Eternal Technologies 10K/A 2005 Annual report (amended)

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 1934
For the Fiscal Year Ended December 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File No. 0-27929
ETERNAL TECHNOLOGIES GROUP, INC. --------------------------------------------------------------- (Name of Small Business Issuer in its charter)
Nevada (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: 011-86-22-2721-7020
Securities 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 None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value ------------------------------------------- (Title of Class)

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

Yes [X] No [ ]

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

None

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

TABLE OF CONTENTS

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

Fourth Quarter.............	$0.60	$0.34
Third Quarter..............	0.60	0.32
Second Quarter.............	0.96	0.41
First Quarter..............	1.13	0.79
Calendar Year 2005

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

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

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

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

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

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

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

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

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

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 Period
	Total		2006		2007		2008
Thereafter
Operating 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	13
Consolidated Balance Sheets as of December 31, 2005 and 2004	15
Consolidated Statements of Income for the years ended December 31, 2005 and 2004	16
Consolidated Statements of Changes in Shareholders' Equity for the for the years ended December 31, 2005 and 2004	17
Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004	19
Notes to Consolidated Financial Statements	20

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.

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			2004
ASSETS	(As Restated)
Current assets:
Cash and cash equivalents	$	8,224,488		$	27,473,354
Short-term investment		-			9,909,084
Accounts receivable		7,137,018			1,538,313
Inventories		135,341			621,307
Prepayments and deposits		57,624			602
Total current assets		35,663,555			29,633,576
Advances to distributors		520,227			-
Property and equipment, net		7,317,502			5,904,050
Land use rights, net		4,828,051			4,944,639
Intangible assets		1,263,409			-
Total assets	$	49,592,744		$	40,482,265

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable	$	443,366		$	443,366
Accounts payable and accrued expenses		706,717			1,526,595
Amounts due to related parties		240,368			272,465
Derivative financial instrument liabilities		562,830			317,658
Total current liabilities		1,953,281			2,560,084
Commitments and contingencies
Unregistered common stock subject to registration rights; $0.001 par value, 790,827 shares issued and outstanding at December 31, 2004		-			563,991
Shareholders' equity: Preferred stock - $0.001 par value, 5,000,000 shares authorized, none issued or outstanding		-
Common stock - $0.001 par value, 95,000,000 shares authorized, 39,854,026 and 29,888,803 shares issued and outstanding at December 31, 2005 and 2004, respectively		39,854			29,888
Additional paid-in capital		13,217,874			8,173,468
Stock subscription receivable		(10,176	)		(10,176	)
Retained earnings		33,215,741			29,165,010
Accumulated other comprehensive income		1,176,170			-
Total shareholders' equity		47,639,463			37,358,190
Total liabilities and shareholders' equity	$	49,592,744		$	40,482,265

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		$	16,834,759
Cost of sales		15,628,000			10,305,514
Gross profit		7,404,965			6,529,245
Selling, general and administrative expenses		2,350,556			1,580,990
Depreciation and amortization		840,795			760,691
Income from operations		4,213,614			4,187,564
Other income (expenses):
Gain on sale of asset		18,889			-
Interest income		188,519			126,049
Interest expense		(54,761	)		(27,234	)
Impairment loss		-			(53,517	)
Change in value of derivative financial instruments		(245,172	)		192,444
Total other income and expenses, net		(92,525	)		237,742
Income before provision for income taxes		4,121,089			4,425,306
Provision for income taxes		70,358			-
Net income	$	4,050,731		$	4,425,306
Net income per common share
Basic and diluted	$	0.12		$	0.15
Weighted average number of common shares outstanding
Basic		33,253,761			29,551,485
Diluted		33,275,289			29,563,297

The accompanying notes are an integral part of these

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		Total
	Shares			Amount
Balance at December 31, 2003 as previously reported		29,177,396		$	29,177		$	8,955,570		$	(10,176	)	$	24,245,643	$	-	$	3,220,214
Prior period adjustment (See Note 20)		(1,749,288	)		(1,749	)		(2,249,946	)		-			494,061		-		(1,757,634	)
Balance at December 31, 2003, as restated		27,428,108			27,428			6,705,624			(10,176	)		24,739,704		-		31,462,580
Net income, as restated		-			-			-			-			4,425,306		-		4,425,306
Notes payable conversion		109,984			110			60,381			-			-		-		60,491
Stock issued for public relation services		100,000			100			89,900			-			-		-		90,000
Stock issued for employee compensation		1,292,250			1,292			515,608		-				-		-		516,900
Capital contributed		-			-			119,372			-			-		-		119,372
Reclassification of unregistered common stock to paid-in capital		958,461			958			682,583			-			-		-		683,541
Balance at December 31, 2004 (as restated)		29,888,803		$	29,888		$	8,173,468		$	(10,176	)	$	29,165,010	$	-	$	37,358,190

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		Total
	Shares		Amount
Balance at December 31, 2004		29,888,803	$	29,888	$	8,173,468	$	(10,176	)	$	29,165,010	$	-	$	37,358,190
Net income		-		-		-		-			4,050,731		-		4,050,731
Foreign currency translation adjustment		-		-		-		-			-		1,176,170		1,176,170
Other comprehensive income		5,226,901
Notes payable conversion		373,295		374		356,045		-			-		-		356,419
Common stock issued for services		591,225		591		239,022		-			-		-		239,613
Common stock issued for cash and as compensation to employees		2,500,000		2,500		1,197,500		-			-		-		1,200,000
Common stock issued under acquisition agreement		5,709,876		5,710		2,278,240		-			-		-		2,283,950
Capital contributed		-		-		410,399		-			-		-		410,399
Reclassification of unregistered common stock to paid-in capital		790,827		791		563,200		-			-		-		563,991
Balance at December 31, 2005		39,854,026	$	39,854	$	13,217,874	$	(10,176	)	$	33,215,741	$	1,176,170	$	47,639,463

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

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

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

Land lease rights and amortization

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

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

Intangible Assets

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

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		2004
Numerator: Net income	$	4,050,731	$	4,425,306
Denominator: Denominator for basic earnings per share-weighted average shares		33,253,761		29,551,485
Effect of diluted securities: Warrants		21,528		11,818
Denominator for dilutive earnings per share: Adjusted weighted average shares and assumed conversions		33,275,289		29,563,297
Earnings per share from continuing operations – diluted	$	0.12	$	.15
Earnings 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		2005
Sheep and cows	$	-	$	231,325
Sheep and cow embryos		12,530		364,126
Other raw materials products		122,196		25,856
Total 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			2004
Office equipment in the United States	$	40,761		$	-
Infrastructure		226,506			226,506
Building		6,244,561			6,244,561
Equipment		1,817,486			1,221,837
Cows		1,273,883			-
Other		626,506			626,506
Total property and equipment		10,229,703			8,319,410
Less 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			2004
Patented 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:

Year
2006	148,636
2007	148,636
2008	148,636
2009	148,636
2010	148,636
Thereafter	520,229
	$ 1,263,409

8. NOTES PAYABLE

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

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

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

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 Price
Options Outsanding at 1-1-04	-	-
Options Granted	500,000	-
Options Exercised	-	-
Options Cancelled	-	-
Options Outstanding 12-31-04	500,000	-
(B) 2005 Stock Option Plan
Options Outstanding at 1-1-05	-	-
Options Granted	2,500,000	$.40
Options Exercised	2,500,000	.40
Options 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	2005
Percent	Amount			Percent			Amount
Income taxes at federal statutory rate 34%	$	1,533,062			34	%	$	1,608,048
Effect of United States and British Virgin Island losses 7%		292,179			7	%		299,498
Income 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	2004
Purchases:
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		RMB
Cash	$	1,432,650	$	11,932,005
Current assets		591,384		4,595,457
Property and equipment, net		516,226		4,284,674
Amortizable intangible assets		1,546,988		12,840,000
Other		506,024		4,200,000
Total assets acquired		4,593,277		37,852,136
Liabilities Assumed
Current liabilities		89,046		722,172
Total liabilities assumed		89,046		722,172
Net assets acquired		4,504,231		37,129,964
Consideration Given
Cash		2,283,950		18,500,000
Common stock		2,283,950		18,500,000
Total consideration given	$	4,567,900	$	37,000,000
Net cash paid	$	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	$	31,162,513
Net income	$	5,815,860
Basic 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:

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

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

20. RESTATEMENT

The Company has restated its 2004 financial statements from amounts previously reported. The Company has determined that certain financial instruments issued by the Company contain features that require the Company to account for these features as derivative instruments 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 Restated
ASSETS
Current assets	$	29,633,576		$	-		$	29,633,576
Property and equipment, net		5,904,050			-			5,904,050
Land use rights, net		4,944,639			-			4,944,639
Total assets	$	40,482,265		$	-		$	40,482,265
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities Notes payable	$	433,366		$			$	443,366
Accounts payable and accrued expenses		1,526,595			(276,768	)		1,249,827
Payable to related company		272,465						272,465
Derivative financial instruments liabilities		-			760,167			760,167
Total current liabilities		2,242,426			483,399			2,725,825
Shareholders' equity:
Preferred stock		-
Common stock		30,679			(952,711	)		30,679
Additional paid-in capital		9,740,830			(1,372,751	)		8,788,119
Stock subscription receivable		(10,176	)		469,312			(10,176	)
Retained earnings		28,478,506			612,584			28,947,818
Total shareholders' equity		38,239,839			(483,399	)		37,756,440
Total liabilities and shareholders' equity	$	40,482,265		$	-		$	40,482,265
SUMMARY OF STATEMENT INCOME
As Restated	As Previously Reported						Adjustment
Sales	$	16,834,759		$	-			16,834,759
Income from operations		4,187,564			276,768			4,464,332
Other income (expenses)
Interest income		126,049			-			126,049
Interest expense		(27,234	)		-			(27,234	)
Impairment loss		(53,517	)		-			(53,517	)
Gain on derivative financial instruments		-			165,379			165,379
Other income and expenses, net		45,298			165,379			210,677
Net 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		2004
Issuance of common stock for payments of notes payable	$	-	$	60,491
Inventory received for settlement of property held for sale	$	-	$	1,518,072
Conversion 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		Corporate
2005
Revenues $ 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		199,762
2004
Revenues	$	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.

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

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

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

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

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

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

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

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

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 Compensation
Name and securities principal underlying position	Year	Bonus	Other annual compensation	Restricted Stock awards	Long term awards
JiJun 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 column
Equity compensation plans approved by security holders	0	$.40
Equity 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.

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

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

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

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

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

(a) Exhibits

Exhibit Number	Description of Exhibit
2.1*	Exchange Agreement by and between Waterford Sterling Corporation and Eternal Technology Group Ltd. dated December 12, 2002 (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated December 12, 2002, filed with the SEC on December 18, 2002).
3.1*	Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form SB-2, filed October 22, 2003 (SEC File No. 333-109908)).
3.2*	Articles of Amendment, dated December 31, 2002, to the Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated December 12, 2002, filed with the SEC on December 18, 2002).
3.3*	Bylaws of Eternal Technologies Group, Inc. adopted December 12, 2002 (incorporated by reference to Exhibit 3.3 to the Company's Registration Statement on Form SB-2, filed October 22, 2003 (SEC File No. 333-109908)).
10.1*	Research Contract with Shen Yang Institute of Applied Ecology of the Chinese Academy of Science. (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2002).
10.2*	Research Contract with Tower International Trade Corp. (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2002).
10.3*	Purchase Agreement with Shang JaiJi dated July 15, 2000 for the purchase of the Shares of Willsley Company Limited (incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2002).
10.4*	Amendment to the Purchase Agreement with Shang Jai Ji dated July 15, 2000 for the Purchase of the Shares of Willsley Company Limited (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2002).
10.5*	Dairy Cow Purchase Contract dated August 5, 2003 by and between Inner Mongolia Aeirshan Agricultural Technologies Limited and Xinjiang Bajinquoleng Husbandry Center.
10.6*	Consulting Agreement dated January 1, 2003 by and between the Company and Market Management LLC.
10.7 *	Public Relations Agreement dated January 23, 2004 by and between the Company and PMR and Associates LLC.
10.8*	Contract dated June 13, 2003 by and between Eternal Technologies Group, Inc. and Paranna, Inc.
10.9*	Form of Subscription Agreement relating to 2003 Placement of Common Stock (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form SB-2, filed October 22, 2003 (SEC File No. 333-109908)).
10.10*	Form of Placement Agreement with First Montauk Securities Corp (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form SB-2, filed October 22, 2003 (SEC File No. 333-109908)).
10.11*	Form of Warrant Agreement (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form SB-2, filed October 22, 2003 (SEC File No. 333-109908)).
10.12	Employment Agreement between Eternal Technologies Group, Inc. and Zhai Rui
10.13	Lease for the Shenzhen facility
10.14	Exchange Agreement between Eternal Technologies Group, Inc. and Sea Biomedical Engineering Co. International Ltd. dated September 30, 2005 *
14.1 *	Code of Ethics for CEO and Senior Financial Officers
31.1 *	Section 302 Certification of CEO
31.2 *	Section 302 Certification of CFO
32.1*	Section 906 Certification of CEO
32.2 *	Section 906 Certification of CFO
*	Previously Filed

ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES

Fees Paid to Independent Public Accountants

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

Fiscal 2005	Fiscal 2004
Audit fees (1)	$111,271
Audit related fees (2)	39,162
Tax fees	5,000
All 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 Wei
		Jianshang Wei
		Chief Executive Officer

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

Signatures	Title	Date
/s/ JIJUN WU 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.;

(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:

(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

Eternal Technologies (ETLT) Inactive 10-K/A2005 FY Annual report (amended)