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                       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, 2006

[  ] 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,  2006  were
$28,718,103.

The  number of  shares of the  registrant's  common  stock,  $.001 par value per
share,  outstanding as of March 23, 2007 was  47,073,579.  The aggregate  market
value of the voting and non-voting  common equity held by  non-affiliates of the
registrant on March 23, 2007,  based on the last sales price on the OTC Bulletin
Board as of such date, was approximately $33,206,609.

                       DOCUMENTS INCORPORATED BY REFERENCE

None

        Transition Small Business Disclosure Format:   Yes  [ ]    No     [X]
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                                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,
                      RELATED STOCKHOLDER MATTERS AND SMALL
                      BUSINESS ISSUER PURCHASE OF EQUITY
                      SECURITIES.......................................  7
         ITEM 6.      MANAGEMENT'S DISCUSSION AND ANALYSIS OR
                      PLAN OF OPERATIONS...............................  8
         ITEM 7.      FINANCIAL STATEMENTS............................. 12
         ITEM 8.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                      ON ACCOUNTING AND FINANCIAL DISCLOSURE........... 34
         ITEM 8A.     CONTROLS AND PROCEDURES.......................... 34
         ITEM 8B.     OTHER INFORMATION................................ 36

                                                     PART III

         ITEM 9.      DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
                      CONTROL PERSONS; COMPLIANCE WITH
                      SECTION 16(a) OF THE EXCHANGE ACT................ 36
         ITEM 10.     EXECUTIVE COMPENSATION........................... 37
         ITEM 11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                      OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
                      MATTERS.......................................... 40
         ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
                      AND DIRECTOR INDEPENDENCE........................ 41
         ITEM 13.     EXHIBITS......................................... 41
         ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES........... 43

SIGNATURES            ................................................. 44
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                           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.  We  manufacture 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.  We also maintain offices in Shenzhen,  China at
the International  Culture Tower, Suite 1721, 3039 Shennan Rd., Shenzhen,  China
518033.

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.,
("E-Sea") also a BVI company.  We also have a minority interest in two other PRC
enterprises.

                                       3
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Eternal - BVI was  incorporated  in the British Virgin Islands in March 2000. In
May 2000, Eternal - BVI acquired 100% of Willsley Company Limited. Willsley is a
holding company that owns 100% of Inner Mongolia Aershan Agriculture & Husbandry
Technology Co., Ltd. ("Aershan Agriculture").  Aershan Agriculture owns a cattle
herd,  conducts  breeding  operations and owns a farm in Inner Mongolia which it
leases  to  a  Chinese  company   ("lessee")  for   4,620,000RMB  per  year  for
approximately  USD$579,000  per year.  The lessee  intends to raise fast growing
trees on the property for lumber. During 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.
```

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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.

We also process and sale mutton from our higher  yielding,  higher
quality genetically engineered stock.
```

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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.

On January 1, 2007 we purchased a 22% interest in Hong Yuan  Acquatic  Products,
Inc. (Hang Yuan)  Changsha,  China for  approximately  US$3,800,000  in cash and
2,719,730  shares of our common  stock  valued at $.70 per  share.  Hang Yuan is
engaged in commercial turtle farming.

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

E-Sea 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.  We anticipate  wide  acceptance of this product as it is a
low cost alternative to expensive and often times unavailable mammography.

Facility.  We  manufacture  and sell 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
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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  equipment  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  equipment 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  segments in general are 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 World  Trade
Organization  ("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,  if we market our  products  outside  of China,  other
governments may impose even greater  restrictions.  Chinese  medical  equipment
regulation  is  evolving  and  subject  to  much   uncertainty.   Under  current
regulations,  the  Chinese  equivalent  of  the  United  States  Food  And  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.

                                       5      As of  December  31, 2005 and 2006,  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.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
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On  February  7,  2007,  the  Company  received  a comment  letter  from the SEC
regarding  its filing on Form  10-KSB for the year ended  December  31, 2005 and
Form 10-QSB for the quarter  ended  September  30,  2006.  The Company is in the
process of responding and resolving the Staff comments mentioned in this letter.
The ultimate resolution of these comments is currently uncertain and may require
the Company to file amendments to both of the aforementioned filings.
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ITEM 2.  DESCRIPTION OF PROPERTY

We operate from four separate facilities,  our administrative  offices
in Tianjin and Shenzhen PRC, a manufacturing facility in Shenzhen, and our farm
in Inner Mongolia, PRC.

The  administrative  offices in Tianjin occupy  approximately 97.8 square meters
(approximately  1,053 square feet) in a commercial  building.  The Company rents
this facility under a two-year  lease,  running  through March 31, 2007, at $964
per month.  This lease was renewed in 2007 for an additional  two years with
monthly rental payment of $964. The  administrative  office in Shenzhen occupies
approximately 150 square meters (approximately 1,585 square feet) in a high rise
office building.  We rented this facility under a two year lease running through
December 31, 2008 at 11,749RMB (approximately US$1,506 per month).
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The leased facility of E-Sea in Shenzhen is an 865 square meters  (approximately
9,310 square feet) facility containing  machinery for the manufacture of medical
equipment,  administrative  offices,  and storage space for raw  materials.  The
lease  expires on December 31, 2008 and requires  monthly  payments of 20,000RMB
(approximately US$2,565).
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The farm  consists of  approximately  2.8 million  acres and is located in Inner
Mongolia, PRC. We 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 2026. We have the option to renew the
land use rights for an additional 25 years at a cost of USD$6,000,000.  In April
2006  we  reached  an  agreement  to  lease  the  farm  to  a  Chinese   company
("Lessee")for  twenty  years for  approximately  $579,000  per year.  The Lessee
intends to raise fast growing trees on teh property for lumber and paper. ITEM 3.  LEGAL PROCEEDINGS

As of March 23, 2007,  we were a party to two  legal  proceedings.  The  first
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.
```

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In October 2005,  the Court  granted our motion for a change of venue
and the  case was  moved to the  Southern  District  Court of Texas in  Houston,
Texas.  We believe that the case is without merit and the basis of the
promissory note involves  expenditures not made on our behalf.  Furthermore,  we
have  significant  counterclaims  that we plan to assert  against Mr. Tedrow and
Market  Management,  Inc.  We believe that this matter will be resolved  during
2007 and that we will prevail on all counts.  The case is scheduled for trial in
May 2007.

The  State  Court in New York  dismissed  a cause of  action,  filed by  Bristol
Investments Limited against us, 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.  No action  has been  taken in this case
since, and it is still pending.

As of March 23, 2007,  there are no other causes of action  pending  against us.
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ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the quarter ended  December 31, 2006, no matters were submitted to a vote
of security holders.

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                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS
         AND SMALL BUSINESS ISSUER PURCHASE OF EQUITY SECURITIES

Our common stock is 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 2005

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

Calendar Year 2006

         Fourth Quarter.............       $0.70             $0.45
         Third Quarter..............        0.51              0.39
         Second Quarter.............        0.56              0.39
         First Quarter..............        0.69              0.39

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

At March 23, 2007, the closing bid price of the common stock was $0.75.

As of March 23, 2007, we estimate  that there were in excess of 2,000  beneficial
holders of our common stock.

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 we 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.  The remaining 332,478 shares
were  unissued  as of  December  31,  2006 as they are  related  to the  Bristol
Investments  Limited  litigation.  See  Item  3 of  our  consolidated  financial
statements.

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In 2005, we also issued 31,225 shares to an individual  who had assisted us 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. In November,  2006, the PRC
government relaxed its currency controls.  However, controls still exist which
would make if difficult to pay dividends in excess of $50,000 per year.

On  January  1,  2007  we  issued  2,719,730  shares  of  our  common  stock  to
shareholders  of Hong Yuen  Aquatic  Products,  Inc.  for a 22% interest in that
enterprise.  The value of the  common  stock  issued  was $.70 per  share  which
approximated the fair value of the common stock on January 1, 2007.
```

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The issuance of the 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 us and our 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.

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. 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.
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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
```

```
 
```

----

```

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.  We 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 share based payments
issued subsequent to January 1, 2006 have been 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      

Results of Operations

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Revenues

Revenues  increased by  $5,685,138  or 24.7% to  $28,718,103  for the year ended
December 31, 2006 from  $23,032,965  for the year ended  December 31, 2005.  The
increase was primarily due to the  inclusions of E-Sea's  operations  for a full
year  increase  of  $7,544,825,  an  increase  in the  sale  of roll  mutton  of
$3,263,973,  an increase in embryo transfer  services of $914,215 and land lease
revenue of $289,405.  These increases were partially  offset by decreases in the
sale of lamb meat of $133,929  in the sale of sheep of $234,155 in sheep  embryo
transfers  of  $1,872,419  and  in  the  sale  of  cattle  embryo  transfers  of
$4,086,776.

The following  chart  illustrates  the charges by category  from the  year-ended
December 31, 2005 to December 31, 2006.

Category                        2006            2005            Difference
---------                      ------          ------          -------------
Lamb meat                    $3,641,995       $3,775,924         $(133,929)
Cattle embryo transfers       5,261,912        9,348,688        (4,086,776)
Sheep embryo transfers                0        1,872,419        (1,872,419)
Sheep                                 0          234,155          (234,155)
Embryo transfer services      1,353,063          438,848           914,215
Roll mutton                   9,433,229        6,169,256         3,263,973
Land lease                      289,405                0           289,405
E-Sea                         8,738,499        1,193,674         7,544,825
                           -------------     -------------    -------------
Totals                      $28,718,103      $23,032,964        $5,685,139
                           =============     =============    =============

Cost of Sales

Cost of sales  increased by  $2,956,881  or 18.92% to  $18,584,881  for the year
ended December 31, 2006 from  $15,628,000  for the year ended December 31, 2005.
The increase in cost of sales is  attributable to an increase in embryo transfer
service of $874.601, in the cost of roll mutton of $3,037,033 and in the cost of
E-Sea  products of $2,606,370  which were  partially  offset by decreases in the
cost of lamb meat of $108,145,  in cattle embryo transfer costs of $2,633,623 in
sheep  embryo  transfer  costs  of  $715,644  and in the  purchase  of  sheep of
$292,566.

The following  chart  illustrates  the changes by category  from the  year-ended
December 31, 2005 to December 31, 2006.

Category                        2006            2005            Difference
---------                      ------          ------          ------------
Lamb meat                    $2,555,786       $2,663,931        $(108,145)
Cattle embryo transfers       3,829,419        6,463,042       (2,633,623)
Sheep embryo transfers                0          715,644         (715,644)
Sheep                                 0          292,566         (292,566)
Embryo transfer services      1,240,308          365,707          874,601
Roll mutton                   7,681,389        4,644,356        3,037,033
Feeding Fee                     191,809                0          191,809
E-Sea                         3,085,532          482,754        2,602,778
                             -----------     -------------   -------------
Totals                      $18,584,243      $15,628,000        2,956,243

These gross profit by category is as follows:

                                Years-ended December 31,
Category                     2006                       2005
---------                   ------                     ------
Lamb meat                  29.8%                        29.4%
Cattle embryo transfers    27.2%                        30.9%
Embryo transfer service     8.3%                        16.7%
Roll mutton                18.6%                        24.7%
E-Sea                      64.7%                        59.9%

Depreciation and Amortization

Depreciation  and amortization  increased by $228,807 or approximately  27.2% to
$1,069,602  for 2006 from  $840,795  for 2005.  The increase  resulted  from the
acquisition of additional depreciable assets as a result of the inclusion of the
operations  of E-Sea for a full  year as  opposed  to three  months in the prior
year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $1,715,938 or 73.0% to
$4,066,494  for 2006 as compared to  $2,350,556  during 2005.  This  increase is
primarily due to an increase in salaries of $521,543 was due to the inclusion of
the E-Sea  salaries for an entire year as opposed to one quarter as in 2005, and
small increase in the salaries of existing  personnel,  an increase in marketing
fees of  $328,095,  principally  for the  marketing of E-Sea  equipment,  and an
increase in other general and administrative  expenses of 1,197,336  principally
from management  expenses,  travel,  and  advertising and public  relations fees
which was partially offset by a decreae of $306,287 in professional fees.

Other Income (Expense)

Other income (expense)  increased by $532,217 from an expense of 92,521 for 2005
to income of $439,696 for 2006. The change resulted from a derivative  valuation
charge  of  $245,172  for 2005  compared  to a  derivative  valuation  charge of
$191,746 for 2006.  During 2005,  we had a gain on the sale of assets,  $18,889.
There was no sale of assets in 2006.  For the  year-ended  December 31, 2005, we
had interest  income of $188,519 and interest  expense of $54,761.  For the year
ended December 31, 2006 we had interest income of $180,421,  no interest expense
and investment income of $451,021.
 Income Taxes

Our  provision  for  income  taxes  increased  from  $70,358  for the year ended
December  31,  2005 to  $555,792  for the year ended  December  31,  2006.  This
increase is attributable  to the increased  contribution to earnings of the E-Sea
operations.  Our  agricultural  operations  are exempt from  taxation.  Only the
income of E-Sea is subject to tax.As a result fo the foregoing,  our earnings  increased by $830,937 or
20.5% to $4,881,668 for the year-ended December 31, 2006 from $4,050,731 for the
year ended  December 31, 2005.

Liquidity and Capital Resources

As of December  31,  2006,  we had cash of  $16,024,123  and working  capital of
$41,864,137  compared to cash of $18,224,488  and working capital of $33,710,276
at December 31, 2005. We also had  short-term  investments  of $15,360,176 as of
December 31, 2006. This compares with short-term investments of $9,909,084 as of
December  31, 2005.  The  short-term  investments  are  somewhat  equivalent  to
American  certificates  of  deposit,  but  because of Chinese  regulations,  are
offered by investment  companies as opposed to banking who are by regulation are
limited in such offerings.
Cash  provided by operating  activities  totaled  $1,589,842 for the year ended
December 31, 2006.  This compares with cash provided by operating  activities of
$237,023 for the year ended  December 31, 2005.  The increase in cash flows from
operations  primarily  resulted from an increase in net income and  depreciation
which were partially  offset by decreases in non-cash  charges such as a smaller
change in the value of derivatives and changes in the current account.

Cash  used by  investing  activities  during  2006 was  $6,165,656  compared  to
$11,560,446 of cash used in investing activities during 2005. For the year ended
December 31, 2006, the amounts used in investing  activities  were from advances
of $511,673,  short-term investments of $5,116,726,  and the purchase of patents
of $537,257.  This compares with $9,909,084 of short-term investments during the
year ended  December 31, 2005. In the prior period we also  expended  $1,225,759
for the purchase of property and  equipment,  $810,858 for the purchase of E-Sea
and received $321,782 from the sale of a patent.
                                       10     

Cash flows from  financing  activities  totaled  $1,200,000 for 2006 compared to
$1,410,399 for 2005. All cash flows from financing activities for 2006 were from
the sale of our common  stock.  For 2005,  we 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, 2006,  we had notes  payable of $443,366  that were 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.  We disputed the validity of the
notes. See Note 8 of our Consolidated Financial Statements under Item 7.

During  the  year-ended   December  31,  2005,  we recorded  capital
contributions  of $410,399, the equivalent of $79,500 in our common shares by a
third party to our public  relations firm for their services and $330,899 of net
proceeds from the sale of shares  contributed by management was used to pay U.S.
operating  expenses.  During  the year ended  December  31,  2006,  there was no
contributed capital.

Although  we  have a cash  and  cash  equivalents  balance  of  $16,024,123  and
short-term investments of $15,350,175,  management believes that the best return
for such cash and short-term  investments is in the People's  Republic of China.
Therefore,  if we are to expand outside the PRC, as we anticipate doing, we will
have to sell additional  shares of our stock or borrow funds from third parties.
However,  because of the loosening of currency  restrictions  in the PRC, we can
pay our  non-PRC  obligations  from  funds held in China.  Therefore,  in the
opinion of management,  we have sufficient funds to carry out our 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  in  Shenzhen  and  Tianjin  as well as the
manufacturing facility in Shenzhen.The following table details our contractual obligations as of December 31, 2006:

                                -----------------------------------------------
                                            Payments Due by Period
                                ---------- ------------ ----------- -----------
                                   Total       2007        2008       Thereafter
                                  -------     ------      ------     -----------
Operating lease commitments     $ 100,596    $ 51,744    $ 48,852            -

Off-Balance Sheet Arrangements

We  had  no  off-balance  sheet   arrangements  or  guarantees  of  third  party
obligations at December 31, 2006.

Inflation

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

Outlook

For calendar year 2007, we will focus on three areas:

1.     Acquiring a turtle breeding facility, mango farms and a
       lychee farm.  In addition we may acquire a manufacturer of video
       equipment.
2.     A possible acquisition to compliment or expand the operations of E-Sea.
3.     Bring the E-Sea diagnostic equipment to the USA for FDA approval and
       potential eventual sale.

If we are successful in  implementing  this strategy it should  increase
both our revenues and profit margins.

                                       11     

ITEM 7.  FINANCIAL STATEMENTS

                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

     Report  of Independent Registered Public Accounting Firm            13

     Consolidated Balance Sheets as of December 31, 2006 and 2005        14

     Consolidated Statements of Income for the years ended
        December 31, 2006 and 2005                                       15

     Consolidated Statements of Changes in Shareholders' Equity for the
        for the years ended December 31, 2006 and 2005                   16

     Consolidated Statements of Cash Flows for the years ended
        December 31, 2006 and 2005                                       17

     Notes to Consolidated Financial Statements                       18-33

                                       12     

             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, 2006 and 2005, and
the related  consolidated  statements of  operations,  changes in  shareholders'
equity, and cash flows for the years 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, 2006 and 2005, and the results
of their  operations and their cash flows for the years 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
March 30, 2007

                                       13     

                ETERNAL TECHNOLOGIES GROUP INC.AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
             FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005

                                                                           2006                  2005
     ASSETS
     Current assets:
     Cash and cash equivalents                                          $ 16,024,123         $ 18,224,488
     Short-term investment                                                15,350,176            9,909,084
     Accounts receivable                                                   6,790,534            7,137,018
     Inventories                                                           5,358,213              135,341
     Prepayments and deposits                                                200,705              257,624
                                                                         ------------         ------------
     Total current assets                                                 43,723,751           35,663,555

     Advances to distributors                                              1,048,929              520,227
     Property and equipment, net                                           6,882,175            7,317,502
     Land use rights, net                                                  4,722,362            4,828,051
     Intangible assets                                                     1,688,520            1,263,409
                                                                         ------------         ------------
     Total assets                                                       $ 58,065,737         $ 49,592,744
                                                                         ============         ============
     LIABILITIES AND SHAREHOLDERS' EQUITY
     Current liabilities:
     Notes payable                                                         $ 443,366            $ 443,366
     Accounts payable and accrued liabilities                                532,037              706,717
     Amounts due to related parties                                          216,175              240,368
     Income taxes payable                                                    229,680
     Derivative financial instrument liabilities                             438,356              562,830
                                                                          ------------         ------------
     Total current liabilities                                             1,859,614            1,953,281
                                                                          ------------         ------------
     Commitments and contingencies     Shareholders' equity:
     Preferred Stock, $.001 par value, 5,000,000 shares authorized,
     no shares outstanding                                                         -                    -
     Common stock - $0.001 par value, 95,000,000 shares authorized,
     43,567,300 and 39,854,026 shares issued and outstanding
     at December 31, 2006 and 2005, respectively                              43,566               39,854
     Additional paid-in capital                                           14,931,218           13,217,874
     Stock subscription receivable                                           (10,176)             (10,176)
     Retained earnings                                                    38,097,409           33,215,741
     Accumulated other comprehensive income                                3,144,106            1,176,170
                                                                          ------------         ------------
     Total shareholders' equity                                           56,206,123           47,639,463
                                                                          ------------         ------------
     Total liabilities and shareholders' equity                         $ 58,065,737         $ 49,592,744
                                                                          ============         ============

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

                                       14     

                ETERNAL TECHNOLOGIES GROUP INC AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
             FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
                           (UNITED STATES DOLLARS)

                                                                         2006               2005
                                                                        ------             -------

      Sales                                                         $ 28,718,103       $ 23,032,965

      Cost of sales                                                   18,584,243         15,628,000
                                                                     ------------       ------------
      Gross profit                                                    10,133,860          7,404,965

      Selling, general and administrative expenses                     4,066,494          2,350,556
      Depreciation and amortization                                    1,069,602            840,795
                                                                     ------------       ------------
      Income from operations                                           4,997,764          4,213,614
                                                                     ------------       ------------
      Other income and (expenses):

      Gain on sale of asset                                                    -             18,889

      Interest and Investment income                                     631,442            188,519

      Interest expense                                                         -            (54,761)

      Change in value of derivative financial instruments               (191,746)          (245,172)
                                                                     ------------       ------------

      Total other income and expenses, net                               439,696            (92,525)
                                                                     ------------       ------------
      Income before provision for income taxes                         5,437,460          4,121,089

      Provision for income taxes                                         555,792             70,358
                                                                     ------------       ------------

      Net income                                                     $ 4,881,668        $ 4,050,731
                                                                     ============       ============
      Net income per common share

      Basic and diluted                                                   $ 0.11             $ 0.12
                                                                     ============       ============
      Weighted average number of common shares outstanding

      Basic                                                           43,567,300         33,253,761
                                                                     ============       ============
      Diluted                                                         43,801,540         33,275,289
                                                                     ============       ============

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

                                       15        

                       ETERNAL TECHNOLOGIES GROUP, INC.
           CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                 For the Years Ended December 31, 2006 and 2005
                       (Amounts in United States Dollars)

                                                              Additional        Stock                        Other
                                 Common Stock                  Paid-In       Subscription    Retained      Comprehensive
                                    Shares       Amount        Capital        Receivable     Earnings       Income          Total
                                --------------  --------     ------------   ------------   ----------    --------------   -------

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 under
the 2005 Option Plan              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

Net Income                                -            -               -           -       4,881,668               -       4,881,668                  --------   
Foreign currency translation adjustment   -            -               -           -               -      1,967,936        1,967,936

Other comprehensive income                                                                                                 6,849,604
Common stock issued for cash      3,000,000        3,000       1,197,000           -               -              -        1,200,000
Loss on issuance of common
stock                                     -            -          97,721           -               -              -           97,721
Common stock issued for
  conversion of convertible
  notes                             713,274          712         418,623           -               -               -         419,335
                                 -----------    ---------    ------------    ---------    -----------    -----------     -----------
Balance at December 31, 2006     43,567,300   $   43,566    $ 14,931,218    $(10,176)   $ 38,097,409    $ 3,144,106    $  56,206,123
                                 ===========    =========    ============    =========    ===========    ===========     ===========

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

                                       16     

                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
                             (UNITED STATES DOLLARS)

                                                                     2006           2005
                                                             ---------------    --------------

Cash Flows From Operating Activities
     Net income                                               $  4,881,668      $  4,050,731
     Adjustments to reconcile net income to net cash
        provided by operating activities:
        Depreciation and amortization                            1,069,602           840,795
        Gain on sale of asset                                            -           (18,889)
        Derivative valuation adjustment                            191,746           245,172
        Compensatory stock issuances                                97,721           439,613
        Changes in operating assets and liabilities:
            Inventories                                         (5,218,442)          493,356
            Accounts receivable                                    580,109        (4,988,866)
            Accounts payable to related parties                    (32,061)          (38,028)
            Prepaid expenses and deposits                           65,352          (137,156)
            Accounts payable and accrued expenses                  (45,853)         (649,705)
                                                               -------------     ------------
               Net cash provided by operating activities       $  1,589,842          237,023
                                                               -------------     ------------
Cash Flows From Investing Activities
     Purchase of short-term investments                         (5,116,726)       (9,909,084)
     Purchase of property and equipment                                  -        (1,225,759)
     Purchase of E-Sea                                                   -          (810,858)
     Proceeds from sale of patent                                        -           321,782
```

```
     Purchase of patent                                      (537,257)               -
     Advances to Distributors                                     (511,673)               -
                                                               ------------      ------------
                Net cash used in investing activities          $(6,165,656)      (11,623,919)
                                                               ------------      ------------

Cash Flows From Financing Activities
     Proceeds from sale of common stock                          1,200,000         1,000,000
     Capital contributed                                                 -           410,399
                                                               ------------      -----------
               Net cash provided by financing activities         1,200,000         1,410,399
                                                               ------------      -----------
Effect of exchange rate changes on cash                          1,175,449           727,631
                                                               ------------      -----------
Net decrease in cash and cash equivalents                     (2,200,365)       (9,248,866)

Cash and cash equivalents at beginning of year                  18,224,488        27,473,354
                                                               ------------      -----------
Cash and cash equivalents at end of year                        16,024,123        18,224,488
                                                               ============      ===========

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

                                       17
```

```
 
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```

                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
transplant  embryos  and to  propagate  quality  sheep meat and other  livestock
breeds in Inner Mongolia.  During the year ended December 31, 2005, this facilitywas leased to a Chinese company that intends to raise a fast-growing type of treeto meet the growing demand for lumber and paper in the PRC.
```

```
E-Sea Biomedical  Engineering Co.  International Ltd. ("E-Sea") was incorporated
on October 20, 2004 under the laws of the British Virgin Islands. E-Sea owns all
of the issued  and  outstanding  stock of E-Sea  Shenzhen,  which  owns  various
Chinese  patents for medical  technology.  E-Sea was acquired as of the close of
business on September  30, 2005 for  5,709,875  shares of the  Company's  common
stock,  valued at $.40 which was the  closing  price of the stock as of the date
the  transaction  was  negotiated,  and  $2,283,950 in cash.  See Note 16 of our
Consolidated financial statements.
```

```
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.

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.

                                       18
```

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

3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES, continued

Accounts Receivable and Allowance for Doubtful Accounts

The allowance for doubtful accounts is the Company's best estimate of the amount
of  uncollectible  amounts  in  its  existing  accounts  receivable.  Management
analyzes  historical  collection  trends  and  changes in its  customer  payment
patterns when  evaluating  the adequacy of its allowance for doubtful  accounts.
The Company  reviews its  allowance  for  doubtful  accounts  annually.  Account
balances deemed uncollectible are charged off against the allowance for doubtful
accounts.  At December 31, 2006 and 2005 the allowance for doubtful accounts was
$0.

Inventory
```

```
Inventories  are  measured  at lower of cost or net  realizable  value using the
first-in first-out ("FIFO") formula. 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:

     Office Equipment                                                   5 years
     Infrastructure in Inner Mongolia                                   5 years
     Buildings                                                         25 years
     Equipment                                                          5 years
     Cows                                                               5 years
     Other                                                              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.  When such events and  circumstances  exist, the Company
compares  the  projected  undiscounted  future  cash flows  associated  with the
related asset or group of assets over their estimated useful lives against their
respective carrying amounts.  Impairment,  if any, is based on the excess of the
carrying  amount  over the fair  value of those  assets and is  recorded  in the
period in which the determination was made.

Land lease rights and amortization

Land lease rights in Mainland  China are stated at the amount of the  prepayment
less accumulated  amortization.  Amortization of land lease rights is 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  US$6,000,000  and such rights extend
through  2026.  The Company has the option to renew the land lease rights for an
additional  25 years at a cost of  $6,000,000.  The farm is  located  in Wulagai
Development Area in Inner Mongolia.
```

```
Amortization  expense  during  2006  and  2005  was  $258,300 and  $251,328,
respectively.

Intangible Assets

In accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No.142, "Goodwill and Other Intangible Assets," 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.  When such events and  circumstances  exist, the Company
compares  the  projected  undiscounted  future  cash flows  associated  with the
related asset or group of assets over their estimated useful lives against their
respective carrying amounts.  Impairment,  if any, is based on the excess of the
carrying  amount  over the fair  value of those  assets and is  recorded  in the
period in which the determination was made.

                                       19
```

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

3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES, continued

Income taxes

Income  taxes are  accounted  for in  accordance  with  Statement  of  Financial
Accounting  Standard  No.109,  "Accounting  for Income  Taxes".  This  Statement
prescribes  the use of the  liability  method  whereby  deferred  tax  asset and
liability account balances are determined based on differences between financial
reporting  and tax bases of assets and  liabilities  and are measured  using the
enacted  tax rates and laws that  will be in  effect  when the  differences  are
expected to reverse. Deferred tax assets are subject to tests of recoverability.
A valuation  allowance  is provided  for such  deferred tax assets to the extent
realization is not judged to be more likely than not.

Foreign currency translation

The Company's reporting currency is the United States of America Dollar ("USD").
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, 2006 and 2005 of 7.82 and 8.07  RMB/US$,
respectively.  The income  statement has been  translated at the average rate of
exchange  in effect  during the year of 7.98  RMB/US$  and 8.20  RMB/US$ for the
years ended December 31, 2006 and 2005, 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, 2006 or 2005 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.

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

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  inthe  financial   statements.   With  limited
exeptions,  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 reported. Compensation cost
will be  recognized  over the  perioed  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.  The Company adopted SFAS 123(R) effective January 1,
2006, using the modified  prospective  method. This method applis 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 stock based payments
issued subsequent to January 1, 2006 will be accounted for under SFAS 123(R).
```

```
                                       20
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                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  programs 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.

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.

                                       21
```

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                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.

Basic  earnings per share is computed by dividing net
income available to common shareholders by the weighted-average number of common
shares assumed to be outstanding  during the period.  Diluted earnings per share
includes the weighted average number of common shares outstanding and the number
of  equivalent  shares  which would be issued  related to the stock  options and
warrants  using  the  treasury  method,   contingently   issuance  shares,   and
convertible   preferred  stock  using  the  if-converted  method,   unless  such
additional equivalent shares are anti-dilutive.

Earnings Per Share

The following table presents the calculation of basic and diluted net income per
share:

                                                          2006            2005
                                                         ------          ------
Net income                                            $4,881,668       $4,050,731
Basic:
Weighted-average shares of common stock outstanding   43,567,300       33,253,761                                            ------------     ------------
Shares used in computing basic net income per share   43,567,300       33,253,761
                                                     ------------     ------------
Effect of dilutive securities:
Warrants                                                 234,240           21,528
                                                     ------------     ------------
Shares used in computing diluted net income per share 43,801,540       33,276,289
                                                     ------------     ------------
Basic and diluted net income per share               $      0.11      $      0.12
                                                     ============     ============
FAIR VALUE OF FINANCIAL INSTRUMENTS

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

The Company  includes fair value  information  in the notes to the  consolidated
financial  statements  when  the  fair  value of its  financial  instruments  is
different from the book value.  When the book value  approximates fair value, no
additional disclosure is made. 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.

                                       22
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                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. INVENTORIES

Inventories consists of the following at December 31 2006 and 2005:

                                                2006         2005
                                             ----------   ----------

     Sheep and cow embryos                   $5,004,029    $  12,882
     Scanners                                   353,409            -
      Raw materials                                 775      122,459
                                             -----------   ---------
         Total inventories                   $5,358,213    $ 135,341
                                             ===========   =========

                                       23
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                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.  PROPERTY AND EQUIPMENT

Fixed assets are comprised of the following at December 31 2006 and 2005:

                                                      2006            2005
                                                  ------------   -------------

     Office equipment in the United States        $  40,761         $40,761
     Infrastructure                                 240,486         232,863
     Building                                     6,629,979       6,419,830
     Equipment                                    1,929,662       1,868,498
     Cows                                         1,319,706       1,277,875
     Other                                          665,174         644,090
                                                 -----------     -----------

        Total property and equipment             10,825,768      10,483,917
                                                 -----------     -----------
        Less accumulated depreciation            (3,943,593)     (3,166,415)
                                                 -----------     -----------
                                                 $6,882,175      $7,317,502
                                                 ===========     ===========

Depreciation   expense   during  2006  and  2005  was  $660,962 and $552,236,
respectively.

6.  INTANGIBLE ASSETS

The Company's identifiable  intangible assets are as follows at December
31, 2006 and 2005:

                                                2006          2005
                                              --------      ---------

     Intangibles in service at year end:
     Patented dialysis technology         $ 1,535,018      $ 1,331,040
     Less accumulated amortization           (383,754)         (67,631)
                                            ----------       ----------
                                            1,151,264        1,263,409

     Intangibles not in service at year end:
     Patented microwave therapy devise    $   191,877      $         -
     Breast tumor testing technology/
     software                                 345,379                -
                                            ----------       ----------
                                              537,256                -

     Total intangible assets              $ 1,688,520      $ 1,263,409
                                            ==========       ==========
```

```
Amortization  expense during 2006 and 2005 for those assets that were in service
was $150,340 and  $37,159,  respectively.  The  estimated  amortization  expense
related to identifiable intangible assets for the next five years is as follows:
      Year
     -------
       2007                      $     150,340
       2008                            150,340
       2009                            150,340
       2010                            150,340
       2011                            150,340
     Thereafter                        399,564
                                 -------------
                              $   1,151,264
                                 ==============

The weighted average  amortization  period for the intangible assets is 10 years
based on an appraisal performed by an independent appraisal firm in China.

                                       24    
                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. NOTES PAYABLE

Notes payable consist of the following at December 31, 2006 and 2005:

     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
```

```

     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
                                                       ----------
                                                       $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  ceased accruing  interest  effective
October 1, 2004 and at  December  31,  2006 and 2005 the notes  payable  were in
default.   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 18 of our Consolidated Financial Statements.

8. 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 Option Plan

In 2005,  the  Company  adopted the 2005 Stock  Option  Plan (the "2005  Plan"),
approved by  shareholders on September 20, 2005. The purpose of the 2005 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.

                                       25
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                ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. 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 2005 Plan is 2,500,000 shares in options to purchase and
a maximum of 560,000  shares in direct stock grants.  Shares  issuable under the
2005 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.The Company adopted the 2006 Stock Option Plan on October 12, 2006. The
maximum  number of shares of common  stock with  respect to which  awards may be
granted pursuant to this plan is 3,000,000 all of which have been awarded.
```

```
 Shares Issuable Under           Weighted Average
                                Outstanding Options             Exercise Price
                                ---------------------          -------------------
Options outstanding at 1/1/05              -                              -
Options granted                    2,500,000                           $.48
Options exercised                  2,500,000                           $.48
Options cancelled                          -                              -
                                  -------------                     ----------
Options outstanding at 12/31/05            -                              -
Options granted                    3,000,000                           $.40
Options exercised                  3,000,000                           $.40
Options cancelled                          -                              -
                                  -------------                     ----------
Options outstanding at 12/31/06            -                              -
                                  =============                     ==========
```

```
9. INCOME TAXES

The Company operates in several jurisdictions and may be subject to taxation in
those jurisdictions.

It is  management's  intention  to reinvest all the income  attributable  to the
Company  earned by its  operations  outside  of the  United  States of  America.
Accordingly,  no United  States  corporate  taxes  have been  provided  in these
consolidated  financial  statements.  The Company has a U.S. net operating  loss
carry  forward  of  $2,087,859  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, 2006.  The Company's net operating  loss carry  forwards
may  be  subject  to  annual  limitations,  which  could  reduce  or  defer  the
utilization  of the  losses as a result of an  ownership  change as  defined  in
section 382 of the Internal Revenue Code.

Under current law of the British Virgin Islands (BVI), any dividends and capital
gains  arising from the Company's  investments  are not subject to income tax in
the British Virgin Islands.

Companies  with  operations  in the Peoples  Republic of China may be subject to
taxes for income  therein.  The Income Tax Law of the Peoples  Republic of China
for Enterprises with Foreign Investment and Foreign  Enterprises provides certain
exemptions from taxation.
```

```
Under current PRC law, all taxes on agriculture have been eliminated. Previously
(from  July,  2000  through  2005)  Aershan  enjoyed a tax  holiday.  Therefore,
Aershan's business activities are not and have not been subject to tax.

The tax holiday resulted in tax savings of $968,866 and $1,404,098 for the years
ended December 31, 2006 and 2005  respectively.  Net income per share  increased
approximately  $0.02 and $0.05 on a basic and diluted  basis for the years ended
December 31, 2006 and 2005, respectively, as a result of the tax holiday.

E-Sea is subject to Enterprise Income Tax at the PRC rate of 15% on net profits.
The  provisions  for taxes on  earnings  of the PRC  subsidiary  for the periods
ending December 31, 2006 and 2005 were $555,792 and $70,358, respectively.

                                       26

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

9. INCOME TAXES, continued

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

                                          2006                                2005
                               -----------------------------     ------------------------------
                                    Amount         Percent            Amount          Percent
                               ---------------    ----------     ---------------     ----------

     Income taxes at federal
        statutory rate           $  1,659,767         34%         $  1,377,249          34%
     Effect of United States
        and British Virgin
        Island losses                 317,205          6%              267,552           7%
     Income tax exemption in
        the Peoples Republic
        of China                     (968,866)       (20%)          (1,404,098)       (35)%
     Difference in United
        States and foreign
        rates                        (452,314)        (9%)            (170,345)        (4)%

                                --------------     ----------     --------------   ----------
        Income tax expense          $ 555,792         11%         $     70,358          2%
                                ==============     ==========     ==============   ==========

10. 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.

                                       27

       

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

```
11.  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, 2006, the balance of the  convertible  notes was $0. This
balance is considered in the derivative financial instrument  liabilities in the
accompanying  balance sheet.  The total amount of penalties  settled through the
issuance of shares was $356,419.

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.

                                       28
```

----

```

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

11.  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.

12. 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.

The Company has a payable to Ji Jun Wu, Chairman of the Board, of  approximately
$50,516  and $50,708 at December  31, 2006 and 2005,  respectively.  The balance
represents advances made to the Company for various expenses in previous years.

The Company has a payable to a former  employee of  approximately  $165,659  and
$166,287 at December  31, 2006 and 2005,  respectively.  The balance  represents
advances made to the Company for various  expenses in previous years. The change
in the balance is due to foreign currency translation.        
```

```
13. 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.

                        2006       2005
                      --------    --------

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

Company A               42%         37%
Company B               23%         24%
Company C               10%          0%

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

Company E              15%          27%
Company F              18%          26%
Company G              23%           0%

14. ACQUISITION OF E-SEA BIOMEDICAL ENGINEERING CO. INTERNATIONAL LTD.
```

```
On  September  30,  2005,  the Company  acquired  certain  assets from E-Sea for
5,709,876  shares of the  Company's  common  stock,  (by  agreement  between the
parties valued at $.40 per share)  representing  approximately  14% of the total
shares outstanding as of October 1, 2005 and $18,500,000 RMB.
E-Sea, a British Virgin Island company was incorporated on October 20, 2004 with
limited  liability.  E-Sea 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.

There were no related party transactions in 2006 and 2005.

The operating results of E-Sea have been included in the Company's  consolidated
financial statements for the years ended December 31, 2005 and 2006. 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.

                                     29

     

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

14.  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.

15.  COMMITMENTS AND CONTINGENCIES

The  administrative  offices in Tianjin occupy  approximately 97.8 square meters
(approximately  1,053 square feet) in a commercial  building.  The Company rents
this facility under a two-year lease, running through March 31, 2007, at $964
per month.  The  administrative  office in Shenzhen  occupies  approximately  150
square meters  (approximately 1,585 square feet) in a high rise office building.
We rented  this  facility  under a two year  lease  running  through
December 31, 2008 at 11,749RMB (approximately US$1,506 per month).

The leased facility of E-Sea in Shenzhen is an 865 square meters  (approximately
9,310 square feet) facility containing  machinery for the manufacture of medical
equipment,  administrative  offices,  and storage space for raw  materials.  The
lease  expires on December 31, 2008 and requires  monthly  payments of 20,000RMB
(approximately US$2,565).

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 2026. The Company has the
option  to renew the land use  rights  for an  additional  25 years at a cost of
US$6,000,000.  The The farm is located in the Wulagai  Development Area in Inner
Mongolia.
Legal Proceedings

As of March 15,  2007,  the  Company  was a party to a single  legal  proceeding
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. As a result of this motion,
the case was  transferred  to the  Federal  Court for the  Southern  District of
Texas. The case is scheduled for trial in May, 2007.

                                       30

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

15.  COMMITMENTS AND CONTINGENCIES, continued

At December 31, 2006, 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.
The Company believes that it is reasonably possible that it
will prevail in this litigation.

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, 2006 and 2005,  the Company has accrued  expenses
for penalties of $0 and $26,074, respectively.

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 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, 2006:

      Year
     -------
      2007                       $      51,744
      2008                              48,852
                           ------------------
     Total                       $     100,596
                                 ==================

Rent expense under operating  lease  obligations was $94,141 for the years ended
December 31, 2006 $11,807 for the year ended 2005, respectively.

                                       31
```

----

```
 
```

```
16.  LEASE INCOME

In April 2000, the Company  purchased the land use rights for a 2.8 million acre
farm in Inner Mongolia,  PRC from the Chinese government for USD$6,000,000.  The
Company's  land use rights extend  through 2026. At December 31, 2006,  the land
use rights, net of accumulated depreciation, were USD$4,722,363.

In April 2006,  the Company  entered into a lease  agreement  with a third-party
("lessee") whereby the lessee may use approximately 104 square kilometers of the
land, including the facilities located on the land, such as the plant for embryo
transfer,  all livestock,  equipment,  roads and  energy-supplying  systems. The
lease  began May 1, 2006 and  terminates  April 30,  2026.  The lessee  pays the
Company an annual rate of 4,620,000 RMB (or approximately  USD$578,810) on April
1st and October 1st of each year.  Rental income for the year ended December 31,
2006 was  USD$289,405  and has been  classified in Sales.  Future  minimum lease
income is as follows:

                                                  Lease
                                                  Income
                                                  (USD)

         2007                                  $   578,810
         2008                                      578,810
         2009                                      578,810
         2010                                      578,810
         2011                                      578,810
         Thereafter                              8,296,281
                                               ------------

                                               $11,190,331

17. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

                                                                    2006          2005
                                                                  -------        ------

Convertible notes converted into common stock                    $      -      $  356,419

In addition to the items listed  above,  See Note 14  regarding  the purchase of
E-Sea.

                                       32

   

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

18. 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 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 equipment. 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 equipment 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:

                                    Agricultural         Medical
                                      Genetics           Equipment           Corporate              Total
                                   ----------------    --------------      --------------     -------------
                2006
--------------------------------
Revenues                            $19,979,604        $8,738,499           $       -         $28,718,103
Income from operations                2,610,687         3,308,948            (921,871)          4,997,764
Depreciation and amortization           795,384           274,218                   -           1,069,602
Total assets                         49,767,525         8,247,087              51,125          58,065,737

                                    Agricultural         Medical
                                      Genetics           Devices            Corporate              Total
                                   ----------------    --------------      --------------     -------------
                2005
--------------------------------

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

                                       33

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

   None
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.

                                   34

   Our  independent  registered  public  accounting  firm,  Ham Langston & Brezina,
L.L.P. ("HLB") conducted an audit of our financial statements for 2006 and 2005.
In  connection  with the issuance of its report to the Board of  Directors,  HLB
reported two  material  weaknesses  under  standards  established  by the Public
Company  Accounting  Oversight  Board  regarding  some elements of our system of
internal controls. They noted the following specific material deficiencies.
(i)  We lacked the required expertise needed to properly account for non-routine
     transactions,  (such as the acquisition of other businesses and preparation
     of  its  required  financial   statement   disclosure  in  accordance  with
     U.S. GAAP. and SEC rules and regulations.
(ii) Accounting for derivative instruments under FASB 133

To address the weakness, we have hired an independent  accounting firm to assist
with accounting for derivatives and will seek outside  accounting  assistance on
any further acquisition.

Our Evaluation of Disclosure Controls and Procedures

Management is responsible for  establishing  and maintaining  adequate  internal
control over financial  reporting for the Company.  In  furtherance,  thereof we
carried out an evaluation  under the supervision and with the  participation  of
our management,  including our CEO and our CFO, as to the effectiveness,  design
and  operation  of our  disclosure  controls and  procedures,  as defined by the
Securitities  Exchange Act of 1934, as amended.  This evaluation  considered the
various  processes  carried out under the direction of our board of directors in
an effort to ensure that information required to be disclosed in the SEC reports
we file or submit under the Exchange Act is accurate, complete and timely.

Based on the results of this evaluation, and with the changes outlined above our
CEO and CFO concluded that our disclosure controls and procedures were effective
as of December 31, 2006.

This  annual  report  does not include an  attestation  report of the  Company's
registered  public  accounting  firm regarding  internal  control over financial
reporting.  Management's  report was not subject to attestation by the Company's
registered  public accounting firm pursuant to temporary rules of the Securities
& Exchange  Commission  that  permit the  Company to provide  only  management's
report in this annual report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal  control over financial  reporting  (other
than  assistance  from third party firms) that have  materially  affected or are
reasonably  likely to  materially  affect our internal  control  over  financial
reporting during the fourth quarter 2006.

                                  35

   

ITEM 8B. OTHER INFORMATION

None

                                    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       70      Chairman of the Board of Directors
         Jiansheng Wei  54      President, Chief Executive Officer and Director
         Shien Zhu      50      Director
         Genchang Li    67      Director
         Shicheng Fu    43      Director
         Yuguo Chang    39      Director
         Mika Zhang     32      Director
         Rui Zhai       39      Secretary
         Shen Zheng     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 at Nankai  University since 1985. He has participated
in international academic exchanges since 1998.

                                       36

   
Yuguo Chang has been  associated  with the Company  since 2002 and is  currently
serving as an  assistant  to the  Chairman in planning  corporate  strategy  and
coordinating company operations.  Prior to joining the Company, Mr. Chang served
in a similar  capacity with several state owned industries in the PRC. Mr. Chang
holds a  Bachelor  of Arts  degree  from  Tianjin  Advanced  Science  Technology
Institute where he studied enterprise management and investment strategy.

Mika Zhang holds a Bachelor of Arts degree from Jilian  University in China. For
the past  three  years,  she has  served as the Chief  Executive  Officer of P&P
Canada, a distribution  company in Canada. For the five years prior, she was the
marketing manager of Sumjin International, Inc., a Korean company engaged in the
manufacturing and production of restaurant equipment.

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,  2006 of each  person  who  served as the
Company's  Chief  Executive  Officer  during fiscal 2006 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, 2006 (the "Named Officers").

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

  JiJun Wu,      2006        102,600         -                -      30,000             -          -             -
  Chairman of    2005        100,000         -                -      80,000             -          -             -
  the Board      2004         20,000         -                -      80,000             -          -             -

Equity Compensation Plan Information

The maximum number of shares of Common Stock with respect to which awards may be
granted  pursuant to the 2006 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.

                                       37

   
Options granted under the 2006 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.

                                       38     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.

On October 12, 2006 the  shareholders  approved the Company's  2006 Stock Option
Plan.  This Plan is  identical to the 2004 and 2005 plan except that it provides
for the issuance of 3,000,000 shares.  The full number of options  authorized by
this plan have been issued.

The following  table gives  information  about equity awards under the Company's
existing plan as of December 31, 2006:

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

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
                                         ============================    =======================    ===========================

Employment Contracts

The Company has an employment  agreement with Zhai, Rui. This contract runs from
February 20, 2007 to February 19, 2008 and pays annual compensation of $60,000.

                                       39

   
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, 2006 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.

       Name and Address of Beneficial Owner (1)        Shares (2)     Percent of Class (2)
  ------------------------------------------------   ---------------  ---------------------

  Jijun Wu                                               1,780,000            3.78%
  Jiansheng Wei                                            683,000            1.45%
  Shien Zhu                                                 50,000               *
  Genchang Li                                               50,000               *
  Shicheng Fu                                               50,000               *
  Yuguo Cheng                                               30,000               *
  Mike Zhang                                               100,000               *
  Rui Zhai                                                  75,100               *
  Zheng Shen                                                30,000               *
  All executive officers and directors as a group       -----------         --------
  (9 persons)                                            2,848,100            6.54%

*........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 2006. 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 2006.

                                  40

   
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain Relationships and Transactions

There were no related party transactions in either 2005 or 2006.

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).

                                       41

   

          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

                                       42

   
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES

Fees Paid to Independent Public Accountants

The following table presents fees for  professional  audit services  rendered by
Ham  Langston &  Brezina,  LLP  ("HLB")  for the audit of the  Company's  annual
financial statements for the years ended December 31, 2006 and December 31, 2005
and fees  billed for other  services  rendered  by Ham  Langston & Brezina,  LLP
("HLB") during those periods.

                                  Fiscal 2006        Fiscal 2005
                                 --------------     -------------
          Audit fees (1)           $151,500             $ 144,331
          Audit related fees (2)     21,530                13,115
          Tax fees                                          4,869

          All other fees                  -                     -
                                  ----------           -----------
           Total                  $ 173,030             $ 162,315
                                  ==========           ===========

(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 Ham Langston
     Brezina LLP  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.
**Auditor's time on task**All of the work  expanded by HLB on our December 31, 2006 and 2005  auditors was
attributed to work performed by HLB's full-time, permanent employees

                                       43

   

                                   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:   March 30, 2007

                               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          March 30, 2007
JIJUN WU

/s/ JIANSHENG WEI       Chief Executive Officer and    March 30, 2007
JIANSHENG WEI           Director

/s/ GENCHANG LI         Director                       March 30, 2007
GENCHANG LI

/s/ SHICHANG FU         Director                       March 30, 2007
SHICHANG FU

/s/ SHIEN ZHU           Director                       March 30, 2007
SHIEN ZHU

/S/ YAQUO CHANG         Director                       March 30, 2007
YAQUO CHANG

/S/ MIKE ZHANG          Director                       March 30, 2007
MIKE ZHANG

                                                                             44

   
                                 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: March 30, 2007

/s/    JIANSHENG WEI

Jiansheng Wei
Chief Executive Officer

                                       45

   

                                                                   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: March 30, 2007

/s/   ZHENG SHEN

Zheng Shen
Chief Financial Officer

                                     46

   
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                                                                  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, 2006, 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: March 30, 2007

/s/    JIANSHENG WEI

Jiansheng Wei
Chief Executive Officer

                                            47

   
                                                                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 her knowledge:

(i)  the Annual Report on Form 10-KSB of the Company for the year ended December
     31, 2006, 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: March 30, 2007

/s/    Zheng Shen

Zheng Shen
Chief Financial Officer

                                       48
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