SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-KSB/A


Amendment
No. 1





(Mark
One)





[X]  ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF
      THE  SECURITIES  EXCHANGE ACT OF 1934For
      the Fiscal Year Ended December 31, 2005[  ]
      TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF
      THE  SECURITIES  EXCHANGE ACT OF 1934For
      the transition period from ____________ to _____________Commission
      File No. 0-27929ETERNAL
      TECHNOLOGIES GROUP, INC.
              ---------------------------------------------------------------
              (Name
      of Small Business Issuer in its charter)Nevada
              (State
      or other jurisdiction
              Of
              incorporation
      or organization)
            62-1655508
              (I.R.S.
      Employer Identification No.)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:   011-86-22-2721-7020Securities
      to be registered pursuant to Section 12(b) of the Act:Title of each class
              None
            Name
      of each exchange on which each is
      registered
              NoneSecurities
      to be registered pursuant to Section 12(g) of the Act:Common
      Stock, $0.001 par value
              -------------------------------------------
              (Title
      of Class)





Check
whether the issuer:  (1) filed all reports required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12
months (or for such shorter period that the registrant was required to file such
reports);  and (2) has been subject to such filing requirements for
the past 90 days.


Yes
[X]   No  [ ]





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





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





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





DOCUMENTS
INCORPORATED BY REFERENCE





None





Transition
Small Business Disclosure Format:   Yes  [
]    No      [X]





TABLE OF
CONTENTS





Page
            
            PART
      IITEM
      1.
            DESCRIPTION
      OF BUSINESS
            3ITEM
      2.
            DESCRIPTION
      OF PROPERTY
            6ITEM
      3.
            LEGAL
      PROCEEDINGS
            6ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
            6PART
      IIITEM
      5.
            MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
            7ITEM
      6.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS FINANCIAL STATEMENTS
            8ITEM
      7.
            CHANGES
      IN AND DISAGREEMENTS WITH
      ACCOUNTANTS               ON
      ACCOUNTING AND FINANCIAL DISCLOSURE
            12ITEM
      8.
            CONTROLS
      AND PROCEDURES
            39PART
      IIIITEM
      8A.
            DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS
      AND               CONTROL
      PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
            39ITEM
      9.
            EXECUTIVE
      COMPENSATION
            41ITEM
      10.
            SECURITY
      OWNERSHIP OF CERTAIN
      BENEFICIAL             OWNERS
      AND MANAGEMENT
            42ITEM
      11.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS
            45ITEM
      12.
            EXHIBITS
      AND REPORTS OF FORM 8-K
            45ITEM
      13.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
            45ITEM
      14.
            SIGNATURES
            46








FORWARD-LOOKING
STATEMENTS





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





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




PART
I





ITEM
1.  DESCRIPTION OF BUSINESS





General





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





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





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


assets of
E-Sea Biomedical Engineering Co. International, Ltd.





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








History
and Development of the Company





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





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





Eternal -
BVI was  incorporated  in the British Virgin Islands in
March 2000. In May 2000, Eternal - BVI acquired 100% of Willsley Company
Limited. Willsley is a holding company that owns 100% of Inner Mongolia Aershan
Agriculture & Husbandry Technology Co., Ltd. ("Aershan
Agriculture").  Aershan Agriculture owns a cattle
herd,  conducts breeding  operations and owns a farm in
Innner Mongolia which it leases to a Chinese company for approximately $572,000
per year.





As of the
fourth quarter of 2005 we acquired certain assets, subject to certain
liabilities of E-Sea Biomedical Engineering
Co.  International,  Ltd.  E-Sea's principal
activities are the manufacture, sale and licensing of medical devices used to
detect breast cancer.





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





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





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





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





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





Medical
Equipment Operations E-Sea





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





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





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





Potential
Acquisitions





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





Competition





Both the
agriculture and medical industries are highly competitive. While animal genetics
is a relatively new field in China several large foreign companies
such


as
Smithfield Foods, Inc. of the United States and Sumitomo Corporation of Japan
have entered the market and compete with us in
the  development  and delivery of advanced animal husbandry
products and services.  Likewise in the medical device
field,  companies  such as Siemens and
General  Electric have entered the market and competed with us. These
companies have a substantial  advantage due to their size and the name
recognition each enjoys.








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





Intellectual
Property





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





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





Governmental
Regulation





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





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


operating
costs.





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





Chinese
laws  impacting  our
animal  husbandry  operations  relate  primarily
to health
and  safety   regulations   covering  food  products
and environmental regulations covering waste products and other land use
regulations. Food product regulations generally govern the safety
of  products in the food chain and the handling  of
those  products.  We  believe  that we
are in  compliance  with all existing food and
environmental  regulations  applicable to our animal
husbandry


operations.  Because
many of those  regulations  are new
and  evolving,  we must continually  monitor
the  interpretation,  enforcement and modification to those
regulations to assure ongoing compliance.





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





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





ITEM
2.  DESCRIPTION OF PROPERTY





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





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





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





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





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













ITEM
3.  LEGAL PROCEEDINGS





As of May
16,  2006,  we were a party to one
legal  proceeding.  The  proceeding involves a
lawsuit brought by Western Securities  Corporation seeking payment of
$500,942 on two outstanding promissory notes, one to Market Management, Inc. and
one to Thomas L. Tedrow plus accrued  interest  since July
11, 2004,  attorney's fees,  cost
of  collection  and
other  court  costs.  This cause of action was
initially filed in Federal District Court in the Eastern District of Louisiana.
The Company filed a Motion to Dismiss for lack
of  personal  jurisdiction  or alternatively a
Motion to Dismiss for lack of venue.





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





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





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





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





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





PART
II





ITEM
5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS





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





Calendar
      Year 2004
            High
            LowFourth
      Quarter.............
            $0.60
            $0.34Third
      Quarter..............
            0.60
            0.32Second
      Quarter.............
            0.96
            0.41First
      Quarter..............
            1.13
            0.79Calendar
      Year 2005Fourth
      Quarter.............
            $0.79
            $0.37Third
      Quarter..............
            0.57
            0.04Second
      Quarter.............
            0.52
            0.20First
      Quarter..............
            0.58
            0.40





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





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





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





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





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





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





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





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





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





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





We have
not paid dividends in the past and we intend to retain earnings, if any,
and  will  not  pay  cash  dividends  in  the  foreseeable  future.  Any  future
determination  to pay cash  dividends  will be at
the discretion of the board of directors  and  will
be  dependent  upon
our  financial  condition,  results  of
operations,   capital  requirements,  general
business  conditions and such other factors as the board of directors
may deem relevant. Furthermore, the PRC has currency controls which make it
difficult to pay dividends in any amount exceeding $10,000 per
year.  Therefore, our ability to pay dividends is also restricted by
governmental policy.










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





The
Company





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





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





Critical
Accounting Policies





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


management  routinely
makes judgments and estimates about the effects of matters that are inherently
uncertain.
Our  critical  accounting  policies  are  those  where  we
have  made  the  most
difficult,  subjective or complex  judgments in
making  estimates,  and/or where these estimates
can  significantly  impact our financial results under
different assumptions and conditions. Our critical accounting policies
are:





Inventory
Valuation





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





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





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





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





Stock-Based
Compensation





In
December 2004, the Financial  Accounting  Standards Board
(the "FASB") issued Statement of
Financial  Accounting  Standard  ("SFAS")
No.  123(R),  Share-Based Payment.  SFAS 123(R)
requires compensation costs related to share-based payment
transactions  to  be  recognized  in  the  financial  statements.  With  limited
exceptions,  the  amount
of  compensation  cost is to
be  measured  based on the
grant-date  fair  value  of
the  equity  or  liability  instruments  issued.  In


addition,   liability  awards  are  to  be  remeasured  each  reporting  period.
Compensation  cost will be recognized over the period that an
employee  provides service in  exchange  for
the  award.  SFAS  123(R) is
a  revision  of SFAS 123, Accounting for Stock-Based
Compensation,  as amended by SFAS 148, Accounting for
Stock-Based  Compensation-Transition  and  Disclosure
and supersedes APB No. 25, Accounting for Stock Issued to Employees. SFAS 123(R)
is effective for companies as of the  beginning  of the
first  annual  reporting  period that
begins  after December 15, 2005. The Company  adopted SFAS
123(R)  effective  January 1, 2006, using the
modified  prospective method. This method applies the fair value based
method to new awards and to awards modified,  repurchased or cancelled
after the required  effective date. Also,  compensation cost
for the portion of awards for which the requisite service has not been rendered
that are outstanding as of the required  effective  date
shall be  recognized  as the service is  rendered
on or after the required  effective date. Any options
issued  subsequent to January 1, 2006 will be accounted for under SFAS
123(R).





Contingencies





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








Revenue
recognition





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





Derivative
instruments





In
connection with the sale of debt or equity  instruments,  we
may sell options or  warrants to  purchase  our
common  stock.  In
certain  circumstances,  these options or warrants may be
classified as derivative liabilities,  rather than as
equity.  Additionally,  the debt
or  equity  instruments  may  contain  embedded
derivative   instruments,   such  as  conversion   options,   which  in  certain


circumstances  may  be  required  to
be  bifurcated  from  the  associated  host
instrument and accounted for separately as a derivative instrument
liability.





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





Results
of Operations





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





Revenues





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


$3,726,353
in the sale of lamb meat and $6,024 in the sale of sheep embryos.





Cost of
Sales





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








Depreciation
and Amortization





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





General,
Selling and Administrative Expenses





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





Other
Income (Expense)





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





Liquidity
and Capital Resources





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





Cash  provided  by  operating  activities  totaled  $237,023  for
the year ended December 31, 2005.  This compares with cash provided by
operating  activities of $10,471,737  for the year
ended  December 31,  2004.  We also had short-term
investments of $9,909,084 as of December 31, 2005.  This compares with
short-term investments of $0 as of December 31, 2004.  The short-term
investments are substantially equivalent to American certicates of deposit, but
because of Chinese regulations, are offered by investment companies as opposed
to banks who are limited by regulation in making such offerings.  The
decrease in cash flows from operations  primarily resulted from a
decrease in net income and changes to the
current  accounts  which
were  periodically  offset by increases in non-cash
charges.  The largest change in the current accounts was the increase
in accounts receivables from $1,583,313 to $7,127,018.  This increase
resulted because of two large sales made late in December.  These
receivables have been subsequently collected.





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





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





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





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


it can
pay its non-PRC obligations from its funds held in China.  Therefore,
in the opinion of  management,  it
has  sufficient  funds to carry out its business plans for
the next twelve months.





Capital
Expenditures and Commitments





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





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





Payments
      Due by PeriodTotal
            
            
            2006
            
            
            2007
            
            
            2008ThereafterOperating
      lease commitments
            
            $
            102,048
            
            
            $
            67,248
            
            
            $
            34,800
            
            
            $
            -Other
      contractual obligations
            
            
            18,050
            
            
            
            18,050
            
            
            
            -
            
            
            
            -Total
            
            
            
            
            
            $
            85,298
            
            
            $
            34,800
            
            
            $
            -


Off-Balance
Sheet Arrangements





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





Inflation





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








Outlook





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





1.
Acquiring a cattle  facility  in the PRC to
increase  its embryo transplant  revenues  from
cattle and to produce cattle for sale


2.
Acquiring a facility in the U.S. to harvest dairy cattle embryos


3. A
possible acquisition to compliment or expand the operations of
E-Sea.





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








ITEM
7.  FINANCIAL STATEMENTS














ETERNAL
TECHNOLOGIES GROUP INC. AND SUBSIDIARIES


INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS











Reports
      of Independent Registered Public Accounting Firm
            13Consolidated
      Balance Sheets as of December 31, 2005 and 2004
            15Consolidated
      Statements of Income for the years ended
              December
      31, 2005 and 2004
            16Consolidated
      Statements of Changes in Shareholders' Equity for the for the years ended
      December 31, 2005 and 2004
            17Consolidated
      Statements of Cash Flows for the years ended
              December
      31, 2005 and 2004
            19Notes
      to Consolidated Financial Statements
            20

















REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the
Board of Directors and Shareholders


of
Eternal Technologies Group, Inc.











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





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





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





/s/ Ham
Langston Brezina, LLP





Ham
Langston Brezina, LLP


Houston,
Texas


May 18,
2006








REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the
Board of Directors and Shareholders


of
Eternal Technologies Group, Inc.











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





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





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





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


2003.








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





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


Houston,
Texas


May 6,
2005 (except for the effect of the matters discussed in Note 20, as to which the
date is May 19, 2006).








ETERNAL
TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 DECEMBER
31, 2005 AND 2004
 (UNITED
STATES DOLLARS)
 
 
 2005
              
              
              2004ASSETS
              
              (As
      Restated)Current
      assets:Cash
      and cash equivalents
              
              $
              8,224,488
              
              
              $
              27,473,354Short-term
      investment
              
              
              -
              
              
              
              9,909,084Accounts
      receivable
              
              
              7,137,018
              
              
              
              1,538,313Inventories
              
              
              135,341
              
              
              
              621,307Prepayments
      and deposits
              
              
              57,624
              
              
              
              602Total
      current assets
              
              
              35,663,555
              
              
              
              29,633,576Advances
      to distributors
              
              
              520,227
              
              
              
              -Property
      and equipment, net
              
              
              7,317,502
              
              
              
              5,904,050Land
      use rights, net
              
              
              4,828,051
              
              
              
              4,944,639Intangible
      assets
              
              
              1,263,409
              
              
              
              -Total
      assets
              
              $
              49,592,744
              
              
              $
              40,482,265LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilitiesNotes
      payable
              
              $
              443,366
              
              
              $
              443,366Accounts
      payable and accrued expenses
              
              
              706,717
              
              
              
              1,526,595Amounts
      due to related parties
              
              
              240,368
              
              
              
              272,465Derivative
      financial instrument liabilities
              
              
              562,830
              
              
              
              317,658Total
      current liabilities
              
              
              1,953,281
              
              
              
              2,560,084Commitments
      and contingenciesUnregistered
      common stock subject to registration rights; $0.001 par value, 790,827
      shares issued and outstanding at December 31, 2004
              
              
              -
              
              
              
              563,991Shareholders'
      equity:
                Preferred
      stock - $0.001 par value, 5,000,000 shares authorized, none issued or
      outstanding
              
              
              -Common
      stock - $0.001 par value, 95,000,000 shares authorized,
                39,854,026
      and 29,888,803 shares issued and outstanding at December 31, 2005 and
      2004, respectively
              
              
              39,854
              
              
              
              29,888Additional
      paid-in capital
              
              
              13,217,874
              
              
              
              8,173,468Stock
      subscription receivable
              
              
              (10,176
              )
              
              
              (10,176
              )Retained
      earnings
              
              
              33,215,741
              
              
              
              29,165,010Accumulated
      other comprehensive income
              
              
              1,176,170
              
              
              
              -Total
      shareholders' equity
              
              
              47,639,463
              
              
              
              37,358,190Total
      liabilities and shareholders' equity
              
              $
              49,592,744
              
              
              $
              40,482,265
 
 The
accompanying notes are an integral part of these
 consolidated
financial statements


ETERNAL
TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME
 FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
 (UNITED
STATES DOLLARS)
 
 2005
              
              
              2004(As
      Restated)Sales
              
              $
              23,032,965
              
              
              $
              16,834,759Cost
      of sales
              
              
              15,628,000
              
              
              
              10,305,514Gross
      profit
              
              
              7,404,965
              
              
              
              6,529,245Selling,
      general and administrative expenses
              
              
              2,350,556
              
              
              
              1,580,990Depreciation
      and amortization
              
              
              840,795
              
              
              
              760,691Income
      from operations
              
              
              4,213,614
              
              
              
              4,187,564Other
      income (expenses):Gain
      on sale of asset
              
              
              18,889
              
              
              
              -Interest
      income
              
              
              188,519
              
              
              
              126,049Interest
      expense
              
              
              (54,761
              )
              
              
              (27,234
              )Impairment
      loss
              
              
              -
              
              
              
              (53,517
              )Change
      in value of derivative financial instruments
              
              
              (245,172
              )
              
              
              192,444Total
      other income and expenses, net
              
              
              (92,525
              )
              
              
              237,742Income
      before provision for income taxes
              
              
              4,121,089
              
              
              
              4,425,306Provision
      for income taxes
              
              
              70,358
              
              
              
              -Net
      income
              
              $
              4,050,731
              
              
              $
              4,425,306Net
      income per common shareBasic
      and diluted
              
              $
              0.12
              
              
              $
              0.15Weighted
      average number of common shares outstandingBasic
              
              
              33,253,761
              
              
              
              29,551,485Diluted
              
              
              33,275,289
              
              
              
              29,563,297
 consolidated
financial statements


ETERNAL
TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
 FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
 (UNITED
STATES DOLLARS)
 Common
      Stock
              
              
              Additional
      Paid In Capital
              
              
              Stock
      Sub-
                scription
      Receivable
              
              
              Retained
      Earnings
              
              
              Accumu-lated
      Other Comprehensive Income
              
              
              TotalShares
              
              
              AmountBalance
      at
                December
      31, 2003
                as
      previously reported
              
              
              29,177,396
              
              
              $
              29,177
              
              
              $
              8,955,570
              
              
              $
              (10,176
              )
              
              $
              24,245,643
              
              
              $
              -
              
              
              $
              3,220,214Prior
      period adjustment
                (See
      Note 20)
              
              
              (1,749,288
              )
              
              
              (1,749
              )
              
              
              (2,249,946
              )
              
              
              -
              
              
              
              494,061
              
              
              
              -
              
              
              
              (1,757,634
              )Balance
      at
                December
      31, 2003,
                as
      restated
              
              
              27,428,108
              
              
              
              27,428
              
              
              
              6,705,624
              
              
              
              (10,176
              )
              
              
              24,739,704
              
              
              
              -
              
              
              
              31,462,580Net
      income, as restated
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,425,306
              
              
              
              -
              
              
              
              4,425,306Notes
      payable conversion
              
              
              109,984
              
              
              
              110
              
              
              
              60,381
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              60,491Stock
      issued for public
                relation
      services
              
              
              100,000
              
              
              
              100
              
              
              
              89,900
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              90,000Stock
      issued for employee
                compensation
              
              
              1,292,250
              
              
              
              1,292
              
              
              
              515,608
              
              
              -­­
              
              
              
              -
              
              
              
              -
              
              
              
              516,900Capital
      contributed
              
              
              -
              
              
              
              -
              
              
              
              119,372
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              119,372Reclassification
      of unregistered
                common
      stock to paid-in
                capital
              
              
              958,461
              
              
              
              958
              
              
              
              682,583
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              683,541Balance
      at
                December
      31, 2004
                (as
      restated)
              
              
              29,888,803
              
              
              $
              29,888
              
              
              $
              8,173,468
              
              
              $
              (10,176
              )
              
              $
              29,165,010
              
              
              $
              -
              
              
              $
              37,358,190


ETERNAL
TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
 FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
 (UNITED
STATES DOLLARS)
 
 
 
 Common
      Stock
              
              
              Additional
      Paid In Capital
              
              
              Stock
      Sub-
                scription
      Receivable
              
              
              Retained
      Earnings
              
              
              Accumu-lated
      Other Comprehensive Income
              
              
              TotalShares
              
              
              AmountBalance
      at
                December
      31, 2004
              
              
              29,888,803
              
              
              $
              29,888
              
              
              $
              8,173,468
              
              
              $
              (10,176
              )
              
              $
              29,165,010
              
              
              $
              -
              
              
              $
              37,358,190Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,050,731
              
              
              
              -
              
              
              
              4,050,731Foreign
      currency
                translation
                adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,176,170
              
              
              
              1,176,170Other
      comprehensive
                income
              
              
              5,226,901Notes
      payable
                conversion
              
              
              373,295
              
              
              
              374
              
              
              
              356,045
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              356,419Common
      stock issued
                for
      services
              
              
              591,225
              
              
              
              591
              
              
              
              239,022
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              239,613Common
      stock issued
                for
      cash
                and
      as compensation to employees
              
              
              2,500,000
              
              
              
              2,500
              
              
              
              1,197,500
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,200,000Common
      stock
                issued
      under
                acquisition
      agreement
              
              
              5,709,876
              
              
              
              5,710
              
              
              
              2,278,240
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,283,950Capital
      contributed
              
              
              -
              
              
              
              -
              
              
              
              410,399
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              410,399Reclassification
      of
                unregistered
                common
      stock to paid-in
                capital
              
              
              790,827
              
              
              
              791
              
              
              
              563,200
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              563,991Balance
      at
                December
      31, 2005
              
              
              39,854,026
              
              
              $
              39,854
              
              
              $
              13,217,874
              
              
              $
              (10,176
              )
              
              $
              33,215,741
              
              
              $
              1,176,170
              
              
              $
              47,639,463
 
 
 The
accompanying notes are an integral part of these
 consolidated
financial statements.





ETERNAL
TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
 (UNITED
STATES DOLLARS)
 
 
 2005
              
              
              2004(As
      Restated)Cash
      Flows From Operating ActivitiesNet
      income
              
              $
              4,050,731
              
              
              $
              4,425,306Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
              
              
              840,795
              
              
              
              760,691Gain
      on sale of asset
              
              
              (18,889
              )
              
              
              -Provision
      for impairment
              
              
              -
              
              
              
              53,517Derivative
      valuation adjustment
              
              
              245,172
              
              
              
              (192,444
              )Compensatory
      stock issuances
              
              
              439,613
              
              
              
              647,600Changes
      in operating assets and liabilities:Inventories
              
              
              493,356
              
              
              
              2,110,947Accounts
      receivable
              
              
              (4,988,866
              )
              
              
              (1,538,313
              )Other
      receivables
              
              
              -
              
              
              
              3,399,995Receivables
      from related companies
              
              
              -
              
              
              
              617,825Prepaid
      expenses and deposits
              
              
              (137,156
              )
              
              
              144,588Accounts
      payable and accrued expenses
              
              
              (649,705
              )
              
              
              393,134Accounts
      payable to related parties
              
              
              (38,028
              )
              
              
              (145,152
              )Accounts
      payable to a related company
              
              
              -
              
              
              
              (205,957
              )Net
      cash provided by operating activities
              
              
              237,023
              
              
              
              10,471,737Cash
      Flows From Investing ActivitiesPurchase
      of current investments
              
              
              (9,909,084
              )
              
              
              -Purchase
      of property and equipment
              
              
              (1,225,759
              )
              
              
              -Purchase
      of E-Sea
              
              
              (810,858
              )
              
              
              -Proceeds
      from sale of patent
              
              
              321,782
              
              
              
              -Proceeds
      from property held for sale
              
              
              -
              
              
              
              620,482Net
      cash provided by (used in) investing activities
              
              
              (11,560,446
              )
              
              
              620,482Cash
      Flows From Financing Activities
                Proceeds
      from sale of common stock
              
              
              1,000,000
              
              
              
              -Capital
      contributed
              
              
              410,399
              
              
              
              78,671Net
      cash provided by (used in) financing activities
              
              
              1,410,399
              
              
              
              78,671Effect
      of exchange rate changes on cash
              
              
              727,631
              
              
              
              -Net
      (decrease) increase in cash and cash equivalents
              
              
              (9,248,866
              )
              
              
              11,170,890Cash
      and cash equivalents at beginning of year
              
              
              27,473,354
              
              
              
              16,302,464Cash
      and cash equivalents at end of year
              
              $
              18,224,488
              
              
              $
              27,473,354Supplemental
      Disclosure of Cash Flow InformationCash
      paid for interest expense
              
              $
              -
              
              
              $
              -Cash
      paid for income taxes
              
              $
              70,358
              
              
              $
              -
 
 The
accompanying notes are an integral part of these
 consolidated
financial statements.








ETERNAL
TECHNOLOGIES GROUP INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





1.
ORGANIZATION AND PRINCIPAL ACTIVITIES





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





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





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





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





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





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





2. BASIS
OF PRESENTATION





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








3.
SUMMARY OF PRINCIPAL ACCOUNTING POLICIES





Basis of
consolidation





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





Economic
and political risks





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





Cash and
cash equivalents





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





Accounts
receivable





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





Inventory





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





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





Fixed
assets and depreciation





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





Buildings
            25
      yearsFurniture
      and fixtures
            5
      yearsOffice
      equipment
            5
      yearsMotor
      vehicles
            5
      years





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








Land
lease rights and amortization





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





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





Intangible
Assets





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





Income
taxes





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





Foreign
currency translation





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





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





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





Revenue
recognition





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





Advertising





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





Research
and development





Research
and development costs are charged to operations as incurred.





Stock-based
compensation





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





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





Employees'
benefits





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





Non-monetary
transactions





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





Derivative
financial instruments





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





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








Certain
instruments, including convertible debt and equity  instruments and
the freestanding  options and warrants issued in
connection  with those  convertible
instruments,  may be subject
to  registration  rights  agreements,  which
impose penalties for failure to register the underlying common stock by a
defined date.


These  potential  cash
penalties may require the Company to account for the debt or
equity  instruments  or
the  freestanding  options and warrants as derivative
financial instrument  liabilities,  rather than as equity.
In addition, when the ability to physical or net-share settle the conversion
option or the exercise of the  freestanding  options or
warrants is deemed to be not within the control of the company,  the
embedded conversion option or freestanding options or warrants may
be  required  to
be  accounted  for  as
a  derivative  financial  instrument
liability.





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





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





The
classification of derivative instruments, including whether such instruments
should be recorded as  liabilities or as
equity,  is  re-assessed  periodically, including
at the end of each reporting period. If re-classification is required, the fair
value of the derivative  instrument,  as of the
determination  date, is re-classified. Any previous charges or credits
to income for changes in the fair value of
the  derivative  instrument  are
not  reversed.  Derivative  instrument


liabilities
are classified in the balance sheet as current or non-current  based
on whether or not net-cash  settlement  of
the  derivative  instrument  could be required
within 12 months of the balance sheet date.





Registration
rights agreements





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





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





Use of
estimates





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





Earnings
per share





The
company calculates basic and diluted earnings per share as required by SFAS No.
128, Earnings Per Share.  Basic earnings per share exludes any
dilutive effects of options, warrants and convertible
securities.  Diluted earnings per share is calculated including the
dilutive effects of warrants, options and convertible securities, if
any.





The
following table sets forth the computation of basic and diluted earnings per
share:





Year
      Ended December 31,2005
            
            
            2004Numerator:
              Net
      income
            
            $
            4,050,731
            
            
            $
            4,425,306Denominator:
              Denominator
      for basic earnings per share-weighted average shares
            
            
            33,253,761
            
            
            
            29,551,485Effect
      of diluted securities:
              Warrants
            
            
            21,528
            
            
            
            11,818Denominator
      for dilutive earnings per share:
              Adjusted
      weighted average shares and assumed conversions
            
            
            33,275,289
            
            
            
            29,563,297Earnings
      per share from continuing operations – diluted
            
            $
            0.12
            
            
            $
            .15Earnings
      per share from continuing operations – basic
            
            $
            0.12
            
            
            $
            .15





Recent
accounting pronouncements





In
December 2004, the Financial  Accounting  Standards Board
("the FASB") issued SFAS No. 123(R),  Share-Based
Payment.  SFAS 123(R) requires  compensation costs related
to share-based  payment  transactions  to be
recognized in the financial statements.  With
limited  exceptions,  the amount of compensation cost is to
be measured  based  on
the  grant-date  fair  value  of  the  equity  or  liability


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





In  November  2004,  the
FASB  issued SFAS
No.  151,  Inventory  Costs.  The new
Statement  amends  ARB No. 43,  Chapter
4,  Inventory  Pricing,  to clarify  the
accounting  for abnormal  amounts of idle
facility  expense,  freight,  handling
costs  and  wasted  material.  This  Statement  requires  that  those  items  be
recognized  as current  period  charges and
requires  that  allocation  of fixed production
overhead to the cost of conversion be based on the normal capacity of
the  production  facilities.  This  Statement  is  effective  for  fiscal  years
beginning after June 15, 2005. The adoption of
this  statement  is not  expected  to
have a material  impact on the Company's financial position or results
of operations.





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





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





4.
INVENTORY





Inventory
consists of the following at December 31:





2004
            
            
            2005Sheep
      and cows
            
            $
            -
            
            
            $
            231,325Sheep
      and cow embryos
            
            
            12,530
            
            
            
            364,126Other
      raw materials products
            
            
            122,196
            
            
            
            25,856Total
      inventory
            
            $
            134,726
            
            
            $
            621,307











Our sheep
and cows are carried at cost.  Included in cost are feeding fees,
cattle management fees and other cow and sheep care expenses.





5.
PROPERTY HELD FOR SALE AND IMPAIRMENT





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





6.  PROPERTY
AND EQUIPMENT





Fixed
assets are comprised of the following at December 31:





2005
            
            
            2004Office
      equipment in the United States
            
            $
            40,761
            
            
            $
            -Infrastructure
            
            
            226,506
            
            
            
            226,506Building
            
            
            6,244,561
            
            
            
            6,244,561Equipment
            
            
            1,817,486
            
            
            
            1,221,837Cows
            
            
            1,273,883
            
            
            
            -Other
            
            
            626,506
            
            
            
            626,506Total
      property and equipment
            
            
            10,229,703
            
            
            
            8,319,410Less
      accumulated depreciation
            
            
            (3,079,130
            )
            
            
            (2,415,361
            )$
            7,150,573
            
            
            $
            5,904,049








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





7.  INTANGIBLE
ASSETS





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








2005
            
            
            2004Patented
      dialysis technology
            
            $
            1,445,783
            
            
            $
            -Less
      accumulated amortization
            
            
            (216,867
            )
            
            
            -Total
            
            $
            1,228,916
            
            
            $
            -





The
weighted average amortization period is 120 months or ten years.











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





Year2006
            148,6362007
            148,6362008
            148,6362009
            148,6362010
            148,636Thereafter
            520,229$
1,263,409








8. NOTES
PAYABLE





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





2004
            2005Promissory
      note to Market Management LLC, due December 11, 2005, interest payments
      are due semi- annually commencing 180 days after the date of the note
      (December 11, 2002) at 8% per year.  $ 401,942
            $  401,942Promissory
      note to Thomas Tedrow due December 11, 2005 interest payments are due
      semi-annually commencing 180 days after the date of the note December 11,
      2002) at 8% per year. $ 41,424
            $   41,424$ 443,366
            $  443,366





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





Pursuant
to the terms of these notes, the company issued 109,984 shares of its common
stock to cancel notes payable of $60,491 in fiscal year 2004.  In
fiscal year 2003, the company issued 517,219 shares of its common stock to
cancel notes payable of 270,040 and accrued interest of
$8,936.  Pursuant to the terms of the notes, the notes could be
converted into the common stock of the company at ___% of the closing price of
the company’s common stock on the day preceeding the date of the acquisition of
Eternal Technologies Group Limited on December 11, 2002.





The
Company's Board of Directors elected to stop accruing
interest  effective October 1, 2004 and at December 31, 2004 the notes
payable were in default.  The decision to stop accruing interest
resulted from an audit of the items which made up the promissory
notes.  The company assumed these notes because it was represented by
the former principal shareholder, Mr. Thomas Tedrow, that the payments
underlying the notes represented actual amounts both he and his company advanced
to Eternal (the Waterford Sterling Corporation) to cover ongoing expenses of the
Company for which the Company had insufficient sums to pay such
obligations.  However, when the records were finally obtained, it
indicated that significant amounts were not in fact paid and many of the
payments had been for Mr. Tedrow’s personnel expenses. Based on this
information, the Board determined to no longer accrue interest and to challenge
the underlying notes in court. The Company is performing
additional  detailed review of all expenditures  prior to
the merger.  The  balances of the notes and
related  interest are the subject of
current  litigation  and may
change  pending  the outcome of
the  litigation  as described further in note
19.





On May
24, 2005, $332,698 of penalties were turned into convertible
notes.  This increased the notes payable by a
corresponding  amount.  In the third quarter of 2005,
$59,569 of this amount was converted into common stock.  In the fourth
quarter an additional $159,858 was converted into common stock.  The
penalties had accrued to the persons who purchased shares and warrants in
2003.  Under the terms of their purchase the company was obligated to
register these shares and these underlying warrants by a given date, which it
failed to do.





9. STOCK
OPTION AND STOCK COMPENSATION PLAN





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





Stock
Compensation Plan





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





Stock
Option Plan





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





9. STOCK
OPTION AND STOCK COMPENSATION PLAN, continued





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





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





On
September 20, 2005, the Company  approved the 2005
Stock  Compensation  Plan. This
Plan  provided  for stock  grants of up
to  560,000  shares  and  2,500,000
options.  Pursuant to this plan, the Company
issued  2,500,000  shares of common stock and
received  $1,000,000  and
awarded  560,000  shares as stock grants for services
rendered.  The stock grants were valued at $239,613 and charged to the
period when granted.  No charge was made for the options as the option
price was the fair market value of the shares.





Shares
      Issuable Under: (A) 2004 Stock Option Plan
            Weighted
      Average Outstanding Options
            Exercise
      PriceOptions
      Outsanding at 1-1-04
            -
            -Options
      Granted
            500,000
            -Options
      Exercised
            -
            -Options
      Cancelled
            -
            -Options
      Outstanding 12-31-04
            500,000
            -(B)
      2005 Stock Option PlanOptions
      Outstanding at 1-1-05
            -
            -Options
      Granted
            2,500,000
            $.40Options
      Exercised
            2,500,000
            .40Options
      Cancelled
            -
            -Options
      Outstanding 12-31-05
            -
            -








10.
INCOME TAXES





The
companies operate in several jurisdictions and may be subject to taxation in
those jurisdictions.





It is
management's intention to reinvest all the income attributable  to the
Company  earned by
its  operations  outside  of
the  United  States of  America.
Accordingly,  no
United  States  corporate  taxes  have
been  provided  in these
consolidated  financial  statements.  The Company
has a U.S. net operating  loss
carry  forward  of  $1,756,960  which  will
begin  expiring  in 2022.  However a
valuation  allowance  has been  provided
as  management  does not expect the tax benefits to be
realized.  No
other  significant  deferred  assets or
liabilities existed at December 31, 2005.  The Company's net
operating  loss carry  forwards
may  be  subject  to  annual  limitations,  which  could  reduce  or  defer  the
utilization  of the  losses as a result of
an  ownership  change as  defined  in
section 382 of the Internal Revenue Code.








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





Companies  with  operations  in
the Peoples  Republic of China may be subject to taxes for
income  therein.  The Income Tax Law of the
Peoples  Republic of China for Enterprises with Foreign Investment and
Foreign  Enterprises provide certain exemptions from taxation. Under
current PRC law, Aershan is exempt from taxation as
Aershan's  operations  currently benefit from a tax holiday.
The tax holiday, granted by Xilingol League,  which is the local
government,  and the central PRC government, commenced on the
incorporation of Inner Mongolia Aershan Agriculture and Husbandry Technology
Co., Ltd., in July 2000. The Company has benefited from this
holiday  since  inception and because of the repeal
of  agricultural  taxes will not be subject to tax on
agricultural income in the future.





The tax
holiday  resulted in tax savings of
$1,404,098  and  $1,548,604  for the
years  ended  December  31,  2005 and
2004  respectively.  Net  income per share
increased  approximately  $0.05 and $0.05 on a basic
and  diluted  basis for the
years  ended  December  31,  2005 and
2004  respectively  as a result of the tax holiday
E-Sea  Shenzhen,  a 100%
owned  subsidiary  in the PRC, is subject to Enterprise
Income Tax at the PRC rate of 15% on
net  profits.  The  provision  for taxes
on earnings of the PRC subsidiary for the period since it was
acquired  during 2005 was $70,358.





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





2004
            
            2005Percent
            
            Amount
            
            
            Percent
            
            
            AmountIncome
      taxes at federal  statutory rate
              34%
            
            $
            1,533,062
            
            
            
            34
            %
            
            $
            1,608,048Effect
      of United States and British Virgin Island losses
              7%
            
            
            292,179
            
            
            
            7
            %
            
            
            299,498Income
      tax exemption in the Peoples Republic of China
              (35%)
            
            
            (1,595,405
            )
            
            
            (35
            )%
            
            
            (1,656,935
            )Difference
      in United States and foreign rates
              (6)%
            
            
            (159,478
            )
            
            
            (3
            )%
            
            
            (250,611
            )Income
      tax expense
              0%
            
            $
            70,358
            
            
            
            3
            %
            
            $
            -





11.
PUBLIC RELATIONS AGREEMENTS





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





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





12.
CONCENTRATION OF CREDIT RISKS





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





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





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





13.  FAIR
VALUE OF FINANCIAL INSTRUMENTS





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





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





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





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





14.  ISSUANCE
OF COMMON STOCK, WARRANTS AND CONVERTIBLE NOTES





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





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








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





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





On  May  24,  2005,  convertible  notes  were  issued  to  investors  to  settle
registration  rights  penalties  due through that
date.  By  agreement  with the
investors,  no further  penalties  are
due.  The  convertible  notes do not bear
interest, have no stated due date and are payable "without demand". The majority
of the notes have been  converted  (and
the  shares  received  by the  investors
sold). At December 31, 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.





The
contributions to capital made during 2004 and 2005 of $119,372 and $410,399
represent amounts contributed to pay for U.S. expenses.





15.
CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS





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





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





16.
ADDITIONAL RELATED PARTY BALANCES AND TRANSACTIONS





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





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





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





China  Continental,  Inc.  ("CCI")
is a related  company.  One of the  Company's
former  officers,  directors and current
major  shareholder  (Shang Jia Ji) owns more than 10% of CCI
and Towering International Trade (US) Corp. The Company had a receivable from
CCI of  approximately  $618,000 at
December  31,  2003.  The
balance  represented  payments  made by the
Company on behalf of CCI in previous


year for
various operating expenses.  The Company had a net payable to Shang
Jia Ji of approximately  $123,000 at December 31, 2003. The Company
had payables of approximately  $210,000 at December  31,
2003 to other  entities  controlled  by Shang Jia
Ji.  These
balances  represented  advances  made to
the  Company  for various operating expenses. These balances
were settled and paid during 2004.





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





There
were no related party transactions in 2005.





17. MAJOR
CUSTOMERS AND SUPPLIERS





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





2005
            2004Purchases:Company
      A
            37%
            -%Company
      B
            16%
            28%Company
      C
            19%
            15%Company
      D
            24%
            33%Sales:Company
      E
            27%
            16%Company
      F
            26%
            24%Company
      G
            23%
            38%Company
      H
            16%
            -%










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





On
October 1, 2005, the Company  acquired  certain assets from
E-Sea  Biomedical Engineering Co. International,  Ltd.
("E-Sea Int'l") for 5,709,876 shares of the
Company's  common  stock
)  representing  approximately  14% of the total
shares outstanding as of October 1, 2005) and $18,500,000 RMB.  The
value of the shares was determined by the Exchange Agreement which stated that
the value of the Company’s shares would by the average closing price of ETLT:BB
shares over the price calendar month or approximately US$0.39 per
share.  The 18,500,000 RMB of cash equals approximately
US$2,228,916.





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





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





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





Assets Acquired
            
            U. S. Dollars
            
            
            RMBCash
            
            $
            1,432,650
            
            
            $
            11,932,005Current
      assets
            
            
            591,384
            
            
            
            4,595,457Property
      and equipment, net
            
            
            516,226
            
            
            
            4,284,674Amortizable
      intangible assets
            
            
            1,546,988
            
            
            
            12,840,000Other
            
            
            506,024
            
            
            
            4,200,000Total
      assets acquired
            
            
            4,593,277
            
            
            
            37,852,136Liabilities
      AssumedCurrent
      liabilities
            
            
            89,046
            
            
            
            722,172Total
      liabilities assumed
            
            
            89,046
            
            
            
            722,172Net
      assets acquired
            
            
            4,504,231
            
            
            
            37,129,964Consideration
      GivenCash
            
            
            2,283,950
            
            
            
            18,500,000Common
      stock
            
            
            2,283,950
            
            
            
            18,500,000Total
      consideration given
            
            $
            4,567,900
            
            
            $
            37,000,000Net
      cash paid
            
            $
            8,51,300








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
            
            $
            31,162,513Net
      income
            
            $
            5,815,860Basic
      and diluted earnings per common share
            
            $
            0.17








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





19.  COMMITMENTS
AND CONTINGENCIES





Legal
Proceedings





As of
March 1, 2006, we were a party to a single legal proceeding.  This
lawsuit brought by Western Securities Corporation. This cause of action seeks
payment of $500,942 on two outstanding promissory notes, one to Market
Management, Inc. and one to Thomas L. Tedrow plus
accrued  interest  since July 11,
2004,  attorney's fees,  cost of collection and other court
costs.  This cause of action was filed in Federal  Court in
the
Eastern  District  of  Louisiana.  The
Company  filed a Motion to Dismiss for lack of personal jurisdiction
or alternatively a Motion to Dismiss for lack of
venue.  This  motion was  granted  as
of  October  2005 and the case was transferred  to
Federal  Court in Houston,  Texas.  At
December  31,  2005,  the Company has
recorded  $443,366 plus accrued  interest of
$77,234  related to the
promissory  notes.  In  management's  opinion,  after  taking  into  account
the liabilities  accrued, it is reasonably possible  no
further liabilities should be accrued and the ultimate outcome  of
the  lawsuit  should  not  have
a  material  adverse  effect  on the
Company's consolidated financial statements in any given year.





Penalties





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





Other
Contingencies





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





Lease
Contracts





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





Year2006
            $11,8072007
            2,966$
14,773








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








20.  RESTATEMENT





The
Company has restated its 2004 financial  statements from
amounts  previously reported.  The Company has determined
that certain financial  instruments issued by the
Company  contain  features  that require the
Company to account for these features
as  derivative  instruments in accordance with FASB 133,
which was not originally done for the year ended December 31, 2004 as
required.  Accordingly,  warrants  issued to
certain investors and brokers have been accounted for as derivative instruments.
Note 14 was added
to  disclose  the  derivative  financial  instrument  liabilities  and
provide information on subsequent changes.





The
Company is required to record the fair value of the
conversion  features and the  warrants on the
balance  sheet at fair value with  changes in the values of
these derivatives reflected in the consolidated statement of operations as "Gain
(loss) on derivative instrument liabilities." The effect of the non-cash changes
related to accounting separately for these derivative instrument liabilities and
modifying the estimated volatility, on the consolidated statement of operations
for the fiscal year ended December 31, 2004,  was an increase in the
net income of $192,444.  Basic and diluted net
income  attributable to common  shareholders per share for
the fiscal year ended December 31, 2004 increased by $0.01. The effect on the
consolidated  balance sheet as of December 31, 2004 was a decrease in
stockholders'  equity of $881,649.  In
addition,  the related  unregistered  shares of
common stock have been  classified as temporary


equity
due to the  liquidated  damages  provision in the
Company's  registration rights agreements.  In all other
material respects, the financial statements are unchanged. Following is a
summary of the restatement adjustments:





Balance Sheet
            
            As
      Previously Reported
            
            
            Adjustment
            
            
            As RestatedASSETSCurrent
      assets
            
            $
            29,633,576
            
            
            $
            -
            
            
            $
            29,633,576Property
      and equipment, net
            
            
            5,904,050
            
            
            
            -
            
            
            
            5,904,050Land
      use rights, net
            
            
            4,944,639
            
            
            
            -
            
            
            
            4,944,639Total
      assets
            
            $
            40,482,265
            
            
            $
            -
            
            
            $
            40,482,265LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities Notes payable
            
            $
            433,366
            
            
            $
            
            
            
            $
            443,366Accounts
      payable and accrued expenses
            
            
            1,526,595
            
            
            
            (276,768
            )
            
            
            1,249,827Payable
      to related company
            
            
            272,465
            
            
            
            
            
            
            
            272,465Derivative
      financial
    instruments     liabilities
            
            
            -
            
            
            
            760,167
            
            
            
            760,167Total
      current liabilities
            
            
            2,242,426
            
            
            
            483,399
            
            
            
            2,725,825Shareholders'
      equity:Preferred
      stock
            
            
            -Common
      stock
            
            
            30,679
            
            
            
            (952,711
            )
            
            
            30,679Additional
      paid-in capital
            
            
            9,740,830
            
            
            
            (1,372,751
            )
            
            
            8,788,119Stock
      subscription receivable
            
            
            (10,176
            )
            
            
            469,312
            
            
            
            (10,176
            )Retained
      earnings
            
            
            28,478,506
            
            
            
            612,584
            
            
            
            28,947,818Total
      shareholders' equity
            
            
            38,239,839
            
            
            
            (483,399
            )
            
            
            37,756,440Total
      liabilities
      and         shareholders'
      equity
            
            $
            40,482,265
            
            
            $
            -
            
            
            $
            40,482,265SUMMARY
      OF STATEMENT INCOMEAs
      Restated
            
            As
      Previously Reported
            
            
            
            
            
            
            AdjustmentSales
            
            $
            16,834,759
            
            
            $
            -
            
            
            
            16,834,759Income
      from operations
            
            
            4,187,564
            
            
            
            276,768
            
            
            
            4,464,332Other
      income (expenses)Interest
      income
            
            
            126,049
            
            
            
            -
            
            
            
            126,049Interest
      expense
            
            
            (27,234
            )
            
            
            -
            
            
            
            (27,234
            )Impairment
      loss
            
            
            (53,517
            )
            
            
            -
            
            
            
            (53,517
            )Gain
      on derivative financial instruments
            
            
            -
            
            
            
            165,379
            
            
            
            165,379Other
      income and expenses, net
            
            
            45,298
            
            
            
            165,379
            
            
            
            210,677Net
      income
            
            $
            4,232,862
            
            
            $
            442,147
            
            
            $
            4,675,009





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








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





2005
            
            
            2004Issuance
      of common stock for payments of notes payable
            
            $
            -
            
            
            $
            60,491Inventory
      received for settlement of property held for sale
            
            $
            -
            
            
            $
            1,518,072Conversion
      of accrued liabilities to convertible notes
            
            $
            332,838
            
            
            $
            -Convertible
      notes converted into common stock
            
            $
            219,567
            
            
            $
            -





In
addition to the items listed  above,  See Note
18  regarding  the purchase of


E-Sea.





22.
SEGMENT REPORTING





The
operating  segments  presented are the segments for which
separate financial information  is  available  and
for which  operating  performance is  evaluated
regularly by  management  to decide how to
allocate  resources  and in to assess
performance.  The Company  evaluates
the  performance of the operating  segments based on income
from operations that is defined as total revenues less operating
expenses.





The
Company has identified two reportable segments: agricultural  genetics
and medical devices. The agricultural genetics segment activities include a
breeding center, embryo-transplantation, and  propagating quality
sheep meat and other livestock breeds in Inner Mongolia, PRC. Medical devices'
operations include the
manufacture,  development,  sales,  marketing and
delivery of medical devices in the  PRC.  Included in
"Other" are corporate-related items,   insignificant


operations
and costs that are not allocated to the reportable segments.





Information
regarding our reportable segments is as follows:





Total
            
            Agricultural
      Genetics
            
            
            Medical
      Devices
            
            
            Corporate2005Revenues
              $  23,032,965
            
            $
            21,839,291
            
            
            $
            1,193,674
            
            
            $
            -Income
      from operations
              4,213,614
            
            
            4,625,484
            
            
            
            447,480
            
            
            
            (859,350
            )Depreciation
      and amortization 840,794
            
            
            773,163
            
            
            
            67,631
            
            
            
            -Total
      assets 49,223,251
            
            
            43,971,812
            
            
            
            5,051,677
            
            
            
            199,7622004Revenues
            
            $
            16,834,759
            
            
            $
            -
            
            
            $
            -Income
      from operations
            
            
            4,849,967
            
            
            
            -
            
            
            
            (385,635
            )Depreciation
      and amortization
            
            
            760,691
            
            
            
            -
            
            
            
            -Total
      assets
            
            
            40,289,041
            
            
            
            -
            
            
            
            193,224












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





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





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





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





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





During
the Company's two most recent fiscal years and any subsequent


interim
period  preceding the dismissal of Leger,  there have been
no reportable events of the type required to be disclosed by
Item  304(a)(1)(v)  of Regulation


S-K.





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





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





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





ITEM
8A.      CONTROLS AND PROCEDURE





We strive
to maintain  disclosure  controls and
procedures  that are designed to ensure that
information  required to be disclosed in our Exchange Act reports is
recorded,  processed,  summarized and reported within the
time periods specified in the SEC's  rules and forms,  and
that
such  information  is  accumulated  and
communicated to our management,  including our chief executive officer
and chief
financial  officer,  as  appropriate,  to
allow for timely  decisions  regarding
required  disclosure.  In designing and
evaluating  the disclosure   controls and
procedures,  management  recognizes that any controls and
procedures,  no matter how
well  designated  and  operated,  can
provide only  reasonable  assurance of achieving the desired
control objectives and management  necessarily is required to apply
its judgment in evaluating
the  cost-benefit  relationship  of possible
controls. Our disclosure controls and procedures have been designed to provide
reasonable  assurance of achieving their objectives  and our
relevant officers have concluded that our disclosure controls and procedures are
effective at the reasonable  assurance level.  Our
independent  accountants,  Thomas Leger & Co. LLP
conducted audits of our financial  statements for
2002,  2003 and 2004. In connection with the issuance of its report of
the independent registered public accounting firm,
Thomas  Leger  &
Co.  LLP  reported  to
our  Board  of  Directors  two  material
weaknesses, one in 2004 and one in 2002
under  standards   established  by  the  Public  Company  Accounting
Oversight Board regarding some elements of our system of internal controls.
They


noted the
following material deficiencies:





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





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





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





As  required  by
SEC
rule  13a-15(b)  we  conducted  an  evaluation,  under  the
supervision and with the  participation  of our
management,  including our Chief Executive Officer, President and Vice
President of Finance, the effectiveness of the design and operation of our
disclosure  controls and procedures.  Based upon that
evaluation,  the Chief
Executive  Officer,  President and Vice President of
Finance  concluded that our disclosure  controls and
procedures are effective in


timely  alerting  them
to material  information  relating to
us  (including  our subsidiaries) required to be included in
our periodic SEC filings.





Our new
independent  accountants,  Ham Langston & Brezina LLP
conducted an audit of our financial  statements  for
2005.  In connection  with the issuance of its report to the
Board
of  Directors,  Ham  Langston  &
Brezina  LLP  reported  two material weaknesses
under standards established by the Public Company Accounting Oversight Board
regarding some elements of our system of internal controls. They noted the
following specific material deficiencies.





(i)  The
Company lacked the required  expertise  needed to
properly  account for
non-routine  transactions  (such as the acquisition of other
businesses and preparation of its
required  financial  statement  disclosure in
accordance with U.S.G.A.A.P. and SEC rules and regulations.





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





As
required by SEC rule 13a-15(b) we conducted an evaluation, under the supervision
and with the participation of our management, including our Chief Executive
Officer, President and Vice President of Finance, the effectiveness of the
design and operation of our disclosure controls and procedures.  Based
upon that evaluation, the Chief Executive Officer, President and Vice President
of Finance concluded that our disclosure controls and procedures are effectively
in timely altering them to material information relating to us (including our
subsidiaries) required to be including in our periodic SEC
filings.  However, our personnel may lack the required expertise to
account for non-routine transactions under USGAAP.





Our new
independent accountants, Ham Langston Brezina LLP conducted an audit of our
financial statements for 2005.  In connection with the issuance of its
report to the Board of Directors, Ham Langston & Brezina LLP reported two
material  weakness under standards established by the Public Company
Accounting Oversight Board regarding some elements of our system of internal
controls they noted the following material deficiencies.





Our
accounting personnel are not sufficiently schooled in US accounting to properly
account for non-routine transactions and to account for derivative instruments
under FASB 133.  To address these weaknesses, the company has hired
two independent accounting firms, one to assist its personnel in accounting for
non-routine transactions and the other to assist its personnel in accounting for
derivatives.  Based on the assistance from these firms, management
believes that it has addressed and rectified any weakness in its internal
controls.











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
            PositionJijun
      Wu
            69
            Chairman
      of the Board of DirectorsJiansheng
      Wei
            53
            President,
      Chief Executive Officer and DirectorShien
      Zhu
            49
            DirectorGenchang
      Li
            66
            DirectorShicheng
      Fu
            42
            DirectorRui
      Zhai
            38
            SecretaryZheng
      Shen
            38
            Chief
      Financial Officer





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





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





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


in Inner
Mongolia and Hebei Province.  Mr. Wei holds an MBA from Tianhin
Finance & Economics College.





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





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





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





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





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





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





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





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








ITEM 10.
EXECUTIVE COMPENSATION





Summary
Compensation Table





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





Annual
      CompensationName
      and securities principal underlying position
            Year
            Bonus
            Other
      annual compensation
            Restricted
      Stock awards
            Long
      term awardsJiJun
      Wu, Chairman & CEO
            2005
              2004
              2003
            100,000
              20,000
              27,299
            -
              -
              -
            -
              -
              -
            80,000
              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 2004 Plan is 500,000
shares.  Shares issuable under the 2004 Plan may be either treasury
shares or authorized but unissued  shares.  The number of
shares available for issuance will be subject to adjustment to prevent dilution
in the event of stock splits, stock dividends or other changes in the
capitalization of the Company.





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





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





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





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





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





Upon a
merger or consolidation  in which securities  possessing
more than 50% of the total  combined  voting power of the
Company's  outstanding  securities  are
transferred  to a person  different  from the
person  holding  those  securities immediately
prior to such transaction,  the sale,  transfer or other
disposition of all or substantially  all of the Company's assets in
complete  liquidation or


dissolution
of the Company the sale, or transfer or other  disposition of all or
substantially  all of the  Company's  assets to
an  unrelated  entity, each, a
("Corporate  Transaction"),  at the  discretion of
the Plan  Administrator,  any award  carrying a
right to exercise that was not previously exercisable shall become fully
exercisable, the restrictions,  deferral limitations and forfeiture
conditions applicable to any other award granted shall lapse and any performance
conditions imposed with respect to awards shall be deemed to be fully
achieved.





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





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





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








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


amount of
such compensation income.





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





The Board
may amend, alter,  suspend,  discontinue or terminate the
2004 Plan at any time,  except that any such action shall be subject
to shareholder  approval at the
annual  meeting  next  following  such
Board  action if such  shareholder approval is required by
federal or state law or  regulation  or the rules of any
exchange or  automated  quotation  system on which
the Common  Stock may then be listed or quoted,  or if the
Board of Directors  otherwise  determines to
submit


such
action for shareholder  approval.  In addition, no
amendment,  alteration,
suspension,  discontinuation  or  termination  to
the 2004  Plan may  materially impair the rights of
any  participant  with respect to any vested Option granted
before amendment without such
participant's  consent.  Unless terminated earlier by the
Board, the 2004 Plan shall terminate upon the earliest to occur of (i) 10 years
after the date or which the Board  approves the 2004 Plan or (ii) the
date on which all shares of Common Stock  available for
issuance  under the 2004 Plan shall have been issued as vested
shares.  Upon such 2004 Plan termination, all
Options  and  unvested  stock  issuances  outstanding  under
the 2004 Plan shall continue to have full force and effect in
accordance  with the provisions of the agreements.





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





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





Plan
      Category
            Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
            Weighted-average
      exercise price of outstanding options, warrants and rights
            Number
      of securities remaining available for
              future
      issuance under equity compensation plans (excluding securities reflected
      in columnEquity
      compensation plans approved
              by
      security holders
            0
            $.40Equity
      compensation plans not
              approved
      by security holders
            500,000
            
            1








Employment
Contracts





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





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
ELATED STOCKHOLDER MATTERS





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





Name
      and Address of Beneficial Owner (1)
            Shares
      (2)
            Percent
      of Class (2)Jijun
      Wu
            1,780,000
            4.4%Jiansheng
      Wei
            653,000
            1.64%Shien
      Zhu
            50,000
            *Genchang
      Li
            50,000
            *Shicheng
      Fu
            50,000
            *Rui
      Zhai
            75,100
            *Zheng
      Shen
            0
            *All
      executive officers and directors as a group (7 persons)
            2,583,000
            6.48%





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





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





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





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





Compliance
With Section 16(a) of the Exchange Act





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








ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





Certain
Relationships and Transactions





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





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





China  Continental,  Inc.  ("CCI")
is a related  company.  One of the  Company's
former  officers,  directors and current
major  shareholder  (Shang Jia Ji) owns more than 10% of CCI
and Towering International Trade (US) Corp. The Company had
a  receivable  from CCI
of  approximately  $618,000 at
December  31,  2003.  The
balance  represents  payments  made by
the  Company on behalf of CCI in previous


year for
various operating expenses.  The Company had a net payable to Shang
Jia Ji of  approximately  $123,000 at December 31, 2003. The
Company had payables of approximately  $210,000 at
December  31, 2003 to
other  entities  controlled  by Shang Jia Ji.
These balances  represent advances made to the Company for various
operating expenses. These balances were settled and paid during
2004.





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





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





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





(a)      Exhibits








Exhibit
      Number
            Description of Exhibit2.1*
            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).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
      Rui10.13
            Lease
      for the Shenzhen facility10.14
            Exchange
      Agreement between Eternal Technologies Group, Inc. and Sea Biomedical
      Engineering Co. International Ltd.  dated September 30, 2005
      *14.1
      *
            Code
      of Ethics for CEO and Senior Financial Officers31.1
      *
            Section
      302 Certification of CEO31.2
      *
            Section
      302 Certification of CFO32.1*
            Section
      906 Certification of CEO32.2
      *
            Section
      906 Certification of CFO*
            Previously
      Filed








ITEM 14.
PRINCIPAL ACCOUNTANTS FEES AND SERVICES





Fees Paid
to Independent Public Accountants





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





Fiscal 2005
            Fiscal 2004Audit
      fees (1)
            $111,271Audit
      related fees (2)
            39,162Tax
      fees
            5,000All
      other fees
            -Total
            $
155,433





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





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





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.Date:
      May 19, 2006
              By:
              /s/ Jianshang
      WeiJianshang
      WeiChief
      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
              JIJUN
      WU
            Chairman
      of the Board
            May
      19, 2006/s/
      JIANSHENG WEI
              JIANSHENG
      WEI
            Chief
      Executive Officer and
              Director
            May
      19, 2006/s/
      GENCHANG LI
              GENCHANG
      LI
            Director
            May
      19, 2006/s/
      SHICHANG FU
              SHICHANG
      FU
            Director
            May
      19, 2006/s/
      SHIEN ZHU
              SHIEN
      ZHU
            Director
            May
      19, 2006














EXHIBIT
31.1





CERTIFICATIONS


Certification
by Jiansheng Wei






Pursuant
to Securities Exchange Act Rule 13a-14(a)





I,
Jiansheng Wei, certify that:





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





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





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





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





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





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





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





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





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





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





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





Date: May
19, 2006








/s/    JIANSHENG
WEI





Jiansheng
Wei


Chief
Executive Officer








EXHIBIT
31.2





Certification
by Zheng Shen


Pursuant
to Securities Exchange Act Rule 13a-14(a)





I, Zheng
Shen, certify that:





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





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





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





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





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





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





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





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





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





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





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





Date: May
19, 2006








/s/   ZHENG
SHEN





Zheng
Shen


Chief
Financial Officer





EXHIBIT
32.1





Certification
of Periodic Financial Report


Pursuant
to 18 U.S.C. Section 1350





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





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





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





Date: May
19, 2006





/s/    JIANSHENG
WEI





Jiansheng
Wei


Chief
Executive Officer








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 certifiesthat, to his knowledge:





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





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





Date: May
19, 2006





/s/    Zheng
Shen





Zheng
Shen


Chief
Financial Officer