Eternal Technologies (ETLT) 10QSB 2007 Q3 Quarterly report (small business)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the quarterly period ended September 30, 2007

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from__________to__________.
Commission File No. 0-27929
ETERNAL TECHNOLOGIES GROUP, INC. (Exact name of registrant as specified in its charter)
Nevada (State or other jurisdiction of incorporation or organization)	62-1655508 (IRS Employer Identification No.)
Suite 2007, Golden Central Tower, No. 3037, Jintian Rd., Futian District, Shenzhen, Guangdong, Province, P.R. China
011-86-22-2721-7020 (Issuer's telephone number)

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

subject to such filing requirements for the past 90 days. YES X NO _

As of October 1, 2007, 47,073,579 shares of Common Stock of the issuer were outstanding.

1

TABLE OF CONTENTS
ETERNAL TECHNOLOGIES GROUP, INC.
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 2007 (Unaudited ) and	3
December 31, 2006
Unaudited Consolidated Statements of Operations for the three and nine
Months ended September 30, 2007 and 2006	4
Unaudited Consolidated Statements of Cash Flows for the nine months ended
September 30, 2007 and 2006	5
Notes to the Unaudited Consolidated Financial Statements	6
Item 2. Management's Discussion and Analysis or Plan of Operations
Item 3. Controls and Procedures	12
Part II. Other Information
Item 1. Legal Proceedings	14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	14
Item 3. Defaults Upon Senior Securities	14
Item 4. Submission of Matters to a Vote of Security Holders	14
Item 5. Other Information	14
Item 6. Exhibits	14
Signatures	15

2

Item 1. Consolidated Financial Statements

ETERNAL TECHNOLOGIES GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, 2007 and December 31, 2006
(Amounts in United States Dollars)
	September 30,				December 31,
	2007				2006
ASSETS
Current assets:
Cash and cash equivalents		$	45,634,503		$	16,024,123
Short-term investments			-			15,350,176
Accounts receivable			4,345,803			6,790,534
Inventories			50,920			5,358,213
Prepayments and deposits			6,252			200,705
Total current assets			50,037,478			43,723,751
Advances to distributors			1,090,774			1,048,929
Property and equipment, net of accumulated depreciation
of $4,073,726 and $3,943,592 at September 30, 2007 and			5,816,690			6,882,175
December 31, 2006, respectively
Land use rights, net of accumulated amortization
of $1,919,392 and $1,647,961 at September 30, 2007 and			4,705,062			4,722,362
December 31, 2006, respectively
Intangible assets			1,636,160			1,688,520
Long-term investment			4,178,473			-
Total assets		$	67,464,637		$	58,065,737
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes Payable and convertible debt		$	443,366		$	443,366
Accounts payable and accrued liabilities			1,055,838			532,037
Amounts due to related parties			215,295			216,175
Payable due to Income Taxes			215,065			229,680
Derivative financial instrument liability			281,670			438,356
Total current liabilities			2,211,234			1,859,614
Stockholders' equity:
Preferred shares - $0.001 par value, 5,000,000
authorized, none issued or outstanding			-			-
Common shares - $0.001 par value; 95,000,000
authorized; 47,073,579 shares issued and
outstanding			47,073			43,566
Additional paid - in capital			17,232,327			14,931,218
Subscription receivable			-			(10,176	)
Retained earnings			43,219,386			38,097,409
Accumulated other comprehensive income			5,636,707			3,144,106
Treasury shares, at cost, 1,509,730 shares			(882,090	)		-
Total stockholders' equity			65,253,403			56,206,123
Total liabilities and stockholders' equity		$	67,464,637		$	58,065,737
The accompanying notes are an integral part of these unaudited consolidated financial statements

3

ETERNAL TECHNOLOGIES GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2007 and 2006
(Amounts in United States Dollars)
								Three Months Ended September 30,											Nine Months Ended September 30,
								2007							2006				2007					2006
Revenue:								$							$				$					$
		Agricultural and genetics sales												1,506,132			3,129,128						16,514,000			15,652,944
																											Medical device sales and services	2,327,130	3,697,468	5,533,578	5,761,636
		Land lease												152,595			289,579						601,895			288,091
				Total revenue										3,985,857			7,116,175						22,649,473			21,702,671
Cost of sales and services
			Agricultural and genetics sales											1,226,044			2,635,873						13,481,271			12,190,489
			Medical device sales and services											674,294			1,257,431						1,706,211			2,087,083
			Land lease											68,097			64,282						201,451			192,845
					Total cost of sales and services									1,968,435			3,957,586						15,388,933			14,470,417
Gross profit														2,017,422			3,158,589						7,260,540			7,232,254
Depreciation Expense														146,072			203,291						566,172			605,714
Selling, general and administrative
		Expenses											760,397				975,078					2,845,511				2,289,608
Income from operations														1,110,953			1,980,220						3,848,857			4,336,932
Other income (expense)
		Interest income											416,015				52,384					866,250			141,221
		Gain on Sales of Assets											481,444				-					473,897			-
		Investment Income											99,088				-					293,131			-
		Change in value of derivative
						financial instruments							57,992				64,373					19,881			(39,841)
	Other income (expense), net										1,054,539						116,757				1,653,159					101,380
Income before provision for
	income taxes								2,165,492								2,096,977				5,502,016					4,438,312
Provision for income taxes													175,330				253,234				380,039					395,070
Net income								$					1,990,162		$		1,843,743		$		5,121,977			$		4,043,242
Net income per common share
	basic and diluted						$			0.04						$		0.05	$			0.11		$		0.10
Weighted average number of
		common shares outstanding,
		basic and diluted										47,073,579					40,567,300			47,073,579						40,321,041
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements

4

ETERNAL TECHNOLOGIES GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2007 and 2006
(Amounts in United States Dollars)
	2007				2006
Cash flows from operating activities
Net income		$	5,121,977		$	4,043,243
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization			767,623			798,559
Gain From Sales of Fixed Assets			(473,897	)
Equity in earnings of Turtle Farm			(293,131	)		-
Change in value of derivative financial instruments			(156,686	)		39,841
Changes in operating assets and liabilities:
Inventories			5,521,048			79,055
Accounts receivable			2,916,266			4,898,444
Prepayments and deposits			202,460			(633	)
Accounts payable and accrued expenses			478,798			1,420,264
Account payable to related parties			-			(29,262	)
Net cash provided by operating activities			14,084,458			11,249,511
Cash flows from investing activities:
Redemption/(Purchase) of Short-Term Investment			15,962,541			(15,157,639	)
Proceeds from Sales of Fixed Assets			1,376,770			-
Advances to distributors			-			(252,628	)
Long Term Investment			(3,885,342	)		-
Net cash provided by investing activities			13,453,969			(15,410,267	)
Cash flows from financing activities:
Capital contributed			2,304,615			-
Repurchase of common stock			(882,090	)		-
Collection of Subscription Receivable			10,176			-
Net cash provided by financing activities			1,432,701			-
Effect of exchange rate changes on cash			639,251			827,939
Net increase (decrease) in cash and cash equivalents			29,610,380			(3,332,817	)
Cash and cash equivalents, beginning of period			16,024,123			18,224,488
Cash and cash equivalents, end of period		$	45,634,503		$	14,891,671
Supplemental disclosure of cash flow information:
Interest Paid		$	-		$	-
Tax paid			380,039			395,070
The accompanying notes are an integral part of these unaudited consolidated financial statements

5

ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Background and Critical Accounting Policies

Pursuant to an exchange agreement, Eternal Technologies Group, Inc., ("Company") formerly known as Waterford Sterling Corporation, completed its acquisition of 100% interest of Eternal Group Limited and Subsidiaries on December 12, 2002. The Company has treated the transaction as a reverse merger for accounting purposes. Following the acquisition, the former shareholders of Eternal Technology Group Limited, a British Virgin Islands limited liability company, now owns approximately 85% of the issued and outstanding common shares of Eternal Technologies Group Inc.

Eternal Phoenix Company Limited was incorporated in the British Virgin Islands with limited liability on March 3, 2000. Pursuant to a resolution passed on September 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 100% of Willsley Company Limited ("Willsley"), a company incorporated in the British Virgin Island with limited liability on May 16, 2000. Willsley's principal activity is investments and owns 100% interest in 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 meat sheep 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 technology 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.

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.

Land lease rights and amortization

Land lease rights in Mainland China 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.

Foreign currency translation

The Company's reporting currency is the US$. The Company maintains no material accounts in currency of the United States of America. All of the subsidiaries maintain their books and accounts in the People's Republic of China currency, which is called Renminbi ("RMB"). Translation of the balance sheet amounts from RMB into US$ has been made at the single rate of exchange on September 30, 2007 and December 31, 2006 of 7.52 and 7.82 RMB/US$, respectively. The income statement has been translated at the average rate of exchange in effect during the year of 7.68 RMB/US$ and 7.98 RMB/US$ for the years ended December 31, 2006, respectively. No representation is made as to whether the RMB amounts could have been, or could be, converted into US$ at that rate on September 30, 2007 or December 31, 2006 or at any other date.

6

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 (SAB 104), revenue from the sale of livestock, mutton 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 collectibility is reasonably assured. Lease income for 2007 is recognized quarterly.

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.

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.

Recent accounting pronouncements

In November 2004, FASB issued SFAS No. 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. SFAS No. 151 is effective for fiscal years beginning after September 15, 2005 and is required to be adopted by the Company in the first quarter of fiscal 2006, beginning on January 1, 2006. The Company is currently evaluating the effect that the adoption of SFAS No. 151 will have on its consolidated financial position, results of operations and cash flows but do not expect SFAS No. 151 to have a material impact

Reclassifications

Certain reclassifications have been made to prior period financial statements to conform to the current period presentation. These reclassifications did not have an impact on the Company’s results of operations.

2. Condensed Financial Statements and Footnotes

The interim consolidated financial statements presented herein have been prepared by the Company and include the unaudited accounts of the Company and its subsidiaries. All significant inter-company accounts and

transactions have been eliminated in the consolidation.

These condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-QSB and Item 310 (b) Regulation S-B. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes the disclosures made are adequate to make the information presented not misleading. The condensed consolidated financial statements should be read in conjunction with the Company's consolidated financial statements for the year ended December 31, 2006 and notes thereto included in the Company's Form 10-KSB.

7

In the opinion of management, the unaudited consolidated condensed financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position of the Company as of September 30, 2007, the results of operations for the three and nine months ended September 30, 2007 and 2006, respectively. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations.

3. Cash and Cash Equivalents

At September 30, 2007, the Company maintains bank accounts in the PRC of approximately $45,634,503.

4. Notes Payable

On August 22, 2007, the Federal District Court for the Southern District of Texas issued a decision involving the promissory notes in default to Tom Tedrow and Market Management LLC awarding them $636,757.86 which includes accrued interest. The full amount of this judgment had previously been reserved.

5.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 approximately $2,300,000 expire in years between 2022 and 2025. However a valuation allowance has been provided as management does not expect the tax benefits to be realized. No other significant deferred assets or liabilities existed at December 31, 2006. The Company's net operating loss carry forwards may be subject to annual limitations, which could reduce or defer the utilization of the losses as a result of an ownership change as defined in section 382 of the Internal Revenue Code.

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

Companies with operations in the Peoples Republic of China may be subject to taxes for income therein. The Income Tax Law of the Peoples Republic of China for Enterprises with Foreign Investment and Foreign Enterprises 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 anticipates that the holiday will extend through July 2008.

The tax holiday resulted in tax savings that account for substantially the entire difference between the income tax provision that would be expected using United States federal statutory tax rates and the tax provision of zero for the three and nine months ended September 30, 2007. The tax provision for the corresponding period of the current year were $175,330 and $ 380,039 respectively, all from the business activities of E-Sea.

6. Contingencies

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 were penalties for not timely meeting filing and effectiveness deadlines, and the Company received claims related to these penalties. On May 24, 2005 the Company issued convertible notes, allowing for conversion of the penalty to the Company’s common stock, to the holders of the subscription agreements who accepted settlement. One subscription agreement holder elected to not accept a convertible note and is pursuing legal action as discussed in Part II, Item 1.

8

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.

7.Related Party Transactions

During the three and nine months ended the Company engaged in various transactions with related parties as follows:

	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2007		2006		2007		2006
Common stock sold by officers/ directors
directors with proceeds contributed
to the company for payment of
operating expenses	$	186,972	$	-	$	186,972	$	-

8. Non-Cash Investing and Financing

During the three and nine months ended the Company engaged in various transactions with related parties as follows:

	Three Months Ended September 30				Nine Months Ended September 30
	2007		2006		2007		2006
Common Stock issued to convert debt	$	-	$	52,262			$	$ 419,335
Common Stock issued for acquisition of Investment	$	-	$	-	$	1,903,811	$	-
Common Stock issued upon exercise of warrants	$	-	$	-	$	136,804	$	-
Compensatory common stock issuances	$	-	$	-	$	264,000	$	-

9.   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 for the nine months ended September 30, 2007and 2006, is as follows:

9

	Agricultural		Land		Medical
	Genetics		Lease		Devices		Corporate			Total
2007
Revenues	$	16,514,000	$	601,895	$	5,533,578	$	-		$	22,649,473
Income from operations		3,475,971		400,444		2,153,555		(907,993	)		5,121,977
Depreciation and amortization		351,675		201,451		214,497		-			767,623
Total assets		50,007,709		4,705,062		10,810,992		1,940,874			67,464,637

	Agricultural		Land		Medical
	Genetics		Lease		Devices		Corporate			Total
2006
Revenues		15,652,944		288,091		5,761,636		-			21,702,671
Income from operations		2,310,783		95,246		2,624,488		(693,585	)		4,336,932
Depreciation and amortization		400,984		192,845		204,730		-			798,559
Total assets		44,031,943		4,728,236		7,742,108		2,730			56,505,017

Information regarding our reportable segments for the three months ended September 30, 2007 and 2006, is as follows:

	Agricultural			Land		Medical
	Genetics			Lease		Devices		Corporate			Total
2007
Revenues	$	1,506,132		$	152,595	$	2,327,130	$	-		$	3,985,857
Income from operations		(62,968	)		84,498		1,164,005		(74,582	)		1,110,953
Depreciation and amortization		73,443			68,097		72,629		-			214,169

	Agricultural		Land		Medical
	Genetics		Lease		Devices		Corporate			Total
2006
Revenues		3,129,128		289,579		3,697,468		-			7,116,175
Income from operations		158,484		225,297		1,679,762		(83,323	)		1,980,220
Depreciation and amortization		134,692		64,282		68,599		-			267,573

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Item 2. Management’s Discussion and Analysis or Plan of Operation

The Company’s business is seasonal. Accordingly, the results of operations for the three and nine month periods ended September 30, 2007 are not indicative of the results for any other quarter, period or for the fiscal year.

The following is derived from, and should be read in conjunction with, our unaudited condensed consolidated financial statements, and related notes, as of and for the three and six months ended September 30, 2007 and 2006.

Three Months Ended September 30, 2007 Compared to Three months Ended September 30, 2006

Revenues -

Revenues for the three months ended September 30, 2007 decreased by $3,130,318 or 44.0% to $3,985,857 from $7,116,175 for the corresponding period of the prior year. The following table indicates the changes in sales by category for the two periods.

	Three months ended September 30
Source of Revenue	2007		2006		Difference
Mutton		1,506,132		3,129,128		(1,622,996	)
Land Lease		152,595		289,579		(136,984	)
E-Sea		2,327,130		3,697,468		(1,370,338	)
Totals		3,985,857		7,116,175		(3,130,318	)

Cost of Sales and Services

Cost of sales and services for the three months ended September 30, 2007 decreased $1,989,151 or 50.3% to $1,968,435 from $3,957,586 for the corresponding period of the prior year. The following table indicates the changes in cost of sales and services for the two periods .

Source of Cost of	Three Months Ended September 30,							2007
Sales and Services	2007		2006		Difference			Profit Margin
Cattle Embryo Transfer
Land lease expense		68,097		64,282		3,815			55.4	%
Feeding fee		29,066		48,846		(19,780	)		-
Mutton		1,196,978		2,587,027		(1,390,049	)		20.6	%
E-Sea		674,294		1,257,431		(583,137	)		71.0	%
Totals		1,968,435		3,957,586		(1,989,151	)		50.3	%

Depreciation and Amortization -

Depreciation and amortization expenses decreased by $57,219 or 28.1% to $146,072 from $203,291 for the corresponding period of the prior year. This decrease is attributable to the disposition of fixed assets.

Selling and Administrative Expenses -

Selling and administrative expenses decreased by $214,681 or 22% to $760,397 from $975,078 for the corresponding period of the prior year. The following table indicates the changes in selling, general and administrative expenses by category for the two periods:

	Three Months Ended September 30,
Category		2007		2006		Difference
Office charges	$	24,259	$	16,136	$	8,123
Salaries		369,019		244,197		124,822
Distributor Commissions		144,668		227,526		(82,858	)
Travel		4,973		3,731		1,242
Entertainment		2,043		2,887		(844	)
Legal & Professional		65,453		80,113		(14,660	)
Rent		15,950		24,019		(8,069	)
Telephone		1,706		2,174		(468	)
Research & Development		132,117		-		132,117
Miscellaneous		210		363		(153	)
Advertising		-		373,932		(373,932	)
		760,397		975,078		(214,681	)

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Other Income (Expense)

For the three months ended September 30, 2007 the company experienced an increase in other income of $937,782 or 803% to $1,054,539 from $116,757 for the corresponding period of the prior year. The increase is primarily attributable to an increase in interest income of $416,015 from short-term investment, an increase in equity earnings of $99,088 on investment in Changsha Hongyuan and a gain on the sale of assets $481,444.

For the three months ended September 30, 2007 the company had a change in the value of derivative instruments of $57,992. For the three months ended September 30, 2006 the company also had a positive change in the value of derivative instruments of $64,373.

Income Taxes

For the three months ended September 30, 2007, the Company provided taxes on its income from its E-Sea operations of $175,330. This compares to a tax provision of $253,234 for the corresponding period of the prior year. The remainder of the Company's income is from agricultural activities which benefits from a tax holiday.

As a result of the foregoing, the company had net income of $1,990,162 or $.04 per share for the three months ended September 30, 2007 compared to net income of $1,843,743 or $.05 per share for the corresponding period of the prior year.

Nine Months Ended September 30, 2007 As Compared to Nine Months Ended September 30, 2006

Revenues-

Revenues for the nine months ended September 30, 2007 increased by $946,802 or 4.4% to $22,649,473 from $21,702,671 for the corresponding period of the prior year. The following table indicates the changes in sales by category for the two periods:

	Nine Months ended September 30
Source of Revenue	2007	2006	Difference
Lamb meat	1,746,407	$3,625,457	(1,879,050)
Cattle Embryo Transfers	4,507,697	5,238,018	(730,321)
Embryo	4,051,716	-	4,051,716
Mutton	6,208,180	5,442,550	765,630
E-Sea	5,533,578	5,761,636	(228,058)
Land Lease	601,895	288,091	313,804
Transfer Services	-	1,346,919	(1,346,919)
Total	22,649,473	$21,702,671	$946,802

Cost of Sales and Services -

Cost of sales and services for the nine months ended September 30, 2007 increased by $918,516 or 6.3% to $15,388,933 from $14,470,417 for the corresponding period of the prior year. The following table indicates the changes in cost of sales and services by category for the two periods:

	Nine Months Ended September 30,
Source of Cost of Sales & Services	2007	2006	Difference	2007 Gross Profit Margin
Lamb meat	1,220,205	$2,544,180	$(1,323,975)	30.1%
Cattle Embryo Transfer	3,226,912	3,810,783	(583,871)	28.4%
Embryo	3,986,576	-	3,986,576	1.6%
Mutton	4,918,080	4,456,930	461,150	9.6%
Feeding fee	129,499	143,920	(14,421)	-
Transfer Services	-	1,234,676	(1,234,676)	-
Land Lease	201,451	192,847	8,604	66.5%
E-Sea	1,706,211	2,087,081	(380,870)	69.2%
Total	$15,388,933	$14,470,417	$918,516	32.3%

12

Depreciation and Amortization -

Depreciation and amortization expenses decreased by $39,542 or 6.5% to $566,172 from $605,714 for the corresponding period of the prior year. This decrease is attributable to the disposition of fixed assets and change in currency valuation.

Selling, General and Administrative Expenses -

Selling, General and Administrative expenses increased by $555,903 or 24.3% to $2,845,511 from $2,289,608 for the corresponding period of the prior year. The following table indicates the changes in Selling, General and Administrative Expenses by category for the two periods.

	Nine Months Ended September 30,
Category	2007	2006	Difference
Office changes	$ 75,952	$ 56,059	$ 19,893
Salaries	1,091,668	728,829	362,839
Commissions to distributors	341,986	319,893	22,093
Travel	24,314	33,967	(9,653)
Consulting Fee	-	24,943	(24,943)
Entertainment	51,750	11,697	40,053
Legal & Professional	342,859	372,102	(29,234)
Rent	61,244	69,194	(7,950)
Telephone	4,512	5,468	(956)
Research & Development	260,560	-	26,0560
Miscellaneous	666	233,312	(233,646)
Advertising Expense	-	374,144	(374,144)
Marketing Expense	30,000	-	30,000
Litigation Reserve	500,000	-	500,000
U.S. Office Expense	60,000	60,000	-
Totals	$2,845,511	$2,289,608	$555,903

Other Income (Expense)

For the nine months ended September 30, 2007 the company experienced an increase in other income of $1,551,779. This resulted from an increase in interest income of $725,029 an increase in investment income of $293,131 and a reduction in the impact of the charges in value of our derivative financial instruments of $59,722 and in increase in the gain on the sale of assets of $473,897.

Income Taxes

The Company provided taxes on its income from the E-Sea operations of $380,039 for the nine-month ended September 30, 2007. This compares with a provision for income taxes for the prior year period of $395,070.

As a result of the foregoing, the Company had net income of $5,121,977 or $.11 per share for the nine months ended September 30, 2007 compared to net income of $4,043,242 or $.10 per share for the corresponding period of the prior year.

Liquidity and Capital Resources

As of September 30, 2007, the Company had cash and cash equivalents of $45,634,503 and working capital of $47,826,244. This compares with cash and cash equivalents of $16,024,123 and working capital of $41,864,137 as of December 31, 2006.

13

Cash provided from investing activities was $13,453.969 during the nine months ended September 30,2007 compared to cash used $15,410,267 for the nine months ended September 30, 2006. This resulted from cash provided from redemption of short-term investment $15,962,541 cash provided from the sale of fixed assets of $1,376,770 and reduced by the purchase of a long-term investment of $3,885,342 for the nine months ended September 30, 2007 compared to cash used to purchase of short-term investment $15,157,639 and advances to distributors of $252,658 for the corresponding period of the prior year.

Cash provided from financing activities for the nine months ended September 30, 2007, totaled $1,432,701, $2,304,615 from the issuance of common stock, $10,176 from the collection of a common stock receivable, and $882,090 used in repurchase of common stock. There were no financing activities for the nine months ended September 30, 2006.

The Company has cash and bank balances of $45,634,503 which is more than sufficient to cover its PRC operations. However, if the Company is to expand outside the PRC, as it anticipates doing, or pay its non-PRC obligations, it will have to sell additional shares of its stock or borrow funds from third parties. Unless it is able to either borrow funds or sell additional shares, it will have insufficient resources to carry out its business objectives outside the PRC for the next twelve (12) months.

Item 3. Controls and Procedures

We strive to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designated and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls.

Our independent registered public accounting firm, Ham Langston & Brezina, L.L.P. ("HLB") conducted an audit of our financial statements for 2006 and 2005. In connection with the issuance of its report to the Board of Directors, HLB reported two material weaknesses under standards established by the Public Company Accounting Oversight Board regarding some elements of our system of internal controls. They noted the following specific material deficiencies.

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

(ii) Accounting for derivative instruments under FASB 133

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

Other than the foregoing initiatives, there were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect such internal controls subsequent to the date of their evaluation.

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.

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

14

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

On August 23, 2007, the U. S. District Court for the Southern District of Texas awarded Western Securities Corporation the sum of $636,757.86 plus accrued interest since May 22, 2007 and attorney fees in an amount to be determined. The Company is currently considering whether to appeal this judgment. The judgment will have no impact on earnings, as the potential liability had been previously accrued.

On the 4^th of September 2007, the Company was served with a suit from International Capital Advisors LLC, as assignee of Market Management, Inc. seeking repayment of the sum of $250,000 alleged paid by Market Management, Inc. on behalf of the Company. On September 18, 2007, the Company filed a general denial to this claim and the case is currently in discovery. It has been scheduled for trial in July, 2008.

The third cause of action involves one of the convertible promissory notes owned by Bristol Investments Limited. This cause of action was filed in State Court in New York and three times was dismissed. On March 30, 2006 without stating a new cause of action, Bristol Investments Limited re-filed the same cause of action against the Company. This case is currently pending.

As of October 31, 2007, there are no other causes of action pending against the Company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the three month period ended September 30, 2007 there were no sales of equity securities.

Item. 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits

EXHIBIT NO.	IDENTIFICATION OF EXHIBIT
31.1	Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

15

Signature

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized.

	ETERNAL TECHNOLOGIES GROUP, INC.
Date: November 8, 2007	By:	/s/ Jiansheng Wei
		Jiansheng Wei
		Chief Executive Officer

Date: November 8, 2007	By:	/s/ Zheng Shen
		Zheng Shen
		Chief Financial Officer

16

CERTIFICATIONS

EXHIBIT 31.1

CERTIFICATION BY JIANSHENG WEI PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14(A)

I, Jiansheng Wei, certify that:

1. I have reviewed this quarterly report on Form 10-QSB 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: November 8, 2007

/s/ JIANSHENG WEI

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

Jiansheng Wei

Chief Executive Officer

17

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 quarterly report on Form 10-QSB 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: November 8, 2007

/s/ ZHENG SHEN

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

Zheng Shen

Chief Financial Officer

18

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 Quarterly Report on Form 10-QSB of the Company for the quarterly period ended September 30, 2007, 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: November 8, 2007

/s/ JIANSHENG WEI

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

Jiansheng Wei

Chief Executive Officer

19

EXHIBIT 32.2

CERTIFICATION OF PERIODIC FINANCIAL REPORT PURSUANT TO 18 U.S.C. SECTION 1350

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

(i) the Quarterly Report on Form 10-QSB of the Company for the quarterly period ended September 30, 2007, 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: November 8, 2007

/s/ Zheng Shen

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

Zheng Shen

Chief Financial Officer