Eternal Technologies (ETLT) 10-Q 2008 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

[  ] TRANSITION  REPORT  PURSUANT  TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________.

Commission File No. 0-27929

ETERNAL TECHNOLOGIES GROUP, INC.

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(Exact name of registrant as specified in its charter)

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

Suite 2007, Main Block

Jinzhonghuan Commercial Tower

3037th Jintian Rd. Futian Dist.

Shenzhen, Guangdong Province, China 518048

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(Address of principal executive offices)

011-86-22-2721-7020

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(Issuer's telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company.

Large Accelerated Filer ___                                           Accelerated Filer ____                                           Non-Accelerated Filer ___                                                      Small Reporting Company _X_

As of August 14, 2008, 55,689,634 shares of Common Stock of the issuer were outstanding.

1

ETERNAL TECHNOLOGIES GROUP, INC.
10-QSB FOR THE QUARTER ENDED JUNE 30, 2008
INDEX
PART I - FINANCIAL STATEMENTS
Item 1.	Consolidated Financial Statements
	Unaudited Consolidated Condensed Balance Sheets at
	June 30, 2008 and December 31, 2007	3
	Unaudited Consolidated Condensed Statements of Operations
	for the three months and six months ended June 30, 2008 and 2007	4
	Unaudited Consolidated Condensed Statements of Cash
	Flows for the six months ended June 30, 2008 and 2007	5
	Notes to Unaudited Consolidated Condensed Financial Statements	6
Item 2.	Management Discussion and Analysis of Financial Condition and Result of Operations	11
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	14
Item 4.	Controls and Procedures	14
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	16
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	16
Item 3.	Defaults Upon Senior Securities	16
Item 4.	Submission of Matters to a Vote of Security Holders	16
Item 5.	Other Information	16
Item 6.	Exhibits	17
	Signatures	17
	Certifications	18

2

ETERNAL TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, 2008 and December 31, 2007
(Amounts in United States Dollars)
		(Unaudited) June 30,			(See Note) December 31,
		2008			2007
ASSETS
Current assets:
Cash and cash equivalents		$	27,976,450		$	12,692,479
Short-term investments			14,717,153			13,827,174
Accounts receivable			7,086,207			6,274,866
Inventories			-			6,312,236
Prepayments and deposits			14,989			14,082
Total current assets			49,794,799			39,120,837
Property and equipment, net of accumulated depreciation
of $5,033,889 and $4,296,083 at June 30, 2008 and
December 31, 2007, respectively			7,158,822			7,161,773
Land use rights, net of accumulated amortization
of $2,324,793 and $2,043,266 at June 30, 2008 and
December 31, 2007, respectively			4,922,217			4,765,501
Intangible assets			1,381,734			6,571,098
Long term Accounts Receivable			3,201,490			-
Patent held for lease, net of accumulated amortization
of $302,201 at June 30, 2008			2,288,095			-
Other Assets			19,063,231			17,433,088
	Total assets	$	87,810,388		$	75,052,297
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable		$	443,366		$	443,366
Accounts payable and accrued liabilities			1,378,620			1,294,310
Amounts due to related parties			215,672			215,295
Income taxes  payable			193,992			167,764
Deferred Income			1,699,813
Derivative financial instrument liability			37,383			109,300
Total current liabilities			3,968,846			2,230,035
Stockholders' equity:
Preferred shares - $0.001 par value, 5,000,000
Authorized, none issued or outstanding			-			-
Common shares - $0.001 par value; 95,000,000
Authorized; 55,689,634 shares issued and
Outstanding			55,689			52,137
Additional paid - in capital			23,075,753			21,303,505
Retained earnings			49,457,232			44,848,766
Treasury shares at cost 1,509,703 shares			(882,090	)		(882,090	)
Accumulated other comprehensive income			12,134,958			7,499,944
Total stockholders' equity			83,841,542			72,822,262
	Total liabilities and stockholders' equity	$	87,810,388		$	75,052,297
Note: The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principals for complete financial statements. The accompanying notes are an integral part of these unaudited consolidated condensed financial statements

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ETERNAL TECHNOLOGIES GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
For the Three Months and Six Months ended June 30, 2008 and 2007
(Amounts in United States Dollars)
	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008		2007
Revenue:			$			$	$		$
Agricultural and genetics sales		10,445,408			9,214,703			18,160,147		14,923,370
Medical device sales and services		3,301,219			1,719,093			5,124,005		3,216,075
Leasing		294,853			150,213			453,862		449,049
Total revenue		14,041,480			11,084,009			23,738,014		18,588,494
Cost of sales and services
Agricultural and genetics sales		8,376,413			7,002,928			15,332,910		12,186,174
Medical device sales and services		1,295,390			501,611			1,870,931		1,033,985
Leasing		281,413			139,331			428,787		277,187
Total cost of sales and services		9,953,216			7,643,870			17,632,628		13,497,346
Gross profit		4,088,264			3,440,139			6,105,386		5,091,148
Depreciation and amortization expenses		265,521			138,458			596,826		275,340
Selling, general and administrative expenses		1,729,081			1,287,108			2,508,867		1,956,574
Research and development expense		286,962			130,055			282,780		129,366
Income from operations		1,806,700			1,884,518			2,716,913		2,729,868
Other income (expense)
Interest income		60,352			53,662			106,341		103,530
Gain on Sale of Assets		-			-			269,649		(849	)
Investment Income		885,994			97,541			1,746,168		543,338
Change in value of derivative
financial instruments		15,797			769			71,917		(38,111	)
Other income (expense), net		962,143			151,972			2,194,075		607,908
Income before provision for
Income taxes		2,768,843			2,036,490			4,910,988		3,337,776
Provision for income taxes		155,283			117,149			302,522		205,694
Net income		2,613,560			1,919,341			4,608,466		3,132,082
Net income per common share
Basic and diluted	$	0.05		$	0.04		$	0.09	$	0.07
Weighted average number of
Common shares outstanding,
Basic and diluted		53,400,825			47,073,579			52,765,941		47,073,579
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements

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ETERNAL TECHNOLOGIES GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2008 and 2007
(Amounts in United States Dollars)
	2008			2007
Cash flows from operating activities
Net income	$	4,608,466		$	3,132,082
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization		1,025,614			552,527
Gain on sale of assets		(269,649	)
Investment income		(1,746,168	)
Change in value of derivative financial instruments		(71,917	)		(98,693	)
Compensatory stock issuances		710,320			-
Changes in operating assets and liabilities:
Inventories		6,718,520			5,430,445
Accounts receivable		(184,481	)		1,752,930
Short-term investments		494,775			-
Long-term investments		436,567			-
Prepayments and deposits		600,755			199,560
Accounts payable and accrued expenses		16,431			539,447
Net cash provided by operating activities		12,339,233			11,508,298
Cash flows from investing activities:
Proceeds from sales of Intangible Assets		1,062,313
Purchase of fixed assets		-			(10,212	)
Purchase of long-term investment		-			(4,018,919	)
Net cash provided by /(used in) investing activities		1,062,313			(4,029,131	)
Cash flows from financing activities:
Capital contributed		-			2,304,615
Common Stock Receivable		-			10,176
Proceeds from sales of common stocks		1,065,480			-
Net cash provided by financing activities		1,065,480			2,314,791
Effect of exchange rate changes on cash		816,945			404,974
Net increase (decrease) in cash and cash equivalents		15,283,971			10,198,932
Cash and cash equivalents, beginning of period		12,692,479			16,024,123
Cash and cash equivalents, end of period	$	27,976,450		$	26,223,055
Supplemental disclosure of cash flow information:
Interest paid	$	-		$	-
Income taxes paid	$	159,610			205,694
Non-cash investing and financing activities
Receivable from sale of intangible assets	$	3,201,490		$	-
Deferred gain from sale of intangible assets	$	1,099,059		$	-
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements

5

ETERNAL TECHNOLOGIES GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Amounts in United States Dollars)

1. REPORTING ENTITY

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

 Eternal - - BVI was incorporated in the British Virgin Islands in March 2000.   In May 2000, Eternal - BVI acquired 100% of Willsley Company Limited.  Willsley is a holding company that owns 100% of Inner Mongolia Aershan Agriculture & Husbandry Technology Co., Ltd. ("Aershan Agriculture").  Aershan Agriculture owns a cattle herd, conducts breeding operations and owns a farm in Inner Mongolia which it leases to a Chinese company for approximately $579,000 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.

2. CONDENSED FINANCIAL STATEMENTS AND FOOTNOTES

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

These  consolidated condensed  financial  statements  have been prepared in  accordance  with generally accepted accounting  principles for interim financial  information and the  instructions  to Form  10-Q  and Rule 10-01 of Regulation S-X.  Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted.  The Company believes the disclosures made are adequate to make the information presented not misleading.  The unaudited condensed  consolidated financial   statements   should  be  read  in  conjunction  with  the  Company's consolidated financial statements for the year ended December 31, 2007 and notes thereto included in the Company's Form 10-KSB.

In the opinion of management,  the unaudited condensed  consolidated  financial statements   reflect  all  adjustments  (which  include  only  normal  recurring adjustments)  necessary to present fairly the financial  position of the Company as of June 30, 2008, and the results of operations and cash flows for the three months ended June 30, 2008 and 2007, respectively.  Interim results are not necessarily indicative of full year performance because of the impact of seasonal  and  short-term variations.

Significant Estimates

The preparation of financial statements in conformity with accounting principles generally  accepted in the United States of America requires  management to make  estimates  and  assumptions  that  affect  the  reported  amounts  of assets and liabilities and disclosure of contingent  assets and liabilities at the dates of the  consolidated  condensed  financial  statements and the reported  amounts of revenues  and  expenses  during the periods.  Actual results  could differ from estimates  making it reasonably  possible  that a change in the estimates  could occur in the near term.

Principles of Consolidation

The unaudited consolidated condensed financial statements include the accounts of the Company and its wholly- owned  subsidiaries  after  elimination  of all significant inter-company accounts and transactions.

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Reclassifications

Certain prior year amounts have been reclassified to conform with the presentation for the current year.  Such reclassifications have no impact on net income or shareholders’ equity as previously reported.

3. CASH AND CASH EQUIVALENTS

At June 30, 2008, substantially all of the Company's cash is to be exclusively used for operations in the PRC.

4. OTHER ASSETS

During the three months ended March 31, 2007, the Company entered into an Exchange Agreement (“the Agreement”) by which it expended $14,850,000 RMB in cash (approximately $1,900,000 USD) and 2,719,730 shares of common stock valued at $.70 USD ($14,850,000 RMB or approximately $1,900,000 USD) for a total investment of $29,700,000 RMB (approximately $3,800,000 USD) in exchange for a 22% interest in the common stock of Changsha Hong Yuan Aquatic Product, Inc. (“Hong Yuan”).  Hong Yuan is a corporation duly organized, validly existing, and in good standing under the laws of the PRC and currently its operations focus on the breeding and sale of turtles.  In accordance with the Agreement, Hong Yuan has committed to pay the Company a guaranteed return on its investment of $3,000,000 RMB (approximately $380,000 USD) per year either in cash or the equivalent in additional shares of its common stock.

On October 15, 2007, the Company acquired a 30% equity interest, respectively, in Hainan Futian Green Agriculture Ltd. ("Hainan") a mango farm, and Maoming Huatang Orchard Trading Co., Ltd. ("Maoming") a Lychee farm. The Mango farm has a guaranteed minimum annual return on investment of $6,800,000 RMB (approximately $980,000 USD) and will increase by a minimum of 1% for ten years. The Lychee farm has a guaranteed minimum annual return on investment of $7,800,000 RMB (approximately $1,120,000 USD) and will increase by 1% for five years.  If the farms are unable to meet the guaranteed minimum annual returns on investment with cash flows from their operation, they must meet the obligations by returning an equivalent amount of the Company's shares originally issued to them as part of the investment purchase.  Based on these quarterly minimums, the Company accrues one-quarter of each guaranteed amount each calendar quarter, or 1,700,000 RMB approximately $245,000 USD and 1,950,000 RMB (approximately $280,000USD) respectively.

In addition to the foregoing, during the three-months ended June 30, 2008, the Company received a payment of $3,000,000 (approximately $432,000USD) RMB for its share of the 2007 earnings.

5. INCOME TAXES

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

It is  management's  intention  to reinvest all the income  attributable  to the Company  earned by its  operations  outside  of the  United  States of  America. Accordingly, no United  States  corporate  taxes  have been  provided  in these consolidated  condensed financial  statements.  The Company has a U.S. net operating loss carry  forward  of  $3,089,704  which will begin  expiring  in 2017.  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, 2007.  The Company's net operating  loss carry  forwards may  be  subject  to  annual  limitations,  which  could  reduce  or  defer  the utilization  of the  losses as a result of an  ownership  change as  defined  in section 382 of the Internal Revenue Code.

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

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

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

The agricultural tax exemption resulted in tax savings of $605,230 and $428,684 for the six months ended June 30, 2008 and 2007 respectively.  Net income per share did not change on either a basic or diluted basis for the three and six months ended June 30, 2008 or 2007, respectively, as a result of the tax holiday.

E-Sea is subject to Enterprise Income Tax at the PRC rate of 15% on net profits. The provisions  for taxes on  earnings  of the PRC  subsidiary  for the six months ending June 30, 2008 and 2007 were $302,521 and $205,694, respectively.

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

5. INCOME TAXES, continued

	2008		2007
	Amount	Percent	Amount	Percent
Income taxes at federal statutory rate	1,566,879	34%	1,064,908	34%
Effect of United States and British Virgin Island losses	158,499	3%	133,711	4%
Income tax exemption in the Peoples Republic of China	(605,230)	(13%)	(428,684)	(14%)
Difference in United States and foreign tax rates	(817,627)	(18%)	(564,241)	(18%)
Income tax expense	302,521	7%	205,694	7%

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6. SEGMENT INFORMATION

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 three reportable segments; agricultural genetics, medical devices, and leasing. 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.  Leasing includes the land lease of the farm and the leasing of certain patents.  Included in "Other" are corporate-related items, insignificant operations and costs that are not allocated to the reportable segments.

Information regarding our reportable segments for the six months ended June 30, 2008 and 2007 is as follows:

	Agricultural				Medical
2008	Genetics		Leasing		Devices		Other			Total
Revenues	$	18,160,147	$	453,862	$	5,124,005	$	-		$	23,738,014
Income from operations		2,174,696		25,075		1,645,719		(1,128,577	)		2,716,913
Depreciation and amortization		-		428,787		596,827		-			1,025,614
Total assets		55,136,565		12,984,595		14,099,019		5,590,209			87,810,388
	Agricultural				Medical
2007	Genetics		Leasing		Devices		Other			Total
Revenues	$	14,923,370	$	449,049	$	3,216,075	$	-		$	18,588,494
Income from operations		2,046,711		171,862		1,364,588		(853,293	)		2,729,868
Depreciation and amortization		133,465		277,187		141,875		-			552,527
Total assets		43,483,495		12,421,172		9,604,014		38,159			65,546,840

Information regarding our reportable segments for the three months ended June 30, 2008 and 2007 is as follows:

	Agricultural				Medical
2008	Genetics		Leasing		Devices		Other			Total
Revenues	$	10,445,408	$	294,853	$	3,301,219	$	-		$	14,041,480
Income from operations		1,736,890		13,440		1,025,084		(968,714	)		1,806,700
Depreciation and amortization		-		281,413		265,521		-			546,934
	Agricultural				Medical
2007	Genetics		Leasing		Devices		Other			Total
Revenues	$	9,214,703	$	150,213	$	1,719,093	$	-		$	11,084,009
Income from operations		1,869,852		10,882		777,103		(773,319	)		1,884,518
Depreciation and amortization		67,088		139,331		71,370		-			277,789

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7.           Leases

The Company’s lease activity consists of a land lease and the lease of a patent.  The land lease is for the lease of approximately 104 square kilometers of the company’s farm in Inner Mongolia and the facilities located on the land.  The lease began on May 1, 2006 and ends on April 30, 2026.  The lessee pays the Company an annual rate of 4,620,000 RMB (or approximately $578,810 USD) on April 1 and October 1 of each year.

On March 20, 2008 E-Sea leased its patent in its SSB Dissemination to an unrelated Chinese entity for five years.  The Chinese entity will develop goods under the patent and manufacture and market them during this period.  For the use of the patent, the Company will receive $18,000,000 RMB, (approximately $2,550,000USD) of which $5,000,000 (approximately $1841,000USD) RMB was received upon the execution of the lease.  The remaining $13,000,000 (approximately $425,000USD) RMB will be paid in four installments; $3,000,000 RMB (approximately $425,000USD) in October 2009, 2010 and 2011 and $4,000,000 RMB (approximately $566,000USD) in October 2012.

8.           Fair Value Measurements

The Company adopted Statements of Financial Accounting Standards No. 157 “Fair Value Measurement” (SFAS 157) on January 1, 2008.  SFAS 157, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis.  SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.  As a basis for considering such assumptions, SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1.	Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2.	Inputs, other than quoted prices included within Level 1, that are observable either directly or indirectly; and
Level 3.	Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

9

As of June 30, 2008, the Company’s assets and liabilities that are measured at fair value on a recurring basis include the following:

			Fair Value Measurements Using
	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Warrant liability	$	37,383		—	$	37,383		—

9.   Share Issuance

On May 29, 2008, the Company issued 3,551,600 shares of its common stock to its employees under the amended 2007 Stock Option Plan.  The exercise price of the stock option was $0.50 per share, the approximate average of the high/low of the company’s stock on the date of issuance.  The shares were purchased at the price of $.30USD per share.  The Company has recorded the difference between the purchase price and the exercise price $710,320USD as employee compensation in its statement of operations.

10.   Legal Proceedings

As of August 10, 2008, we were a party to three legal proceeding. The first proceeding involves a lawsuit brought by Western Securities  Corporation seeking principal 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.  On August 23, 2007, the Federal Court in Houston, Texas awarded Western Securities Corporation the sum of $636,757 plus accrued interest since May 22, 2007 and attorney fees in an amount to be determined which totaled $784,566 as of June 30, 2008.  This judgment became final on October 31, 2007.  In April, 2008 this case was appealed by the Company to the 5th Circuit Court of Appeals in New Orleans.

On the 4th of September 2007, the Company was served with a lawsuit from International Capital Advisors LLC, as assignee of Market Management, Inc. seeking repayment of the sum of $250,000 alleged paid by Market Management, Inc. on behalf of the Company.  On the 26th of October, the Plaintiff amended its petition, adding several additional causes of action and are now seeking $960,000 plus accrued interest and attorney’s fees.  On September 18, 2007, the Company filed a general denial to this claim.

On July 7, 2008 the Company filed a Counter Claim and Third Party Petition in this action against Thomas Tedrow, Joseph D. Jordan, Market Management LLC, International Capital Advisors LLC. Market Management International, Inc., Global Business Networks, Inc., Merchant Marketing, Inc., Piranha, Inc. and Western Securities Corporation alleging  securities fraud, fraudulent inducement, fraud, and Breach of Contract.  The case has been scheduled for trial in March, 2009.

The third cause of action involves a convertible promissory note payable to Bristol Investments Limited.  On December 27, 2007, a New York Court rendered a decision in favor of Bristol Investments Limited.  The parties have since reached a settlement of $64,000.  To date, $30,000 of this $64,000 has been paid.

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

The Company’s business is seasonal.  Accordingly, the results of operations for the three and six month periods ended June 30, 2008 are not indicative of the results for any other quarter, period or for the fiscal year.

The following is derived from, and should be read in conjunction with, our unaudited condensed consolidated financial statements, and related notes, as of and for the three and six months ended June 30, 2008 and 2007.

Three Months Ended June 30, 2008 Compared to Three months Ended June 30, 2007

Revenues -

Revenues for the three months ended June 30, 2008 increased by $2,957,471 or 26.7% to $14,041,480 from $11,084,009 for the corresponding period of the prior year. The following table indicates the changes in sales by category for the two periods.

	Three months ended June 30
Source of Revenue	2008		2007		Difference
Cattle Embryo Transfers		3,650,871	$	4,499,894		(849,023	)
Mutton		6,794,537		4,714,809		2,079,728
Leasing		294,853		150,213		144,640
E-Sea		3,301,219		1,719,093		1,582,126
Totals		14,041,480	$	11,084,009		2,957,471

Cost of Sales and Services

Cost of sales and services for the three months ended June 30, 2008 increased $2,309,346 or 30.2% to $9,953,216 from $7,643,870 for the corresponding period of the prior year. The following table indicates the changes in cost of sales and services for the two periods:

Source of Cost of	Three Months Ended June 30,							2008
Sales and Services	2008		2007		Difference			Profit Margin
Cattle Embryo Transfer		2,729,006		3,221,326		(492,320	)		34	%
Leasing		281,413		139,331		142,082			5	%
Feeding fee		-		50,332		(50,332	)		-
Mutton		5,647,407		3,731,270		1,916,137			20	%
E-Sea		1,295,390		501,611		793,779			155	%
Totals	$	9,953,216		7,643,870		2,309,346			41	%

Depreciation and Amortization -

Depreciation and amortization expenses increased by $127,063 or 91.8% to $265,521 from $138,458 for the corresponding period of the prior year.  This increase is due to patents and fixed assets acquired by E-Sea during the fourth quarter of 2007.

Selling and Administrative Expenses -

Selling and administrative expenses increased by $441,973 or 34% to $1,729,081 from $1,287,108 for the corresponding period of the prior year.  The following table indicates the changes in selling, general and administrative expenses by category for the two periods:

	Three Months Ended June 30,
Category	2008		2007		Difference
Marketing Expense		35,000	$	30,000		5,000
Office charges		45,908		15,446		30,462
Salaries		447,597		363,259		84,338
Distributor Commissions		233,874		105,344		128,530
Travel		4,613		8,953		(4,340	)
Entertainment		4,598		7,169		(2,571	)
Legal & Professional		153,969		174,932		(20,963	)
Rent		27,988		20,377		7,611
Telephone		1,070		1,332		(262	)
Miscellaneous		144		296		(152	)
US Office Expense		-		60,000		(60,000	)
Litigation Accrual		774,320		500,000		274,320
	$	1,729,081	$	1,287,108	$	441,973

11

Research and Development Expense -

Research and development expense increased by $156,907 or 121% to $286,962 from $130,055 for the corresponding period of the prior year. These expenses were paid to a  third party, Sheng Zheng Au Ke Wei Technology Development Company (“TDC”) pursuant to a contract dated October 17, 2007 under which TDC agreed to perform certain research for the Company.

Other Income (Expense)

For the three months ended June 30, 2008 the company experienced an increase in interest income of $6,690 or 12.5% to $60,352 from $53,662 for the corresponding period of the prior year.  The increase is attributable to an increase in balances on deposit and higher interest rates.

For the three months ended June 30, 2008, the company had investment income of $885,994 from both long and short-term investments. Investment income for the corresponding period of the prior year was $97,541 all from the turtle farm.

For the three months ended June 30, 2008 the company had a change in the value of derivative instruments of $15,797 as compared to change in the value of derivative instruments of $769 during the three months ended June 30, 2007

As a result of the foregoing, the company’s other income increased by $810,171 to $962,143 from $151,972 for the corresponding period of 2007.

Income Taxes

For the three months ended June 30, 2008, the Company’s income tax expense on its income from its E-Sea operations was $155,283.  This compares to a tax expense of $117,149 for the corresponding period of the prior year.

As a result of the foregoing, the company had net income of $2,613,560 or $.05 per share for the three months ended June 30, 2008 compared to net income of $1,919,341 or $.04 per share for the corresponding period of the prior year.

Six Months Ended June 30, 2008 As Compared to Six Months Ended June 30, 2007

Revenues­

Revenues for the six months ended June 30, 2008 increased by $5,149,520 or 27.7.% to $23,738,014 from $18,588,494 for the corresponding period of the prior year. The following table indicates the changes in sale by category for the two periods:

	Six Months ended June 30
Source of Revenue	2008		2007		Difference
Lamb meat		2,692,068	$	1,734,155		957,913
Cattle Embryo Transfers		3,597,672		4,476,073		(878,401	)
Embryo		5,174,878		4,023,291		1,151,587
Mutton		6,695,529		4,689,851		2,005,678
E-Sea		5,124,005		3,216,075		1,907,930
Leasing		453,862		449,049		4,813
Total	$	23,738,014	$	18,588,494		5,149,520

12

Cost of Sales and Services

Cost of sales and services for the six months ended June 30, 2008 increased by $4,135,282 or 30.6% to $17,632,628 from $13,497,346 for the corresponding period of the prior year. The following table indicates the changes in cost of sales and services by category for the two periods:

	Six Months Ended June 30,
Source of Cost of Sales & Services	2008		2007		Difference			2008 Gross Profit Margin
Lamb meat		1,988,511	$	1,211,645		776,866			35	%
Cattle Embryo Transfer		2,689,240		3,204,273		(515,033	)		34	%
Embryo		5,090,044		3,958,609		1,131,435			2	%
Mutton		5,565,115		3,711,518		1,853,597			20	%
Feeding fee		-		100,129		(100,129	)		-
E-Sea		1,870,931		1,033,985		836,946			174	%
Leasing		428,787		277,187		151,600			6	%
Total	$	17,632,628	$	13,497,346		4,135,282			35	%

Depreciation and Amortization - -

Depreciation and amortization expenses increased by $321,486 or 116.8% to $596,826 from $275,340 for the corresponding period of the prior year. This increase is due to patents and fixed assets aqquired by E-Sea during the  fourth quarter of 2007.

Selling, General and Administrative Expenses -

Selling, General and Administrative expenses increased by $552,293 or 28% to $2,508,867 from  $1,956,574 for the corresponding period of the prior year.  The following table indicates the changes in Selling, General and Administrative Expenses by category for the two periods.

	Six Months Ended June 30,
Category	2008		2007		Difference
Office changes		89,498	$	51,443		38,055
Salaries		882,152		722,673		159,479
Commissions to distributors		361,959		197,930		164,029
Travel		10,383		19,274		(8,891	)
Entertainment		8,506		49,387		(40,881	)
Legal & Professional		288,960		277,404		11,556
Rent		55,168		45,196		9,972
Telephone		2,714		2,810		(96	)
Miscellaneous		207		457		(250	)
Marketing Expense		35,000		30,000		5,000
US Office Expense		-		60,000		(60,000	)
Litigation Reserve		774,320		500,000		274,320
Totals	$	2,508,867	$	1,956,574		552,293

Research and Development Expense -

Research and development expense increased by $153,414 or 119% to $282,780 from $129,366 for the corresponding period of the prior year.  These expenses were paid to a  third party, Sheng Zheng Au Ke Wei Technology Development Company (“TDC”) pursuant to a contract dated October 17, 2007 under which TDC agreed to perform certain research for the Company.

Other Income (Expense)

For the six months ended June 30, 2008 the company experienced an increase in other income of $1,586,167.  This resulted from an increase in interest income of $2,811 an increase in the gain on the sale of assets of $270,498 an increase in investment income of $1,202,830 and a benefit from the impact of the changes in value of our derivative financial instruments of $110,028.

13

Income Taxes

The Company income tax expense on its income from the E-Sea operations was $302,521 for the six-month ended June 30, 2008.  This compares with a income tax expense for the prior year period of $205,694.

As a result of the foregoing, the Company had net income of $4,608,467 or $.09 per share for the six months ended June 30, 2008 compared to net income of $3,132,082 or $.07 per share for the corresponding period of the prior year.

Liquidity and Capital Resources

As of June 30, 2008, the Company had cash and cash equivalents of $27,976,450 and working capital of $45,825,953 This compares with cash and cash equivalents of $12,692,479 and working capital of $36,890,802 as of December 31, 2007.

Cash provided by operating activities totaled $12,339,233 for the six months ended June 30, 2008. This compares with cash provided by operating activities of $11,508,298 for the corresponding period of the prior year. This increase resulted from an increase in net income of $1,476,384, an increase in depreciation and amortization of $473,087, an increase in compensatory stock issuance of $710,320 and a net increase in changes in the current accounts of $897,281 which were partially offset by a gain in the sale of  intangible assets of $269,649, an increase in investment income of a long term investment of $1,746,168,  and  net decrease in the change of value of derivative financial instruments of $26,776.

Cash provided by/(used in) investing activities was $1,062,313 during the six months ended June 30,2008 compared to ($4,029,131) for the six months ended June 30, 2007. Allof the cash used in investing activities during the six months ended June 30, 2007 was for the purchase of a long-term investment.

Cash provided from financing activities for the six months ended June 30, 2008, totaled $1,065,480 from the sale of common stock to its employees.

At June 30, 2008, the Company listed notes payable of $443,366. These notes are currently the subject of litigation which is now on appeal. (See legal proceedings, supra).

The Company has a cash and bank balances of $27,976,450 and short term liquid investments of $14,717,153 which is more than sufficient to cover its PRC operations.  However, if the Company is to expand outside the PRC, as it anticipates doing, or pay its non-PRC obligation, it will have to sell additional shares of its stock or borrow funds from third parties. Unless it is able to either borrow funds or sell additional shares, it will have insufficient resources to carry out is business objectives outside the PRC for the next twelve (12) months.

Item 3.                        Quantitative and Qualititative Disclosures About Market Risk

In the ordinary course of business, we are exposed to various market risk factors, including  changes in general  economic conditions, domestic competition  and foreign currency  exchange rates.

Because we operate in the People’s Republic of China, but report the results of our operations in U.S. dollars and pay certain of our obligations in US dollars we are exposed to foreign  currency exchange rate gains and losses.  Volatility in these markets could impact our net income.

Item 4.    Controls and Procedures

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

14

Our  independent  registered  public  accounting  firm,  Ham Langston & Brezina, L.L.P. ("HLB") conducted an audit of our financial statements for 2007 and 2006.  In  connection  with the issuance of its report to the Board of  Directors,  HLB

reported two  material  weaknesses  under  standards  established  by the Public Company  Accounting  Oversight  Board  regarding  some elements of our system of internal controls. They noted the following specific material deficiencies.

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

(ii)   Accounting for derivative instruments under FASB 133

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

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

As  required  by SEC rule  13a-15(b)  we  conducted  an  evaluation,  under  the supervision and with the  participation  of our management,  including our Chief Executive Officer, President and Vice President of Finance, regarding the effectiveness of the design and operation of our disclosure  controls and procedures.  Based upon that evaluation,  the Chief Executive  Officer,  President and Vice President of Finance  concluded that our disclosure  controls and procedures are effective in timely  alerting  them to material  information  relating to us  (including  our subsidiaries) required to be included in our periodic SEC filings.

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

15

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

 As of August 10, 2008, we were a party to three legal proceeding. The first proceeding involves a lawsuit brought by Western Securities  Corporation seeking principal 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.  On August 23, 2007, the Federal Court in Houston, Texas awarded Western Securities Corporation the sum of $636,757 plus accrued interest since May 22, 2007 and attorney fees in an amount to be determined which totaled $784,566 as of June 30, 2008.  This judgment became final on October 31, 2007.  In April, 2008 this case was appealed by the Company to the 5th Circuit Court of Appeals in New Orleans.

On the 4th of September 2007, the Company was served with a lawsuit from International Capital Advisors LLC, as assignee of Market Management, Inc. seeking repayment of the sum of $250,000 alleged paid by Market Management, Inc. on behalf of the Company.  On the 26th of October, the Plaintiff amended its petition, adding several additional causes of action and are now seeking $960,000 plus accrued interest and attorney’s fees.  On September 18, 2007, the Company filed a general denial to this claim.

On July 7, 2008 the Company filed a Counter Claim and Third Party Petition in this action against Thomas Tedrow, Joseph D. Jordan, Market Management LLC, International Capital Advisors LLC. Market Management International, Inc., Global Business Networks, Inc., Merchant Marketing, Inc., Piranha, Inc. and Western Securities Corporation alleging  securities fraud, fraudulent inducement, fraud, and Breach of Contract.  The case has been scheduled for trial in March, 2009.

The third cause of action involves a convertible promissory note payable to Bristol Investments Limited.  On December 27, 2007, a New York Court rendered a decision in favor of Bristol Investments Limited.  The parties have since reached a settlement of $64,000.  To date, $30,000 of this $64,000 has been paid.

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

During the three months ended June 30, 2008, the Company did not issue any unregistered securities.  However, on May 29, 2008, the Company issued 3,551,600 shares of its common stock to its employees under its amended 2007 Stock Option Plan.  The shares were issued at $0.50 per share, the approximate average of the high/low price of the company’s common stock on that day.

Item. 3. Defaults Upon Senior Securities

     None

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

     None

Item 5.  Other Information

16

     None

Item 6. Exhibits

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

SIGNATURES

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

ETERNAL TECHNOLOGIES GROUP, INC.

 /s/ Jiansheng Wei

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

August 13, 2008                                               Jiansheng Wei, Chief Executive Officer

/s/ Zheng Shen

August 13, 2008                                             -------------------------------------

Zheng Shen, Chief Financial Officer

17

CERTIFICATIONS

EXHIBIT 31.1

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

I, Jiansheng Wei, certify that:

1. I  have  reviewed  this   quarterly   report  on  Form  10-Q  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: August 13, 2008

/s/ JIANSHENG WEI

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

Jiansheng Wei

Chief Executive Officer

18

                                                                           EXHIBIT 31.2

CERTIFICATION

BY ZHENG SHEN PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14(A)

I, Zheng Shen, certify that:

1. I  have  reviewed  this   quarterly   report  on  Form  10-Q  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: August 13, 2008

/s/ ZHENG SHEN

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

Zheng Shen

Chief Financial Officer

19

                                                                           EXHIBIT 32.1

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

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

(i) the  Quarterly  Report on Form  10-Q of the  Company  for the quarterly period ended June 30, 2008, 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: August 13, 2008

/s/ JIANSHENG WEI

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

Jiansheng Wei

Chief Executive Officer

20

                                                                           EXHIBIT 32.2

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

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

(i) the  Quarterly  Report on Form  10-Q of the  Company  for the quarterly period ended June 30, 2008, 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: August 13, 2008

/s/ Zheng Shen

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

Zheng Shen

Chief Financial Officer