ETLT Form 10-QSB

10QSB 1 fm10qsb_63007.htm ETLT FORM 10-QSB ETLT Form 10-QSB

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

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

ACT OF 1934

For the quarterly period ended June 30, 2007

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

EXCHANGE ACT OF 1934

For the transition period from__________to__________.
Commission File No. 0-27929
ETERNAL TECHNOLOGIES GROUP, INC. (Exact name of registrant as specified in its charter)
Nevada (State or other jurisdiction of incorporation or organization)	62-1655508 (IRS Employer Identification No.)
Sect. D, 5/F, Block A. Innotech Tower, 235 Nanjing Rd. Heping District, Tianjin 300052 (Address of principal executive offices)
011-86-22-2721-7020 (Issuer's telephone number)

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

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

As of July 31, 2007, 47,073,579 shares of Common Stock of the issuer were outstanding.

TABLE OF CONTENTS

ETERNAL TECHNOLOGIES GROUP, INC.

Part I. Financial Information



Item 1. Consolidated Financial Statements

Consolidated Balance Sheets at June 30, 2007 (Unaudited ) and	3
December 31, 2006

Unaudited Consolidated Statements of Operations for the three and six
Months ended June 30, 2007 and 2006	4

Unaudited Consolidated Statements of Cash Flows for the six months ended
June 30, 2007 and 2006	5

Notes to the Unaudited Consolidated Financial Statements	6

Item 2. Management's Discussion and Analysis or Plan of Operations

Item 3. Controls and Procedures	13

Part II. Other Information

Item 1. Legal Proceedings	14

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	14

Item 3. Defaults Upon Senior Securities	14

Item 4. Submission of Matters to a Vote of Security Holders	14

Item 5. Other Information	14

Item 6. Exhibits	14

Signatures	14

Item 1. Consolidated Financial Statements

ETERNAL TECHNOLOGIES GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, 2007 and December 31, 2006
(Amounts in United States Dollars)
	June 30,		December 31,
	2007		2006
ASSETS
Current assets:
Cash and cash equivalents	$	26,223,055	$	16,024,123
Short-term investments		15,738,117		15,350,176
Accounts receivable		5,313,627		6,790,534
Inventories		63,185		5,358,213
Prepayments and deposits		6,217		200,705
Total current assets		47,344,201		43,723,751
Advances to distributors		1,075,438		1,048,929
Property and equipment, net of accumulated depreciation
of $4,816,318 and $3,943,592 at June 30, 2007 and
December 31, 2006, respectively		6,720,059		6,882,175
Land use rights, net of accumulated amortization
of $1,824,808 and $1,647,961 at June 30, 2007 and
December 31, 2006, respectively		4,706,510		4,722,362
Intangible assets		1,652,502		1,688,520
Long-term investment		4,048,130		-
Total assets	$	65,546,840	$	58,065,737
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes Payable and convertible debt	$	443,366	$	443,366
Accounts payable and accrued liabilities		1,177,100		532,037
Amounts due to related parties		215,130		216,175
Payable due to Income Taxes		143,315		229,680
Derivative financial instrument liability		339,663		438,356
Total current liabilities		2,318,574		1,859,614
Stockholders' equity:
Preferred shares - $0.001 par value, 5,000,000
authorized, none issued or outstanding		-		-
Common shares - $0.001 par value; 95,000,000
authorized; 47,073,579 shares issued and
outstanding		47,073		43,566
Additional paid - in capital		17,232,327		14,931,218
Subscription receivable		-		(10,176	)
Retained earnings		41,229,491		38,097,409
Accumulated other comprehensive income		4,719,375		3,144,106
Total stockholders' equity		63,228,266		56,206,123
Total liabilities and stockholders' equity	$	65,546,840	$	58,065,737

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

ETERNAL TECHNOLOGIES GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2007 and 2006
(Amounts in United States Dollars)

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007			2006
Revenue:			$$					$$
Agricultural and genetics sales		9,214,703		8,912,038		14,923,370			12,522,328
Medical device sales and services		1,719,093		1,458,099		3,216,075			2,064,168
Land lease		150,213		-		449,049			-
Total revenue		11,084,009		10,370,137		18,588,494			14,586,496
Cost of sales and services
Agricultural and genetics sales		7,002,928		6,945,868		12,186,174			9,460,525
Medical device sales and services		501,611		648,711		1,033,985			923,743
Land lease		67,034		63,982		133,359			128,229
Total cost of sales and services		7,571,573		7,658,561		13,353,518			10,512,497
Gross profit		3,512,436		2,711,576		5,234,976			4,073,999
Depreciation Expense		210,755		202,058		419,168			402,757
Selling, general and administrative
expenses		1,417,163		913,881		2,085,940			1,314,530
Income from operations		1,884,518		1,595,637		2,729,868			2,356,712
Other income (expense)
Interest income		53,662		48,109		103,530			88,837
Loss on Sales of Assets		-		-		(849	)		-
Investment Income		97,541		-		543,338			-
Change in value of derivative
financial instruments		769		117,435		(38,111	)		(104,214	)
Other income (expense), net		151,972		165,544		607,908			(15,377	)
Income before provision for
income taxes		2,036,490		1,761,181		3,337,776			2,341,335
Provision for income taxes		117,149		102,481		205,694			141,836
Net income	$	1,919,341	$	1,658,700	$	3,132,082		$	2,199,499
Net income per common share
basic and diluted	$	0.04	$	0.04	$	0.07		$	0.05
Weighted average number of
common shares outstanding,
basic and diluted		47,073,579		40,567,300		47,073,579			40,321,041

ETERNAL TECHNOLOGIES GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2007 and 2006
(Amounts in United States Dollars)

	2007				2006

Cash flows from operating activities
Net income		$	3,132,082		$	2,199,499
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization			552,527			530,986
Change in value of derivative financial instruments			(98,693	)		104,214
Changes in operating assets and liabilities:
Inventories			5,430,445			20,553
Fixed Assets			(10,212	)		-
Accounts receivable			1,752,930			6,234,810
Prepayments and deposits			199,560			(374,874	)
Accounts payable and accrued expenses			539,447			69,152
Account payable to related parties			-			(141,619	)

Net cash provided by operating activities			11,498,086			8,642,721

Cash flows from investing activities:
Long Term Investment			(4,018,919	)		(249,796	)

Net cash provided by investing activities			(4,018,919	)		(249,796	)

Cash flows from financing activities:
Capital contributed			2,304,615			-
Common Stock Receivable			10,176			-

Net cash provided by financing activities			2,314,791			-

Effect of exchange rate changes on cash			404,974			568,729

Net increase (decrease) in cash and cash equivalents			10,198,932			8,961,654

Cash and cash equivalents, beginning of period			16,024,123			18,224,488

Cash and cash equivalents, end of period		$	26,223,055		$	27,186,142

Supplemental disclosure of cash flow information:
Interest Paid		$	-		$	-
Tax paid			205,694			26,518



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

ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Background and Critical Accounting Policies

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

Eternal Phoenix Company Limited was incorporated in the British Virgin Islands with limited liability on March 3, 2000. Pursuant to a resolution passed on 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 100% of Willsley Company Limited ("Willsley"), a company incorporated in the British Virgin Island with limited liability on May 16, 2000. Willsley's principal activity is investments and owns 100% interest in Inner Mongolia Aershan Agriculture & Husbandry Technology Co., Ltd ("Aershan").

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

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

Inventory

Livestock inventories that are purchased for embryo transplanting, resale, or meat processing are recorded at historical cost. Estimated costs of raised livestock prior to use for embryo transplanting, sale, or meat processing are accumulated and capitalized as inventory at the balance sheet date. Embryo inventories are recorded at historical cost. Inventories are measured at lower of cost and net realizable value using the first-in first-out ("FIFO") or weighted average cost formulas. The Company reviews its inventory quarterly to identify slow moving, obsolete or otherwise impaired inventory. The identification process includes historical performance of the inventory, current operational plans for the inventory, as well as industry and customer specific trends. If actual results differ from management expectations with respect to the selling of inventories at amounts equal to or greater than their carrying amounts, an adjustment to inventories would be made.

Land lease rights and amortization

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

Foreign currency translation

The Company's reporting currency is the US$. The Company maintains no material accounts in currency of the United States of America. All of the subsidiaries maintain their books and accounts in the People's Republic of China currency, which is called Renminbi ("RMB"). Translation of the balance sheet amounts from RMB into US$ has been made at the single rate of exchange on June 30, 2007 and December 31, 2006 of 7.63 and 7.82 RMB/US$, respectively. The income statement has been translated at the average rate of exchange in effect during the year of 7.73 RMB/US$ and 7.98 RMB/US$ for the years ended December 31, 2006, respectively. No representation is made as to whether the RMB amounts could have been, or could be, converted into US$ at that rate on June 30, 2007 or December 31, 2006 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 (SAB 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 collectibility is reasonably assured.

Stock-based compensation

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

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

Use of estimates

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

Recent accounting pronouncements

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

2. Condensed Financial Statements and Footnotes

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

transactions have been eliminated in the consolidation.

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

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

3. Cash and Cash Equivalents

At June 30, 2007, the Company maintains bank accounts in the PRC of approximately $26,223,055.

4. Notes Payable

The Company's promissory notes payable are in default at June 30, 2007 and the holder of the notes has filed suit for payment of the notes. The case was tried in May 2007. However, no decision has yet been rendered by the Court.

5. Income Taxes

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

It is management's intention to reinvest all the income attributable to the Company earned by its operations outside of the United States of America. Accordingly, no United States corporate taxes have been provided in these consolidated financial statements. The Company has a U.S. net operating loss carry forward of approximately $2,087,859 expire in years between 2022 and 2025. However a valuation allowance has been provided as management does not expect the tax benefits to be realized. No other significant deferred assets or liabilities existed at December 31, 2006. The Company's net operating loss carry forwards may be subject to annual limitations, which could reduce or defer the utilization of the losses as a result of an ownership change as defined in section 382 of the Internal Revenue Code.

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

Companies with operations in the Peoples Republic of China may be subject to taxes for income therein. The Income Tax Law of the Peoples Republic of China for Enterprises with Foreign Investment and Foreign Enterprises provide certain exemptions from taxation. Under current PRC law, Aershan is exempt from taxation as Aershan's operations currently benefit from a tax holiday. The tax holiday, granted by Xilingol League, which is the local government, and the central PRC government, commenced on the incorporation of Inner Mongolia Aershan Agriculture and Husbandry Technology Co., Ltd., in July 2000. The Company has benefited from this holiday since inception and anticipates that the holiday will extend through July 2008.

The tax holiday resulted in tax savings that account for substantially the entire difference between the income tax provision that would be expected using United States federal statutory tax rates and the tax provision of zero for the three and six months ended June 30, 2007. The tax provision for the corresponding period of the current year were $117,149 and $ 205,694 respectively, all from the business activities of E-Sea.

6. Contingencies

In conjunction with certain subscription agreements entered into during 2003, the Company has agreed to register the shares issued under a Form SB-2 registration statement. There were penalties for not timely meeting filing and effectiveness deadlines, and the Company received claims related to these penalties. On May 24, 2005 the Company issued convertible notes, allowing for conversion of the penalty to the Company’s common stock, to the holders of the subscription agreements who accepted settlement. One subscription agreement holder elected to not accept a convertible note and is pursuing legal action as discussed in Part II, Item 1.

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

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

7. Related Party Transactions

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

Three Months Ended

Six Months Ended

June 30,

2007

2006

2007

2006

Common stock sold by officers/ directors

directors with proceeds contributed

to the company for payment of

operating expenses

8. Non-Cash Investing and Financing

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

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

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, 2007 are not indicative of the results for any other quarter, period or for the fiscal year.

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

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

Revenues -

Revenues for the three months ended June 30, 2007 increased by $713,872 or 7% to $11,084,009 from $10,370,137 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	2007		2006		Difference
Cattle Embryo Transfers	$	4,499,894	$	5,222,576	$	(722,682	)
Embryo		0		1,346,155		(1,346,155	)
Mutton		4,714,809		2,343,307		2,371,502
Land Lease		150,213		-		150,213
E-Sea		1,719,093		1,458,099		260,994
Totals	$	11,084,009	$	10,370,137	$	713,872

Cost of Sales and Services

Cost of sales and services for the three months ended June 30, 2007 decreased $86,988 or 1% to $7,571,573 from $7,658,561 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,							2007
Sales and Services	2007		2006		Difference			Profit Margin
Cattle Embryo Transfer		3,221,326		3,829,769		(608,443	)		40	%
Land lease expense		67,034		63,982		3,052			124	%
Feeding fee		50,332		-		50,332			-100	%
Embryo		-		1,233,975		(1,233,975	)		0	%
Mutton		3,731,270		1,882,124		1,849,146			26	%
E-Sea		501,611		648,711		(147,100	)		242	%
Totals		7,571,573		7,658,561		(86,988	)		46	%

Depreciation and Amortization -

Depreciation and amortization expenses decreased by $55,285 or 20.8% to $210,755 from $266,040 for the corresponding period of the prior year. This decrease is attributable to the classification of the land lease depreciation of $67,034 being reclassified to cost of goods sold in the current period. Without this reclassification, depreciation would have increased by $11,749, principally because of the change in currency valuation.

Selling and Administrative Expenses -

Selling and administrative expenses increased by $503,282 or 55% to $1,417,163 from $913,881 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	2007		2006		Difference
Marketing Expense	$	30,000			$	30,000
Office charges		15,446	$	13,505		1,941
Salaries		363,259		242,805		120,454
Distributor Commissions		105,344		72,917		32,427
Travel		8,953		25,189		(16,236	)
Consulting fees		0		24,929		(24,929	)
Entertainment		7,169		3,750		3,419
Legal & Professional		174,932		288,405		(113,473	)
Rent		20,377		24,880		(4,503	)
Telephone		1,332		1,809		(477	)
Penalty Expense		-		154,760		(154,760	)
Research & Development		130,055		-		130,055
Miscellaneous		296		932		(636	)
US Office Expense		60,000		60,000		-
Litigation Accrual		500,000		-		500,000
	$	1,417,163	$	913,881	$	503,282

Other Income (Expense)

For the three months ended June 30, 2007 the company experienced an increase in interest income of $5,553 or 11.5% to $53,662 from $48,109 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, 2007, the company had investment income of $97,541 from the company’s Turtle Farm investment. There was no investment income for the corresponding period of 2006.

For the three months ended June 30, 2007 the company had a change in the value of derivative instruments of $769. For the three months ended June 30, 2006 the company had a positive change in the value of derivative instruments of $117,435.

Income Taxes

As a result of the foregoing, the company’s other income decreased by $13,572 to $151,972 from $165,544 for the corresponding period of 2006.

For the three months ended June 30, 2007, the Company provided taxes on its income from its E-Sea operations of $117,149. This compares to a tax provision of $102,481 for the corresponding period of the prior year. The remainder of the Company's income is from agricultural activities which benefits from a tax holiday.

As a result of the foregoing, the company had net income of $1,919,341 or $.04 per share for the three months ended June 30, 2007 compared to net income of $1,658,700 or $.04 per share for the corresponding period of the prior year.

Six Months Ended June 30, 2007 As Compared to Six Months Ended June 30, 2006

Revenues-

Revenues for the six months ended June 30, 2007 increased by $4,001,998 or 27.4% to $18,588,494 from $14,586,496 for the corresponding period of the prior year. The following table indicates the changes in sales by category for the two periods:

	Six Months ended June 30
Source of Revenue	2007		2006		Difference
Lamb meat	$	1,734,155	$	3,616,013	$	(1,881,858	)
Cattle Embryo Transfers		4,476,073		5,224,374		(748,301	)
Embryo		4,023,291		1,343,411		2,679,880
Mutton		4,689,851		2,338,530		2,351,321
E-Sea		3,216,075		2,064,168		1,151,907
Land Lease		449,049		-		449,049
Total	$	18,588,494	$	14,586,496	$	4,001,998,

Cost of Sales and Services

Cost of sales and services for the six months ended June 30, 2007 increased by $2,969,250 or 28.6% to $13,353,518 from $10,384,268 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	2007		2006		Difference			2007 Gross Profit Margin
Lamb meat	$	1,211,645	$	2,537,553	$	(1,325,908	)		43	%
Cattle Embryo Transfer		3,204,273		3,813,228		(608,955	)		40	%
Embryo		3,958,609		1,231,460		2,727,149			2	%
Mutton		3,711,518		1,878,284		1,833,234			26	%
Feeding fee		100,129		-		100,129			-100	%
E-Sea		1,033,985		923,743		110,242			211	%
Land Lease		133,359		128,229		5,130			236	%
Total	$	13,353,518	$	10,512,497	$	2,841,021			39	%

Depreciation and Amortization -

Depreciation and amortization expenses decreased by $111,818 or 21.1% to $419,168 from $530,986 for the corresponding period of the prior year. This decrease is attributable to depreciation of $133,359 being reclassified to cost of goods sold in the current period. Without the reclassification deprecation would have increased by $21,541 principally because of the change in currency valuation.

Selling, General and Administrative Expenses -

Selling, General and Administrative expenses increased by $771,410 or 59% to $2,085,940 from $1,314,530 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	2007		2006		Difference
Office changes	$	51,443	$	40,542	$	10,901
Salaries		722,673		484,620		238,053
Commissions to distributors		197,930		93,292		104,638
Travel		19,274		30,175		(10,901	)
Consulting Fee		-		24,878		(24,878	)
Entertainment		49,387		8,801		40,586
Legal & Professional		277,404		367,840		(90,436	)
Rent		45,196		45,180		16
Telephone		2,810		3,298		(488	)
Research & Development		129,366		-		129,366
Miscellaneous		457		1,144		(687	)
Penalty Expense		-		154,760		(154,760	)
Marketing Expense		30,000		-		30,000
US Office Expense		60,000		60,000		-
Litigation Reserve		500,000		-		500,000
Totals	$	2,085,940	$	1,314,530	$	771,410

Other Income (Expense)

For the six months ended June 30, 2007 the company experienced an increase in other income of $623,285. This resulted from an increase in interest income of $14,693 an increase in investment income of $543,338 and a reduction in the impact of the charges in value of our derivative financial instruments of $66,103 which was partially offset by a loss on the sale of assets of $849.

Income Taxes

The Company provided taxes on its income from the E-Sea operations of $205,694 for the six-month ended June 30, 2007. This compares with a provision for income taxes for the prior year period of $141,836.

As a result of the foregoing, the Company had net income of $3,132,082 or $.07 per share for the six months ended June 30, 2007 compared to net income of $2,199,499 or $.05 per share for the corresponding period of the prior year.

Liquidity and Capital Resources

As of June 30, 2007, the Company had cash and cash equivalents of $26,223,055 and working capital of $45,025,627. This compares with cash and cash equivalents of $16,024,123 and working capital of $41,864,137 as of December 31, 2006.

Cash provided by operating activities totaled $11,498,086 for the six months ended June 30, 2007. This compares with cash provided by operating activities of $8,642,721 for the corresponding period of the prior year. This increase resulted from an increase in net income of $932,582 a change in the current accounts of $2,254,361 and an increase in depreciation and amortization of $21,541 which was partially offset by negative change in the value of the derivative financial instruments of $202,907.

Cash used in investing activities was $4,018,919 during the six months ended June 30,2007 compared to $249,796 for the six months ended June 30, 2006. All of 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, 2007, totaled $2,314,791, 2,304,615 from the issuance of common stock and $10,176 from the collection of a common stock receivable. There were no financing activities for the six months ended June 30, 2006.

At June 30, 2007, the Company listed notes payable of $443,366. These notes are currently the subject of litigation where the Company is challenging their validity. (See legal proceedings, supra).

The Company has a cash and bank balances of $26,223,055 and short term liquid investments of $15,738,117 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. Controls and Procedures

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

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

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

(ii) Accounting for derivative instruments under FASB 133

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

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

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

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

As of May 16, 2006, we were a party to two legal proceedings. The proceedings involve 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 2006, 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 case was tried in May, 2007. However, the court has not yet rendered its decision.

On February 14, 2006, the second cause of action involves one of the convertible promissory notes owned by Bristol Investments Limited in the State Court in New York dismissed for the third time a cause of action, filed by Bristol Investments Limited against the Company, On March 30, 2006 without stating a new cause of action, Bristol Investments Limited re-filed the same cause of action against the Company. This case is currently pending.

As of August 15, 2007, there are no other causes of action pending against the Company.

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

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

Item. 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits

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

Signature

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


	ETERNAL TECHNOLOGIES GROUP, INC.

Date: August 13, 2007	By:	/s/ Jiansheng Wei
		Chief Executive Officer




Date: August 13, 2007	By:	/s/ Zheng Shen
		Chief Financial Officer

CERTIFICATIONS

EXHIBIT 31.1

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

I, Jiansheng Wei, certify that:

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

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

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

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

(a)

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

(b)

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

(c)

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

(d)

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

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

(a)

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

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

Date: August 13, 2007

/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 quarterly report on Form 10-QSB of Eternal Technologies Group, Inc.;

(a)

(b)

(c)

(d)

(a)

(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, 2007

/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 Quarterly Report on Form 10-QSB of the Company for the quarterly period ended June 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the "Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

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

Date: August 13, 2007

/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 certifies that, 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: August 13, 2007

/s/ Zheng Shen

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

Zheng Shen

Chief Financial Officer