UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
  FORM
10-Q/A
 
 x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
quarterly period ended June 30,
2009
 
 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 Number:000-50906
 
  ETERNAL
ENERGY CORP.
 (Exact
name of registrant as specified 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
      of principal executive offices)
              (Zip
      Code)
 
 (303) 798-5235(Registrant’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 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 filer o
              Accelerated
      filer oNon-accelerated
      filer o
              Smaller
      reporting company x
 
 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 March 10,
2010.
  
  ETERNAL
ENERGY CORP.
 FORM
10-Q
 QUARTERLY
PERIOD ENDED JUNE 30, 2009
 
 INDEX
 
 A
      Note About Forward Looking Statements
                1PART
      I - FINANCIAL INFORMATIONItem
      1 - Condensed Financial Statements (Unaudited)
                3Condensed
      Balance Sheets – June 30, 2009 (Unaudited) and December 31,
      2008
                F-1Condensed
      Statements of Operations (Unaudited) - For Each of the Three- and
      Six-Month Periods Ended June 30, 2009 and 2008
                F-2Condensed
      Statements of Cash Flows (Unaudited) - For Each of the Three- and
      Six-Month Periods Ended June 30, 2009 and 2008
                F-3Notes
      to the Condensed Unaudited Financial Statements
(Unaudited)
                F-5Item
      2 - Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                4Item
      4 - Controls and Procedures
                10PART
      II - OTHER INFORMATIONItem
      6 – Exhibits
                11Signatures
                13
  
  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
   EXPLANATORY
NOTE
 In 2009,
we discovered that certain accounting errors had occurred that affected our
financial statements for the years ended December 31, 2008 and
2007.  Specifically:
  ·
              we
      had improperly expensed our entire interest in the North Dakota prospect
      rather than expensing only the interest owned beneficially through our
      investment in Pebble Petroleum.  We sold our beneficial
      ownership interest in 2007;
  ·
              amounts
      advanced to Rover Resources Inc. in 2007 were improperly recorded as
      investments in oil and gas properties and subsequently expensed upon the
      sale of the Company’s investment in Pebble
  Petroleum;
  ·
              a
      gain on the sale of the Company’s interest in Pebble Petroleum Inc. was
      improperly presented as a sale of an oil and gas prospect rather than as a
      gain on the sale of an equity
investment;
  ·
              spud
      fee revenue was not recognized in the same period during which the initial
      drilling of the wells commenced;
  ·
              stock-based
      compensation expense was understated for both 2006, 2007 and 2008 due to
      an incorrect application of SFAS 123(R), Share-Based Payment;
      and
  ·
              we
      had overstated the gain associated with the sale of our Steamroller
      Prospect due to an incorrect application of the rules of the full cost
      method of accounting.
  Due to
the materiality of the errors, we have elected to restate our 2008 and 2007
financial statements to reflect the correction of these errors.  The
nature and effect of the corrections of the accounting errors on the financial
statements for the year ended December 31, 2008 and for the three-month and
six-month periods ended June 30, 2008 are discussed in detail in Part I, Item 7:
Management’s Discussion and Analysis or Plan of Operation (page 5) as well as in
Part II, Item 8: Financial Statements and Supplementary Data (Footnote 2, page
F-5).
  This
Amendment No. 1 on Form 10-Q/A amends our Report on Form 10-Q for the quarter
ended June 30, 2009 filed with the Securities and Exchange Commission on August
14, 2009.  This Amendment No. 1 on Form 10-Q/A amends Part I, Item 1:
Financial Statements, Part I, Item 2: Management’s Discussion and Analysis of
Financial Condition and Results of Operation and Part I, Item 4T: Controls or
Procedures.  No other Item in our Report on Form 10-Q filed on August
14, 2009 is amended, modified or updated hereby.  Pursuant to Rule
12b-15 under the Securities Exchange Act of 1934, new certifications of our
principal executive officer and principal financial officer are being filed as
exhibits to this Form 10-Q/A.
  2
  PART
I. FINANCIAL INFORMATION
 
 ITEM
1. FINANCIAL STATEMENTS.
  3
 Eternal Energy Corp.
  Condensed Financial Statements
(Unaudited)
  As of June 30, 2009,
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
  
  Eternal Energy Corp.
  Index to the Condensed Financial
Statements (Unaudited)
  As of June 30, 2009,
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 Condensed Financial Statements of
      Eternal Energy Corp. (Unaudited):Condensed Balance Sheets as of
      June 30, 2009 (Unaudited) and December 31, 2008
                      
                      
                      F-1Condensed Statements of Operations
      For Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
      2008 (Unaudited)
                      
                      
                      F-2Condensed Statements of Cash Flows
      For Each of the Six-Month Periods Ended June 30, 2009 and 2008
      (Unaudited)
                      
                      
                      F-3Notes to the Condensed Financial
      Statements (Unaudited)
                      
                      
                      F-5
  
  Eternal Energy Corp.
  Condensed Balance
Sheets
  As of June 30, 2009 and December 31,
2008
 
 June 30,2009
                                            
                                            
                                            December
31,(Unaudited)
                                            
                                            
                                            2008(Restated)
                                            
                                            
                                            (Restated)ASSETSCurrent
    assets:Cash
                                            
                                            $
                                            297,691
                                            
                                            
                                            $
                                            727,701Accounts
      receivable
                                            
                                            
                                            20,833
                                            
                                            
                                            
                                            -Prepaid
      expenses
                                            
                                            
                                            6,054
                                            
                                            
                                            
                                            9,266Total current
      assets
                                            
                                            
                                            324,578
                                            
                                            
                                            
                                            736,967Receivable
                                            
                                            
                                            20,000
                                            
                                            
                                            
                                            750,000Equipment and leasehold
      improvements, net of accumulated depreciation and amortization of $74,721
      and $54,667 respectively
                                            
                                            
                                            61,692
                                            
                                            
                                            
                                            60,242Oil and gas properties – subject
      to amortization, net of accumulated depletion of
      $57,667
                                            
                                            
                                            2,438,097
                                            
                                            
                                            
                                            2,324,154Oil and gas properties – not
      subject to amortization
                                            
                                            
                                            1,324,496
                                            
                                            
                                            
                                            1,324,400Assets held for
      sale
                                            
                                            
                                            57,000
                                            
                                            
                                            
                                            38,000Deposits
                                            
                                            
                                            1,620,366
                                            
                                            
                                            
                                            1,604,366Total
assets
                                            
                                            $
                                            5,846,229
                                            
                                            
                                            $
                                            6,838,129LIABILITIES AND STOCKHOLDERS'
      EQUITYCurrent
      liabilities:Accounts payable and accrued
      liabilities
                                            
                                            $
                                            185,870
                                            
                                            
                                            $
                                            98,808Accrued officer’s
      compensation
                                            
                                            
                                            43,101
                                            
                                            
                                            
                                            43,101Accrued oil and gas
      interests
                                            
                                            
                                            -
                                            
                                            
                                            
                                            444,738Total
      liabilities
                                            
                                            $
                                            228,971
                                            
                                            
                                            $
                                            586,647Commitments and
      contingenciesStockholders'
      equity:Common stock, $.001 par value,
      875,000,000 shares authorized, 44,550,000 shares issued and outstanding,
      respectively
                                            
                                            
                                            44,550
                                            
                                            
                                            
                                            44,550Additional paid-in
      capital
                                            
                                            
                                            9,238,406
                                            
                                            
                                            
                                            9,039,131Accumulated
      deficit
                                            
                                            
                                            (3,665,698
                                            )
                                            
                                            
                                            (2,832,199
                                            )Total stockholders'
      equity
                                            
                                            
                                            5,617,258
                                            
                                            
                                            
                                            6,251,482Total liabilities and
      stockholders' equity
                                            
                                            $
                                            5,846,229
                                            
                                            
                                            $
                                            6,838,129
  F-1
  Eternal Energy Corp.
  Condensed Statements of Operations
(Unaudited)
  For Each of the Six-Month Periods Ended
June 30, 2009 and 2008
 
 For
      the Three-Month Period Ended
                                
                                
                                For
      the Six-Month Period EndedJune
      30, 2008
                                
                                
                                
                                
                                
                                June
      30, 2008June
      30, 2009
                                
                                
                                (Restated)
                                
                                
                                June
      30, 2009
                                
                                
                                (Restated)Gain
      on sale of oil and gas property – excluded from amortizable pool, net
      of costs
                                
                                
                                
                                
                                
                                
                                425,372
                                
                                
                                
                                
                                
                                425,372Oil
      and gas sales
                                
                                
                                4,533
                                
                                
                                
                                56,816
                                
                                
                                
                                4,533
                                
                                
                                
                                137,073Total
      revenue
                                
                                
                                4,533
                                
                                
                                
                                482,188
                                
                                
                                
                                4,533
                                
                                
                                
                                562,445Operating
      expenses:Oil
      and gas operating expenses
                                
                                
                                3,326
                                
                                
                                
                                187,838
                                
                                
                                
                                33,334
                                
                                
                                
                                397,226Down-hole
      gas and water license royalties
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                51,000Impairment
      of oil and gas properties
                                
                                
                                -
                                
                                
                                
                                (1,194
                                )
                                
                                
                                -
                                
                                
                                
                                1,087General
      and administrative
                                
                                
                                167,511
                                
                                
                                
                                151,594
                                
                                
                                
                                389,046
                                
                                
                                
                                317,474Stock
      based compensation
                                
                                
                                89,025
                                
                                
                                
                                101,747
                                
                                
                                
                                199,275
                                
                                
                                
                                204,651Professional
      fees
                                
                                
                                86,586
                                
                                
                                
                                132,954
                                
                                
                                
                                223,339
                                
                                
                                
                                164,107Depreciation,
      amortization and depletion expense
                                
                                
                                10,819
                                
                                
                                
                                35,812
                                
                                
                                
                                20,052
                                
                                
                                
                                64,886Total
      operating costs
                                
                                
                                357,267
                                
                                
                                
                                608,751
                                
                                
                                
                                865,046
                                
                                
                                
                                1,200,431Total
      operating income (loss)
                                
                                
                                352,734
                                
                                
                                
                                (126,563
                                )
                                
                                
                                (860,513
                                )
                                
                                
                                (637,986
                                )Interest
      income
                                
                                
                                16,722
                                
                                
                                
                                705
                                
                                
                                
                                27,014
                                
                                
                                
                                3,372Net
      loss
                                
                                $
                                (336,012
                                )
                                
                                $
                                (125,858
                                )
                                
                                $
                                (833,499
                                )
                                
                                $
                                (634,614
                                )Net
      loss per common share -Basic
      and diluted
                                
                                $
                                (0.01
                                )
                                
                                $
                                0.00
                                
                                
                                $
                                (0.02
                                )
                                
                                $
                                0.01Weighted
      average number of shares outstanding -Basic
      and diluted
                                
                                
                                44,550,000
                                
                                
                                
                                44,550,000
                                
                                
                                
                                44,550,000
                                
                                
                                
                                44,550,000
  F-2
  Eternal Energy Corp.
  Condensed Statements of Cash Flows
(Unaudited)
  For Each of the Six-Month Periods Ended
June 30, 2009 and 2008
 
 20082009
                                    
                                    
                                    (Restated)Cash flows provided by (used for)
      operating activities:Net income
      (loss)
                                    
                                    $
                                    (833,499
                                    )
                                    
                                    $
                                    (634,614
                                    )Adjustments to reconcile net loss
      to net cash used by operating activities:Non cash
      transactions:Stock-based
      compensation
                                    
                                    
                                    199,275
                                    
                                    
                                    
                                    204,651Depreciation, depletion and
      amortization
                                    
                                    
                                    20,054
                                    
                                    
                                    
                                    64,886Gain on the sale of oil and gas
      property, excluded from amortization
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (425,372
                                    )Changes in operating assets and
      liabilities:(Increase) decrease in
      receivables
                                    
                                    
                                    709,167
                                    
                                    
                                    
                                    148,681Decrease in prepaid
      expense
                                    
                                    
                                    3,212
                                    
                                    
                                    
                                    14,242Increase in
      deposits
                                    
                                    
                                    (16,000
                                    )
                                    
                                    
                                    -Increase (decrease) in accounts
      payable and accrued liabilities
                                    
                                    
                                    87,062
                                    
                                    
                                    
                                    (68,739
                                    )Net cash provided by (used for)
      operating activities
                                    
                                    
                                    169,271
                                    
                                    
                                    
                                    (696,265
                                    )Cash flows provided by (used for)
      investing activities:Return of drilling
      deposits
                                    
                                    
                                    -
                                    
                                    
                                    
                                    121,452Proceeds from the sale of oil and
      gas property, excluded from amortization
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,190,135Additions to oil and gas
      properties
                                    
                                    
                                    (558,777
                                    )
                                    
                                    
                                    (319,974
                                    )Additions to equipment and
      leasehold improvements
                                    
                                    
                                    (40,504
                                    )
                                    
                                    
                                    (22,479
                                    )Net cash provided by (used for)
      investing activities
                                    
                                    
                                    (599,281
                                    )
                                    
                                    
                                    969,134Net increase (decrease) in
      cash
                                    
                                    
                                    (430,010
                                    )
                                    
                                    
                                    272,869Cash - beginning of
      period
                                    
                                    
                                    727,701
                                    
                                    
                                    
                                    791,891Cash - end of
      period
                                    
                                    $
                                    297,691
                                    
                                    
                                    $
                                    1,064,760
 
 The
accompanying notes are an integral part of the financial
statements.
  F-3
  Eternal Energy Corp.
  Condensed Statements of Cash Flows
(Unaudited)
  For Each of the Six-Month Periods Ended
June 30, 2009 and 2008
 
 Supplemental Disclosure of Cash Flow
Information
 
 20082009
                    
                    
                    (Restated)Cash paid during the three-month
      and six-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 June 30, 2009,
and
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 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 June 30, 2009, the Company has entered into participation agreements related
to oil and gas exploration projects in the Big Sand Spring Valley Prospect
located in Nye County, Nevada, and the Pebble Beach Prospect, located in Divide
County, North Dakota, and Sheridan County, Montana and Saskatchewan,
Canada.  The Company also owns a 75% working interest in certain leases
located within the Southwest Extension of the West Ranch Field, located in
Jackson County, Texas. In addition, the Company owns certain overriding royalty
interests in oil and gas leases located in San Juan County, Utah and San Miguel
County, Colorado.
  2.
                  Correction
      of an Error andReclassifications
  In 2009, the Company discovered that
certain transactions reported in its 2006, 2007 and 2008 financial statements
were recorded incorrectly.  Specifically:
  ·
                  stock-based compensation expense
      for 2006, 2007 and 2008 was understated due to an incorrect application of
      SFAS No. 123(R),Share-Based
      Payment("SFAS
      123(R)") (Note 3).  The impact of this correction includes an
      increase to the Company’s beginning accumulated deficit balance as of
      January 1, 2008 in the amount of $193,482.  The effect of this
      correction results in an increase in additional paid in capital and
      accumulated deficit balances as of December 31, 2008 of $269,762 and
      increases in stock-based compensation expense for the three- and six-month
      periods ended June 30, 2008 of 22,875 and $48,914, respectively.  The
      correction of this error did not impact the Company’s statements of cash
      flows for the six-month period ended June 30,
  2008;
  ·
                  the Company had incorrectly
      recognized the gross proceeds from the sale of its Steamroller Prospect
      (June 2008) as revenues and written off the specific costs associated with
      the Steamroller Prospect as costs of prospects sold.  The Company has
      subsequently changed its accounting treatment for the sale of its
      Steamroller Prospect to allocate a portion of the sales proceeds to the
      portion of the Company’s full cost pool that is not subject to
      amortization, based on the relative estimated fair market values of the
      prospects included in the pool as of the date of the Steamroller Prospect
      sale.  The impact of this correction is a decrease in oil and gas
      properties not subject to amortization, and an increase in accumulated
      deficit of $502,416 as of December 31, 2008, a decrease in revenues
      associated with the sale of prospects of $1,353,645, a decrease in cost of
      prospects sold in the amount of $253,506, an increase in the gain
      associated with sale of prospects of $425,372 and a decrease in general
      and administrative expenses of $7,340 for the three- and six-month periods
      ended June 30, 2008.  In addition, the impact of the correction of
      this error was a decrease in the amount of cash provided by operations and
      an increase in decrease in the amount of cash used for investing
      activities, respectively, in the amount of $927,789 for the six-month
      period ended June 30, 2008;
  F-5
  Eternal Energy Corp.
  Notes to the Condensed Financial
Statements
  As of June 30, 2009,
and
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 ·
                  spud fee revenue was improperly
      recognized in June 2008 although initial drilling of the corresponding
      well did not commence until July 2008.   The Company has
      corrected this error by recording the spud fee revenue in the three-month
      period ended September 30, 2009.  The impact of this correction is a
      decrease in spud fees revenue of $250,000 for the three- and six-month
      period ended June 30, 2008.   The correction of this error did
      not impact the Company’s statement of cash flows for the six-month period
      ended June 30, 2008.
  Given the materiality of the affected
transactions and related account balances, the Company has elected to restate
its 2007 and 2008 financial statements in order to correct the errors.  The
correction of these errors had the following effects on the Company’s balance
sheet as of December 31, 2008:
  December
31,December
31,
                        
                        
                        20082008
                        
                        
                        as
    PreviouslyRestated
                        
                        
                        Reported
                        
                        
                        ChangeOil and gas properties
      (net)
                        
                        $
                        3,648,554
                        
                        
                        $
                        4,150,970
                        
                        
                        $
                        (502,416
                        )Additional paid in
      capital
                        
                        
                        9,039,131
                        
                        
                        
                        8,769,369
                        
                        
                        
                        269,762Accumulated
      deficit
                        
                        
                        (2,832,199
                        )
                        
                        
                        (2,060,020
                        )
                        
                        
                        (772,179
                        )
 
 The correction of these errors had the
following effects on the Company’s results of operations for the three- and
six-month periods ended June 30, 2008:
 
 For TheFor The
                        
                        
                        Three-MonthThree-Month
                        
                        
                        Period
EndedPeriod
Ended
                        
                        
                        June 30,
    2008June 30,
    2008
                        
                        
                        as
    PreviouslyRestated
                        
                        
                        Reported
                        
                        
                        ChangeSale of
      prospects
                        
                        $
                        -
                        
                        
                        $
                        1,353,645
                        
                        
                        $
                        (1,353,645
                        )Cost of prospects
      sold
                        
                        
                        -
                        
                        
                        
                        253,506
                        
                        
                        
                        (253,506
                        )Gain on sale of oil and gas
      property
                        
                        
                        425,372
                        
                        
                        
                        -
                        
                        
                        
                        425,372General and
      administrative
                        
                        
                        151,594
                        
                        
                        
                        158,934
                        
                        
                        
                        (7,340
                        )Stock-based
      compensation
                        
                        
                        101,747
                        
                        
                        
                        78,871
                        
                        
                        
                        22,876Net earnings
      (loss)
                        
                        
                        (125,858
                        )
                        
                        
                        564,445
                        
                        
                        
                        (690,303
                        )Basic and diluted loss per
      share
                        
                        $
                        (0.00
                        )
                        
                        $
                        0.01
                        
                        
                        $
                        (0.01
                        )
  F-6
  Eternal Energy Corp.
  Notes to the Condensed Financial
Statements
  As of June 30, 2009,
and
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 For TheFor The
                        
                        
                        Six-MonthSix-Month
                        
                        
                        Period
EndedPeriod
Ended
                        
                        
                        June 30,
    2008June 30,
    2008
                        
                        
                        as
    PreviouslyRestated
                        
                        
                        Reported
                        
                        
                        ChangeSale of
      prospects
                        
                        $
                        -
                        
                        
                        $
                        1,353,645
                        
                        
                        $
                        (1,353,645
                        )Cost of prospects
      sold
                        
                        
                        -
                        
                        
                        
                        253,506
                        
                        
                        
                        (253,506
                        )Gain on sale of oil and gas
      property
                        
                        
                        425,372
                        
                        
                        
                        -
                        
                        
                        
                        425,372Spud fee
      revenue
                        
                        
                        -
                        
                        
                        
                        250,000
                        
                        
                        
                        (250,000
                        )General and
      administrative
                        
                        
                        317,474
                        
                        
                        
                        288,016
                        
                        
                        
                        29,458Stock-based
      compensation
                        
                        
                        204,651
                        
                        
                        
                        155,737
                        
                        
                        
                        48,914Net earnings
      (loss)
                        
                        
                        (634,614
                        )
                        
                        
                        331,717
                        
                        
                        
                        (966,331
                        )Basic and diluted loss per
      share
                        
                        $
                        (0.01
                        )
                        
                        $
                        0.01
                        
                        
                        $
                        (0.02
                        )
  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.
  The Company has evaluated subsequent
events through August 13, 2009, the date that the financial statements were
issued and included in the Company’s Quarterly Report on Form 10-Q for the
period ended June 30, 2009.
  Revenue Recognition
  The Company records the sale of its
interests in prospects as a reduction to the cost pool when the terms of the
transaction are final and the sales price is determinable. Spud fee revenue is
recognized when drilling commences.  Working interest, royalty and net
profit interests are recognized as revenue when oil and gas is
sold.
  Concentration of Credit
Risk
  At June 30, 2009, the Company had
$47,691 on deposit in excess of the United States (FDIC) federal insurance limit
of $250,000 per bank. The Company believes this credit risk is mitigated by the
financial strength of the financial institution.
  F-7
  Eternal Energy Corp.
  Notes to the Condensed Financial
Statements
  As of June 30, 2009,
and
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 Equipment and Leasehold
Improvements
  Equipment and leasehold improvements are
recorded at cost. Expenditures for major additions and improvements are
capitalized and depreciated over the estimated useful lives of the related
assets using the straight-line method for financial reporting 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.Under
the full cost method, all costs associated with the exploration of properties
are capitalized into appropriate cost centers within the full cost pool. 
Internal costs that are capitalized are limited to those costs that can be
directly identified with acquisition, exploration, and development activities
undertaken and do not include any costs related to production, general corporate
overhead, or similar activities.  Cost centers are established on a
country-by-country basis.
  Capitalized
costs within the cost centers are amortized on the unit-of-production basis
using proved oil and gas reserves. The cost of investments in unproved properties and
major development projects are excluded from capitalized costs to be
amortizeduntil it is determined whether or
not proved reserves can be assigned to the properties.Until such a determination is made, the
properties are assessed annually to ascertain whether impairment has
occurred.The costs of drilling
exploratory dry holes are included in the amortization base immediately upon
determination that the well is dry.
  At the
end of each reporting period, capitalized costs are subject to a ceiling test,
in which the costs shall not exceed the cost center ceiling.  The cost
center ceiling is equal to i) the present value
of estimated future net revenues computed by applying current prices of oil and
gas reserves (with consideration of price changes only to the extent provided by
contractual arrangements) to estimated future production of proved oil and gas
reserves as of the date of the latest balance sheet presented, less estimated
future expenditures (based on current costs) to be incurred in developing and
producing the proved reserves computed using a discount factor of ten percent
and assuming continuation of existing economic conditions;  plus ii) the cost of properties not being
amortized; plus iii) the lower of cost or
estimated fair value of unproven properties included in the costs being
amortized; less iv) income tax effects
related to differences between the book and tax basis of the properties.If unamortized costs capitalized within a
cost center, less related deferred income taxes, exceed the cost center ceiling,
the excess is charged to expense and separately disclosed during the period in
which the excess occurs.
  F-8
  Eternal Energy Corp.
  Notes to the Condensed Financial
Statements
  As of June 30, 2009,
and
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 Fair Value of Financial
Instruments
  In accordance with the requirements of
Financial Accounting Standards Board's (“FASB”) 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 Share-Based
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,
and ("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 its 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.
  Basic and Diluted Earnings (Loss) Per
Share
  Basic earnings (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 earnings (loss) per common share is computed in the same way as basic
earnings (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. Diluted earnings (loss) per common share for the three-month and six
month periods ended June 30, 2009 and 2008 is computed in the same way as basic
earnings (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 7 for the calculation of basic and diluted
weighted average common shares outstanding for the three-month and six month
periods ended June 30, 2009 and 2008.
  F-9
  Eternal Energy Corp.
  Notes to the Condensed Financial
Statements
  As of June 30, 2009,
and
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 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 benefits and 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.
  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, the valuation of oil and gas
reserves to which the Company owns mineral rights and the valuation 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 these estimates.
  New Accounting
Pronouncements
  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 has been applied prospectively. The adoption of SFAS 157 has
not had a material impact on the Company’s financial position or reported
results of operations.
  F-10
  Eternal Energy Corp.
  Notes to the Condensed Financial
Statements
  As of June 30, 2009,
and
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 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 is required to report
unrealized gains and losses on items for which the fair value option has been
elected in its results of operations 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 has not elected to measure its
financial instruments and/or other eligible assets at their fair market
values.  Consequently, the adoption of SFAS 159 has not had a material
impact on the Company’s financial position or reported results of
operations.
  In December 2007, the FASB ratified the
final consensuses in Emerging Issues Task Force, or EITF, Issue No. 07-1,
"Accounting for
Collaborative Arrangements," (“Issue 07-1”), which requires
certain income statement presentation of transactions with third parties and of
payments between parties to the collaborative arrangement, along with disclosure
about the nature and purpose of the arrangement.  Issue 07-1 is effective
for the Company’s year beginning January 1, 2009.  The Company does not
expect Issue 07-1 to have a significant impact on our financial
statements.
  In December 2007, the FASB issued SFAS
No. 141(R), “Business
Combinations”(“SFAS
141(R)”), which replaces SFAS No. 141,“Business
Combinations.”SFAS 141(R)
requires an acquiring company to recognize the assets acquired, the liabilities
assumed, and any non-controlling interest in the acquired entity at the
acquisition date, measured at their fair values as of that date, with limited
exceptions.  This Statement also requires the acquiring company in a
business combination achieved in stages to recognize the identifiable assets and
liabilities, as well as the noncontrolling interest in the acquired company, at
the full amounts of their fair values.  SFAS 141(R) makes various other
amendments to authoritative literature intended to provide additional guidance
or to confirm the guidance in that literature to that provided in this
Statement.  This Statement is effective for the Company’s financial
statements beginning January 1, 2009.  The Company does not expect the
adoption of this accounting pronouncement to have a significant impact on our
financial statements.
  In December 2007, the FASB issued SFAS
No. 160,“Noncontrolling
Interests in Consolidated Financial Statements”(“SFAS 160”), which amends Accounting
Research Bulletin No. 51,“Consolidated
Financial Statements”, to
improve the relevance, comparability, and transparency of the financial
information that a reporting entity provides in its consolidated financial
statements.  SFAS 160 establishes accounting and reporting standards that
require the ownership interests in subsidiaries not held by the parent to be
clearly identified, labeled and presented in the consolidated statement of
financial position within equity, but separate from the parent's equity. 
This statement also requires the amount of consolidated net income attributable
to the parent and to the non-controlling interest to be clearly identified and
presented on the face of the consolidated statement of income.  Changes in
a parent's ownership interest while the parent retains its controlling financial
interest must be accounted for consistently, and when a subsidiary is
deconsolidated, any retained non-controlling equity investment in the former
subsidiary must be initially measured at fair value.  The gain or loss on
the deconsolidation of the subsidiary is measured using the fair value of any
non-controlling equity investment.  The Statement also requires entities to
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. This
Statement applies prospectively to all entities that prepare consolidated
financial statements and applies prospectively for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008.  The Company does not expect the adoption of this accounting
pronouncement to have a significant impact on our financial
statements.
  F-11
  Eternal Energy Corp.
  Notes to the Condensed Financial
Statements
  As of June 30, 2009,
and
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 In May 2008, the FASB issued SFAS No.
162"The Hierarchy of
Generally Accepted Accounting Principles"("SFAS 162"), which is effective 90
days following the SEC's approval of the Public Company Oversight Board
amendments to AU Section 411,“The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting
Principles”.  SFAS 162
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States.  The Company does not
expect the adoption of SFAS 162 to have a significant impact on our financial
statements.
  In May 2009, the FASB issued SFAS
No. 165, “Subsequent Events.” This standard incorporates into authoritative
accounting literature certain guidance that already existed within generally
accepted auditing standards, with the requirements concerning recognition and
disclosure of subsequent events remaining essentially unchanged. This guidance
addresses events which occur after the balance sheet date but before the
issuance of financial statements. Under SFAS No.165, as under previous practice,
an entity must record the effects of subsequent events that provide evidence
about conditions that existed at the balance sheet date and must disclose but
not record the effects of subsequent events which provide evidence about
conditions that did not exist at the balance sheet date. This standard added an
additional required disclosure relative to the date through which subsequent
events have been evaluated and whether that is the date on which the financial
statements were issued.As
it relates to the Company, this standard was effective beginning
April 1, 2009. The additional disclosures required by this standard are
included in Note 3.
  In June 2009, the FASB issued SFAS
No. 168, “The FASB Accounting Standards CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles a replacement of FASB Statement No. 162,”
and approved the FASB Accounting Standards CodificationTM(Codification) as the single
source of authoritative nongovernmental US GAAP. The Codification does not
change current US GAAP, but is intended to simplify user access to all
authoritative US GAAP by providing all the authoritative literature related to a
particular topic in one place. All existing accounting standard documents will
be superseded and all other accounting literature not included in the
Codification will be considered non-authoritative.As it relates to the Company,the Codification is
effective July 1, 2009 and will require future references to authoritative
US GAAP to coincide with the appropriate section of the Codification.
Accordingly, this standard will not have an impact on the Company’s results of
operations or financial condition.
  F-12
  Eternal Energy Corp.
  Notes to the Condensed Financial
Statements
  As of June 30, 2009,
and
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 4.
                  Equipment
      and Leasehold Improvements
  The following is a summary of equipment
and improvements, at cost, as of June 30, 2009:
  Office
      equipment
                        
                        $
                        88,904Leasehold
      improvements
                        
                        
                        47,509Total equipment and
      improvements
                        
                        
                        136,413Less: accumulated
      depreciation
                        
                        
                        (74,721
                        )Equipment and improvements,
      net
                        
                        $
                        61,692
 
 Depreciation expense for the six-month
periods ended June 30, 2009 and 2008 was $20,052 and $17,591,
respectively.
  During 2008, the Company purchased
$38,000 of Down-Hole Gas/Water Separation (“DGWS”) tools.  An additional
$19,000 of DGWS tools was purchased during the six-month period ended June 30,
2009.  Due to the fact that the Company was subsequently unable to exercise
its option to acquire 100% of the DGWS opportunity, as discussed in Note 9, the
Company has no plans to utilize the tools in the near future.  The
Company’s management does not believe that the value of the tools has been
impaired and plans to market the tools to other exploration and development
companies.  Accordingly, the down-hole tools have been classified as Assets
Held for Sale on the Company’s balance sheet as of June 30, 2009 and December
31, 2008.
  5.
                  Oil
      and Gas Properties
  As of
June 30, 2009 and 2008, the
Company’s cost centers are as follows:
  June 30, 2009
                          
                          
                          December 31, 2008Amortizable
                          
                          
                          Non-Amortizable
                          
                          
                          Amortizable
                          
                          
                          Non-AmortizableUnited
      States
                          
                          $
                          2,438,097
                          
                          
                          $
                          1,323,053
                          
                          
                          $
                          2,324,154
                          
                          
                          $
                          1,322,957Canada
                          
                          
                          -
                          
                          
                          
                          1,443
                          
                          
                          
                          -
                          
                          
                          
                          1,443The
      North Sea
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Total
                          
                          $
                          2,438,097
                          
                          
                          $
                          1,324,496
                          
                          
                          $
                          2,324,154
                          
                          
                          $
                          1,324,400
  F-13
  Eternal Energy Corp.
  Notes to the Condensed Financial
Statements
  As of June 30, 2009,
and
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 Producing Properties
  The Company owns a 75% working interest
in certain leases located within the Southwest Extension of the West Ranch
Field, located in Jackson County, Texas.
  The net capitalized cost of this
property is summarized below:
  Acquisition
      cost
                        
                        $
                        1,906,764Development
      costs
                        
                        
                        589,0002,495,764Depletion
                        
                        
                        (57,667
                        )Balance at June 30,
      2009
                        
                        $
                        2,438,097
  Exploratory
Prospects
  The Company has entered into
participation agreements in five exploratory oil and gas properties. Each of the
five exploratory projects is excluded from its respective amortizable cost
pool.  Each prospect’s costs willbe
transferred into the amortization base on an ongoing (well-by-well or
property-by-property) basis as the prospect is evaluated and proved reserves
established or impairment determined.Two of the five properties have been
abandoned. The Company has a working interest and/or overriding royalty interest
in the wells on the remaining properties, 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.
  United States
  Big Sand
Spring Valley Prospect
  In 2005, The Company acquired a 50%
working interest in the Big Sand Spring Valley Prospect (the “BSSV Prospect”)
and an option to acquire a 50% working interest in an additional prospect, for
an initial payment of $667,000 and the obligation for a future payment of
$2,000,000, which represented 50% of the estimated initial drilling costs in the
BSSV Prospect. In 2006, the Company acquired the other 50% working interest in
the BSSV Prospect in exchange for cash payments totaling $300,000 and the
transfer of the Company’s option on the additional prospect.  Under the
terms of the participation agreement, 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 BSSV Prospect. As of June 30, 2009, the
Company’s investment in the BSSV Prospect totals $1,292,229.  No
exploratory wells have been drilled in BSSV Prospect to date.  Unless
annual rentals are renewed, the oil and gas leases relating to the BSSV Prospect
will expire in August 2009.  As of June 30, 2009, the Company’s management
has not yet determined if the annual rentals will be renewed.  This
property is evaluated for impairment annually.  There were no impairments
evident at June 30, 2009.
  F-14
  Eternal Energy Corp.
  Notes to the Condensed Financial
Statements
  As of June 30, 2009,
and
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 Steamroller
Prospect
  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. 
 This property is evaluated for impairment annually.
  In June
2008, the Company sold its 50% working interest in the Steamroller
prospect.  Because the Steamroller prospect represented a significant
portion of the full cost pool, not subject to amortization and because full cost
accounting rules do not allow for the use of specific identification with
respect to calculating gains on the partial disposal of the pool, the Company
has allocated the total cost of the full cost pool, not subject to amortization,
among the individual prospects included within the pool, based on their relative
fair market value as of the date of the Steamroller disposition.  The
allocated basis attributed to the Steamroller prospect as of the date of sale
was $764,763.  Gross proceeds from the sale totaled $1,190,135, resulting
in a $425,372 gain on the sale of the Steamroller prospect.
  Under the
terms of the sale, the Company retained an overriding royalty interest on all
future production from the property sold, as well as an overriding royalty
interest on production from properties of mutual interest which the purchaser
may develop in the future.  The Company currently owns various
overriding royalty interests under approximately 20,172 net acres in Utah and
Colorado, located within the Steamroller Prospect.  In addition, the
Company is entitled to receive an overriding royalty interest on any additional
leasehold interest acquired by its working interest partners in an area of
mutual interest (“AMI”) between the parties.  The AMI covers approximately
3,571,200 gross acres.
  Pebble Beach
Prospect
  In 2006, the Company entered into a
series of agreements that resulted in the acquisition of five percent (5%) of
the capital stock of Pebble Petroleum, Inc. (“Pebble”), as well as the following
rights and interest in the Pebble Beach Prospect:
  ·
                  A $250,000 spud fee for each of
      the first eight wells drilled by
Pebble;
  ·
                  A five percent (5%) gross
      overriding royalty from each well drilled on certain acreage that Pebble
      holds rights to in SE Saskatchewan, Canada (no capital outlay or other
      expenses to be required by the Company);
  and
  ·
                  A ten percent (10%) working
      interest in a joint venture with Rover Resources, Inc., (“Rover”), a
      subsidiary of Pebble; the joint venture will explore and develop certain
      prospects principally located in Divide County, North Dakota (the Company
      will pay 10% of all costs
incurred).
  F-15
  Eternal Energy Corp.
  Notes to the Condensed Financial
Statements
  As of June 30, 2009,
and
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 As of March 31, 2009, Pebble owns
approximately 324,590 gross and net acres in the Pebble Beach Prospect in SE
Saskatchewan, Canada in which the Company owns a five percent (5%) gross
overriding royalty.  In addition, Rover has acquired approximately 61,572
gross and 35,264 net acres principally located in Divide County, North Dakota,
within the Pebble Peach Prospect.  The Company owns a ten percent (10%)
working interest in these properties. As of June 30, 2009, the Company’s working
interest expenditures in the North Dakota property total
$533,242.
  This
property is evaluated for impairment annually.  There were no impairments
evident at June 30,
2009.  The property is currently in an evaluation phase.  The Company
does not expect that a determination will be made on the viability of the
property within the next twelve months.
  North Sea
Quad 14 and Quad 41/42 Prospects
  In 2005 and 2006, the Company acquired
working interests in the Quad 14 and Quad 41/42 Prospects with the obligation to
fund 12.5% and 15% of the drilling costs of two exploratory wells, respectively.
The Company placed $1.5 million on deposit for each prospect to cover its share
of the drilling costs. The exploratory wells on both of these prospects were
completed in 2007.  No economically viable reserves were
discovered.
  Once no
viable reserves were discovered, the Company’s investment in the North Sea was
included in the amortizable cost pool and the entire capitalized cost was
charged to expense in 2007 because the costs exceeded the cost center ceiling
due to lack of future revenue or any fair value of the property. A portion of
the monies that were held on deposit relating to the Company’s working interest
in the Quad 14 Project and released to the operator in 2007were subsequently returned to the
Company in 2008 and has been recognized as revenue during the current
year.
  The Company is disputing its obligation
to participate in the drilling of the Quad 41/42 exploratory well.  As a
result, no amounts held on deposit have been released to the operator for the
Quad 41/42 Prospect.  The Company’s management is attempting to determine
what amount, if any, it is obligated to pay related to the drilling of the Quad
41/42 exploratory well and what amount of deposited funds, if any, could be
returned to the Company.
  The Company recorded impairments related
to the North Sea projects as follows:
  Restated2009
                            
                            
                            2008Quad 14
                            
                            $
                            -
                            
                            
                            $
                            1,087Quad 41/42
                            
                            
                            -
                            
                            
                            
                            -Totals
                            
                            $
                            -
                            
                            
                            $
                            1,087
  F-16
  Eternal Energy Corp.
  Notes to the Condensed Financial
Statements
  As of June 30, 2009,
and
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 Canada
  In June 2008, the Company acquired a 5%
overriding royalty position in additional prospects located in Saskatchewan,
Canada.
  6.
                  Commitments
      and Contingencies
  Financial Results, Liquidity and
Management's Plan
  The Company has incurred net losses
since inception.  This factor raises substantial doubt about the Company's
ability to continue as a going concern.  Historically, the Company has been
successful in generating additional operating capital through the disposition of
oil and gas prospects.  However, the disposition of properties is not a
viable strategy for funding the Company’s long-term operations. 
Accordingly, the Company’s management is developing and implementing plans to
sustain the Company’s cash flow from operating activities and/or acquire
additional capital funding.
  No assurances can be given that the
Company will 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 recognize
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 secrets 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 5.  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 5.
  F-17
  Eternal Energy Corp.
  Notes to the Condensed Financial
Statements
  As of June 30, 2009,
and
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 As discussed in Note 10, the litigation
was favorably settled in July 2009.
  Employment
Agreements
  In August 2007, the Company entered into
a two-year employment agreement with its Vice President of Engineering. 
Unless extended, the employment agreement will expire on July 31, 2009. 
The Company amended its employment agreement with its Vice President of
Engineering effective October 1, 2008.  The amended agreement provides for
annual compensation of $144,000 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 have a five-year life,
vest over a two-year period and have an exercise price of $0.24 per share, which
represents the estimated market value of the shares on the date of
grant.
  In June 2008, the Company entered into a
two-year employment agreement with its Chief Financial Officer.  The
agreement provides for annual compensation of $138,000.  In addition, the
Company granted to this employee options to purchase 1 million shares of the
Company’s common stock.  The options have a five-year life, vest over a
two-year period and have an exercise price of $0.18 per share, which represents
the estimated market value of the shares on the date of
grant.
  Lease Obligation
  In December 2008, the Company
renegotiated its lease for its corporate offices. The new lease has a term of 36
months and expires on December 31, 2011. Rents remaining as of June 30, 2009
under this lease are as follows:
  Amount2009
      (remaining)
                              
                              $
                              31,2682010
                              
                              
                              62,5372011
                              
                              
                              64,1402012
                              
                              
                              -2013
                              
                              
                              -Total
                              
                              $
                              157,945
 
 Gross rent expense for the three-month
periods ended June 30, 2009 and 2008 was $19,418 and $16,158,
respectively.  Gross rent expense for the six-month periods ended June 30,
2009 and 2008 was $38,837 and $32,049, respectively.
  F-18
  Eternal Energy Corp.
  Notes to the Condensed Financial
Statements
  As of June 30, 2009,
and
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 7.
                  Earnings (Loss)
      Per Share
  The following is a reconciliation of the
number of shares used in the calculation of basic earnings (loss) per share and
diluted earnings (loss) per share for the three-month and six-month periods
endedJune 30, 2009 and 2008:
  For the
      Three-Month
                          
                          
                          For the
      Six-MonthPeriod Ended June
      30,
                          
                          
                          Period Ended June
      30,2008
                          
                          
                          
                          
                          
                          20082009
                          
                          
                          (Restated)
                          
                          
                          2009
                          
                          
                          (Restated)Net income
      (loss)
                          
                          $
                          (336,012
                          )
                          
                          $
                          (125,858
                          )
                          
                          $
                          (833,499
                          )
                          
                          $
                          (634,614
                          )Weighted-average number of common
      shares outstanding
                          
                          
                          44,550,000
                          
                          
                          
                          44,550,000
                          
                          
                          
                          44,550,000
                          
                          
                          
                          44,550,000Incremental shares from the
      assumed exercise of dilutive stock options
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Diluted common shares
      outstanding
                          
                          
                          44,550,000
                          
                          
                          
                          44,550,000
                          
                          
                          
                          44,550,000
                          
                          
                          
                          44,550,000Diluted earnings (loss) per
      share
                          
                          $
                          (0.01
                          )
                          
                          $
                          0.00
                          
                          
                          $
                          (0.02
                          )
                          
                          $
                          0.01
 
 The following securities were not
included in the computation of diluted net earnings (loss) per share as their
effect would have been anti-dilutive:
  June 30,
                        
                        
                        June 30,2009
                        
                        
                        2008Stock
    Options
                        
                        
                        5,543,800
                        
                        
                        
                        4,543,800Warrants
                        
                        
                        -
                        
                        
                        
                        12,924,000
 
 8.
                  Equity
      Transactions
  Issuance of Stock
Options
  In March 2008, the Board of Directors
ratified the grant of options to purchase 100,000 of its common shares a
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 ofJune 30, 2009, all 100,000 stock options are
exercisable.
  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.
  F-19
  Eternal Energy Corp.
  Notes to the Condensed Financial
Statements
  As of June 30, 2009,
and
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 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 $0.17 per share, 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 for
the six-month period endedJune 30, 2009 and the year ended December 31,
2008 is presented below:
  WeightedWeighted
                        
                        
                        AverageAverage
                        
                        
                        RemainingExercise
                        
                        
                        ContractOptions
                        
                        
                        Price
                        
                        
                        TermOutstanding at December 31,
      2007
                        
                        
                        3,393,800
                        
                        
                        $
                        0.67
                        
                        
                        3.5 yearsOptions
    granted
                        
                        
                        2,150,000
                        
                        
                        $
                        0.19
                        
                        
                        4.5 yearsOptions
      exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Options
    expired
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Options
      forfeited
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Outstanding at December 31,
      2008
                        
                        
                        5,543,800
                        
                        
                        $
                        0.46
                        
                        
                        3.4 yearsOptions
    granted
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Options
      exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Options
    expired
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Options
      forfeited
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Outstanding at June 30,
      2009
                        
                        
                        5,543,800
                        
                        
                        $
                        0.46
                        
                        
                        2.9 yearsExercisable at June 30,
      2009
                        
                        
                        4,093,800
                        
                        
                        $
                        0.55
                        
                        
                        2.5 years
  The assumptions used in the
Black-Scholes option pricing model for the stock options granted during the year
ended December 31, 2008 were as follows:
  Risk-free interest
      rate
                            
                            
                            2.77-3.25
                            %Expected volatility of common
      stock
                            
                            
                            101
                            %Dividend
    yield
                            
                            $
                            0.00Expected life of
      options
                            
                            5 yearsWeighted average fair market value
      of options granted
                            
                            $
                            0.18
 
 Warrants
  A summary of warrant activity for the
six-month period ended June 30, 2009 and the year ended December 31, 2008 is
presented below:
  F-20
  Eternal Energy Corp.
  Notes to the Condensed Financial
Statements
  As of June 30, 2009,
and
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 WeightedAverageNumber
      of
                        
                        
                        ExerciseWarrants
                        
                        
                        PriceOutstanding,
      December 31, 2007
                        
                        
                        12,924,000
                        
                        
                        $
                        1.16Issued
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -Expired
                        
                        
                        (12,924,000
                        )
                        
                        $
                        (1.16
                        )Forfeited
                        
                        
                        -
                        
                        
                        
                        -Outstanding,
      December 31,2008
                        
                        
                        -
                        
                        
                        $
                        -Issued
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -Expired
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        -
                        
                        
                        
                        -Outstanding,
      June 30, 2009
                        
                        
                        -
                        
                        
                        $Exercisable,
      June 30, 2009
                        
                        
                        -
                        
                        
                        $
                        -
  Warrants to purchase 11,676,000 expired
in March 2008.  Warrants to purchase 1,248,000 shares expired in May
2008.
  Shares Reserved for Future
Issuance
  As ofJune 30, 2009, the Company has reserved shares
for future issuance upon exercise of outstanding options and warrants as
follows:
  Options
                          
                          
                          5.543.800Warrants
                          
                          
                          -Total
                          
                          
                          5,543,800
  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.
  F-21
  Eternal Energy Corp.
  Notes to the Condensed Financial
Statements
  As of June 30, 2009,
and
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 9.
                  Related
      Party Transaction
  In October 2007, the Company acquired
certain exploratory oil and gas leases and an option (“Option”) to acquire 100%
of a natural gas production opportunity which employs specialty down-hole
gas/water separation equipment from entities partially-owned by our President
and Chief Executive Officer.  Under the Option agreement, the Company can,
after meeting certain obligations, purchase all of the outstanding shares of
such related entity in exchange for 25 million shares of its common
stock.
 
 The Company made the following payments
to acquire the Option:
 
 1)
                  $125,000 to the related entity for
      certain the oil and gas leases located in Alberta,
      Canada.
 
 2)
                  $20,000 to the related entity as
      reimbursement for amounts paid to Zavanna Canada Corp in connection with
      licenses to the DGWS
equipment.
 
 The Company had the following periodic
obligations in order to retain the Option, which expires on December 31,
2010:
 
 1)
                  Payments of $20,000 to the related
      entity each six months commencing on June 30, 2008 through June 30,
      2010.
 
 2)
                  Payments to the related entity of
      $250,000 on each of December 31, 2008 and December 31, 2009.  These
      amounts may be paid in either cash or with shares of our common
      stock.
 
 3)
                  Drill and equip two wells with
      DGWS equipment; one before June 30, 2008 and the other before January 15,
      2009.
 
 4)
                  Pay to one DGWS manufacturer (Kudu
      Industries) $25,000 in September 2007 and further agree to purchase ten
      DGWS devices each year, beginning in 2008, at a cost of $3,800 per device
      in order to maintain exclusive rights to equipment supply. In addition,
      the grantor of the license will receive a 1% royalty on each well which
      utilizes the device.  The license expires in January 2012 and can be
      extended for an additional 5 years at a cost of
      $300,000.
 
 5)
                  Payments to a second DGWS
      manufacturer (Down-Hole Injections, Inc.) of $35,000 on March 30, 2008 and
      future annual payments of $10,000. The Company is required to pay $500 for
      each device used and assign to the manufacturer a carried 5% working
      interest in each well using the device.  The Company is required to
      purchase and install 20 devices in Canada by March 31,
      2008.
  F-22
  Eternal Energy Corp.
  Notes to the Condensed Financial
Statements
  As of June 30, 2009,
and
 For Each of the Three-Month and
Six-Month Periods Ended June 30, 2009 and 2008
 
 6)
                  Payments to the second DGWS
      manufacturer of $6,000 by March 31 of each year and give to the
      manufacturer a 5% working interest in each well located in the state of
      Utah that utilizes the
device.
  As a result of the on-going litigation
with Zavanna LLC, et al, and its associated negative impact on the Company’s
working capital position, the Company was unable to meet all of the obligations
under the Option agreement.  Consequently, in December 2008, the Company
received a notification from one of the related entities of its desire to
attempt to re-market the DGWS natural gas opportunity to third parties.  As
a result, the original Option agreement between the Company and the related
entity was amended.  The amended agreement relieves the Company of its
obligation to make the $250,000 payments to the related entity, originally
scheduled for December 2008 and 2009, and enables the related entity to attempt
to freely market the technology and opportunity.  Furthermore, the related
entity has agreed to work in good faith to reimburse the Company for its
investment in the original technology and to secure the granting of a 1%
overriding royalty interest in favor of the Company for any wells in which the
technology is used to generate production.  As a result of the amended
agreement, the Company has been relieved of its liability to the related
entities and has reduced the carrying value of the licenses by $500,000. 
In addition, the Company has removed the licenses from its balance sheet and
reclassified $57,000 of DGWS tools as Assets Held for Sale as ofJune 30, 2009.
  10.
                  Subsequent
      Event
  In July 2009, the Company favorably
settled its litigation with Zavanna LLC, et al.  Under the terms of the
settlement agreement, the plaintiffs agreed to pay the Company $255,000 and to
dismiss with prejudice all claims against the Company and its President, Brad
Colby, in exchange for the Company’s dismissal with prejudice of all
counterclaims made by the Company.  The Company anticipates that the full
amount of the settlement proceeds will be received during the third quarter of
2009.
  F-23
 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.
 
 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 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 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 Annual
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.
 
 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.
  4
  Worldwide
oil prices rose throughout 2007 and reached historical highs during the last
half of 2008, before tumbling amid worldwide economic
crisis.  Continued economic instability could impact demand, thus
adversely affecting crude oil prices.
 
 Oil
prices cannot be predicted with any certainty and have significantly affected
profitability and returns for upstream producers. Historically, the WTI price
has averaged approximately $47 per barrel over the past ten years. However,
during that time, the industry has 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 $5.67 per
mcf.
 
 Restatement
of the 2008 Financial Statements
 
 In 2009,
we discovered that that certain transactions reported in our 2008 and 2007
financial statements were reported incorrectly.  Given the materiality
of the affected transactions and related account balances, we have elected to
restate our 2008 and 2007 financial statements in order to correct the
error.  The nature and effect of the corrections of the accounting
errors on the financial statements for the years ended December 31, 2008 and
2007 are discussed in detail in Part II, Item 8: Financial Statements and
Supplementary Data (Footnote 2, page F-__). As a result, we have revised our
discussion of the results of operations for the three-month and six-month
periods ended June 30, 2009 vs. 2008.
 
 Results
of Operations for the Three-Month Period Ended June 30, 2009 vs.
2008
 
 Our
business plan includes the acquisition of interests in oil and gas exploratory
prospects, and in some cases, such as the Steamroller Prospect, we may sell all
or part of our working interest and retain an overriding royalty interest in the
properties. The nature of these transactions is that they occur irregularly and,
therefore, our operating results may fluctuate significantly from period to
period.
 
 The
Company acquired a 75% working interest in the West Ranch property through a
series of transactions occurring in 2007 and began recognizing oil and gas
revenues and operating expenses relating to the West Ranch property in the
fourth quarter of 2007.  Falling oil prices led us to temporarily
shut-in the producing wells on the West Ranch property during the latter part of
2008.  We also elected to temporarily delay further development of the
West Ranch wells to divert working capital to fund our legal defense in the
Zavanna LLC, et al (“Zavanna”) litigation. As of June 30, 2009, the West Ranch
wells continue to be shut in.  Accordingly, the Company has not
recognized any revenue from oil and gas sales from the West Ranch property
during the three-month period ended June 30, 2009, compared to oil and gas
revenue of $56,816 for the three-month period ended June 30,
2008.  Oil and gas operating expenses totaled $3,326 for the
three-month period ended June 30, 2009, which represents costs necessary to
maintain the wells during the shut-in period.  Oil and gas operating
expenses totaled $187,838 for the three-month period ended June 30,
2008.
  5
  As of
June 30, 2009, we had $1,615,021 on deposit relating to the drilling of the Quad
41/ 42 Prospect.  We are currently disputing our obligation to
participate in the drilling of the Quad 41/42 exploratory well.  As a
result, no amounts held on deposit have been released to the project’s
operator.  Our management is attempting to determine what amount, if
any, we are obligated to pay related to the drilling of the Quad 41/42
exploratory well and what amount of deposited funds, if any, could be returned
to the Company.
 
 General
and administrative expenses increased from $151,594 for the three-month period
ended June 30, 2008 to $167,511 for the three-month period ended June 30, 2009
primarily due to the following:
 
 ·
              As
      a result of the hiring our Chief Financial Officer in June 2008, the
      Company's payroll and related expenses for the three-month period ended
      June 30, 2009 increased by $24,753 from the same period in
      2008.
 
 ·
              Prior
      to October 1, 2008, we engaged a third-party consultant to provide us with
      investor relations services.  Investor relations expenses
      totaled $12,034 for the three-months ended June 30, 2008 compared to $0
      for the three-month period ended June 30, 2009.  All investor
      relations activities are currently performed by our Chief Financial
      Officer.
 
 ·
              Consulting
      fees for the three-month period ended June 30, 2009 related to land
      management declined by $16,688 from the same period in 2008.  We
      reduced our lease acquisition activity in 2009 in order to fund our
      defense of the Zavanna litigation, as discussed
  below.
 
 Stock-based
compensation expense for the three-month periods ended June 30, 2009 and 2008
was $89,025 and $101,747, respectively.  The decrease is due to the
normal vesting of stock options which became fully vested in the fourth quarter
of 2008.
 
 Professional
fees for the three-month period ended June 30, 2009 decreased by $46,368 from
the same period in 2008 primarily as a result lower audit fees as well as lower
legal fees incurred in connection with our defense of the litigation brought
forth by Zavanna.  As discussed below, the litigation with Zavanna
LLC, et al was favorably settled in July 2009.  Legal fees for May and
June 2009 declined as settlement talks neared their conclusion.
 
 Depreciation,
depletion and amortization expense for the three-month period ended June 30,
2009 decreased by $24,993 from the same period in 2008, primarily due to the
fact that we wrote off our payments made under the licenses to use specialty
down-hole gas/water separation (“DGWS”) equipment in December
2008.  Amortization related to the down-hole licenses totaled $0 and
$17,100 for the three months ended June 30, 2009 and 2008,
respectively.  In addition, we did not recognize any depletion expense
related to the West Ranch property as there was no production during the current
quarter.
 
 We
recognized $16,722 of interest income for the three-month period ended June 30,
2009, primarily related to our North Sea deposit.  Interest income
related to the North Sea deposit was not accrued in the first half of 2008, but
rather, was recognized in the fourth quarter.
  6
  Results
of Operations for the Six-Month Period Ended June 30, 2009 vs. 2008
 
 As noted
above, our West Ranch wells have been temporarily shut in since late
2008.  Accordingly, we have not recognized any oil and gas sales
revenue related to the West Ranch property in 2009.  We are currently
refining our strategy to waterflood the wells in order to stimulate production
from these wells.  We anticipate reinstating our waterflood activities
during the second half of 2009.  The Company has incurred $33,334 of
oil and gas operating expenses related to the West Ranch property during the
six-month period ended June 30, 2009.  The incurrence of these costs
was required in order to maintain the wells during the shut-in
period.
 
 In April
2009, we began receiving royalty payments associated with our 5% gross
overriding royalty interest in certain properties located in Saskatchewan,
Canada.  We recognized $4,533 of oil and gas sales revenue associated
with these overrides during the six-month period ended June 30,
2009.
 
 General
and administrative expenses increased from $317,474 for the six-month period
ended June 30, 2008 to $389,046 for the six-month period ended June 30, 2009
primarily due to the following:
 
 ·
              Payroll
      and related expenses for the six-month period ended June 30, 2009
      increased by $74,817 from that of the prior year primarily as a result of
      the hiring our Chief Financial Officer in June 2008 as well granting a
      salary increase to our Vice President of Engineering in October
      2008.
 
 ·
              Prior
      to October 1, 2008, we engaged a third-party consultant to provide us with
      investor relations services.  Investor relations expenses
      totaled $30,374 for the six-months ended June 30, 2008 compared to $0 for
      the six-month period ended June 30, 2009.  All investor
      relations activities are currently performed by our Chief Financial
      Officer.
 
 ·
              Office
      rent expense increased by $7,388 for the six-month period ended June 30,
      2009 compared to the same period in the prior year as a result of entering
      into to a new office lease in January
2009.
 
 ·
              Travel
      and entertainment expenses for the six-month period ended June 30, 2009
      and 2008 were $5,372 and $16,085, respectively.  The decrease is
      primarily due to management’s decision to reduce business development
      activities until the Company’s cash position can be
      strengthened.
 
 Stock-based
compensation expense for the six-month periods ended June 30, 2009 and 2008 was
$199,275 and $204,651, respectively.  The decrease is due to the
normal vesting of stock options which became fully vested in the fourth quarter
of 2008.
 7
  Professional
fees for the six-month period ended June 30, 2009 increased by $59,232 from the
same period in 2008 primarily as a result of legal fees incurred in connection
with our defense of the litigation brought forth by Zavanna.
 
 Depreciation,
depletion and amortization expense for the six-month period ended June 30, 2009
decreased by $44,834 from the same period in 2008, primarily due to the fact
that we wrote off our payments made under the licenses to use specialty
down-hole gas/water separation (“DGWS”) equipment in December
2008.  Amortization related to the down-hole licenses totaled $0 and
$34,200 for the six months ended June 30, 2009 and 2008,
respectively.  In addition, we have not recognized any depletion
expense in 2009 related to our West Ranch wells due to the fact that the wells
remain shut-in.  Depletion expense related to our West Ranch wells
totaled $13,095 for the six-month period ended June 30, 2008.
 
 We
recognized $27,014 of interest income for the six-month period ended June 30,
2009, an increase of $23,642 from the same period in 2008.  The
increase is due to interest earned on our North Sea deposit as well as on spud
fees which were being held in escrow pending the outcome of the Zavanna
litigation.  Interest income related to the North Sea deposit was not
recognized in 2008 until the fourth quarter.
 
 Liquidity and Capital
Resources
 
 As of
June 30, 2009, our assets totaled $5,846,229, which included cash balances of
$297,691 and investments in oil and gas properties of $3,762,593, net of
accumulated depletion.  In addition, we have recorded a $20,000
receivable for spud fees earned in 2008 and have $1,615,021 on deposit related
to our interest in the Quad 41/42 prospect.  In May 2009, we collected
$730,000 of the spud fees owed to us that were previously held in
escrow.  A portion of these funds was used to settle amounts owed to
Rover Resources Inc. in connection with our working interest in the Pebble Beach
Prospect, totaling $444,835.
 
 We
anticipate spending $2,245,000 for improvement to our West Ranch property over
the next several years.  Since the Company has historically generated
net losses and negative cash flows, it is likely that we will need to obtain
additional working capital in order to fund these
expenditures.  Historically, we have successfully raised additional
operating capital through private equity funding sources.  With that
in mind, our management is refining its business plan regarding various funding
options.  However, no assurances can be given that the Company will be
able to obtain sufficient working capital through the sale of its common stock
and/or borrowing or that the development and implementation of the Company’s
business plan will generate sufficient future revenues to sustain ongoing
operations. In addition, we continue to dispute our participation of the
drilling of the Quad 41/42 exploratory well and are pursuing the release funds
held on deposit associated with this prospect.  As of June 30, 2009,
it is uncertain how much, if any, of the funds held on deposit will ultimately
be returned to the Company.  The combination of these factors raises
substantial doubt with our auditor about the Company’s ability to continue as a
going concern.
 8
  On
November 2007, we were 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. The Plaintiffs sought compensatory and punitive
damages in an unspecified amount, prejudgment interest, declaratory relief,
injunctive relief, accounting, and attorneys’ fees. From the onset, Management
believed that the causes of action were without merit and defended its rights
vigorously. In January 2008, we filed a countersuit claiming abuse of process,
intentional interference with an existing business and contractual relations,
commercial disparagement and conspiracy.  The lawsuit continued to
negatively impact our ability to pursue additional opportunities and/or acquire
additional oil and gas prospects during 2008 and 2009.  A further
result of the lawsuit was the sale of certain assets in order to fund our
ongoing operations.  The litigation was favorably settled in July
2009.  As part of the settlement agreement, we will receive $255,000
in settlement proceeds as partial reimbursement of legal fees incurred in
connection with the litigation.  The entire amount of the settlement
proceeds is expected to be received during the third quarter of
2009.
  Off-Balance
Sheet Arrangements
 
 The
Company had no off-balance sheet arrangements at June 30, 2009.
  9
  ITEM 4T. 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 initially concluded that our disclosure controls
and procedures were effective at the reasonable assurance
level.  Based on these evaluations, our certifying Officers initially
concluded, subject to the limitations noted below, that, as of the end of the
period covered by this Quarterly Report on Form 10-Q:
 
 (a)           Our
disclosure controls and procedures were effective to provide reasonable
assurance that material information required to be disclosed by us in the
reports we file or submit under the Securities Exchange Act of 1934 was
recorded, processed, summarized, and reported within the time periods specified
in the SEC’s rules and forms; and
 
 (b)           Our
disclosure controls and procedures were effective to provide reasonable
assurance that material information required to be disclosed by us in the
reports we file or submit under the Securities Exchange Act was accumulated and
communicated to our management, including the Certifying Officers, as
appropriate to allow timely decisions regarding required
disclosure.
 
 However,
during 2009, we discovered that we had inadvertently omitted certain disclosures
regarding our controls and procedures and that certain 2008 transactions were
not accounted for properly, as discussed in the Explanatory section located on
page 2 of this Quarterly Report.  The discovery of these omissions and
errors is an indication that our disclosure controls and procedures were, in
fact, not effective at the time of our original filing.
 
 Inherent
Limitations on Effectiveness of Controls
 
 Our
management, including our Chief Executive Officer and our Chief Financial
Officer, do not expect that our disclosure controls and procedures will prevent
or detect all error and all fraud.  A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
that the control system’s objectives will be met.  The design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their
costs.  Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, have been detected.  These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or
mistake.  Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people or by management override of
the controls.  The design of any system of controls is based in part
on certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions.  Projections of any evaluation of
controls effectiveness to future periods are subject to risks.  Over
time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or
procedures.
 
 Changes
in Internal Control over Financial Reporting
 
 There were no changes made
to our internal controls over financial reporting during the quarter ended June
30, 2009.During the fourth quarter of 2009, we implemented
processes to strengthen the review of our accounting policies and the
applicability of these policies to individual transactions and disclosures
included in our financial statements.
  10
  Part
II - OTHER INFORMATION
 
 ITEM
6. EXHIBITS.
 
 Exhibit
                                                      
                                                      Description of Exhibit3(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.)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.)
  11
 
 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).10.20
                                      
                                      Agreement
      To Terminate DGWS Option (Incorporated by reference to Exhibit 10.20 of
      our Quarterly Report on Form 10-Q filed May 15, 2009).10.21
                                      
                                      Amended
      and Restated Employment Agreement by and between Eternal Energy Corp. and
      Craig Phelps dated August 1, 2007 (Incorporated by reference to Exhibit
      10.21 of our Quarterly Report on Form 10-Q filed May 15,
      2009).10.22
                                      
                                      Employment
      Agreement by and between Eternal Energy Corp. and Kirk A. Stingley dated
      June 2, 2008 (Incorporated by reference to Exhibit 10.22 of our Quarterly
      Report on Form 10-Q filed May 15, 2009).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.
  12
  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)March
      10, 2010
                /s/
      Bradley M. ColbyBradley
      M. ColbyPresident
      and Chief Executive Officer
 13