 (53,517)
     Gain loss on derivative financial
     instruments                                                     -                  192,444                  192,444
                                                -----------------------  -----------------------   ----------------------
                                                -----------------------  -----------------------   ----------------------

        Other income and expenses, net                          45,298                  192,444                  237,742
                                                -----------------------  -----------------------   ----------------------

               Net income                       $            4,232,862   $              192,444    $           4,425,306
                                                =======================  =======================   ======================
           per common share
     Basic and diluted                          $                 0.14                             $                0.15
                                                =======================                            ======================
</TABLE>

                                       34
<PAGE>

                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

20.  RESTATEMENT, continued

Following is the impact of the restatement on the quarterly financial statements
previously filed by the Company (unaudited):
<TABLE>

As Originally Filed
                                        March 31           June 30              Sept. 30
                                        -------------    --------------      ----------------
                2005
--------------------------------
<S>                                      <C>              <C>                 <C>


Current assets                       $    30,186,994   $    33,085,482    $       33,685,080
Total assets                              40,845,516        43,553,836            45,476,026

Current liabilities                        2,413,543         2,999,563             2,698,965

Unregistered common stock subject
to registration
    registration rights                            -                 -                     -

Stockholders' equity                      38,431,973        40,554,255            42,777,061

Revenues                                   2,108,747        10,123,668             5,026,968
Gross profit                                 542,313         2,652,318             1,514,566
Income (loss) from operations               (81,086)         1,986,495             1,026,030
Other income and expenses                     48,842           (6,908)                42,278
Net (loss) income                           (32,244)         1,979,587             1,068,308

Basic and diluted earnings (loss)
per share                                     (0.00)              0.06                  0.03

                2004
-------------------------------------
-------------------------------------

Current assets                       $    24,241,933   $    25,703,025    $       28,660,807
Total assets                              35,661,124        36,932,048            39,699,664

Current liabilities                        2,281,261         2,461,325             2,467,720

Unregistered common stock subject
to registration
    registration rights                            -                 -                     -

Stockholders' equity                      33,379,863        34,470,723            37,231,944

Revenues                                   2,044,578         4,096,253             9,074,651
Gross profit                                 594,641         1,595,692             3,310,555
Income from operations                        36,299           983,716             2,705,255
Other income and expenses                   (27,137)            28,470                29,035
Net income                                     9,162         1,012,186             2,734,290

Basic and diluted earnings per share            0.00              0.03                  0.09

</TABLE>



                                       35
<PAGE>



                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

20.  RESTATEMENT, continued
<TABLE>

As  Restated
                                        March 31          June 30          Sept. 30
                                        -------------    -------------     -------------
                2005
------------------------------
<S>                                     <C>               <C>              <C>


Current assets                       $    30,186,994   $   33,085,482    $   33,685,080
Total assets                              40,845,516       43,553,836        45,476,026

Current liabilities                        3,075,801        3,869,845         4,245,401

Unregistered common stock subject
to registration
    registration rights                      563,991                -                 -

Stockholders' equity                      37,205,724       39,683,991        41,230,625

Revenues                                   2,108,747       10,123,668         5,026,968
Gross profit                                 542,313        2,652,318         1,514,566
Income (loss) from operations               (81,086)        1,986,495         1,026,030
Other income and expenses                     35,371        (110,920)         (295,799)
Net income                                  (45,715)        1,875,575           730,231

Basic and diluted earnings per share          (0.00)             0.06              0.02

                2004
-------------------------------------
-------------------------------------

Current assets                       $    24,241,933   $   25,703,025    $   28,660,807
Total assets                              35,661,124       36,932,048        39,699,664

Current liabilities                        2,848,712        2,697,973         2,682,699

Unregistered common stock subject
to registration
    registration rights                    1,247,532        1,247,532           834,190

Stockholders' equity                      31,564,880       32,986,543        36,182,775

Revenues                                   2,044,578        4,096,253         9,074,651
Gross profit                                 594,641        1,595,692         3,310,555
Income from operations                        36,299          983,716         2,705,255
Other income and expenses                   (84,486)          359,273            50,704
Net income (loss)                           (48,187)        1,342,989         2,755,959

Basic and diluted earnings per share          (0.00)             0.05              0.09

</TABLE>

21. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
<TABLE>

                                                                    2005            2004
<S>                                                              <C>             <C>


Issuance of common stock for payments of notes payable           $        -  $        60,491

Inventory received for settlement of property held for sale      $        -  $     1,518,072

Convertible notes converted into common stock                    $  356,419  $             -
</TABLE>


In addition to the items listed  above,  See Note 18  regarding  the purchase of
E-Sea.


                                       36
<PAGE>


                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

22. SEGMENT REPORTING

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 two reportable  segments:  agricultural  genetics and
medical devices. 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.  Included  in  "Other"  are  corporate-related  items,   insignificant
operations and costs that are not allocated to the reportable segments.

Information regarding our reportable segments is as follows:
<TABLE>

                                    Agricultural         Medical
                                      Genetics           Devices            Corporate              Total
                                   ----------------    --------------      --------------     -------------
                2005
--------------------------------
<S>                               <C>               <C>                  <C>                 <C>


Revenues                        $   21,839,291   $     1,193,674         $        -         $  23,032,965
Income from operations               4,625,484           447,480           (859,350)            4,213,614

Depreciation and amortization          773,163            67,632                  -               840,795
Total assets                        44,341,305         5,051,677             199,762           49,592,744

                2004
--------------------------------

Revenues                        $   16,834,759   $             -                $  -        $  16,834,759

Income from operations               4,573,199                 -            (385,635)           4,187,564

Depreciation and amortization          760,691                 -                   -              760,691

Total assets                        40,289,041                 -             193,224           40,482,265

</TABLE>


                                       37
<PAGE>



ITEM 8.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

On July 12, 2005, the Company  informed  Thomas Leger & Co.  ("Leger") that they
were being dismissed as the Company's independent accountants.

The decision to change  accountants was recommended and approved by the board of
directors of the Company.

Leger's audit report on the financial statements for the year ended December 31,
2004 contained no adverse opinion or disclaimer of opinion and was not qualified
or modified as to uncertainty, audit scope, or accounting principles.

     During  the  Company's  two most  recent  fiscal  years and any  subsequent
interim  period  preceding the dismissal of Leger,  there were no  disagreements
with  Leger on any  matter of  accounting  principles  or  practices,  financial
statement disclosure,  or auditing scope or procedure,  which disagreement(s) if
not  resolved to the  satisfaction  of Leger,  would have  caused  Leger to make
reference to the subject matter of the  disagreement(s)  in connection  with its
report.

     During  the  Company's  two most  recent  fiscal  years and any  subsequent
interim period  preceding the dismissal of Leger,  there have been no reportable
events of the type required to be disclosed by Item  304(a)(1)(v)  of Regulation
S-K.

     The Company has provided Leger with a copy of the  disclosures it is making
in response to Item 304(a) of  Regulation  S-K. The Company has  requested  that
Leger review the disclosure  and furnish the Company with a letter  addressed to
the Commission stating whether it agrees with the statements made by the Company
in response to Item 304(a) of Regulation  S-K and, if not,  stating the respects
in which it does not agree. Such letter will be filed by amendment as an exhibit
to this Report upon receipt of the same.

     (b) On July 8, 2005,  the  Company  engaged  Ham,  Langston  & Brezina  LLP
("HLB") as its new independent accountants.  Prior to the engagement of HLB, the
Company did not consult with such firm  regarding the  application of accounting
principles to a specific  completed or contemplated  transaction,  or any matter
that was either the subject of a disagreement or a reportable event. The Company
also did not consult with HLB regarding the type of audit opinion which might be
rendered on the Company's financial statements and no oral or written report was
provided by HLB.

The Company has had no  disagreements  with HLB on any  accounting  or financial
disclosure issue.

ITEM 8A.      CONTROLS AND PROCEDURE

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 former independent  accountants,  Thomas Leger & Co. LLP conducted
audits of our financial  statements for 2002,  2003 and 2004. In connection with
the issuance of its report of the independent registered public accounting firm,
Thomas  Leger  & Co.  LLP  reported  to our  Board  of  Directors  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 material deficiencies:

(i)  The Company's reported financial  statements relating to the acquisition of
     E-Sea Biomedical  Engineering Co. International,  Ltd. were indicative of a
     material  weakness in controls over closing  procedures  and the accounting
     for  non-routine  transactions.  We determined  the Company  lacked certain
     procedures  and  required   expertise   needed  to  properly   account  for
     non-routine  transactions  (such as acquisitions  of other  businesses) and
     preparation of its required  financial  statement  disclosure in accordance
     with U.S. G.A.A.P. and SEC rules and regulations.


                                       38
<PAGE>


(ii)The Company has  restated  its  consolidated  financial  statements  for the
     year-ended  December  31, 2002 to reflect  merger costs of $867,411 as post
     acquisition  activity.  The  restatement is considered a material  weakness
     over financial reporting as defined by the PCAOB.

We have  conducted  a review of the errors  requiring  restatement,  including a
separate  review by our board of directors to determine  what remedial  measures
were  necessary.  We believe  our  management  has taken or is in the process of
taking the steps necessary to correct the errors and avoid similar errors in the
future.  One important  measure is to have our President also become involved in
the review of our internal controls and procedures.

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, 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.

Our new independent  accountants,  Ham Langston & Brezina LLP conducted an audit
of our financial  statements  for 2005.  In connection  with the issuance of its
report to the Board of  Directors,  Ham  Langston  & Brezina  LLP  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)  The Company 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.G.A.A.P. and SEC rules and regulations.

(ii) The Company has  restated its  consolidated  financial  statements  for the
     year-ended December 31, 2004 to reflect the accounting for derivatives. The
     restatement is considered a material  weakness over financial  reporting as
     defined by the PCAOB.

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.

While we have taken or are in the process of taking the foregoing steps in order
to address the  adequacy of our  disclosure  controls  and  procedures,  and, in
addition,  to develop  and  implement  a formal  set of  internal  controls  and
procedures  for financial  reporting in accordance  with SEC's proposed rules to
adopt the internal  control report  requirements  included in Section 404 of the
Sarbanes-Oxley  Act of 2002,  the  efficiency of the steps we have taken to date
and the steps we are still in the process of  completing is subject to continued
management  review  supported  by  confirmation  and testing by our internal and
external  auditors.  As a result,  it is likely that additional  changes will be
made to our internal controls.



                                       39
<PAGE>


                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS

The  following  table sets forth the names,  ages and  offices of the  executive
officers  of the  Company  as of March  1,  2005.  Each  officer  serves  at the
discretion of the board of directors,  but  generally for a one-year  term.  The
periods  during which such persons have served in such  capacities are indicated
in the description of business experience of such persons below.

         Name          Age               Position

         Jijun Wu       69      Chairman of the Board of Directors
         Jiansheng Wei  53      President, Chief Executive Officer and Director
         Shien Zhu      49      Director
         Genchang Li    66      Director
         Shicheng Fu    42      Director
         Rui Zhai       38      Secretary
         Zheng Shen     38      Chief Financial Officer

The  following  is a  biographical  summary of the  business  experience  of the
executive  officers and  directors  of the Company.  Each officer of the Company
devotes fulltime to their respective positions.

Jijun Wu has  served as our  Chairman  of the Board  since  the  acquisition  of
Eternal  Technology  Group  Ltd.  and  Subsidiaries  (the  "Reorganization")  in
December 2002. From March 2000 to the Reorganization,  Mr. Wu served as Chairman
of Eternal  Technology  Group Ltd. From 1997 to 2000 he was the President of Sky
Dragon  Foundation.  Previously,  Mr. Wu served as Accountant - General of a PRC
state-owned electronics company with revenues in excess of $1.5 billion and as a
consultant to various multinational corporations entering the PRC market. Mr. Wu
is a graduate  of China  Central  Finance & Economics  University  and holds the
designation of CPA in China.

Jiansheng  Wei has  served as Chief  Operation  Officer  and a  Director  of the
Company since 2002 and as President since 2004. From March 2000 to 2002, Mr. Wei
served as Chief Operation  Officer and a Director of ETG. From 1998 to 2000, Mr.
Wei was the  vice-general  manager of towering  industrial  Group Ltd, a trading
company.  Mr. Wei has been engaged in animal husbandry  practices and management
for over 30 years and has been responsible for operations of several large farms
in Inner Mongolia and Hebei Province.  Mr. Wei holds an MBA from Tianhin Finance
& Economics College.

Shien Zhu has served as a Director  since 2000.  Mr. Zhu served as a Director of
the Company from 2000 to 2002. Since 2001, Mr. Zhu has been a professor at China
Agricultural  University.  From 1996 to 2001, Mr. Zhu was an associate professor
at China Agricultural University. Mr. Zhu is also Associate Professor and Master
Director,  involved in post  doctorate  studies,  at Kochi  University and Ehime
University in Japan.  Mr. Zhu majored in the area of early embryo  vitrification
freezing and  transfer  and mammal  adoscuolation  in embryo  biotechnology.  He
invented  a  system  of  freezing  and  preservation,  not  aided  by a  cooling
frigorimeter,  which is characterized  by low cost,  simple operation and a high
embryo survival rate. In recent years, he has written more than 40 articles that
were  published in  international  and domestic  periodicals.  Currently,  he is
undertaking vital projects for China and scientific  research projects under the
"Ninth Five-Year Plan" period.

Genchang Li was appointed to the Board in 2005. He is an experienced  researcher
with Tianjin Social Science Academy.  Mr. Li is a pioneer in the development and
operation  of  China's  stock  market.  When he was  working  for the  municipal
government, he was in charge of the review and administration or reorganizations
of assets  and going  public of state  owned  enterprises.  He is engaged in the
research  of the  policies  for China's  stock  market.  He was  involved in the
publication  of various  instructive  essays and books.  He was Section Chief in
Economic System Reform Commission of Tianjin  Municipal  Government from 1985 to
1993  AND  vice  general  Manager  of  Investment  Banking  Department  of Junan
Securities  Company from 1994 to 1999.  He is a researcher  with Tianjin  Social
Science Academy since 2000.

Shicheng  Fu was  appointed  to the Board in 2005.  He is a lawyer,  Dean of Law
Department,  Nankai University,  and Supervisor for graduate students. His other
professional  activities include Director of China Law Institute  Administrative
Law Research Society,  Guest Researcher of Peking University Public Law Research
Center,   Adjunct   Researcher  of  State   Administrative   College   Institute
Administrative  Law Research  Center,  Consultant  to the Standing  Committee of
Tianjin  Municipal  People's  Congress for legal  affairs,  Legal  Consultant to
Tianjin Municipal  Government,  and Arbitrator of Tianjin Arbitrator  Committee.
Prof. Fu attended Nankai University,  Law Department from September 1981 to July
1985. He has been teaching ant Nankai University since 1985. He has participated
in international academic exchanges since 1998.

                                       40
<PAGE>

Zhai Rui was  appointed  as  corporate  secretary  in 2005.  Ms. Zhai has a B.A.
degree in computer  science and has been the titular head of the company's  U.S.
office since February  2005. For the four years before joining the company,  Ms.
Rui was a systems analyst for EB Electronic Engineering Company.

Zheng Shen was appointed as the Chief Financial  Officer of the Company in 2005.
Ms.  Shen  has a Ph.D in  management  (accounting  and  auditing)  from  Tianjin
University of Finance and Economics. Prior to joining the Company, Ms. Shen held
positions with a Chinese accounting firm and in two companies as their financial
manager.  Ms.  Shen is also a  professor  at Tianjin  University  of Finance and
Economics.

Since  the  Company  does not  have an  audit  committee,  the  entire  board is
considered the audit committee.

The  Company's  Board of Directors has  determined  that Zheng Shen is the audit
committee financial expert. Ms. Shen is not independent.

The Company has adopted and filed a code of ethics that applies to the Company's
principal executive officer,  principal financial officer,  principal accounting
officer, and persons performing similar functions.

ITEM 10. EXECUTIVE COMPENSATION

Summary Compensation Table

The  following  table  sets  forth  information  concerning  cash  and  non-cash
compensation  paid or accrued  for  services  in all  capacities  to the Company
during  the year  ended  December  31,  2004 of each  person  who  served as the
Company's  Chief  Executive  Officer  during fiscal 2004 and the four other most
highly paid  executive  officers  whose total annual  salary and bonus  exceeded
$100,000 during the fiscal year ended December 31, 2003 (the "Named Officers").
<TABLE>

                                                                                Long-Term Compensation
                                  Annual Compensation                      Awards           Payouts
  Name and                                                        Restricted   Securities
  Principal                                       Other Annual    Stock        Underlying   LTIP         All Other
  Position      Year       Salary       Bonus     Compensation      Awards      Options      Payouts    Compensation
-------------- ------- --------------- --------- ---------------- ----------- ------------- ---------- ---------------
<S>            <C>     <C>             <C>        <C>             <C>         <C>            <C>       <C>

    JiJun Wu,    2005         100,000         -                -      80,000             -          -               -
  Chairman of    2004          20,000         -                -      80,000             -          -               -
    the Board    2003          27,299         -                -      80,000             -          -               -
</TABLE>



Equity Compensation Plan Information

The maximum number of shares of Common Stock with respect to which awards may be
granted  pursuant to the 2004 Plan is 500,000 shares.  Shares issuable under the
2004 Plan may be either treasury shares or authorized but unissued  shares.  The
number of shares available for issuance will be subject to adjustment to prevent
dilution in the event of stock splits,  stock  dividends or other changes in the
capitalization of the Company.

Subject to  compliance  with Rule 16b-3 of the  Securities  Exchange Act of 1934
(the "Exchange Act"), the 2004 Plan is administered by the Board of Directors of
the  Company  (the  "Board")  or, in the event the Board  shall  appoint  and/or
authorize a committee of two or more members of the Board to administer the 2004
Plan, by such  committee  (the "Plan  Administrator").  Except for the terms and
conditions  explicitly  set forth in the 2004 Plan,  and  subject to  applicable
provisions  of the Internal  Revenue  Code of 1986,  as amended (the "Code") the
Plan Administrator shall have the authority, in its discretion, to determine all
matters  relating to the options to be granted  under the 2004 Plan,  including,
without  limitation,  selection of whether an option will be an incentive  stock
option or a  nonqualified  stock  option,  selection  of the  individuals  to be
granted options, the number of shares to be subject to each option, the exercise
price per share,  the timing of grants and all other terms and conditions of the
options.

                                       41
<PAGE>

Options granted under the 2004 Plan may be "incentive stock options" ("Incentive
Options")  within the meaning of Section 422 of the Code or stock  options which
are not incentive stock options ("Non-Incentive  Options" and, collectively with
Incentive  Options,  hereinafter  referred to as "Options").  Each Option may be
exercised  in whole or in part;  provided,  that only whole shares may be issued
pursuant  to the  exercise  of  any  Option.  Subject  to any  other  terms  and
conditions  herein, the Plan Administrator may provide that an Option may not be
exercised  in whole or in part for a stated  period or  periods  of time  during
which such Option is  outstanding;  provided,  that the Plan  Administrator  may
rescind,  modify, or waive any such limitation (including by the acceleration of
the vesting  schedule  upon a change in control of the  Company) at any time and
from time to time after the grant date thereof.  During an optionee's  lifetime,
any Incentive  Options granted under the 2004 Plan are personal to such optionee
and are exercisable solely by such optionee.

The Plan  Administrator  can determine that additional  forms of payment will be
permitted. To the extent permitted by the Plan Administrator and applicable laws
and regulations (including,  without limitation, federal tax and securities laws
and regulations and state corporate law), an Option may be exercised by:

(a) delivery of shares of Common Stock of the Company held by an optionee having
a fair market  value equal to the exercise  price,  such fair market value to be
determined in good faith by the Plan Administrator; or

(b)  delivery  of  a  properly  executed  notice  of  exercise,   together  with
instructions  to the  Company to withhold  from the shares of Common  Stock that
would  otherwise be issued upon  exercise  that number of shares of Common Stock
having a fair market value equal to the option exercise price.

Upon a merger or consolidation  in which securities  possessing more than 50% of
the total  combined  voting power of the Company's  outstanding  securities  are
transferred  to a person  different  from the person  holding  those  securities
immediately prior to such transaction,  the sale,  transfer or other disposition
of all or substantially  all of the Company's assets in complete  liquidation or
dissolution of the Company the sale, or transfer or other  disposition of all or
substantially  all of the  Company's  assets to an  unrelated  entity,  each,  a
("Corporate  Transaction"),  at the  discretion of the Plan  Administrator,  any
award  carrying a right to exercise that was not  previously  exercisable  shall
become fully exercisable, the restrictions,  deferral limitations and forfeiture
conditions applicable to any other award granted shall lapse and any performance
conditions imposed with respect to awards shall be deemed to be fully achieved.

Incentive  Options granted under the 2004 Plan may not be transferred,  pledged,
mortgaged,  hypothecated or otherwise encumbered other than by will or under the
laws of descent and distribution,  except that the Plan Administrator may permit
transfers of awards for estate  planning  purposes  if, and to the extent,  such
transfers  do not cause a  participant  who is then subject to Section 16 of the
Exchange  Act to lose the  benefit  of the  exemption  under Rule 16b-3 for such
transactions.

Additional  rules apply under the Code to the grant of  Incentive  Options.  For
instance an Incentive Option must be exercised within 10 years after the date of
grant,  unless  granted to an  individual  owning more than 10% of the Company's
stock,  in  which  case the  exercise  period  may not  exceed  five (5)  years.
Similarly,  an Incentive Option must be granted at an exercise price that equals
or exceeds 100% of the fair market value of the underlying  stock at the time of
grant,  a threshold  that is  increased to 110% of such fair market value in the
case of a grant to an individual owning more than 10% of the Company's stock.

For federal  income tax  purposes,  the grant to an optionee of a  Non-Incentive
Option  generally  will not constitute a taxable event to the optionee or to the
Company.  Upon exercise of a Non-Incentive Option (or, in certain cases, a later
tax recognition date), the optionee will recognize  compensation  income taxable
as  ordinary  income,  measured  by the excess of the fair  market  value of the
Common Stock purchased on the exercise date (or later tax recognition date) over
the amount paid by the  optionee for such Common  Stock,  and will be subject to
federal income tax withholding.  Upon recognition of income by the optionee, the
Company may claim a deduction for the amount of such compensation.  The optionee
will have a tax basis in the Common  Stock  purchased  equal to the amount  paid
plus the amount of ordinary income recognized upon exercise of the Non-Incentive
Option.  Upon the subsequent  sale of the Common Stock received upon exercise of
the Non-Incentive  Option, an optionee will recognize capital gain or loss equal
to the difference  between the amount realized on such sale and his tax basis in
the Common  Stock,  which may be long-term  capital gain or loss if the optionee
holds the Common Stock for more than one year from the exercise date.

For federal income tax purposes, in general,  neither the grant nor the exercise
of an Incentive Option will constitute a taxable event to the optionee or to the
Company,  assuming the Incentive Option qualifies as an "incentive stock option"
under Code ss.422.  If an optionee does not dispose of the Common Stock acquired
upon exercise of an Incentive  Option during the statutory  holding period,  any
gain or loss upon subsequent sale of the Common Stock will be long-term  capital
gain or loss,  assuming the shares  represent a capital asset in the  optionee's
hands. The statutory  holding period is the later of two years from the date the
Incentive  Option  is  granted  or one year  from the date the  Common  Stock is
transferred to the optionee pursuant to the exercise of the Incentive Option. If
the statutory  holding period  requirements  are satisfied,  the Company may not
claim any federal income tax deduction upon either the exercise of the Incentive
Option  or the  subsequent  sale of the  Common  Stock  received  upon  exercise
thereof.  If the statutory  holding period  requirement  is not  satisfied,  the
optionee will recognize  compensation  income taxable as ordinary  income on the
date the Common Stock is sold (or later tax recognition date) in an amount equal
to the lesser of (i) the fair market value of the Common Stock on that date less
the  amount  paid by the  optionee  for such  Common  Stock,  or (ii) the amount
realized  on the  disposition  of the Common  Stock less the amount  paid by the
optionee for such Common  Stock;  the Company may then claim a deduction for the
amount of such compensation income.

                                       42
<PAGE>

The  federal  income  tax  consequences  summarized  hereinabove  are based upon
current law and are subject to change.

The Board may amend, alter,  suspend,  discontinue or terminate the 2004 Plan at
any time,  except that any such action shall be subject to shareholder  approval
at the annual  meeting  next  following  such Board  action if such  shareholder
approval is required by federal or state law or  regulation  or the rules of any
exchange or  automated  quotation  system on which the Common  Stock may then be
listed or quoted,  or if the Board of Directors  otherwise  determines to submit
such action for shareholder  approval.  In addition,  no amendment,  alteration,
suspension,  discontinuation  or  termination  to the 2004  Plan may  materially
impair the rights of any  participant  with respect to any vested Option granted
before amendment without such participant's  consent.  Unless terminated earlier
by the Board, the 2004 Plan shall terminate upon the earliest to occur of (i) 10
years after the date or which the Board  approves the 2004 Plan or (ii) the date
on which all shares of Common Stock  available for issuance  under the 2004 Plan
shall have been issued as vested shares.  Upon such 2004 Plan  termination,  all
Options  and  unvested  stock  issuances  outstanding  under the 2004 Plan shall
continue to have full force and effect in accordance  with the provisions of the
agreements.

On August 26, 2005,  the  shareholders  approved the company's 2005 Stock Option
Plan.  This plan is  identical  to the 2004 Plan except that it provides for the
issuance of 2,500,000 shares. The full number of options authorized by this plan
have been exercised.

The following  table gives  information  about equity awards under the Company's
existing plan as of December 31, 2005:
<TABLE>


                                                                                                       Number of securities
                                                                                                     remaining available for
                                                                            Weighted-average          future issuance under
                                         Number of securities to be        exercise price of        equity compensation plans
                                           issued upon exercise of        outstanding options,        (excluding securities
Plan Category                               outstanding options,          warrants and rights          reflected in column
                                             warrants and rights
-------------------------------------    ----------------------------    -----------------------    ---------------------------
-------------------------------------    ----------------------------    -----------------------    ---------------------------
<S>                                      <C>                              <C>                       <C>

Equity compensation plans approved
by security holders                                        2,500,000                       $.40                              0
Equity compensation plans not
approved by security holders                                 500,000                         --                        500,000
Warrants issued with sale of shares
                                                           1,049,575                        .40                      1,049,575
Warrants issued in exchange for
penalties                                                  1,486,867                        .25                        332,478
                                         ----------------------------    -----------------------    ---------------------------
                                         ----------------------------    -----------------------    ---------------------------
                                                           5,536,442                                                 1,882,053
                                         ============================    =======================    ===========================
</TABLE>

Employment Contracts

The Company has an employment  agreement with Zhai, Rui. This contract runs from
February 20, 2006 to February 19, 2007 and pays annual compensation of $60,000.

                                       43
<PAGE>

Compensation of Directors

We reimburse all direct costs of attendance of Board meetings by our directors.

No additional compensation of any nature is paid to employee directors.

ITEM 11.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

The following table is furnished as of December 31, 2005 to indicate  beneficial
ownership of shares of the Company's Common Stock by (1) each shareholder of the
Company who is known by the Company to be a beneficial  owner of more than 5% of
the Company's  Common Stock,  (2) each director,  nominee for director and Named
Officer of the Company,  individually, and (3) all officers and directors of the
Company as a group.  The information in the following table was provided by such
persons.
<TABLE>


              Name and Address of Beneficial Owner (1)        Shares (2)             Percent of Class (2)
         ------------------------------------------------   ---------------------    ---------------------
         ------------------------------------------------   ---------------------    ---------------------
<S>                                                          <C>                       <C>

         Jijun Wu                                                      1,780,000                     4.4%
         Jiansheng Wei                                                   653,000                     1.6%
         Shien Zhu                                                        50,000                        *
         Genchang Li                                                      50,000                        *
         Shicheng Fu                                                      50,000                        *
         Rui Zhai                                                         75,100                        *
         Zheng Shen                                                            0                        *
         All executive officers and directors as a group
         (7 persons)                                                   2,658,100                     6.0%

</TABLE>




*........Less than 1%.

(1)  The persons named in the table have sole voting and  investment  power with
     respect to all shares of Common Stock shown as beneficially  owned by them,
     subject to community  property laws, where applicable,  and the information
     contained in the footnotes to the table.

(2)  Includes shares of Common Stock not  outstanding,  but which are subject to
     options,   warrants  and  other  convertible   securities   exercisable  or
     convertible within 60 days of the date of the information set forth in this
     table,  which are deemed to be outstanding for the purpose of computing the
     shares held and percentage of outstanding  Common Stock with respect to the
     holder  of such  options.  Such  shares  are  not,  however,  deemed  to be
     outstanding  for the  purpose  of  computing  the  percentage  of any other
     person.


(3)  Address is Suite 04-06,  28/F,  Block A Innotec  Tower,  235 Nanjing  Road,
     Heping District, Tianjin, PRC 300100.

Compliance With Section 16(a) of the Exchange Act

Under the securities  laws of the United States,  the Company's  directors,  its
executive  officers,  and any  persons  holding  more  than ten  percent  of the
Company's  Common Stock are required to report  their  initial  ownership of the
Company's  Common  Stock and any  subsequent  changes in that  ownership  to the
Securities  and Exchange  Commission.  Specific due dates for these reports have
been established and the Company is required to disclose in this Proxy Statement
any failure to file by these dates during 2005. Based solely on a review of such
reports  and  written  statements  of  its  directors,  executive  officers  and
shareholders,  the Company does not believe that all of the filing  requirements
were satisfied on a timely basis in 2005.


                                       44
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain Relationships and Transactions

The Company's amounts due from/(to) directors and related parties are unsecured,
interest-free and are repayable on demand.

The Company has a payable to Ji Jun Wu, Chairman of the Board, of  approximately
$50,708 at December 31, 2005 and 2004. The balance  represents  advances made to
the Company for various expenses in previous years.

China  Continental,  Inc.  ("CCI") is a related  company.  One of the  Company's
former  officers,  directors and current major  shareholder  (Shang Jia Ji) owns
more than 10% of CCI and Towering International Trade (US) Corp. The Company had
a  receivable  from CCI of  approximately  $618,000 at December  31,  2003.  The
balance  represents  payments  made by the  Company on behalf of CCI in previous
year for various operating expenses.  The Company had a net payable to Shang Jia
Ji of  approximately  $123,000 at December 31, 2003. The Company had payables of
approximately  $210,000 at December  31, 2003 to other  entities  controlled  by
Shang Jia Ji. These balances  represent advances made to the Company for various
operating expenses. These balances were settled and paid during 2004.

The Company  has a payable to a former  employee  of  approximately  $160,000 at
December 31, 2004 and 2003. The balance represents  advances made to the Company
for various expenses in previous years.

During January 2003, the Company entered into a consulting agreement with Market
Management, LLC pursuant to which consulting services were to be provided over a
24 month period.  Payments for those  services  total $10,000 per month.  Market
Management,   LLC  is  controlled  by  Thomas  L.  Tedrow,  a  former  principal
shareholder and former officer of the Company. The total amount expensed in 2004
related to the contract  with Market  Management,  LLC was $60,000.  On July 12,
2004, the Company's Board of Directors  determined these services were no longer
being  rendered and cancelled the agreement  effective July 1, 2004. The Company
believes it has meritorious defenses to any claims related to this agreement.


ITEM 13.      EXHIBITS AND REPORTS ON FORM 8-K.

    (a)      Exhibits

              Exhibit
              Number              Description of Exhibit
             ----------          -------------------------

          2.1* Exchange Agreement by and between Waterford Sterling  Corporation
               and  Eternal  Technology  Group  Ltd.  dated  December  12,  2002
               (incorporated  by  reference  to  Exhibit  2.1 to  the  Company's
               Current  Report on Form 8-K dated  December 12, 2002,  filed with
               the SEC on December 18, 2002).

          3.1* Articles of  Incorporation  (incorporated by reference to Exhibit
               3.1 to the Company's  Registration  Statement on Form SB-2, filed
               October 22, 2003 (SEC File No. 333-109908)).

          3.2* Articles of Amendment,  dated  December 31, 2002, to the Articles
               of Incorporation (incorporated by reference to Exhibit 3.1 to the
               Company's  Current  Report on Form 8-K dated  December  12, 2002,
               filed with the SEC on December 18, 2002).

          3.3* Bylaws of Eternal  Technologies  Group, Inc. adopted December 12,
               2002  (incorporated  by reference to Exhibit 3.3 to the Company's
               Registration  Statement on Form SB-2, filed October 22, 2003 (SEC
               File No. 333-109908)).

          10.1* Research Contract with Shen Yang Institute of Applied Ecology of
               the Chinese  Academy of Science.  (incorporated  by  reference to
               Exhibit 10.1 to the  Company's  Annual  Report on Form 10-KSB for
               the year ended December 31, 2002).

                                       45
<PAGE>


          10.2* Research   Contract   with  Tower   International   Trade  Corp.
               (incorporated  by  reference  to  Exhibit  10.2 to the  Company's
               Annual  Report on Form  10-KSB  for the year ended  December  31,
               2002).

          10.3* Purchase  Agreement with Shang JaiJi dated July 15, 2000 for the
               purchase of the Shares of Willsley Company Limited  (incorporated
               by reference to Exhibit 10.3 to the  Company's  Annual  Report on
               Form 10-KSB for the year ended December 31, 2002).

          10.4* Amendment to the Purchase Agreement with Shang Jai Ji dated July
               15,  2000 for the  Purchase  of the  Shares of  Willsley  Company
               Limited  (incorporated  by  reference  to  Exhibit  10.4  to  the
               Company's  Annual  Report  on  Form  10-KSB  for the  year  ended
               December 31, 2002).

          10.5* Dairy Cow Purchase  Contract dated August 5, 2003 by and between
               Inner Mongolia  Aeirshan  Agricultural  Technologies  Limited and
               Xinjiang Bajinquoleng Husbandry Center.

          10.6* Consulting  Agreement  dated  January 1, 2003 by and between the
               Company and Market Management LLC.

          10.7 *Public Relations Agreement dated January 23, 2004 by and between
               the Company and PMR and Associates LLC.

          10.8* Contract dated June 13, 2003 by and between Eternal Technologies
               Group, Inc. and Paranna, Inc.

          10.9* Form of  Subscription  Agreement  relating to 2003  Placement of
               Common  Stock  (incorporated  by reference to Exhibit 10.5 to the
               Company's  Registration Statement on Form SB-2, filed October 22,
               2003 (SEC File No. 333-109908)).

          10.10*Form of Placement  Agreement with First Montauk  Securities Corp
               (incorporated  by  reference  to  Exhibit  10.6 to the  Company's
               Registration  Statement on Form SB-2, filed October 22, 2003 (SEC
               File No. 333-109908)).

          10.11*Form of Warrant Agreement  (incorporated by reference to Exhibit
               10.7 to the Company's  Registration Statement on Form SB-2, filed
               October 22, 2003 (SEC File No. 333-109908)).

          10.12 Employment  Agreement between Eternal  Technologies  Group, Inc.
               and Zhai Rui

          10.13 Lease for the Shenzhen facility

          10.14 Exchange Agreement between Eternal  Technologies Group, Inc. and
               E-Sea  Biomedical   Engineering  Co.   International  Ltd.  dated
               September 30, 2005 *

          14.1 *Code of Ethics for CEO and Senior Financial Officers

          31.1 *Section 302 Certification of CEO

          31.2 *Section 302 Certification of CFO

          32.1* Section 906 Certification of CEO

          32.2 *Section 906 Certification of CFO

          *    Previously Filed


                                       46
<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES

Fees Paid to Independent Public Accountants

The following table presents fees for  professional  audit services  rendered by
Thomas  Leger & Co.,  L.L.P.  for the audit of the  Company's  annual  financial
statements  for the years ended December 31, 2004 and December 31, 2003 and fees
billed for other services  rendered by Thomas Leger & Co.,  L.L.P.  during those
periods.

                                          Fiscal 2005        Fiscal 2004
                                       ------------------    ----------------
                                       ------------------    ----------------
          Audit fees (1)                      $ 144,331           $ 142,453
          Audit related fees (2)                 13,115              39,162
          Tax fees                                4,869               5,000

          All other fees                              -                   -
                                       ------------------    ----------------
           Total                              $ 162,315           $ 186,615
                                       ==================    ================

(1)  Audit Fees consist of fees billed for  professional  services  rendered for
     the audit of the Company's  consolidated  annual  financial  statements and
     review  of  the  interim  consolidated  financial  statements  included  in
     quarterly reports and services that are normally provided by Thomas Leger &
     Co.,  L.L.P.  and Ham Langston  Brezina LP in connection with statutory and
     regulatory filings or engagements.

(2)  Audit-Related  Fees consist of fees billed for assurance and other services
     not  explicitly  related to the  performance  of the audit or review of the
     Company's  consolidated  financial  statements  and are not reported  under
     "Audit  Fees."  This  category  includes  fees  related  to  the  Company's
     registration   statements,   review  of  proxy  statements  and  accounting
     research.



                                       47
<PAGE>



                                                    SIGNATURES

In  accordance  with  Section 13 or 15(d) of the Exchange  Act,  the  registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                               ETERNAL TECHNOLOGIES GROUP, INC.
Dated:   May 19, 2006

                               By: /s/ Jianshang Wei
                                   --------------------
                                        Jianshang Wei
                                        Chief Executive Officer

     In  accordance  with the Exchange Act, this report has been signed below by
the following  persons on behalf of the  registrant and in the capacities and on
the dates indicated.

         Signatures                       Title                      Date

/s/ JIJUN WU                     Chairman of the Board          May 19, 2006
JIJUN WU


/s/ JIANSHENG WEI                Chief Executive Officer and    May 19, 2006
JIANSHENG WEI                    Director


/s/ GENCHANG LI                  Director                       May 19, 2006
GENCHANG LI

/s/ SHICHANG FU                  Director                       May 19,2006
SHICHANG FU

/s/ SHIEN ZHU                    Director                       May 19, 2006
SHIEN ZHU


                                       48
<PAGE>


                                 CERTIFICATIONS
                                                                   EXHIBIT 31.1
Certification by Jiansheng Wei
Pursuant to Securities Exchange Act Rule 13a-14(a)

I, Jiansheng Wei, certify that:

1.   I have reviewed  this annual report on Form 10-KSB of Eternal  Technologies
     Group, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material  fact or omit to state a  material  fact  necessary  to make the
     statements made, in light of the circumstances  under which such statements
     were made,  not  misleading  with  respect  to the  period  covered by this
     report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in  this  report,  fairly  present  in all  material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules  13a-15(e) and 15d-15(e))  and internal  control over
     financial  reporting  (as  defined  in  Exchange  Act Rules  13a-15(f)  and
     15d-15(f)) for the registrant and have:

(a)  Designed such disclosure controls and procedures, or caused such disclosure
     controls and  procedures to be designed  under our  supervision,  to ensure
     that  material  information  relating  to  the  registrant,  including  its
     consolidated  subsidiaries,  is made  known to us by  others  within  those
     entities,  particularly  during the  period in which  this  report is being
     prepared;

(b)Designed such  internal  control  over  financial  reporting,  or caused such
     internal  control  over  financial  reporting  to  be  designed  under  our
     supervision,  to provide reasonable  assurance regarding the reliability of
     financial  reporting  and  the  preparation  of  financial  statements  for
     external  purposes  in  accordance  with  generally   accepted   accounting
     principles;

(c)  Evaluated the  effectiveness  of the registrant's  disclosure  controls and
     procedures  and  presented  in  this  report  our  conclusions   about  the
     effectiveness of the disclosure  controls and procedures,  as of the end of
     the period covered by this report based on such evaluation; and

(d)  Disclosed in this report any change in the  registrant's  internal  control
     over financial  reporting that occurred during the registrant's most recent
     fiscal  quarter (the  registrant's  fourth fiscal quarter in the case of an
     annual report) that has  materially  affected,  or is reasonably  likely to
     materially  affect,  the  registrant's   internal  control  over  financial
     reporting; and

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent functions):

(a)  All  significant  deficiencies  and  material  weaknesses  in the design or
     operation of internal control over financial reporting which are reasonably
     likely to adversely  affect the  registrant's  ability to record,  process,
     summarize and report financial information; and

(b)  Any fraud,  whether or not  material,  that  involves  management  or other
     employees who have a significant role in the registrant's  internal control
     over financial reporting.

Date: May 19, 2006


/s/    JIANSHENG WEI

Jiansheng Wei
Chief Executive Officer

                                       49
<PAGE>



                                                                   EXHIBIT 31.2
Certification by Zheng Shen
Pursuant to Securities Exchange Act Rule 13a-14(a)

I, Zheng Shen, certify that:

1.   I have reviewed  this annual report on Form 10-KSB of Eternal  Technologies
     Group, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material  fact or omit to state a  material  fact  necessary  to make the
     statements made, in light of the circumstances  under which such statements
     were made,  not  misleading  with  respect  to the  period  covered by this
     report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in  this  report,  fairly  present  in all  material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules  13a-15(e) and 15d-15(e))  and internal  control over
     financial  reporting  (as  defined  in  Exchange  Act Rules  13a-15(f)  and
     15d-15(f)) for the registrant and have:

(a)  Designed such disclosure controls and procedures, or caused such disclosure
     controls and  procedures to be designed  under our  supervision,  to ensure
     that  material  information  relating  to  the  registrant,  including  its
     consolidated  subsidiaries,  is made  known to us by  others  within  those
     entities,  particularly  during the  period in which  this  report is being
     prepared;

(b)Designed such  internal  control  over  financial  reporting,  or caused such
     internal  control  over  financial  reporting  to  be  designed  under  our
     supervision,  to provide reasonable  assurance regarding the reliability of
     financial  reporting  and  the  preparation  of  financial  statements  for
     external  purposes  in  accordance  with  generally   accepted   accounting
     principles;

(c)  Evaluated the  effectiveness  of the registrant's  disclosure  controls and
     procedures  and  presented  in  this  report  our  conclusions   about  the
     effectiveness of the disclosure  controls and procedures,  as of the end of
     the period covered by this report based on such evaluation; and

(d)  Disclosed in this report any change in the  registrant's  internal  control
     over financial  reporting that occurred during the registrant's most recent
     fiscal  quarter (the  registrant's  fourth fiscal quarter in the case of an
     annual report) that has  materially  affected,  or is reasonably  likely to
     materially  affect,  the  registrant's   internal  control  over  financial
     reporting; and

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent functions):

(a)  All  significant  deficiencies  and  material  weaknesses  in the design or
     operation of internal control over financial reporting which are reasonably
     likely to adversely  affect the  registrant's  ability to record,  process,
     summarize and report financial information; and

(b)  Any fraud,  whether or not  material,  that  involves  management  or other
     employees who have a significant role in the registrant's  internal control
     over financial reporting.

Date: May 19, 2006


/s/   ZHENG SHEN

Zheng Shen
Chief Financial Officer


                                       50
<PAGE>


---------------------------------------------------------------------------


                                                                  EXHIBIT 32.1

                   Certification of Periodic Financial Report
                       Pursuant to 18 U.S.C. Section 1350

For purposes of 18 U.S.C.  Section 1350,  as adopted  pursuant to Section 906 of
the  Sarbanes-Oxley  Act of 2002,  the  undersigned,  Jiansheng  Wei,  the chief
executive officer of Eternal  Technologies  Group, Inc. (the "Company"),  hereby
certifies that, to his knowledge:

(i)  the Annual Report on Form 10-KSB of the Company for the year ended December
     31, 2005, as filed with the Securities and Exchange  Commission on the date
     hereof (the "Report") fully complies with the requirements of section 13(a)
     or 15(d) of the Securities Exchange Act of 1934; and

(ii)the  information  contained in the Report fairly  presents,  in all material
     respects, the financial condition and results of operations of the Company.

Date: May 19, 2006

/s/    JIANSHENG WEI

Jiansheng Wei
Chief Executive Officer


                                       51
<PAGE>


                                                                EXHIBIT 32.2



----------------------------------------------------------------------------
                   Certification of Periodic Financial Report
                       Pursuant to 18 U.S.C. Section 1350

For purposes of 18 U.S.C.  Section 1350,  as adopted  pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, the undersigned, Zheng Shen, the chief financial
officer of Eternal  Technologies  Group, Inc. (the "Company"),  hereby certifies
that, to his knowledge:

(i)  the Annual Report on Form 10-KSB of the Company for the year ended December
     31, 2005, as filed with the Securities and Exchange  Commission on the date
     hereof (the "Report") fully complies with the requirements of section 13(a)
     or 15(d) of the Securities Exchange Act of 1934; and

(ii)the  information  contained in the Report fairly  presents,  in all material
     respects, the financial condition and results of operations of the Company.

Date: May 19, 2006

/s/    Zheng Shen

Zheng Shen
Chief Financial Officer