**UNITED
      STATES**




**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**









**FORM
      10-QSB**




**(Mark
                one)****ý**
            
            **QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934.**




**For
      the fiscal quarter ended September 30, 2007**




**OR**




**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,
      Colorado 80120**


(Address
      and telephone number of Principal Executive Offices)





**(303)
      798-5235**


(Issuer’s
      Telephone Number, Including Area Code)








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





Yes ý 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 ý





Number
      of
      shares outstanding as of the close of business on November 16, 2007





**TITLE
                OF CLASS**
            
            **NUMBER
                OF SHARES**
              **OUTSTANDING**Common
                Stock, $0.001 par value.
            
            42,550,000





Transitional
      Small Business Disclosure Format (Check one): Yes o No ý













**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements**




**Eternal
      Energy Corp.**




**Condensed
      Financial Statements**


***As
      of September 30, 2007,***


***For
      Each of the Three-Month and Nine-Month Periods Ended September 30, 2007 and
      2006***







**Eternal
                      Energy Corp.**
                    
                    **Index
                      to the Condensed Financial Statements**
                    ***As
                      of September 30, 2007, and***
                    ***For
                      the Three-Month and Nine-Month Periods Ended September 30,
                      2007 and
                      2006***Condensed
                      Financial Statements of Eternal Energy Corp.:Condensed
                      Balance Sheet as of September 30, 2007
                  1Condensed
                      Statements of Operations For Each of the
                    Three-Month
                      and Nine-Month Periods Ended September 30, 2007 and 2006
                  2Condensed
                      Statements of Cash Flows For Each of the
                    Nine-Month
                      Periods Ended September 30, 2007 and 2006
                  3Notes
                      to the Condensed Financial Statements
                  5










**Eternal
                Energy Corp.**
              
              **Condensed
                Balance Sheet**
              ***September
                30, 2007***




*ASSETS*Current
                assets:Cash
            
            $
            1,559,312Prepaids
            
            
            5,297Total
                current assets
            
            
            1,564,609Equipment
                and leasehold improvements, net of accumulated depreciation and
                amortization of $12,257
            
            
            91,941Oil
                and gas properties
            
            
            2,533,663Deposits
                - future drilling costs
            
            
            1,531,721**Total
                assets**
            
            **$**
            **5,721,934**




*LIABILITIES
                AND STOCKHOLDERS' EQUITY*Current
                liabilities:Accounts
                payable and accrued liabilities
            
            $
            29,280Accrued
                payroll-related
                costs
            
            
            13,189**Total
                current liabilities**
            
            
            **42,469**Commitments
                and contingenciesStockholders'
                equity:Common
                stock, $.001 par value, 875,000,000 shares authorized,42,550,000
                shares issued and outstanding
            
            
            42,550Additional
                paid-in capital
            
            
            7,683,938Accumulated
                deficit
            
            
            (2,047,023
            )**Total
                stockholders' equity**
            
            
            **5,679,465****Total
                liabilities and stockholders' equity**
            
            **$**
            **5,721,934**




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


1




**Eternal
                    Energy Corp.**
                  
                  **Condensed
                    Statements of Operations**
                  ***For
                    the Three_Month and Nine_Month Periods Ended September 30, 2007
                    and 2006***




For
                theNine-Month
                Period Ended
            
            For
                the Three-Month Period EndedSeptember
                30, 2007
            
            September
                30, 2006
            
            September
                30, 2007
            
            September
                30, 2006Sale
                of exploration prospect
            
            $
            877,353
            
            
            -
            
            
            -
            
            
            **-**Spud
                fee revenue
            
            
            749,991
            
            
            -
            
            $
            500,006
            
            
            -Total
                revenue
            
            
            1,627,344
            
            
            -
            
            
            500,006
            
            
            -Operating
                expenses:Costs
                of prospect sold
            
            
            259,482
            
            
            -
            
            
            -
            
            
            -Dry
                hole costs
            
            
            1,538,416
            
            
            -
            
            
            -
            
            
            -General
                and administrative
            
            
            587,365
            
            $
            422,652
            
            
            163,628
            
            $
            164,694Professional
                fees
            
            
            167,982
            
            
            216,377
            
            
            49,288
            
            
            70,807(Gain)
                loss on derivatives
            
            
            -
            
            
            (3,708,412
            )
            
            -
            
            
            (5,496,544
            )Total
                operating costs
            
            
            2,553,245
            
            
            (3,069,383
            )
            
            212,916
            
            
            (5,261,043
            )Total
                operating income (loss)
            
            
            (925,901
            )
            
            3,069,383
            
            
            287,090
            
            
            5,261,043Interest
                income
            
            
            43,803
            
            
            5,347
            
            
            9,807
            
            
            5,347Income
                (loss) before cumulative effect of change in accounting
                principal
            
            
            (882,098
            )
            
            3,074,730
            
            
            296,897
            
            
            5,266,390Cumulative
                effect of the change in accounting principal
            
            
            (4,021,112
            )
            
            -
            
            
            -
            
            
            -**Net****income
                (loss)**
            
            **$**
            **(4,903,210**
            **)**
            **$**
            **3,074,730**
            
            **$**
            **296,897**
            
            **$**
            **5,266,390****Net
                income (loss)****per common share, basic and diluted**
            
            **$**
            **(0.12**
            **)**
            **$**
            **0.08**
            
            **$**
            **0.01**
            
            **$**
            **0.12****Weighted
                average number of shares outstanding****,
                basic and diluted**
            
            
            **42,550,000**
            
            
            **37,983,333**
            
            
            **42,550,000**
            
            
            **42,450,000**




The
        accompanying notes are an integral part of the financial
        statements.
  2





**Eternal
                Energy Corp.**
              
              **Condensed
                Statements of Cash Flows**
              ***For
                the Three_Month and Nine_Month Periods Ended September 30, 2007 and
                2006***




For
                the Nine-Month Period EndedSeptember
                30, 2007
            
            September
                30, 2006*Cash
                flows provided by (used in) operating activities:*Net
                income (loss)before cumulative effect of change in accounting principal
            
            $
            (882,098
            )
            $
            3,074,730Adjustments
                to reconcile netincome
                (loss) to net cash used by operating activities:Non
                cash transactions:Stock-based
                compensation
            
            
            138,138
            
            
            79,314Loss
                on derivatives
            
            
            -
            
            
            (3,708,412
            )Depreciation
            
            
            12,257
            
            
            -Dry
                hole costs incurred in prior year
            
            
            1,309,179
            
            
            -Changes
                in operating assets and liabilities:Decrease
                in prepaidexpenses
            
            
            7,531
            
            
            61,875Increase(decrease) in accounts payable and accrued liabilities
            
            
            61,875
            
            
            10,321Increase
                (decrease) in accrued payroll-related
                costs
            
            
            (2,331
            )
            
            10,727**Net
                cash used in operating activities**
            
            
            **404,525**
            
            
            **(471,445**
            **)***Cash
                flows provided by (used in) investing activities:*Return
                of drilling deposits
            
            
            163,510
            
            
            -Increase
                in drilling deposits
            
            
            -
            
            
            (3,000,000
            )Additions
                to oil and gas properties
            
            
            (1,288,454
            )
            
            (600,067
            )Additions
                to equipment and leasehold improvements
            
            
            (87,079
            )
            
            -**Net
                cash used in investing activities**
            
            
            **(1,212,023**
            **)**
            
            **(3,600,067**
            **)***Cash
                flows provided by financing activities:*Proceeds
                from issuance of common stock and warrants
            
            
            -
            
            
            6,349,550**Net
                cash provided by financing activities**
            
            
            **-**
            
            
            **6,349,550****Net
                increase****(decrease) in cash**
            
            
            **(807,498**
            **)**
            
            **2,278,038****Cash
                - beginning of period**
            
            
            **2,366,810**
            
            
            **117,259****Cash
                - end of period**
            
            **$**
            **1,559,312**
            
            **$**
            **2,395,297**


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


3




**Eternal
                    Energy Corp.**
                  
                  **Condensed
                    Statements of Cash Flows**
                  ***For
                    the Three_Month and Nine_Month Periods Ended September 30, 2007
                    and
                    2006***




*Supplemental
                Disclosure of Cash Flow
                Information*




For
                the Nine-Month Period EndedSeptember
                30, 2007
            
            September
                30, 2006Cash
                paid for:Interest
            
            
            -
            
            
            -Income
                taxes
            
            
            -
            
            
            -Fair
                value of common shares issued in connection with oil and gas property
                acquisitions
            
            
            -
            
            
            -





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





4


**Eternal
            Energy Corp.**
  **Notes
            to the Condensed Financial Statements**
 ***As
            of September 30, 2007, and***
 ***For
            the Three-Month and Nine-Month Periods Ended September 30, 2007 and 2006***
 **1.**
                **Interim
                    Presentation**


The
      accompanying condensed interim financial statements as of September 30, 2007
      and
      for the three-month and nine-month periods ended September 30, 2007 and 2006
      are
      unaudited. In the opinion of management, such condensed financial statements
      include all adjustments consisting only of normal recurring accruals necessary
      for the fair presentation of the financial position and the results of
      operations. The results of operations for the three-month and nine-month periods
      ended September 30, 2007 and 2006 are not necessarily indicative of the results
      to be expected for the full year. The condensed interim financial statements
      should be read in conjunction with the Company's annual report on Form 10-KSB
      as
      of December 31, 2006.


**2.**
                **Description
                    of Business**


Eternal
      Energy Corp. (the "Company") was incorporated in the state of Nevada in March
      2003. The Company's business plan is to develop and engage in the acquisition,
      exploration, development and sale of natural resource properties. At September
      30, 2007, 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 and acquired a 45%
      working interest in West Ranch Field in Jackson County, Texas.




In
      June
      2007, the Company sold its interest in the Pebble Beach Prospect, and therefore
      is no longer in the development stage.


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




*Basis
      of Presentation*




These
      condensed 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 in which it has an
      interest when the terms of the transaction are final and the sales price is
      determinable. Additional amounts associated with the sale of prospects,
      including spud fees, working interest, royalty, and net profit interests are
      recorded as revenue when received.




*Concentration
      of Credit Risk*




At
      September 30, 2007, the Company had $1,459,312 on deposit that exceeded United
      States (FDIC) federally insurance limit of $100,000 per bank. The Company
      believes this credit risk is mitigated due to the financial strength of the
      financial institution.





5


**Eternal
          Energy Corp.**
  **Notes
          to the Condensed Financial Statements**
 ***As
          of September 30, 2007, and***
 ***For
          the Three-Month and Nine-Month Periods Ended September 30, 2007 and 2006***
 **3.**
              **Summary
                  of Significant Accounting Policies,
                  Continued**




*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 basically
      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 viable
      reserves are not discovered in a cost center, the costs incurred are charged
      to
      expense as "dry hole costs."




At
      September 30, 2007, all of the Company’s investments in oil and gas properties
      are in the exploration stage, and therefore are not subject to the ceiling
      test.




*Fair
      Value of Financial Instruments*




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




*Accounting
      for Stock-Based Employee Compensation*




In
      December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
      No.
      123(R), *Share-Based
      Payment* .
      This
      pronouncement amends SFAS No. 123, *Accounting
      for Stock-Based Compensation* ,
      (SFAS
      No. 123) and supersedes Accounting Principles Board Opinion No. 25, *Accounting
      for Stock Issued to Employees* (APB No.
      25). SFAS No. 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 No. 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, 2007. Under SFAS No. 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





6


**Eternal
          Energy Corp.**
  **Notes
          to the Condensed Financial Statements**
 ***As
          of September 30, 2007, and***
 ***For
          the Three-Month and Nine-Month Periods Ended September 30, 2007 and 2006***
 **3.**
              **Summary
                  of Significant Accounting Policies,
                  Continued**




*Accounting
      for Stock-Based Employee Compensation, Continued*




the
      service period that the awards are expected to vest. As permitted under SFAS
      No.
      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.




Prior
      to
      January 1, 2007, the Company accounted for stock-based compensation, as
      permitted by SFAS No. 123 under the intrinsic value method described in APB
      No.
      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 No. 123(R)
      to
      stock-based employee compensation, using the straight-line method, for the
      following periods.


For
                the Nine-Month Period Ended
            
            For
                the Three-Month Period EndedSeptember
                30, 2007
            
            September
                30, 2006
            
            September
                30, 2007
            
            September
                30, 2006Net
                income (loss), as reported
            
            $
            (4,903,210
            )
            $
            3,074,730
            
            $
            296,897
            
            $
            5,266,390Total
                stock-based employee compensation expense determined under fair value
                based method for all awards, net of related tax effect
            
            
            (138,138
            )
            
            79,314
            
            
            (46,046
            )
            
            125,114Pro
                forma net income (loss)
            
            $
            (5,041,348
            )
            $
            3,154,044
            
            $
            250,851
            
            $
            5,391,504Income
                (loss) per share:Basic
                and diluted - as reported
            
            $
            (0.12
            )
            $
            (0.06
            )
            $
            (0.02
            )
            $
            0.04Basic
                and diluted - pro forma
            
            $
            (0.12
            )
            $
            (0.06
            )
            $
            (0.02
            )
            $
            0.04






*Stock
      Split*




In
      November 2006, the Company forward split its outstanding common shares 35 for
      1.
      All capital accounts, historical share amounts, weighted average share, and
      loss
      per share have been restated as if this forward split occurred at
      inception.





7


**Eternal
          Energy Corp.**
  **Notes
          to the Condensed Financial Statements**
 ***As
          of September 30, 2007, and***
 ***For
          the Three-Month and Nine-Month Periods Ended September 30, 2007 and 2006***
 **3.**
              **Summary
                  of Significant Accounting Policies,
                  Continued**




*Basic
      and Diluted Loss Per Share*




Basic
      loss per common share is computed by dividing net loss available to common
      shareholders by the weighted average number of common shares outstanding.
      Diluted loss per common share is computed in the same way as basic loss 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. As
      of
      September 30, 2007, the Company had outstanding stock options and warrants
      that
      can be converted into $16,143,800 shares of common stock. The options and
      warrants are in excess of the trading price of shares of the Company's common
      stock, and therefore would have an anti-dilutive effect and are not included
      in
      diluted loss per share.




*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 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.




*Use
      of Estimates and Assumptions*




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires us to make 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. Our 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 as of January 1, 2007.





8


**Eternal
          Energy Corp.**
  **Notes
          to the Condensed Financial Statements**
 ***As
          of September 30, 2007, and***
 ***For
          the Three-Month and Nine-Month Periods Ended September 30, 2007 and 2006***
 **3.**
              **Summary
                  of Significant Accounting Policies,
                  Continued**




*New
      Accounting Pronouncements, Continued*




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
      No. 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 No. 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 No. 157 to have a material impact on its results of operations
      or
      financial condition.




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities”. SFAS No. 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 No. 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 No.
      159
      is effective for financial statements issued for fiscal years beginning after
      November 15, 2007 (January 1, 2008 for 3M) 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 No.
      159
      to have a material impact on its results of operations.


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




FASB
      Staff Position No. EITF 00-19-2, "Accounting for Registration Rights Payment
      Arrangements", changes the way registration rights arrangements are recorded.
      This Staff Position no longer requires warrants and embedded conversion features
      with registration rights arrangements to be treated as derivative instruments.
      This Staff Position requires that these instruments be recorded as if they
      had
      not been recorded as a derivative instrument at their inception and the
      difference recorded as a cumulative effect of change in accounting principal.
      This Staff Position prohibits retrospective application and was implemented
      by
      the Company in January 2007. On January 1, 2007, the Company recorded a
      cumulative effect of change in accounting principal and increased additional
      paid in capital by $6,091,061, decreased financial instrument derivative
      liability by $2,069,949 and increased net loss for the nine month period ended
      September 30, 2007 by $4,021,112.





9


**Eternal
          Energy Corp.**
  **Notes
          to the Condensed Financial Statements**
 ***As
          of September 30, 2007, and***
 ***For
          the Three-Month and Nine-Month Periods Ended September 30, 2007 and 2006***
 **5.**
              **Oil
                  and Gas Properties**


In
      May
      2007, the Company acquired a 50% working interest in the South West extension
      of
      the West Ranch Field in Jackson County, Texas. The estimated proved undeveloped
      secondary recovery reserves of this property are 900,000 barrels. The Company
      has invested $1,369,459 in the acquisition of the working interest in this
      property and expects to invest an additional $900,000 in the next 12 months
      in
      this project.




The
      Company has also entered into participation agreements in three exploratory
      oil
      and gas properties. Two of these were properties have been abandoned. The
      Company has a working interest in the wells on the remaining property, if they
      are successful, of 50%. 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 the property. A description of the oil and gas properties
      follows.




*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 initial drilling costs. Subsequently, the Company is
      obligated to pay 50% of additional 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, 2007, 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.




*Pebble
      Beach Prospect*




In
      May
      2007, the Company sold its interest in the Pebble Beach prospect for $877,353.
      in addition, the Company will receive $250,000 for each of the first eight
      wells
      drilled on the prospect by the purchaser. The Company records these amounts
      as
“spud fees” when received.




*North
      Sea Quad 14, 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
      14
      prospect and $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.




The
      Company’s share of the drilling costs of Quad 14 of $1,309,179 was released to
      the operator from the deposit. No amounts have been released to the operator
      for
      the Quad 41 and 42 prospect and the Company has instructed to 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.




10


**Eternal
          Energy Corp.**
  **Notes
          to the Condensed Financial Statements**
 ***As
          of September 30, 2007, and***
 ***For
          the Three-Month and Nine-Month Periods Ended September 30, 2007 and 2006***
 **5.**
              **Oil
                  and Gas Properties,
                  Continued**


The
      Company recorded dry hole costs related to the North Sea prospects as
      follows:




Quad
                14
            
            $
            1,430,428Quad
                41 and 42
            
            
            107,988Total
            
            $
            1,538,416


**6.**
              **Commitments
                  and
                  Contingencies**




*Financial
      Results, Liquidity and Management's Plan*




The
      Company has incurred net losses for the nine-month period ended September 30,
      2007 of $(4,903,210). The Company has been able to obtain additional operating
      capital through private equity funding sources. As of September 30, 2007, the
      Company had $1,559,312 in cash on hand, but Management's plans include the
      continued development and implementation of its business plan including a
      minimum payment of $2,000,000 for the Company’s portion of future drilling
      costs. The Company has relied upon equity funding and a loan from a related
      party since inception.




*Litigation*




The
      Company is not aware of any litigation matters pending or threatened as of
      September 30, 2007 that will materially affect the Company's financial
      statements. The Company may in the future become involved in matters of
      litigation that the Company considers ordinary routine litigation incidental
      to
      the Company's business. The Company's policy is to accrue during a period,
      as a
      charge to operations, amounts related to legal matters if it is probable that
      a
      liability has been incurred and the amount of loss can be reasonably estimated,
      as required by SFAS No. 5, *Accounting
      for Contingencies* .




*Drilling
      Cost Obligations*




As
      discussed in Note 5, the Company is obligated to fund its share of drilling
      costs related to its participation in exploratory oil and gas wells. The minimum
      obligation on the wells on this property is $2 million, none of which has been
      expended at September 30, 2007.





11


**Eternal
          Energy Corp.**
  **Notes
          to the Condensed Financial Statements**
 ***As
          of September 30, 2007, and***
 ***For
          the Three-Month and Nine-Month Periods Ended September 30, 2007 and 2006***
 **6.**
              **Commitments
                  and Contingencies,
                  Continued**




*Employment
      Agreement*




The
      Company entered into an employment agreement with its president. This agreement
      has a term of two years, provides for annual compensation of $174,000 and a
      signing bonus of $165,000 of which $90,000 has been paid at September 30, 2007.
      In addition, the Company granted to its president options to purchase 1,443,800
      shares of the Company’s common stock at an exercise price of $1.00 per share.
      The employment agreement also gives the Company the right to repurchase from
      the
      president 1,250,000 shares he currently owns upon his termination. The
      repurchase price is the lesser of the fair market value of the shares on the
      date the repurchase right is exercised by the Company or $.023 per share. This
      repurchase right lapses as follows:




Number
                ofDate
            
            SharesMay
                7, 2008
            
            
            625,000November
                7, 2008
            
            
            625,000**Total**
            
            
            **1,250,000**


**7.**
              **Stock
                  Based
                  Compensation**




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 nine-month period
      from the effective date of grant, and all become exercisable on November 7,
      2008. Options to purchase 721,899 were exercisable at September 30,
      2007.




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
      500,000 common shares for a new option to purchase 350,000 shares of common
      stock. In addition, this director was granted an option to purchase an
      additional 300,000 shares of common stock. The exercise price of these options
      is $0.78 per share, which was the market price on the effective date of grant.
      The Company recognized $46,046 and $92,091 as compensation expense during the
      three and nine month periods ended September 30, 2007. The options vest at
      the
      rate of 116,667 shares at the date of grant, and 133,333 at the end of each
      six-month period from the effective date of grant, and all become exercisable
      on
      February 27, 2009. Of these options, 250,000 were exercisable at September
      30,
      2007.





12


**Eternal
          Energy Corp.**
  **Notes
          to the Condensed Financial Statements**
 ***As
          of September 30, 2007, and***
 ***For
          the Three-Month and Nine-Month Periods Ended September 30, 2007 and 2006***
 **8.**
              **Equity
                  Transactions**




*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. The registration rights agreement provides for
      liquidated damages equal to $72,500, which is included in accrued liabilities
      at
      September 30, 2007. The registration became effective and no additional
      penalties will be due.




*Warrants*




2007
            
            2006Weighted
            
            
            
            WeightedAverage
            
            
            
            AverageNumber
                of
            
            Exercise
            
            Number
                of
            
            ExerciseWarrants
            
            Price
            
            Warrants
            
            PricesOutstanding,
                beginning of period
            
            
            14,050,000
            
            $
            1.16
            
            
            1,126,000
            
            $
            1.20Issued
            
            
            -
            
            
            -
            
            
            13,124,000
            
            $
            1.00Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Outstanding,
                June 30
            
            
            14,050,000
            
            $
            1.16
            
            
            14,250,000
            
            $
            1.16Exercisable,
                June 30
            
            
            14,050,000
            
            $
            1.16
            
            
            14,250,000
            
            $
            1.20






*Shares
      Reserved for Future Issuance*




The
      Company has reserved shares for future issuance upon exercise of outstanding
      options and warrants as follows:




Options
            
            
            2,093,800Warrants
            
            
            14,050,000**Total
                at June 30, 2007**
            
            
            **16,143,800**




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.


13


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




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.




*A
      Note About Forward-Looking Statements*




This
      Quarterly Report on Form 10-QSB contains “forward-looking statements” within the
      meaning of the Private Securities Litigation Reform Act of 1995 that are based
      on current management’s 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
      this section. 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, oil and gas exploration
      uncertainties, and an inability to attract, develop, or retain technical,
      consulting, 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.




*Results
      of Operations for the Three- and Nine-Month Periods Ended September 30, 2007
      and
      2006*




In
      June
      2007, we sold our equity interest in Pebble Petroleum, Inc., and, therefore,
      are
      no longer in the development stage. This transaction represents the first
      revenue that we have generated. We received $877,353 for our interest in this
      prospect, which we had acquired earlier in 2007. In addition to the initial
      payment, we will receive $250,000 for each of the first eight wells drilled
      on
      the property. The first three wells were commenced in the three-month period
      ended September 30, 2007. We do not know at this time when or if any additional
      wells will be drilled on this property. Also during the nine-month period ended
      September 30, 2007, we abandoned our interests in the North Sea Quad 14, 41
      and
      42 activities. Two test wells were completed and no economical reserves were
      discovered. Our share of the cost of the test well on Quad 14 was $1,430,429,
      which is included in “dry hole costs.” Also included in dry hole costs is
      $107,988 related to costs we incurred on the Quad 41 and 42 prospect. We made
      a
      deposit of $1,500,000 to cover our share of the drilling costs of the test
      well
      on this prospect. No amounts of this deposit have been released to the operator
      and we have instructed the holder of the funds not to release any funds. We
      are
      currently attempting to determine what amount, if any, will be released to
      the
      operator.





In
      2006,
      we privately sold certain of our securities. We provided the holders of those
      securities with certain registration rights that require us to file a
      registration statement with the Securities and Exchange Commission to register
      for resale the common stock and the common stock to be issued upon exercise
      of
      the warrants. Because the ability to register those securities upon exercise
      is
      deemed to be outside our control, 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. We filed the registration statement
      during 2006 and it became effective in the first quarter of 2007.





In
      December 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Staff Position No. EITF 00-19-2 “Accounting for Registration Rights Payment
      Arrangements.” This Staff Position changes the way registration rights
      arrangements are recorded. This Staff Position no longer requires warrants
      and
      embedded conversion features with registration rights arrangements to be treated
      as derivative instruments. This Staff Position requires that these instruments
      be recorded as if they had not been recorded as a derivative instrument at
      their
      inception and the difference recorded as a cumulative effect of change in
      accounting principal. This Staff Position could not be implemented by the
      Company until 2007 and does not allow retrospective application. On January
      1,
      2007, the Company recorded a cumulative effect of change in accounting principal
      and increased net loss during the three-month period ended March 31, 2007 by
      $4,021,112, increased additional paid-in capital by $6,091,061 and decreased
      financial instrument derivative liability by $2,069,949.





3


The
      fair
      value of these warrants decreased during the three- and-nine-month periods
      ended
      September 30, 2006, and, therefore, we recorded a gain on warrant derivatives
      of
      $3,708,412 and $5,496,544 during those periods. The gain on warrant derivative
      liability did not affect current or future cash flow, and, therefore, the
      following discussion reflects the results of our operations before considering
      the gain on warrant derivative liability during the three- and nine-month
      periods ended September 30, 2006.





General
      and administrative expenses were about the same during the three-month periods
      in each year and increased from $422,652 to $587,365 during the nine-month
      periods. An analysis of the increases in general and administrative expenses
      and
      the relevant components follows:





·
            Consulting
                fees decreased $11,678 and $13,790 to $1,260 and $34,748 in the three-
                and
                nine-month periods, respectively, in 2007 compared to the same periods
                in
                2006, as our activities, both in evaluating possible energy prospects
                and
                in developing our infrastructure necessary to support our activities,
                remained consistent during the periods. Outside consultants have
                been
                replaced with employees and compensation costs increased $29,007
                and
                $45,027 during the periods in 2007 compared to the same periods in
                2006.





·
            We
                commenced investor relation activities in June 2006. We incurred
                $16,680
                and $42,935 of these costs during the three- and nine-month periods
                in
                2007 compared to $6,600 and $11,314 in the three- and nine-month
                periods
                in 2006. We expect the amounts we incurred during 2007 to continue
                for the
                foreseeable future.





·
            We
                occupied new office space during the first quarter of 2007 and, in
                the
                second quarter of 2007, subleased a portion of our space. Net rent
                expense
                was $4,890 (net of sublease receipts of $11,853 and $35,571 during
                the
                three- and nine-month periods in 2007 compared to $2,000 and $6,834
                during
                the same periods in 2006.





·
            Stock
                based compensation was $46,046 and $138,138 during the three- and
                nine-month periods in 2007 compared to $33,513 and $45,800 during
                the same
                periods in 2006.





·
            Professional
                fees decreased $22,519 and $48,395 to $49,288 and $167,982 during
                the
                three- and nine-month periods in 2007 from the same periods in 2006,
                primarily due to legal and accounting fees related to the change
                in
                accounting principal described above and the Registration Statement
                that
                became effective in 2007.





·
            We
                realized $9,807 and $43,803 in interest income during the three-
                and
                nine-month periods in 2007, which resulted from the amounts earned
                on the
                proceeds of our private offering in the second quarter of
                2006.





·
            Travel
                costs increased $1,222 and $50,380 during the three- and nine-month
                periods in 2007 to $3,222 and $104,222 related to our sale of the
                Pebble
                Beach prospect and our unsuccessful efforts in the North Sea.





·
            During
                the nine-month period in 2007, we incurred $72,500 in settlement
                costs
                related to our untimely filing of the registration statement required
                by
                the private offering of our securities in
                2006.





*Liquidity
      and Capital Resources*




As
      of
      September 30, 2007, our total assets were $5,721,934, including cash balances
      of
      $1,559,312. We have invested $2,533,663 in oil and gas prospects. In addition,
      we have on deposit $1.5 million for our share, if any, related to the
      unsuccessful test well on the Quad 41 and 42 North Sea prospect. We have
      commitments for future drilling costs totaling at least $2.0 million. During
      the
      year ended December 31, 2005, we sold equity units with net proceeds of
      $1,126,000, and in 2006, we sold equity units with net proceeds of $6,124,760.
      Each of these equity unit sales consisted of one share of our common stock
      and a
      warrant to purchase one share of our common stock. The warrant exercise price
      of
      the warrants sold in 2005 is $1.20 per share and the warrant exercise price
      of
      the warrants sold in March 2006 is $1.00 per share.





4


Despite
      our positive cash flows from operation of $404,525 for the nine-month period
      ended September 30, 2007, our minimum drilling costs associated with our oil
      and
      gas exploration participations of $2.0 million and our on going administrative
      costs exceed our current cash resources. We have been able to obtain additional
      operating capital through private equity funding sources to fund our activities
      to date. Management’s plan includes the continued development and implementation
      of our business plan. We have relied upon equity funding since
      inception.





No
      assurances can be given that we will be able to obtain sufficient working
      capital through the sale of our common stock and borrowing or that the
      development and implementation of our business plan will generate sufficient
      revenues in the future to sustain ongoing operations. These factors raise
      substantial doubt with our auditor about our ability to continue as a going
      concern.





*Off-Balance
      Sheet Arrangements*




We
      have
      no off-balance sheet arrangements at September 30, 2007.




**Item
      3. Controls and Procedures**




We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our Exchange Act reports is recorded,
      processed, summarized and reported within the time periods specified under
      the
      Securities and Exchange Commission’s rules and forms, and that such information
      is accumulated and communicated to our management, including our Principal
      Executive Officer and our Principal Financial Officer, as appropriate, to allow
      timely decisions regarding required disclosures. Our management, including
      our
      Principal Executive Officer and our Principal Financial Officer, does not expect
      that our disclosure controls or procedures will prevent all error and all fraud.
      A control system, no matter how well conceived and operated, can provide only
      reasonable, not absolute assurance that the objectives of the control system
      are
      met. Further, the benefits of controls must be considered relative to their
      costs. Because of the inherent limitations in all control systems, no evaluation
      of controls can provide absolute assurance that all control issues and instances
      of fraud, if any, within us have been detected.




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).




10.8
            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 Act.





31.2*
            Certification
                pursuant to Section 906 of the Sarbanes-Oxley Act.








*Filed
      with this report.


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
                19, 2007
            /s/Bradley
                M. ColbyBradley
                M. ColbyPresident,
                Chief Executive Officer, Secretary, Treasurer, and Chief Financial
                Officer





8