**UNITED
      STATES**


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549







FORM
      10-Q





x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
      ACT OF 1934




**For
      the quarterly period ended September 30, 2008**




o 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. 000-50906**




**ETERNAL
      ENERGY CORP.**


(Exact
      Name of Small Business Issuer in its Charter)





**Nevada**
            
            **20-0237026**(State
                or Other Jurisdiction
              of
                Incorporation or
              Organization)
            
            (I.R.S.
                Employer
              Identification
                No.)





**2549
      West Main Street, Suite 202**


**Littleton,
      CO 80120**


(Address
      and telephone number of Principal Executive Offices)





**(303)
      798-5235**


(Issuer’s
      Telephone Number, Including Area Code)





Indicate
      by check mark whether the registrant: (1) has 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 o




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes o No x




Indicate
      the number of shares outstanding of each of the issuer's classes of common
      equity, as of the latest practicable date: 44,550,000 shares of common stock
      issued and outstanding at November 7, 2008.





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act.





(Check
      one):





Large
                accelerated filero
            Accelerated
                fileroNon-accelerated
                filero
            Smaller
                reporting companyx







ETERNAL
      ENERGY CORP.


FORM
      10-Q


QUARTERLY
      PERIOD ENDED SEPTEMBER 30, 2008





INDEX





A
                Note About Forward Looking Statements
            1PART
                I - FINANCIAL INFORMATIONItem
                1 - Condensed Financial Statements
            2Balance
                Sheet (Unaudited) - September 30, 2008
            F-1Statement
                of Operations (Unaudited) - For the three and nine months ended September
                30, 2008 and 2007
            F-2Statement
                of Cash Flows (Unaudited) - For the nine months ended September 30,
                2008
                and 2007
            F-3Notes
                to Unaudited Financial Statements
            F-5Item
                2 - Management's Discussion and Analysis of Financial Condition or
                Results
                of Operations
            3Item
                4 - Controls and Procedures
            5PART
                II - OTHER INFORMATIONItem
                6 - Exhibits
            6Signatures
            8








*A
      Note About Forward-Looking Statements*





This
      Quarterly Report on Form 10-Q contains “forward-looking statements” within the
      meaning of the Private Securities Litigation Reform Act of 1995 that are based
      on management's current expectations. These statements may be identified by
      their use of words like “plans,” “expect,” “aim,” “believe,” “projects,”
“anticipate,” “intend,” “estimate,” “will,” “should,” “could” and other
      expressions that indicate future events and trends. All statements that address
      expectations or projections about the future, including statements about our
      business strategy, expenditures, and financial results, are forward-looking
      statements. We believe that the expectations reflected in such forward-looking
      statements are accurate. However, we cannot assure you that such expectations
      will occur.





Actual
      results could differ materially from those in the forward looking statements
      due
      to a number of uncertainties including, but not limited to, those discussed
      in
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations. Factors that could cause future results to differ from these
      expectations include general economic conditions; further changes in our
      business direction or strategy; competitive factors; market uncertainties;
      and
      an inability to attract, develop, or retain consulting or managerial agents
      or
      independent contractors. As a result, the identification and interpretation
      of
      data and other information and their use in developing and selecting assumptions
      from and among reasonable alternatives requires the exercise of judgment. To
      the
      extent that the assumed events do not occur, the outcome may vary substantially
      from anticipated or projected results, and accordingly, no opinion is expressed
      on the achievability of those forward-looking statements. No assurance can
      be
      given that any of the assumptions relating to the forward-looking statements
      specified in the following information are accurate, and we assume no obligation
      to update any such forward-looking statements. You should not unduly rely on
      these forward-looking statements, which speak only as of the date of this
      Quarterly Report. Except as required by law, we are not obligated to release
      publicly any revisions to these forward-looking statements to reflect events
      or
      circumstances occurring after the date of this report or to reflect the
      occurrence of unanticipated events.


1





**PART
      I. FINANCIAL INFORMATION**


**ITEM
      1. FINANCIAL STATEMENTS.**





**Eternal
      Energy Corp.**




**Condensed
      Financial Statements**


***As
      of September 30, 2008,***


***For
      Each of the Three-Month and Nine-Month Periods Ended September 30, 2008 and
      2007***





Condensed
                Financial Statements of Eternal Energy Corp.:Condensed
                Balance Sheet as of September 30, 2008
            
            
            1Condensed
                Statements of Operations For Each of the Three-Month and Nine-Month
                Periods Ended September 30, 2008 and 2007
            
            
            2Condensed
                Statements of Cash Flows For Each of the Nine-Month Periods Ended
                September 30, 2008 and 2007
            
            
            3Notes
                to the Condensed Financial Statements
            
            
            5




2




**Eternal
      Energy Corp.**




**Condensed
      Balance Sheet**


***September
      30, 2008***








September 30,
            
            December 31,2008
            
            2007*ASSETS*Current
                assets:Cash
            
            $
            671,269
            
            $
            791,891Prepaid
                expenses
            
            
            23,501
            
            
            46,966Total
                current assets
            
            
            694,770
            
            
            838,857Receivable
            
            
            1,250,000
            
            
            500,000Equipment
                and leasehold improvements, net of accumulated depreciation and
                amortization of $45,943 and
              $19,625,
                respectively
            
            
            87,968
            
            
            90,282Oil
                and gas properties, net of accumulated depletion of $43,391 and $30,107,
                respectively
            
            
            3,637,277
            
            
            3,526,190Licenses,
                net of accumulated amortization of $51,300 and $0,
                respectively
            
            
            632,700
            
            
            684,000Deposits
            
            
            1,414,678
            
            
            1,536,130**Total
                assets**
            
            **$**
            **7,717,393**
            
            **$**
            **7,175,459***LIABILITIES
                AND STOCKHOLDERS' EQUITY*Current
                liabilities:Accounts
                payable and accrued liabilities
            
            $
            144,468
            
            $
            177,309Accrued
                officer's compensation
            
            
            43,101
            
            
            43,101Due
                to related party
            
            
            250,000
            
            
            250,000Total
                current liabilities
            
            
            437,569
            
            
            470,410Due
                to related party - non-current
            
            
            250,000
            
            
            250,000Total
                liabilities
            
            $
            687,569
            
            $
            720,410Commitments
                and contingenciesStockholders'
                equity:Common
                stock, $.001 par value, 875,000,000 shares authorized, 44,550,000
                shares
                issued and outstanding
            
            
            44,550
            
            
            44,550Additional
                paid-in capital
            
            
            8,646,832
            
            
            8,395,321Accumulated
                deficit
            
            
            (1,661,558
            )
            
            (1,984,822
            )Total
                stockholders' equity
            
            
            7,029,824
            
            
            6,455,049**Total
                liabilities and stockholders' equity**
            
            **$**
            **7,717,393**
            
            **$**
            **7,175,459**





The
      accompanying notes are an integral part of the
      financial statements.






F-1




**Eternal
      Energy Corp.**




**Condensed
      Statements of Operations**




***For
      Each of the Three-Month and Nine-Month Periods Ended September 30, 2008 and
      2007***





For the Three-Month Period End
            
            For the Nine-Month Period EndedSeptember  30, 2008
            
            September 30, 2007
            
            September 30, 2008
            
            September 30, 2007Sale
                of prospects
            
            
            -
            
            
            -
            
            
            1,353,645
            
            
            877,353Oil
                and gas sales
            
            
            -
            
            
            -
            
            
            137,073
            
            
            -Spud
                fee revenue
            
            
            500,000
            
            
            500,006
            
            
            750,000
            
            
            749,991Total
                revenue
            
            
            500,000
            
            
            500,006
            
            
            2,240,718
            
            
            1,627,344Operating
                expenses:Cost
                of prospect sold
            
            
            (2,048
            )
            
            -
            
            
            251,457
            
            
            259,482Oil
                and gas operating expenses
            
            
            70,302
            
            
            -
            
            
            467,528
            
            
            -Down-hole
                gas and water license royalties
            
            
            -
            
            
            -
            
            
            51,000
            
            
            -Dry
                hole costs
            
            
            1,697
            
            
            -
            
            
            2,784
            
            
            1,538,416General
                and administrative
            
            
            193,079
            
            
            109,272
            
            
            481,096
            
            
            402,222Stock
                based compensation
            
            
            95,773
            
            
            46,046
            
            
            251,510
            
            
            138,138Professional
                fees
            
            
            129,888
            
            
            50,549
            
            
            330,803
            
            
            202,730Depreciation,
                amortization and depletion expense
            
            
            26,015
            
            
            7,049
            
            
            90,902
            
            
            12,257Total
                operating costs
            
            
            514,706
            
            
            212,916
            
            
            1,927,080
            
            
            2,553,245Total
                operating income (loss)
            
            
            (14,706
            )
            
            287,090
            
            
            313,638
            
            
            (925,901
            )Interest
                income
            
            
            6,253
            
            
            9,807
            
            
            9,625
            
            
            43,803**Net
                income (loss**)
            
            **$**
            **(8,453**
            **)**
            **$**
            **296,897**
            
            **$**
            **323,263**
            
            **$**
            **(882,098**
            **)****Net
                income (loss) per common share -****Basic**
            
            **$**
            **0.00**
            
            **$**
            **0.01**
            
            **$**
            **0.01**
            
            **$**
            **(0.02**
            **)****Diluted**
            
            **$**
            **0.00**
            
            **$**
            **0.01**
            
            **$**
            **0.01**
            
            **$**
            **(0.02**
            **)****Weighted
                average number of shares outstanding -****Basic**
            
            
            **44,550,000**
            
            
            **42,550,000**
            
            
            **44,550,000**
            
            
            **42,550,000****Diluted**
            
            
            **44,550,000**
            
            
            **42,550,000**
            
            
            **44,773,273**
            
            
            **42,550,000**





The
      accompanying notes are an integral part of the financial
      statements.




F-2


**Eternal
      Energy Corp.**




**Condensed
      Statements of Cash Flows**




***For
      Each of the Three-Month and Nine-Month Periods Ended September 30, 2008 and
      2007***





For the
            
            For theNine-Month
            
            Nine-MonthPeriod Ended
            
            Period EndedSeptember 30,
            
            September 30,2008
            
            2007*Cash
                flows provided by (used in) operating activities:*Net
                income (loss)
            
            $
            323,263
            
            $
            (882,098
            )Adjustments
                to reconcile net loss to net cash used by operating
                activities:Non
                cash transactions:Stock-based
                compensation
            
            
            251,510
            
            
            138,138Depreciation,
                depletion and amortization
            
            
            90,902
            
            
            12,257Dry
                hole costs incurred in prior year
            
            
            -
            
            
            1,309,179Changes
                in operating assets and liabilities:Increase
                in receivables
            
            
            (750,000
            )
            
            -Decrease
                in prepaid expense
            
            
            23,465
            
            
            7,531Decrease
                in accounts payable and accrued liabilities
            
            
            (32,840
            )
            
            (178,151
            )Decrease
                in accrued payroll-related costs
            
            
            -
            
            
            (2,331
            )**Net
                cash provide by (used in) operating activities**
            
            
            **(93,700**
            **)**
            
            **404,525***Cash
                flows used in investing activities:*Return
                of drilling deposits
            
            
            121,453
            
            
            163,510Additions
                to oil and gas properties
            
            
            (124,371
            )
            
            (1,288,454
            )Additions
                to equipment and leasehold improvements
            
            
            (24,004
            )
            
            (87,079
            )**Net
                cash used in investing activities**
            
            
            **(26,922**
            **)**
            
            **(1,212,023**
            **)****Net
                decrease in cash**
            
            
            **(120,622**
            **)**
            
            **(807,498**
            **)****Cash
                - beginning of period**
            
            
            **791,891**
            
            
            **2,366,810****Cash
                - end of period**
            
            **$**
            **671,269**
            
            **$**
            **1,559,312**




The
      accompanying notes are an integral part of the financial
      statements.




F-3


**Eternal
      Energy Corp.**




**Condensed
      Statements of Cash Flows**




***For
      Each of the Three-Month and Nine-Month Periods Ended September 30, 2008 and
      2007***








*Supplemental
      Disclosure of Cash Flow Information*





For the
            
            For theNine-Month
            
            Nine-MonthPeriod Ended
            
            Period EndedSeptember 30,
            
            September 30,2008
            
            2007Cash
                paid during the three-month and nine-month period for:Interest
            
            $
            -
            
            $
            -Income
                taxes
            
            $
            -
            
            $
            -





The
      accompanying notes are an integral part of the financial
      statements.




F-4


**Eternal
        Energy Corp.**
  **Notes
        to the Condensed Financial Statements**
  ***As
        of September 30, 2008,***
 ***For
        Each of the Three-Month and Nine-Month Periods Ended September 30, 2008 and
        2007***








**1.**
            **Description
                of Business**





Eternal
      Energy Corp. (the "Company") was incorporated in the state of Nevada in March
      2003. The Company engages in the acquisition, exploration, development and
      producing of oil and gas properties. At September 30, 2008, the Company has
      entered into participation agreements related to oil and gas exploration
      projects in the Big Sand Spring Valley Prospect and the Cherry Creek Project,
      both located in Nye County, Nevada. The Company also owns a 75% working interest
      in the South West extension of the West Ranch Field, located in Jackson County,
      Texas. In addition, the Company has acquired licensing and usage rights to
      a
      certain down-hole gas and water separation technology, designed to stimulate
      the
      production of underperforming wells.





**2.**
            **Interim
                Presentation**





The
      results of operations for the three-month and nine-month periods ended September
      30, 2008 and 2007 are not necessarily indicative of the results to be expected
      for the full year. The interim financial statements should be read in
      conjunction with the Company's Annual Report on Form 10-KSB as of December
      31,
      2007.





Certain
      amounts from the previous year have been reclassified to conform to the current
      period presentation.





**3.**
            **Summary
                of Significant Accounting
                Policies**





*Basis
      of Presentation*





These
      financial statements are presented in United States dollars and have been
      prepared in accordance with accounting principles generally accepted in the
      United States.





*Revenue*





The
      Company records the sale of its interests in prospects when the terms of the
      transaction are final and the sales price is determinable. Spud fee revenue
      is
      recorded when drilling commences. Working interest, royalty and net profit
      interests are recorded as revenue when oil and gas is sold.





*Concentration
      of Credit Risk*





At
      September 30, 2008, the Company had $421,269 on deposit that exceeded United
      States (FDIC) federally insurance limit of $250,000 per bank. The Company
      believes this credit risk is mitigated due to the financial strength of the
      financial institution.




F-5


**Eternal
          Energy Corp.**
  **Notes
          to the Condensed Financial Statements**
  ***As
          of September 30, 2008,***
 ***For
          Each of the Three-Month and Nine-Month Periods Ended September 30, 2008
          and
          2007***


**3.**
            **Summary
                of Significant Accounting Policies,
                Continued**





*Equipment
      and Leasehold Improvements*





Equipment
      and leasehold improvements are recorded at cost. Expenditures for major
      additions and improvements are capitalized and depreciated over their useful
      lives. Depreciation is provided over the estimated useful lives of the related
      assets using the straight-line method for financial statement purposes. The
      Company uses other depreciation methods (generally accelerated) for tax
      purposes, where appropriate. The estimated useful lives for significant property
      and equipment categories are as follows:


Equipment
              3
                  yearsLeasehold
                  improvements
              lesser
                  of useful life or lease term





When
      equipment and improvements are retired or otherwise disposed of, the cost and
      the related accumulated depreciation are removed from the Company's accounts
      and
      any resulting gain or loss is included in the results of operations for the
      respective period.





Expenditures
      for minor replacements, maintenance and repairs are charged to expense as
      incurred.





*Oil
      and Gas Properties*





The
      Company follows the full cost method of accounting for its investments in oil
      and gas properties. Accordingly, all costs associated with the acquisition,
      exploration and development of oil and gas reserves are capitalized as incurred.
      The Company has not capitalized any interest or any of its internal costs
      related to its investments in oil and gas properties.





In
      addition, the capitalized costs are subject to a "ceiling test," which limits
      such costs to the aggregate of the "estimated present value" of future net
      revenues from proved reserves, discounted at a 10 percent interest rate, based
      on current economic and operating conditions, plus the lower of cost or fair
      market value of unproved properties.





Costs
      are
      accumulated by specific prospect, or cost center, and if economically
      recoverable reserves are not discovered in a prospect, the costs incurred are
      charged to expense as "dry hole costs."





Depreciation
      and depletion of producing oil and gas properties is determined by the units
      of
      production method.





F-6




**Eternal
            Energy Corp.**
  **Notes
            to the Condensed Financial Statements**
  ***As
            of September 30, 2008,***
 ***For
            Each of the Three-Month and Nine-Month Periods Ended September 30, 2008
            and
            2007***


3.
                **Summary
                    of Significant Accounting Policies,
                    Continued**





*Fair
      Value of Financial Instruments*





In
      accordance with the requirements of Financial Accounting Standards Board's
      Statement of Financial Accounting Standards ("SFAS") No. 107, *Disclosures
      about Fair Value of Financial Instruments* ,
      the
      Company has determined the estimated fair value of its financial instruments
      using available market information and appropriate valuation methodologies.
      Due
      to their short-term maturity, the fair value of financial instruments classified
      as current assets and current liabilities approximates their carrying
      values.





*Accounting
      for Stock-Based Employee Compensation*





In
      December 2004, the FASB issued SFAS No. 123(R) ("SFAS 123(R)"), *Share-Based
      Payment* .
      This
      pronouncement amends SFAS No. 123, *Accounting
      for Stock-Based Compensation* ,
      ("SFAS
      123") and supersedes Accounting Principles Board Opinion No. 25, *Accounting
      for Stock Issued to Employees* ("APB
      25"). SFAS 123(R) requires that companies account for awards of equity
      instruments issued to employees under the fair value method of accounting and
      recognize such amounts in their statements of operations. The Company adopted
      SFAS 123(R) on January 1, 2006, using the modified prospective method and,
      accordingly, has not restated the consolidated statements of operations for
      periods prior to January 1, 2006. Under SFAS 123(R), the Company is required
      to
      measure compensation cost for all stock-based awards at fair value on the date
      of grant and recognize compensation expense in our consolidated statements
      of
      operations over the service period that the awards are expected to vest. As
      permitted under SFAS 123(R), the Company has elected to recognize compensation
      cost for all options with graded vesting on a straight-line basis over the
      vesting period of the entire option.





*Accounting
      for Stock-Based Employee Compensation, Continued*





Prior
      to
      January 1, 2006, the Company accounted for share-based payment, as permitted
      by
      SFAS 123, under the intrinsic value method described in APB 25. Under the
      intrinsic value method, no stock-based employee compensation cost is recorded
      when the exercise price is equal to, or higher than, the market value of the
      underlying common stock on the date of grant.





The
      following table illustrates the effect on net loss and loss per share if the
      Company had applied the fair value recognition provisions of SFAS 123(R) to
      stock-based employee compensation, using the straight-line method, for the
      following periods:





F-7




**Eternal
          Energy Corp.**
  **Notes
          to the Condensed Financial Statements**
  ***As
          of September 30, 2008,***
 ***For
          Each of the Three-Month and Nine-Month Periods Ended September 30, 2008
          and
          2007***





**3.**
            **Summary
                of Significant Accounting Policies,
                Continued**





For the Three-Month Period Ended
            
            For the Nine-Month Period EndedSeptember 30, 2008
            
            September 30, 2007
            
            September 30, 2008
            
            September 30, 2007Net
                income (loss), as reported
            
            $
            (8,453
            )
            $
            296,897
            
            $
            323,263
            
            $
            (882,098
            )Total
                stock-based employee compensation expense determined under fair value
                based method for all awards, net of related tax effect
            
            
            (15,605
            )
            
            (46,046
            )
            
            (46,815
            )
            
            (138,138
            )Pro
                forma net income (loss)
            
            $
            (24,058
            )
            $
            250,851
            
            $
            276,448
            
            $
            (1,020,236
            )Income
                (loss) per share:Basic
                and diluted – as reported
            
            $
            0.00
            
            $
            0.01
            
            $
            0.01
            
            $
            (0.02
            )Basic
                and diluted – pro forma
            
            $
            0.00
            
            $
            0.01
            
            $
            0.01
            
            $
            (0.02
            )Weighted
                Average Number of Shares Outstanding:Basic
            
            
            44,550,000
            
            
            42,550,000
            
            
            44,550,000
            
            
            42,550,000Diluted
            
            
            44,550,000
            
            
            42,550,000
            
            
            44,773,273
            
            
            42,550,000





*Basic
      and Diluted Loss Per Share*





Basic
      income (loss) per common share is computed by dividing net income (loss)
      available to common shareholders by the weighted average number of common shares
      outstanding during the period. Diluted income per common share is computed
      in
      the same way as basic income per common share except that the denominator is
      increased to include the number of additional common shares that would be
      outstanding if all potential common shares had been issued and if the additional
      common shares were dilutive. Diluted loss per common share is computed in the
      same way as basic loss per common share, as the inclusion of additional common
      shares that would be outstanding if all potential common shares had been issued
      would be anti-dilutive. See Note 8 for the calculation of basic and diluted
      weighted average common shares outstanding for the three-month and nine-month
      periods ended September 30, 2008 and 2007.





*Income
      Taxes*





The
      Company follows the liability method of accounting for income taxes. Under
      this
      method, deferred income tax assets and liabilities are recognized for the future
      tax consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      balances. Deferred income tax assets and liabilities are measured using enacted
      or substantially enacted tax rates expected to apply to the taxable income
      in
      the years in which those differences are expected to be recovered or
      settled. The effect on deferred income tax assets and liabilities of a change
      in
      tax rates is recognized in income in the period that includes the date of
      enactment or substantive enactment.




F-8


**Eternal
        Energy Corp.**
  **Notes
        to the Condensed Financial Statements**
  ***As
        of September 30, 2008,***
 ***For
        Each of the Three-Month and Nine-Month Periods Ended September 30, 2008 and
        2007***







**3.**
            **Summary
                of Significant Accounting Policies,
                Continued**





*Use
      of Estimates and Assumptions*





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires the use of estimates and
      assumptions that affect the reported amounts of assets, liabilities, revenues
      and expenses and disclosure of contingent obligations in the financial
      statements and accompanying notes. The Company's most significant assumptions
      are the estimates used in the determination of the deferred income tax asset
      valuation allowance and the determination of the value of the Company’s common
      shares that were issued for obligations. The estimation process requires
      assumptions to be made about future events and conditions, and as such, is
      inherently subjective and uncertain. Actual results could differ materially
      from
      our estimates.





*New
      Accounting Pronouncements*





In
      June
      2006, the FASB issued Interpretation No. 48 (FIN 48), *Accounting
      for Uncertainty in Income Taxes, an interpretation of FASB Statement No.
      109* .
      This
      interpretation was effective and adopted by the Company as of January 1,
      2007.





*New
      Accounting Pronouncements, Continued*





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* ("SFAS
      157"). SFAS 157 establishes a single definition of fair value and a framework
      for measuring fair value, sets out a fair value hierarchy to be used to classify
      the source of information used in fair value measurements, and requires new
      disclosures of assets and liabilities measured at fair value based on their
      level in the hierarchy. SFAS 157 is effective for the Company’s year beginning
      January 1, 2008 and is to be applied prospectively. The Company is currently
      evaluating the impacts and disclosures of this standard, but would not expect
      SFAS 157 to have a material impact on its results of operations or financial
      condition.




F-9


**Eternal
        Energy Corp.**
  **Notes
        to the Condensed Financial Statements**
  ***As
        of September 30, 2008,***
 ***For
        Each of the Three-Month and Nine-Month Periods Ended September 30, 2008 and
        2007***





**3.**
            **Summary
                of Significant Accounting Policies,
                Continued**




In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities*("SFAS
      159"). SFAS 159 permits an entity to choose, at specified election dates, to
      measure eligible financial instruments and certain other items at fair value
      that are not currently required to be measured at fair value. An entity shall
      report unrealized gains and losses on items for which the fair value option
      has
      been elected in earnings at each subsequent reporting date. Upfront costs and
      fees related to items for which the fair value option is elected shall be
      recognized in earnings as incurred and not deferred. SFAS 159 also establishes
      presentation and disclosure requirements designed to facilitate comparisons
      between entities that choose different measurement attributes for similar
      types of
      assets
      and liabilities. SFAS 159 is effective for financial statements issued for
      fiscal years beginning after November 15, 2007 (January 1, 2008 for the Company)
      and interim periods within those fiscal years. At the effective date, an entity
      may elect the fair value option for eligible items that exist at that date.
      The
      entity shall report the effect of the first remeasurement to fair value as
      a
      cumulative-effect adjustment to the opening balance of retained earnings. The
      Company is currently evaluating the impacts and disclosures of this standard,
      but would not expect SFAS 159 to have a material impact on its results of
      operations.





**4.**
            **Change
                of Accounting
                Principal**





FASB
      Staff Position ("FSP") EITF 00-19-2, *Accounting
      for Registration Payment Arrangements* ,
      specifies that the contingent obligation to make future payments or otherwise
      transfer consideration under a registration payment arrangement, whether issued
      as a separate agreement or included as a provision of a financial instrument
      or
      other agreement, should be separately recognized and measured in accordance
      with
      SFAS No. 5 ("SFAS 5"), *Accounting
      for Contingencies* .
      This
      FSP further clarifies that a financial instrument subject to a registration
      payment arrangement should be accounted for in accordance with other applicable
      Generally Accepted Accounting Principles without regard to the contingent
      obligation to transfer consideration pursuant to the registration payment
      arrangement. This FSP is effective immediately for registration payment
      arrangements and the financial instruments subject to those arrangements that
      are entered into or modified subsequent to December 21, 2006. For registration
      payment arrangements and financial instruments subject to those arrangements
      that were entered into prior to December 21, 2006, the guidance in the FSP
      is
      effective for financial statements issued for fiscal years beginning after
      December 15, 2006, and interim periods within those fiscal years.





On
      January 1, 2007, the Company recorded a cumulative effect of change in
      accounting principle and increased additional paid in capital by $6,091,061,
      decreased financial instrument derivative liability by $2,069,949 and increased
      accumulated deficit at December 31, 2007 by $4,021,112.





F-10


**Eternal
      Energy Corp.**




**Notes
      to the Condensed Financial Statements**




***As
      of September 30, 2008,***


***For
      Each of the Three-Month and Nine-Month Periods Ended September 30, 2008 and
      2007***








**5.**
            **Equipment
                and Leasehold
                Improvements**




The
      following is a summary of equipment and improvements, at cost as of September
      30, 2008:




Office
                equipment
            
            $
            74,630Downhole
                gas and water equipment
            
            
            19,000Leasehold
                improvements
            
            
            40,281Total
                equipment and improvements
            
            
            133,911Less:
                accumulated depreciation
            
            
            (45,943
            )**Equipment
                and improvements, net**
            
            **$**
            **87,968**





Depreciation
      expense for the nine-month periods ended September 30, 2008 and 2007 was $26,318
      and $12,257, respectively.





**6.**
            **Oil
                and Gas Properties**





*Producing
      Properties*





In
      2007,
      the Company acquired a 75% working interest in the South West extension of
      the
      West Ranch Field, located in Jackson County, Texas.





The
      net
      capitalized cost of this property is summarized below:





Acquisition
                cost
            
            $
            1,888,539Improvement
                costs
            
            
            500,3452,388,884Depletion
            
            
            (43,391
            )**Balance
                at September 30, 2008**
            
            **$**
            **2,345,493**





*Exploratory
      Prospects*





The
      Company has also entered into participation agreements in three exploratory
      oil
      and gas properties. Two of these properties have been abandoned. The Company
      has
      a 50% working interest in the wells on the remaining property, if they are
      successful. The Company paid certain amounts upon execution of the agreements,
      and is obligated to share in the drilling costs of the exploratory wells. In
      addition, the Company has agreed to issue shares of its common stock based
      upon
      the proven reserves of the property. A description of the oil and gas properties
      follows.




F-11




**Eternal
      Energy Corp.**




**Notes
      to the Condensed Financial Statements**




***As
      of September 30, 2008,***


***For
      Each of the Three-Month and Nine-Month Periods Ended September 30, 2008 and
      2007***








**6.**
            **Oil
                and Gas Properties,
                Continued**





Big
      Sand Spring Valley and Cherry Creek Prospect





The
      Company acquired a 50% working interest in these properties for an initial
      payment of $667,000 and the obligation for a future payment of $2,000,000,
      which
      represents 50% of the estimated initial drilling costs. The Company is obligated
      to pay 50% of future drilling costs on this property. In addition, the Company
      is obligated to issue one million shares of its common stock for each ten
      million equivalent barrels of net proven oil reserves developed on the Big
      Sand
      Spring Valley Prospect. At September 30, 2008, the Company was not obligated
      to
      fund any additional drilling costs nor are there any net proven oil reserves
      on
      these properties. This participation agreement has a term of ten years, which
      expires in November 2015.





North
      Sea Quad 41 and Quad 42





The
      Company acquired 10% working interests in these prospects with the obligation
      to
      fund 15% of exploratory wells. The Company placed $1.5 million for the Quad
      41
      and 42 prospect on deposit to cover its share of these costs. The exploratory
      wells on both of these prospects have been completed and no economically viable
      reserves were discovered.





No
      amounts have been released to the operator for the Quad 41 and 42 prospect
      and
      the Company has instructed the holder of the funds not to make any
      distributions. The Company is attempting to determine what amounts, if any,
      it
      is obligated to pay related to this prospect.





The
      following table summarizes the activity of exploratory costs for the nine-month
      periods ended September 30, 2008 and 2007:





2008
            
            2007Balance
                at the beginning of the period
            
            $
            1,210,458
            
            $
            1,245,210Additions
                to exploratory costs
            
            
            336,026
            
            
            1,696,893Dry
                hole costs
            
            
            (1,194
            )
            
            (1,538,416
            )Costs
                of prospects sold
            
            
            (253,506
            )
            
            (259,482
            )Balance
                at the end of the period
            
            $
            1,291,784
            
            $
            1,144,205





Utah





In
      December 2007, the Company purchased a 50% interest in a 640-acre mineral lease
      from the State of Utah. In the first quarter of 2008, the Company purchased
      a
      50% interest in an additional 10,860 acre lease from the State of Utah.





F-12


**Eternal
      Energy Corp.**




**Notes
      to the Condensed Financial Statements**




***As
      of September 30, 2008,***


***For
      Each of the Three-Month and Nine-Month Periods Ended September 30, 2008 and
      2007***





**6.**
            **Oil
                and Gas Properties,
                Continued**





*Canada*





In
      June
      2008, the Company acquired an overriding royalty position in additional
      prospects located in Saskatchewan, Canada.





*Prospects
      Sold*





In
      May
      2007, the Company sold its 15% equity interest in Pebble Petroleum, Inc.
      ("Pebble"), which held a working interest in the Pebble Beach prospect. Proceeds
      from the sale totaled $877,353, resulting in a gain on the disposition of the
      Pebble Beach investment of $619,901. An additional $163,150 of sales proceeds
      were received in the second quarter of 2008 relating to this transaction. Per
      the terms of the Pebble sale, the Company retained a 5% gross overriding royalty
      from each well drilled on certain acreage that Pebble holds rights to in western
      Canada. In addition, the Company obtained the right to receive $250,000 for
      each
      of the first eight wells drilled on the property. The Company records these
      amounts as “spud fees” when drilling commences. As of September 30, 2008, all
      eight of the initial wells have been drilled, for which the Company has earned
      $2,000,000 in spud fees. As a result of the litigation described in Note 7,
      as
      of September 30, 2008, the purchaser is holding in escrow $1,250,000 in spud
      fees owed to the Company until the legal matter is resolved. The Company does
      not believe that there is any merit in the claim and expects that the spud
      fees
      due to the Company will eventually be received. The timeframe for the settlement
      of this lawsuit is uncertain and, accordingly, the receivable has been
      classified as non-current.





In
      June
      2008, the Company sold its 50% working interest in the Utah properties. Gross
      proceeds from the sale totaled $1,190,135, resulting in a $936,678 gain on
      the
      transaction. Under the terms of the sale, the Company retains an overriding
      royalty on production from the property sold, as well as an overriding royalty
      on production from properties of mutual interest which the purchaser may develop
      in the future.





**7.**
            **Commitments
                and Contingencies**





*Financial
      Results, Liquidity and Management's Plan*





Excluding
      profits realized from the disposition of oil and gas properties, the Company
      has
      incurred net losses for the nine-month periods ended September 30, 2008 and
      2007
      of $778,925 and $1,499,969, respectively, and a net operating loss of $1,437,768
      for the year ended December 31, 2007. These factors raise substantial doubt
      about the Company's ability to continue as a going concern. As stated in Note
      6,
      the Company has been successful in generating additional operating capital
      through the disposition of oil and gas prospects. However, the successful
      disposition of properties is not a viable strategy to fund the Company’s
      long-term operations. Accordingly, the Company’s management is developing
      and implementing plans to bolster the Company’s cash flow from operating
      activities.




F-13
 
  **Eternal
          Energy Corp.**
  **Notes
          to the Condensed Financial Statements**
  ***As
          of September 30, 2008,***
 ***For
          Each of the Three-Month and Nine-Month Periods Ended September 30, 2008
          and 2007***


**7.**
            **Commitments
                and Contingencies,
                Continued**




No
      assurances can be given that the Company can obtain sufficient working capital
      through the sale of oil and gas properties, the issuance of common stock or
      by
      leveraging the Company's current assets, or that the implementation of its
      business plan will generate sufficient revenues in the future to sustain ongoing
      operations. The financial statements do not include any adjustments that might
      be necessary if the Company is unable to continue as a going
      concern.





*Litigation*





The
      Company's policy is to accrue amounts related to legal matters as a charge
      to
      operations if it is probable that a liability has been incurred and the amount
      of loss can be reasonably estimated, as required by SFAS 5.





On
      November 20, 2007, the Company was served with a complaint alleging breach
      of
      contract, misappropriation of confidential and proprietary information and
      of
      trade secret and claims under the Colorado Uniform Trade Secrets Act, fraud,
      declaratory relief declaring any agreements of release to be void and
      unenforceable as they were obtained by fraudulent inducement, declaration of
      accounting and constructive trust for all proceeds and profits from the alleged
      misappropriation, injunctive relief for return of all allegedly misappropriated
      information and cessation of use, civil theft of business values, and tortuous
      interference with contract. Plaintiffs seek compensatory damages in an
      unspecified amount, prejudgment interest, declaratory relief, injunctive relief,
      accounting, and attorneys’ fees. The Company believes that the causes of action
      are without merit and intends to defend this case vigorously. The Company has
      filed a countersuit claiming abuse of process, intentional interference with
      an
      existing business and contractual relations, commercial disparagement and
      conspiracy. The lawsuit has continued to negatively impact the Company's ability
      to pursue additional opportunities or acquire additional oil and gas prospects,
      as discussed in Note 6. A further result of the lawsuit has been the sale of
      certain assets in order to fund the Company’s ongoing operations, as discussed
      on Note 6. The litigation is currently in the discovery phase. As of the date
      of
      these financial statements, the ultimate outcome of the litigation cannot be
      reasonably estimated.





*Drilling
      Cost Obligations*





As
      discussed in Note 6, the Company is obligated to fund its share of future
      drilling costs related to its participation in three exploratory oil and gas
      wells on the Big Sand Spring Valley prospect. The minimum future obligation
      on
      the wells on this property is $2 million.




F-14




**Eternal
        Energy Corp.**
  **Notes
        to the Condensed Financial Statements**
  ***As
        of September 30, 2008,***
 ***For
        Each of the Three-Month and Nine-Month Periods Ended September 30, 2008 and
        2007***




**7.**
            **Commitments
                and Contingencies,
                Continued**





*Employment
      Agreements*





The
      Company entered into a two-year employment agreement with its President. This
      agreement, as amended, terminates on October 31, 2009, provides for annual
      compensation of $174,000 and a signing bonus of $125,000 of which $90,000 has
      been paid at September 30, 2008. In addition, the Company granted to its
      President options to purchase 1,443,800 shares of the Company’s common stock.
      The options vest over a three-year period and have an exercise price of $1.00
      per share.





In
      August
      2007, the Company entered into a two-year employment agreement with its Vice
      President of Engineering. The agreement provides for annual compensation of
      $120,000 and a signing bonus of $30,000. In addition, the Company granted to
      this employee options to purchase 1 million shares of the Company’s common
      stock. The options vest over a two-year period and have an exercise price of
      $0.24 per share.





In
      June
      2008, the Company entered into a two-year employment agreement with its Chief
      Financial Officer. The agreement provides for annual compensation of $138,500.
      In addition, the Company granted to this employee options to purchase 1 million
      shares of the Company’s common stock. The options vest over a two-year period
      and have an exercise price of $0.18 per share.





*Lease
      Obligation*





In
      February 2007, the Company entered into a lease for its corporate offices.
      The
      lease has a term of 48 months. Rents remaining as of September 30, 2008 under
      this lease are as follows:





Amount2008
                (remaining)
            
            $
            12,4272009
            
            
            51,1782010
            
            
            52,7822011
            
            
            4,4102012
            
            
            -**Total**
            
            **$**
            **120,797**




F-15




**Eternal
        Energy Corp.**
  **Notes
        to the Condensed Financial Statements**
  ***As
        of September 30, 2008,***
 ***For
        Each of the Three-Month and Nine-Month Periods Ended September 30, 2008 and
        2007***


**8.**
            **Loss
                Per Share**





The
      following is a reconciliation of the number of shares used in the calculation
      of
      basic loss per share and diluted loss per share for the three-month and
      nine-month periods ended September 30, 2008 and 2007:





For the Three-Month
            
            For the Nine-MonthPeriod Ended September 30,
            
            Period Ended September 30,2008
            
            2007
            
            2008
            
            2007Net
                income (loss)
            
            $
            (8,453
            )
            $
            296,897
            
            $
            323,263
            
            $
            (882,098
            )Weighted-average
                number of common shares outstanding - Basic
            
            
            44,550,000
            
            
            42,550,000
            
            
            44,550,000
            
            
            42,550,000Incremental
                shares from the assumed exercise of dilutive stock options
            
            
            -
            
            
            -
            
            
            223,273
            
            
            -Weighted-average
                number of common shares outstanding - Diluted
            
            
            44,550,000
            
            
            42,550,000
            
            
            44,773,273
            
            
            42,550,000Net
                income (loss) per share,Basic
            
            $
            (0.00
            )
            $
            0.01
            
            $
            0.01
            
            $
            (0.02
            )Diluted
            
            $
            (0.00
            )
            $
            0.01
            
            $
            0.01
            
            $
            (0.02
            )





The
      following securities were not included in the computation of diluted net income
      (loss) per share as their effect would have been anti-dilutive:




For the Three-Month
            
            For the Nine-MonthPeriod Ended September 30,
            
            Period Ended September 30,2008
            
            2007
            
            2008
            
            2007Stock
                Options
            
            
            4,543,800
            
            
            3,393,800
            
            
            4,320,527
            
            
            3,393,800Warrants
            
            
            -
            
            
            12,924,000
            
            
            -
            
            
            12,924,000





**9.**
            **Share-Based
                Payment**





In
      November 2005, the Company granted options to purchase 1,443,800 shares of
      its
      common stock to its President. The exercise price of these options is $1.00
      per
      share, which exceeded the market price on the effective date of grant. The
      options vest at the rate of 240,633 shares at the end of each six-month period
      from the effective date of grant, and all become exercisable on November 7,
      2008.





In
      February 2006, the Company granted options to purchase 500,000 shares of its
      common stock to a director. In December 2006, the Company exchanged the option
      to purchase 500,000 common shares for a new option to purchase 350,000 shares
      of
      common stock. The exercise price of the new options is $0.78 per share, which
      was the market price on the effective date of grant. The options vest at the
      rate of 116,667 shares at the date of grant and 58,333 at the end of each
      six-month period from the effective date of grant, and all become exercisable
      on
      December 4, 2008.




F-16




**Eternal
        Energy Corp.**
  **Notes
        to the Condensed Financial Statements**
  ***As
        of September 30, 2008,***
 ***For
        Each of the Three-Month and Nine-Month Periods Ended September 30, 2008 and
        2007***




**9.**
            **Share-Based
                Payment, Continued**





In
      December 2006, Company granted options to purchase an additional 300,000 shares
      of its common stock to this same director. The exercise price of these options
      is $0.80 per share, which was the market price on the effective date of grant.
      The options vest at the rate of 50,000 at the end of each six-month period
      from
      the effective date of grant, and all become exercisable on December 4,
      2009.





In
      July
      2007, the Company granted options to purchase 300,000 shares of its common
      stock
      to a director. These options vest over three years, have a life of five years
      and have an exercise price of $0.25 per share, the market price on the effective
      date of grant. The options vest at the rate of 50,000 shares at the end of
      each
      six-month period from the effective date of grant, and all will be exercisable
      on July 26, 2010.





In
      August
      2007, the Company granted options to purchase 1,000,000 shares of its common
      stock to its Vice President of Engineering. These options vest over 2 years,
      have a life of 5 years and have an exercise price of $0.24 per share, the market
      price on the effective date of grant. The options vest at the rate of 250,000
      shares at the end of each six-month period from the effective date of grant,
      and
      all will be exercisable on August 1, 2009.





In
      March
      2008, the Board of Directors ratified the grant of options to purchase 50,000
      of
      its common shares to a consultant. The stock options were originally approved
      by
      management on August 1, 2006. These options vest over 1 year, have a life of
      5
      years and have an exercise price of $0.97 per share, the market price on the
      effective date of grant. Under the corresponding stock option agreement, 16,667
      options vested at the time the agreement was executed with an additional 16,667
      options vesting at the end of each six-month period from the grant date. As
      of
      September 30, 2008, all 50,000 stock options are exercisable.





Also
      in
      March 2008, the Board of Directors ratified the grant of options to purchase
      100,000 of its common shares to the same consultant. The stock options were
      originally approved by management on August 1, 2007. These options vest over
      1
      year, have a life of 5 years and have an exercise price of $0.20 per share,
      the
      market price on the effective date of grant. Under the corresponding stock
      option agreement, 33,333 options vested at the time the agreement was executed
      with an additional 33,333 options vesting at the end of each six-month period
      from the grant date. As of September 30, 2008, all 100,000 stock options are
      exercisable.




F-17




**Eternal
        Energy Corp.**
  **Notes
        to the Condensed Financial Statements**
  ***As
        of September 30, 2008,***
 ***For
        Each of the Three-Month and Nine-Month Periods Ended September 30, 2008 and
        2007***


**9.**
            **Share-Based
                Payment, Continued**





In
      June
      2008, the Company granted options to purchase 1,000,000 shares of its common
      stock to its Chief Financial Officer. These options vest over 2 years, have
      a
      life of 5 years and have an exercise price of $0.18 per share, the market price
      on the effective date of grant. The options vest at the rate of 250,000 shares
      at the end of each six-month period from the effective date of grant, and all
      will be exercisable on December 2, 2010.





In
      October 2008, the Company granted options to purchase 1,000,000 shares of its
      common stock to its President. These options vest over 2 years, have a life
      of 5
      years and have an exercise price of $0.24 per share, which exceeds the market
      price on the effective date of grant. Fifty percent of the options vested
      immediately, with the remaining 50% vesting one year from the effective date
      of
      the grant.





A
      summary
      of stock option activity, as of September 30, 2008, and changes during the
      nine-month period then ended is presented below:




WeightedWeighted
            
            
            
            AverageAverage
            
            Remaining
            
            AggregateExercise
            
            Contract
            
            IntrinsicShares
            
            Price
            
            Term
            
            ValueOutstanding
                at December 31, 2007
            
            
            3,393,800
            
            $
            0.67
            
            
            3.5
                years
            
            
            -Options
                granted
            
            
            1,150,000
            
            $
            0.22
            
            
            -
            
            
            -Options
                exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Options
                expired
            
            
            -
            
            
            -
            
            
            -
            
            
            -Options
                forfeited
            
            
            -
            
            
            -
            
            
            -
            
            
            -Outstanding
                at September 30, 2008
            
            
            4,543,800
            
            $
            0.55
            
            
            2.8
                years
            
            $
            -Exercisable
                at September 30, 2008
            
            
            2,344,833
            
            $
            0.70
            
            
            1.7
                years
            
            $
            -





The
      assumptions used in the Black-Scholes option pricing model for the stock options
      granted during the nine-month period ended September 30, 2008 were as
      follows:





Risk-free
                interest rate
            
            
            2.37-3.25
            %Expected
                volatility of common stock
            
            
            101
            %Dividend
                yield
            
            $
            0.00Expected
                life of options
            
            
            5
                yearsWeighted
                average fair market value of options granted
            
            $
            0.22





F-18


**Eternal
        Energy Corp.**
  **Notes
        to the Condensed Financial Statements**
  ***As
        of September 30, 2008,***
 ***For
        Each of the Three-Month and Nine-Month Periods Ended September 30, 2008 and
        2007***


**10.**
            **Equity
                Transactions**




*Issue
      of Shares for Working Interest*




In
      October 2007, the Company acquired an additional 25% working interest in the
      West Ranch Field in exchange for 2 million shares of its common stock, valued
      at
      $629,513.




F-19


**Eternal
        Energy Corp.**
  **Notes
        to the Condensed Financial Statements**
  ***As
        of September 30, 2008,***
 ***For
        Each of the Three-Month and Nine-Month Periods Ended September 30, 2008 and
        2007***


*Sale
      of Equity Units*





In
      March
      and May 2006, the Company sold 11,876,000 and 1,248,000 equity units,
      respectively, through a private placement offering. Each equity unit consisted
      of one share of the Company’s common stock and one warrant to purchase a share
      of the Company’s common stock at $1.00 per share. The per equity unit price was
      $0.50 with net proceeds of $6,562,000. The Company paid $440,240 as finders
      fees
      related to this offering. The equity units have a registration rights agreement
      that required the Company to file a registration statement with the Securities
      and Exchange Commission covering the shares and shares to be issued upon
      exercise of the warrants.





*Warrants*





WeightedAverageNumber
                of
            
            ExerciseWarrants
            
            Price**Outstanding,
                December 31, 2007**
            
            
            12,924,000
            
            $
            1.16Issued
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -Expired
            
            
            (12,924,000
            )
            $
            (1.16
            )Forfeited
            
            
            -
            
            
            -**Outstanding,
                September 30**,**2008**
            
            
            -
            
            $
            -**Exercisable,
                September 30**,**2008**
            
            
            -
            
            $
            -





Warrants
      to purchase 11,676,000 million shares expired in March 2008 and 1,248,000
      expired in May 2008.





*Warrant
      Derivative Liability*





The
      holders of the warrants to purchase shares of the Company’s common stock had
      registration rights that require the Company to file a registration statement
      with the Securities and Exchange Commission to register for resale the common
      stock to be issued upon exercise of the warrants. Because the ability to
      register the shares to be issued upon exercise was deemed to be outside the
      control of the Company, the initial fair value of the warrants were recorded
      as
      a financial instrument derivative liability and were marked to market at the
      end
      of each reporting period. The registration statement became effective in the
      first quarter of 2007.





F-20
 
  **Eternal
          Energy Corp.**
  **Notes
          to the Condensed Financial Statements**
  ***As
          of September 30, 2008,***
 ***For
          Each of the Three-Month and Nine-Month Periods Ended September 30, 2008
          and 2007***


**10.**
            **Equity
                Transactions,
                Continued**




The
      Company estimated the fair value of the warrants using the Black-Scholes
      valuation model with the following assumptions:





December
                31,Inception
            
            2005Term
            
            
            24
                 months
            
            
            22
                monthsRisk
                free interest rate
            
            
            4.30%
                to 4.92
            %
            
            4.34
            %Volatility
            
            
            101
            %
            
            101
            %Dividend
            
            
            -0-
            
            
            -0





*Shares
      Reserved for Future Issuance*





As
      of
      September 30, 2008, the Company has reserved shares for future issuance upon
      exercise of outstanding options and warrants as follows:





Options
            
            
            4,543,800Warrants
            
            
            -**Total**
            
            
            **4,543,800**





These
      amounts do not include any shares that may have to be issued upon the discovery
      of net proved reserves in the Nevada oil and gas property.





**11.**
            **Related
                Party Transaction**





In
      October 2007, the Company acquired certain exploratory oil and gas leases and
      exclusive licenses to use a down-hole gas/water device from entities owned
      by
      its Chairman and Chief Executive Officer. The Company paid $125,000 for the
      oil
      and gas leases and is obligated to pay to a related entity $250,000 on each
      of
      December 31, 2008 and December 31, 2009. The Company may pay these amounts
      either in cash or with shares of its common stock. In addition, the Company
      reimbursed one of the related entities $20,000 for amounts paid to Zavanna
      Canada Corp. The Company is required to drill and equip two wells, and may
      cancel this agreement after the two required wells have been drilled and the
      first $250,000 payment has been made.





One
      license agreement required the Company to pay $25,000 in September 2007 and
      further requires the Company to purchase ten devices each year, beginning in
      2008, at a cost of $4,000 per device. In addition, the grantor of the license
      will receive a 2% royalty on each well using the device. The license expires
      in
      January 2012 and can be extended for 5 years at a cost of $300,000.




F-21




**Eternal
        Energy Corp.**
  **Notes
        to the Condensed Financial Statements**
  ***As
        of September 30, 2008,***
 ***For
        Each of the Three-Month and Nine-Month Periods Ended September 30, 2008 and
        2007***




**11.**
            **Related
                Party Transaction,
                Continued**





The
      second license required a payment of $35,000 on March 30, 2008 and an annual
      payment of $10,000. The Company is required to pay $500 for each device used
      and
      give to the grantor of the license a 5% working interest in each well using
      the
      device. In order to retain exclusive rights to the device license, the Company
      was required to purchase and install 20 devices in Canada by June 30, 2008.
      The
      Company did not purchase and install the required number of devices and,
      therefore, the license is no longer exclusive.





The
      third
      license requires the Company to make an annual payment of $6,000 each year,
      and
      give to the grantor of the license a 5% working interest in each well using
      the
      device. In order to retain exclusive rights to the device license, the Company
      was required to purchase and install five devices in the United States by June
      30, 2008. The Company did not purchase and install the required number of
      devices and, therefore, the license is no longer exclusive.





As
      part
      of the acquisition of the licenses from the related entity, the Company acquired
      an option to purchase all of the outstanding shares of such related entity
      in
      exchange for 25 million shares of its common stock. The Company is periodically
      required to make certain contingent payments through June 30, 2010 to retain
      this option, which expires on December 31, 2010.





F-22





**ITEM
      2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.**





THE
      FOLLOWING PRESENTATION OF OUR MANAGEMENT’S DISCUSSION AND ANALYSIS SHOULD BE
      READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND OTHER FINANCIAL
      INFORMATION INCLUDED ELSEWHERE IN THIS REPORT.





*Industry
      Outlook*





The
      petroleum industry is highly competitive and subject to significant volatility
      due to numerous market forces. Crude oil and natural gas prices are affected
      by
      market fundamentals, such as weather, inventory levels, competing fuel prices,
      overall demand, and the availability of supply.





Worldwide
      oil prices rose throughout 2007 and reached historical highs during the first
      quarter of 2008, but later subsided during the third quarter of 2008. Continued
      economic growth, resulting in increased demand and concerns about supply
      availability, could result in continued high prices. Conversely, a decline
      in
      demand, caused by any number of economic and political factors, and further
      strengthening of the U.S. Dollar on foreign exchange markets could result in
      lower crude oil prices in future periods.





Oil
      prices have significantly affected profitability and returns for upstream
      producers. Oil prices cannot be predicted with any certainty. The West Texas
      Intermediate price has averaged approximately $38 per barrel over the past
      ten
      years; however, the industry has historically experienced wide fluctuations
      in
      prices.





While
      local supply/demand fundamentals are a decisive factor affecting domestic
      natural gas prices over the long-term, day-to-day prices may be more volatile
      in
      the futures markets, such as on the NYMEX and other exchanges, making it
      difficult to forecast prices with any degree of confidence. Over the last ten
      years, the NYMEX gas price has averaged approximately $5.03 per
      Mcf.





*Results
      of Operations for the Three-Month Periods Ended September 30, 2008 and
      2007*





In
      May
      2007, the Company sold its 15% equity interest in Pebble Petroleum, Inc.
      ("Pebble"), which held a working interest in the Pebble Beach prospect. Per
      the
      terms of the Pebble sale, the Company retained a 5% gross overriding royalty
      from each well drilled on certain acreage in western Canada to which Pebble
      holds rights. In addition, the Company obtained the right to receive a $250,000
      spud fee for each of the first eight wells drilled on the property. The
      Company considers the spud fees as being earned when drilling commences on
      each
      well. The first of the eight wells was drilled in June 2007. Drilling activities
      have continued since that time. The Company recognized $500,000 in spud fee
      revenue for the three-month period ended September 30, 2007, in connection
      with
      the drilling of the second and third wells. As of September 30, 2008, all eight
      wells for which the Company is entitled to receive spud fees have been drilled,
      resulting in cumulative spud fee revenues of $2,000,000. Drilling commenced
      on
      the final two wells during July and August 2008, respectively, resulting in
      the
      recognition of $500,000 of spud fee revenue for the current quarter. As a result
      of the Company's involvement in the Zavanna litigation, as discussed below,
      spud
      fees relating to the final five wells that were drilled are currently being
      held
      in escrow until the litigation is resolved. As of September 30, 2008, $1,250,000
      of spud fees is held in escrow.





During
      2007, the Company acquired a 75% working interest in the Southwest Extension
      of
      the West Ranch Field through a series of cash and stock transactions. The West
      Ranch Field contains numerous, older wells with proven reserves, yet whose
      production has waned over recent years. The Company acquired its interest in
      the
      property with the intention of exploiting producible reserves believed to remain
      in several reservoirs. The Company first began recognizing oil and gas revenues
      and operating expenses relating to the West Ranch property in the fourth quarter
      of 2007. To date, actual production from the West Ranch property has been less
      than anticipated. The impact of the Zavanna litigation has resulted in the
      re-prioritization of working capital and the diverting of funds initially
      earmarked for further development of the West Ranch property to other projects,
      as well as to fund the Company's defense in the Zavanna litigation. As of
      September 30, 2008, the West Ranch wells are shut in until the Zavanna
      litigation is resolved and/or additional sources of working capital can be
      identified. Accordingly, the Company did not receive any revenue from the sale
      of oil and gas for the third quarter of 2008. Operating expenses related to
      the
      West Ranch property totaled $70,302 for the three months ended September 30,
      2008.





As
      a
      result of hiring a Vice President of Engineering in August 2007 and a Chief
      Financial Officer in June 2008, the Company's payroll and benefits related
      expenses for the three-month period ended September 30, 2008 increased by
      $61,181 and $5,606, respectively, from the same period in 2007. As part of
      their
      overall compensation packages, each of these individuals received one million
      options to purchase shares of the Company's stock. The Company also granted
      stock options to two of its Directors in July 2007. Accordingly, the Company's
      stock based compensation expense for the third quarter of 2008 increased by
      $49,727 from that of the third quarter of 2007.





Legal
      expense for the three-month period ended September 30, 2008 increased by $85,674
      from the same period in 2007, primarily as a result of the Company's defense
      of
      litigation brought forth by Zavanna LLC, et al. The Company hopes to recoup
      all
      of its legal expenditures relating to this action as part of the countersuit
      it
      has filed against Zavanna LLC, et al.





The
      Company recorded depreciation, depletion and amortization expense of $26,015
      for
      the third quarter of 2008, compared to $7,049 for the same period in 2007.
      The
      increase is related primarily to the amortization of certain down hole gas/water
      separation technology licenses that the Company acquired in early 2008.
      Amortization of these licenses totaled $17,100 for the current quarter, compared
      to zero for the same third quarter of 2007.





3




The
      Company utilized a significant amount of its available cash in late 2007 to
      acquire the West Ranch Property and to pursue other potential prospects. As
      a
      result, interest income for the three-month period ended September 30, 2008
      decreased by $3,554 from the same period in 2007.





*Results
      of Operations for the Nine-Month Periods Ended September 30, 2008 and
      2007*





The
      Company recognized approximately $750,000 in spud fee revenue for each of the
      nine-month periods ended September 30, 2008 and 2007, in connection with the
      drilling of three wells during each period. As of September 30, 2008, all eight
      of the initial wells for which the Company is entitled to receive spud fees
      have
      been drilled. As a result of the Company's involvement in the Zavanna
      litigation, as discussed below, spud fees relating to wells that were drilled
      subsequent to the lawsuit are being held in escrow until the lawsuit is
      resolved. As of September 30, 2008, $1,250,000 of spud fees is being held in
      escrow.





As
      noted
      above, the Company acquired a 75% working interest in the West Ranch property
      in
      2007. The Company began recognizing oil and gas revenues and operating expenses
      relating to the West Ranch property in the fourth quarter of 2007. Oil and
      gas
      revenues and operating costs for the nine-month period ended September 30,
      2008
      totaled $137,073 and $467,528, respectively, compared to zero for the same
      period in 2007. As noted above, the Company elected to postpone further
      development of the West Ranch wells during June 2008 in order to divert working
      capital to other projects and to fund its legal defense in the Zavanna
      litigation.





In
      May
      2007, the Company sold its 15% equity interest in Pebble, which held a working
      interest in the Pebble Beach prospect. Proceeds from the sale totaling $877,353
      were received in 2007 versus associated costs of $259,482, resulting in a gain
      of $617,871 on the sale. An additional $163,510 of proceeds from the sale were
      received and recognized in 2008.





In
      June
      2008, the Company sold its 50% interest in certain properties located in Utah.
      Proceeds from the sale totaled $1,190,135, versus associated costs of $251,457,
      resulting in a gain on the sale of $938,678. The Company had originally intended
      to participate in the development of the Utah prospect; however, the decision
      was made to dispose of the investment to ease cash restrictions resulting from
      the Company being named in litigation brought forth by Zavanna LLC, et al,
      as
      described below. Proceeds from the sale of prospects were used to bolster
      the Company's working capital position.





As
      indicated in the footnotes to the financial statements, the Company capitalizes
      all exploration related costs related to a prospect until it can be determined
      whether the prospect contains any economically recoverable oil or gas reserves.
      In the event that the drilling of exploratory wells is unsuccessful in locating
      economic reserves, the prospect is abandoned and the related costs are expensed
      in the current period. The Company recognized $1,538,416 in dry hole expense
      for
      the nine-month period ended September 30, 2007 in connection with the
      abandonment of the Quad 14 and Quad 41 / 42 properties. No exploratory wells
      have been abandoned to date in 2008. The Company's income statement for the
      nine-month period ending September 30, 2008 contains a dry hole expense of
      $2,784 related to the abandonment of the Quad 14 property, for which the Company
      was not billed until the current period. Additional residual costs may be
      received during the remainder of 2008 as the final accounting for the Quad
      14
      project is completed. Management does not expect these residual costs to have
      a
      material effect on the Company’s financial statements. As of September 30, 2008,
      the Company had $1,410,268 on deposit relating to the drilling of the Quad
      41 /
      42 prospect. No determination can be made at this point whether any or all
      of
      the deposited funds will ever be returned to the Company.





As
      a
      result of the hiring and stock option granting activities discussed above,
      the
      Company's payroll related and stock based compensation expenses for the
      nine-month period ended September 30, 2008 increased by $183,829 and $113,373
      from the same period in 2007, respectively.





Legal
      expense for the nine-month period ended September 30, 2008 totaled $249,879,
      the
      majority of which was incurred in connection with the Company's defense of
      the
      litigation brought forth by Zavanna LLC, et al. The Company hopes to recoup
      all
      of its legal expenditures relating to this action as part of the countersuit
      it
      has filed against Zavanna LLC, et al.





Travel
      expense for the nine-month period ended September 30, 2008 decreased by $81,265
      from the same period in 2007, largely due to the fact that the Company has
      not
      pursued the acquisition of additional oil and gas prospects as aggressively
      as
      in 2007. Participation in the litigation with Zavanna LLC, et al, has severely
      hampered the Company's ability to pursue additional exploration and development
      opportunities in the current year.





Depreciation,
      depletion and amortization expense for the nine-month period ended September
      30,
      2008 increased by $78,645 from the same period in 2007 as a result of depleting
      capitalized costs related to the West Ranch property and the amortization of
      certain down-hole gas/water separation technology licenses that the Company
      acquired in early 2008.





Year-to-date
      interest income for 2008 decreased by $34,178 from the prior year as a result
      of
      a lower average available cash balance on hand during the period. As previously
      discussed, the Company utilized a significant amount of its available cash
      in
      late 2007 to acquire the West Ranch Property and to pursue other potential
      prospects.




4


*Liquidity
      and Capital Resources*





As
      of
      September 30, 2008, the Company's cash and cash equivalents totaled $671,269.
      In
      addition, the Company had recorded receivables totaling $1,250,000, which
      represent earned spud fees that are being held in escrow pending the outcome
      of
      the Zavanna litigation. An additional $1,410,268 has been placed on deposit
      in
      connection with the drilling of the Quad 41 / 42 prospect. As previously stated,
      no economically recoverable reserves were found on the Quad 41 / 42 property.
      At
      this time, it is uncertain whether any of the funds placed on deposit will
      ultimately be returned to the Company.





The
      Company's cash flows used in operations totaled $93,700 for the nine-month
      period ended September 30, 2008. As of September 20, 2008, the Company has
      committed to fund future drilling efforts totaling at least $2 million in
      connection with various joint ventures and exploration participation agreements.
      In addition, the Company's management is evaluating various strategies designed
      to stimulate production from wells located on the West Ranch Property. Total
      costs associated with these strategies are estimated to range from approximately
      $210,000 to $420,000 over the next twelve months.





While
      the
      Company has historically been successful in raising additional working capital
      through private equity funding sources and/or the sale of existing oil and
      gas
      prospects, as of September 30, 2008, the Company does not have the financial
      resources to meet all of its potential obligations. The Company's management
      is
      currently developing financial strategies to meet its liquidity needs and to
      continue to pursue exploration opportunities. No assurances can be given that
      the Company we will be able to obtain sufficient working capital through the
      issuance of common stock, the sale of oil and gas properties and/or the
      borrowing of funds or that the development and implementation of our business
      plan will generate sufficient revenues to sustain future operations. These
      factors raise substantial doubt with the Company's auditors with respect to
      the
      Company's ability to continue as a going concern.





In
      November 2007, the Company was named as a defendant in a complaint,
      styled
      Zavanna LLC, a Colorado limited liability company; Prairie Petroleum, Inc,
      a
      Colorado corporation; Trapper Oil Company, Inc., a Colorado corporation; Zavanna
      Canada Corporation, a Nova Scotia unlimited liability company v. Brad Colby;
      Eternal Energy, Inc., a Nevada corporation; Pebble Petroleum, Inc., a British
      Columbia corporation; Steven Swanson; Fairway, LLC, a Colorado limited liability
      company; ABC Corporation; DEF Limited Partnership; and John Doe 1-10, District
      court, City and County of Denver, Colorado case No. 07-CV-10775. The complaint
      alleged, among other things, breach of contract, misappropriation of
      confidential and proprietary information and of trade secret and claims under
      the Colorado Uniform Trade Secrets Act, fraud, declaratory relief declaring
      any
      agreements of release to be void and unenforceable as they were obtained by
      fraudulent inducement, declaration of accounting and constructive trust for
      all
      proceeds and profits from the alleged misappropriation, injunctive relief for
      return of all allegedly misappropriated information and cessation of use, civil
      theft of business values, and tortuous interference with contract (the Zavanna
      litigation). The plaintiffs seek compensatory damages in an unspecified amount,
      prejudgment interest, declaratory relief, injunctive relief, accounting, and
      attorneys’ fees. The Company's management believes that the claims are without
      merit and intends to defend the Company's rights vigorously. In January 2008,
      the Company filed a countersuit alleging abuse of process, intentional
      interference with an existing business and contractual relations, commercial
      disparagement, and conspiracy. The Company has responded to all interrogatories
      filed by the plaintiff and is awaiting the receipt of documents requested as
      part of its countersuit. The lawsuit has continued to negatively impact the
      Company’s ability to pursue additional opportunities or acquire additional oil
      and gas prospects. While management believes that the Company will ultimately
      prevail in this matter, the ultimate outcome of the litigation cannot be
      reasonably estimated.





*Off-Balance
      Sheet Arrangements*





The
      Company has no off-balance sheet arrangements at September 30,
      2008.





**ITEM
      4. CONTROLS AND**  **PROCEDURES.**





We
      carried out an evaluation, under the supervision and with the participation
      of
      our management, including our Principal Executive Officer and our Principal
      Financial Officer, of the effectiveness of the design and operation of our
      disclosure controls and procedures as of the end of the period covered by this
      report. Based on the foregoing, our Principal Executive Officer and our
      Principal Financial Officer concluded that our disclosure controls and
      procedures were effective at the reasonable assurance level.




There
      has
      been no change in our internal controls over financial reporting during our
      most
      recent fiscal quarter that has materially affected, or is reasonably likely
      to
      materially affect, our internal controls over financial reporting.




5





**Part
      II - OTHER INFORMATION**


**ITEM
      6. EXHIBITS.**


**Exhibit**
              
              **Description
                  of Exhibit**3(i).1
              
              Articles
                  of Incorporation filed with the Nevada Secretary of State on July
                  25,
                  2003. (Incorporated by reference to Exhibit 3.1 of our Form 10-SB
                  filed
                  August 18, 2004.)3(i).2
              
              Certificate
                  of Change filed with the Nevada Secretary of State effective November
                  7,
                  2005. (Incorporated by reference to Exhibit 3(i).2 of our Current
                  Report
                  on Form 8-K filed November 9, 2005.)3(i).3
              
              Articles
                  of Merger filed with the Nevada Secretary of State effective November
                  7,
                  2005. (Incorporated by reference to Exhibit 3(i).3 of our Current
                  Report
                  on Form 8-K filed November 9, 2005.)3(ii).1
              
              Bylaws,
                  adopted July 18, 2003. (Incorporated by reference to Exhibit 3.2
                  of our
                  Form 10-SB filed August 18, 2004.)3(ii).2
              
              Amendment
                  No. 1 to Bylaws, adopted November 4, 2005. (Incorporated by reference
                  to
                  Exhibit 3(ii) of our Current Report on Form 8-K filed November
                  9,
                  2005.)10.1
              
              Agreement
                  and Plan of Merger between Golden Hope Resources Corp. (renamed
                  Eternal
                  Energy Corp.) and Eternal Energy Corp., filed with the Nevada Secretary
                  of
                  State effective November 7, 2005. (Incorporated by reference to
                  Exhibit
                  10.1 of our Current Report on Form 8-K filed November 9,
                  2005.)10.2
              
              Purchase
                  and Sale Agreement between Eternal Energy Corp. and Merganser Limited,
                  dated November 7, 2005. (Incorporated by reference to Exhibit 10.2
                  of our
                  Current Report on Form 8-K filed November 9, 2005.)10.3
              
              Form
                  of Subscription Agreement for November 2005 private placement.
                  (Incorporated by reference to Exhibit 10.3 of our Current Report
                  on Form
                  8-K filed November 9, 2005.)10.4
              
              Form
                  of Common Stock Purchase Warrant for November 2005 private placement.
                  (Incorporated by reference to Exhibit 10.4 of our Current Report
                  on Form
                  8-K filed November 9, 2005.)10.5
              
              Registration
                  Rights Agreement for November 2005 private placement. (Incorporated
                  by
                  reference to Exhibit 10.5 of our Current Report on Form 8-K filed
                  November
                  9, 2005.)10.6
              
              Letter
                  Agreement by and between Eternal Energy Corp. and International
                  Frontier
                  Resources Corporation. (Incorporated by reference to Exhibit 10.1
                  of our
                  Current Report on Form 8-K filed December 5, 2005.)10.7
              
              Employment
                  Agreement by and between Eternal Energy Corp. and Bradley M. Colby.
                  (Incorporated by reference to Exhibit 10.1 of our Amended Current
                  Report
                  on Form 8-K/A filed June 29, 2006).10.7(b)
              
              Excerpt
                  from the minutes of the Board of Directors meeting on July 26,
                  2007,
                  setting forth the terms of the Second Amendment to Employment Agreement
                  by
                  and between Eternal Energy Corp. and Bradley M. Colby. (Incorporated
                  by
                  reference to Exhibit 10.1b of our Current Report on Form 8-K filed
                  September 27, 2007.)10.8
              
              First
                  Amendment to Employment Agreement by and between Eternal Energy
                  Corp. and
                  Bradley M. Colby (Incorporated by reference to Exhibit 10.1(a)
                  of our
                  Current Report on Form 8-K filed December 8, 2006).10.9
              
              Letter
                  Agreement by and between Eternal Energy Corp. and International
                  Frontier
                  Resources Corporation Relating to Quad 41 and Quad 42 dated January
                  30,
                  2006. (Incorporated by reference to Exhibit 10.1 of our Current
                  Report on
                  Form 8-K filed February 3, 2006.)
  6
  10.10
              
              Amended
                  and Restated Letter Agreement by and between Eternal Energy Corp.
                  and
                  International Frontier Resources Corporation Relating to Quad 14
                  dated
                  January 30, 2006. (Incorporated by reference to Exhibit 10.2 of
                  our
                  Current Report on Form 8-K filed February 3, 2006.)10.11
              
              Finder’s
                  Fee Agreement by and between Eternal Energy Corp. and Taverham
                  Company
                  Ltd. dated January 30, 2006. (Incorporated by reference to Exhibit
                  10.3 of
                  our Current Report on Form 8-K filed February 3, 2006.)10.12
              
              Form
                  of Subscription Agreement for March 2006 private placement. (Incorporated
                  by reference to Exhibit 10.1 of our Current Report on Form 8-K
                  filed March
                  8, 2006.)10.13
              
              Form
                  of Common Stock Purchase Warrant for March 2006 private placement.
                  (Incorporated by reference to Exhibit 10.2 of our Current Report
                  on Form
                  8-K filed March 8, 2006.)10.14
              
              Form
                  of Registration Rights Agreement for March 2006 private placement.
                  (Incorporated by reference to Exhibit 10.1 of our Amended Current
                  Report
                  on Form 8-K/A filed March 29, 2006.)10.15
              
              Letter
                  Agreement between us and Eden Energy Corp. dated April 14, 2006
                  (Incorporated by reference to Exhibit 10.1 our Current Report on
                  Form 8-K
                  filed April 21, 2006).10.16
              
              Letter
                  Agreement effective as of May 19, 2006, by and among Eternal Energy
                  Corp.,
                  International Frontier Resources Corporation, Palace Exploration
                  Company
                  Limited, Oilexco Incorporated, and Challenger Minerals (North Sea)
                  Limited
                  (Incorporated by reference to Exhibit 10.1 of our Current Report
                  on Form
                  8-K filed May 23, 2006).10.17**
              
              Letter
                  Agreement dated October 15, 2006, by and among Eternal Energy Corp.,
                  Fairway Exploration, LLC, Prospector Oil, Inc., and 0770890 B.C.
                  Ltd.
                  (Incorporated by reference to Exhibit 10.17 of our Registration
                  Statement
                  on Form 10-KSB filed April 16, 2007).10.18**
              
              Letter
                  Agreement dated October 26, 2006, by and among Eternal Energy Corp.,
                  Fairway Exploration, LLC, Prospector Oil, Inc., 0770890 B.C. Ltd.,
                  and
                  Rover Resources Inc. (Incorporated by reference to Exhibit 10.18
                  of our
                  Registration Statement on Form 10-KSB filed April 16,
                  2007).10.19
              
              Letter
                  Agreement dated February 28, 2007, by and among Eternal Energy
                  Corp.,
                  Pebble Petroleum Inc., Emerald Bay Holdings Ltd., and Heartland
                  Resources
                  Inc. (Incorporated by reference to Exhibit 10.19 of our Registration
                  Statement on Form 10-KSB filed April 16, 2007).31.1*
              
              Certification
                  pursuant to Section 302 of the Sarbanes-Oxley Act31.2*
              
              Certification
                  pursuant to Section 302 of the Sarbanes-Oxley Act32.1*
              
              Certification
                  pursuant to Section 906 of the Sarbanes-Oxley Act32.2*
              
              Certification
                  pursuant to Section 906 of the Sarbanes-Oxley
                  Act





*
      Filed
      herewith.


**
      Portions omitted pursuant to a request for confidential treatment.




7




**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      Report to be signed on its behalf by the undersigned, thereunto duly
      authorized.





ETERNAL
                ENERGY CORP.(Registrant)November
                7, 2008
            /s/
                Bradley M. ColbyBradley
                M. ColbyPresident
                and Chief Executive Officer





8