UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549







FORM
10-Q





x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
quarterly period ended June 30,
2010





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:


41,520,000
shares of common stock issued and outstanding at August 13, 2010.







ETERNAL
ENERGY CORP.


FORM
10-Q


QUARTERLY
PERIOD ENDED JUNE 30, 2010





INDEX





A
      Note About Forward Looking Statements
              1PART
      I - FINANCIAL INFORMATIONItem
      1 - Condensed Financial Statements (Unaudited)Condensed
      Balance Sheets – June 30, 2010 (Unaudited) and December 31,
      2009
              F-3Condensed
      Statements of Operations (Unaudited) - For Each of the Three-Month and
      Six-Month Periods Ended June 30, 2010 and 2009
              F-4Condensed
      Statements of Cash Flows (Unaudited) - For Each of the Three-Month and
      Six-Month Periods Ended June 30, 2010 and 2009
              F-5Notes
      to the Condensed Financial Statements (Unaudited)
              F-7Item
      2 - Management’s Discussion and Analysis of Financial Condition or Results
      of Operations
              2Item
      4 - Controls and Procedures
              6PART
      II - OTHER INFORMATIONItem
      6 – Exhibits
              7Signatures
              10








A Note About Forward-Looking
Statements





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





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


1




PART I. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS.


Eternal
Energy Corp.
  Condensed
Financial Statements (Unaudited)
  As
of June 30, 2010 and December 31, 2009 and
 For
Each of the Three-Month and Six-Month Periods ended June 30, 2010 and
2009
  
  Eternal
Energy Corp.
  Index
to the Condensed Financial Statements (Unaudited)
  As
of June 30, 2010 and December 31, 2009 and
 For
Each of the Three-Month and Six-Month Periods ended June 30, 2010 and
2009
 
 Condensed
      Financial Statements of Eternal Energy Corp. (Unaudited):Condensed
      Balance Sheets as of June 30, 2010 (Unaudited) and December 31,
      2009
                          F-3Condensed
      Statements of Operations for Each of the Three-Month and Six-Month Periods
      Ended June 30, 2010 and 2009 (Unaudited)
                          F-4Condensed
      Statements of Cash Flows for Each of the Three-Month and Six-Month Periods
      Ended June 30, 2010 and 2009 (Unaudited)
                          F-5Notes
      to the Condensed Financial Statements (Unaudited)
                          F-7
  F-2
  Eternal
Energy Corp.
  Condensed
Balance Sheets
  As
of June 30, 2010 and December 31, 2009
 
 June
      30,2010
                  
                  
                  December 31(Unaudited)
                  
                  
                  2009Current
      assets:Cash
                  
                  $
                  4,068,692
                  
                  
                  $
                  1,508,754Receivables
                  
                  
                  81,061
                  
                  
                  
                  120,927Prepaid
      expenses
                  
                  
                  6,015
                  
                  
                  
                  46,384Spud
      fees receivable
                  
                  
                  -
                  
                  
                  
                  20,000Total
      current assets
                  
                  
                  4,155,768
                  
                  
                  
                  1,696,065Equipment
      and leasehold improvements, net of accumulated depreciation and
      amortization of $123,788 and $100,208, respectively
                  
                  
                  27,767
                  
                  
                  
                  49,809Oil
      and gas properties – subject to amortization
                  
                  
                  126,029
                  
                  
                  
                  -Oil
      and gas properties – not subject to amortization
                  
                  
                  257,574
                  
                  
                  
                  412,797Assets
      held for sale
                  
                  
                  57,000
                  
                  
                  
                  57,000Marketable
      securities
                  
                  
                  904,324
                  
                  
                  
                  -Deposits
                  
                  
                  5,345
                  
                  
                  
                  5,345Deferred
      tax asset
                  
                  
                  -
                  
                  
                  
                  -Total
      assets
                  
                  $
                  5,533,807
                  
                  
                  $
                  2,221,016Current
      liabilities:Accounts
      payable and accrued liabilities
                  
                  $
                  113,438
                  
                  
                  $
                  138,664Accrued
      oil and gas interests
                  
                  
                  -
                  
                  
                  
                  25,155Short-term
      asset retirement obligation
                  
                  
                  -
                  
                  
                  
                  65,258Total
      current liabilities
                  
                  
                  113,438
                  
                  
                  
                  229,077Long-term
      asset retirement obligation, net of discount of $0, and $36,720,
      respectively
                  
                  
                  -
                  
                  
                  
                  177,697Deferred
      tax liability
                  
                  
                  -
                  
                  
                  
                  -Total
      liabilities
                  
                  
                  113,438
                  
                  
                  
                  406,774Commitments
      and contingencies (Note 6)Stockholders'
      equity:Common
      stock, $.001 par value, 875,000,000 shares authorized, 42,669,000 and
      44,550,000 shares issued and outstanding
                  
                  
                  42,669
                  
                  
                  
                  44,550Additional
      paid-in capital
                  
                  
                  9,414,654
                  
                  
                  
                  9,524,308Accumulated
      deficit
                  
                  
                  (4,041,572
                  )
                  
                  
                  (7,754,616
                  )Unrealized
      gains on equity investments
                  
                  
                  4,618
                  
                  
                  
                  -Total
      stockholders' equity
                  
                  
                  5,420,369
                  
                  
                  
                  1,814,242Total
      liabilities and stockholders' equity
                  
                  $
                  5,533,807
                  
                  
                  $
                  2,221,016
  The
accompanying notes are an integral part of the financial
statements.
 F-3
  Eternal
Energy Corp.
  Condensed
Statements of Operations (Unaudited)
  For
Each of the Three-Month and Six-Month Periods Ending March 31, 2010 and
2009
 
 For the Three-Month Period
      Ended
                  
                  
                  For the Six-Month Period
    EndedJune 30, 2010
                  
                  
                  June 30, 2009
                  
                  
                  June 30, 2010
                  
                  
                  June 30, 2009Oil
      and gas revenues
                  
                  $
                  2,999
                  
                  
                  $
                  4,533
                  
                  
                  $
                  74,485
                  
                  
                  $
                  4,533Gain
      on sale of oil and gas properties – subject to amortization, net of
      costs
                  
                  
                  509,934
                  
                  
                  
                  -
                  
                  
                  
                  509,934
                  
                  
                  
                  -Gain
      on sale of oil and gas properties – not subject to amortization, net of
      costs
                  
                  
                  4,735,253
                  
                  
                  
                  -
                  
                  
                  
                  4,735,253
                  
                  
                  
                  -Total
      revenue
                  
                  
                  5,248,186
                  
                  
                  
                  4,533
                  
                  
                  
                  5,319,672
                  
                  
                  
                  4,533Operating
      expenses:Oil
      and gas operating expenses
                  
                  
                  -
                  
                  
                  
                  3,326
                  
                  
                  
                  -
                  
                  
                  
                  33,334General
      and administrative
                  
                  
                  218,150
                  
                  
                  
                  167,511
                  
                  
                  
                  452,402
                  
                  
                  
                  389,046Stock
      based compensation
                  
                  
                  -
                  
                  
                  
                  89,025
                  
                  
                  
                  -
                  
                  
                  
                  199,275Professional
      fees
                  
                  
                  84,021
                  
                  
                  
                  86,586
                  
                  
                  
                  238,426
                  
                  
                  
                  223,339Depreciation,
      amortization and depletion expense
                  
                  
                  11,801
                  
                  
                  
                  10,819
                  
                  
                  
                  28,060
                  
                  
                  
                  20,052Total
      operating costs
                  
                  
                  313,972
                  
                  
                  
                  357,267
                  
                  
                  
                  718,888
                  
                  
                  
                  865,046Total
      operating income (loss)
                  
                  
                  4,934,214
                  
                  
                  
                  (352,734
                  )
                  
                  
                  4,600,784
                  
                  
                  
                  (860,513
                  )Interest
      income
                  
                  
                  2,677
                  
                  
                  
                  16,722
                  
                  
                  
                  4,372
                  
                  
                  
                  27,014Income
      (loss) before taxes
                  
                  
                  4,936,891
                  
                  
                  
                  (336,012
                  )
                  
                  
                  4,605,156
                  
                  
                  
                  (833,499
                  )Provision
      for income taxes
                  
                  
                  (892,112
                  )
                  
                  
                  -
                  
                  
                  
                  (892,112
                  )
                  
                  
                  -Net income
      (loss)
                  
                  $
                  4,044,779
                  
                  
                  $
                  (336,012
                  )
                  
                  $
                  3,713,044
                  
                  
                  $
                  (833,499
                  )Net
      income (loss) per common share -Basic
                  
                  $
                  0.09
                  
                  
                  $
                  (0.01
                  )
                  
                  $
                  0.08
                  
                  
                  $
                  (0.02
                  )Diluted
                  
                  $
                  0.09
                  
                  
                  $
                  (0.01
                  )
                  
                  $
                  0.08
                  
                  
                  $
                  (0.02
                  )Weighted
      average number of shares outstanding -Basic
                  
                  
                  43,532,612
                  
                  
                  
                  44,550,000
                  
                  
                  
                  44,043,152
                  
                  
                  
                  44,550,000Diluted
                  
                  
                  44,424,504
                  
                  
                  
                  44,550,000
                  
                  
                  
                  46,168,152
                  
                  
                  
                  44,550,000
  The
accompanying notes are an integral part of the financial
statements.
 F-4
  Eternal
Energy Corp.
  Condensed
Statements of Cash Flows (Unaudited)
  For
Each of the Six-Month Periods Ending June 30, 2010 and 2009
 
 2010
                  
                  
                  2009Cash
      flows provided by (used for) operating activities:Net
      income (loss)
                  
                  $
                  3,713,044
                  
                  
                  $
                  (833,499
                  )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Non
      cash transactions:Stock-based
      compensation
                  
                  
                  -
                  
                  
                  
                  199,275Depreciation,
      depletion and amortization
                  
                  
                  28,060
                  
                  
                  
                  20,054Gain
      on sale of oil and gas properties
                  
                  
                  (5,245,187
                  )Changes
      in operating assets and liabilities:Decrease
      in prepaid expense
                  
                  
                  40,369
                  
                  
                  
                  3,212Decrease
      in spud fees receivable
                  
                  
                  20,000
                  
                  
                  
                  730,000(Increase)
      decrease in other receivables
                  
                  
                  77,366
                  
                  
                  
                  (20,833
                  )Increase
      in deposits
                  
                  
                  -
                  
                  
                  
                  (16,000
                  )Increase
      in accounts payable and accrued liabilities
                  
                  
                  (25,226
                  )
                  
                  
                  87,061Net
      cash provided by (used for) operating activities
                  
                  
                  (1,391,574
                  )
                  
                  
                  169,270Cash
      flows provided by (used for) investing activities:Additions
      to equipment and leasehold improvements
                  
                  
                  (1,538
                  )
                  
                  
                  (40,502
                  )Additions
      to oil and gas properties
                  
                  
                  (35,682
                  )
                  
                  
                  (558,778
                  )Proceeds
      from sale of oil and gas properties
                  
                  
                  4,125,000
                  
                  
                  
                  -Purchase
      of equity investments
                  
                  
                  (24,733
                  )
                  
                  
                  -Net
      cash provided by (used for) investing activities
                  
                  
                  4,063,047
                  
                  
                  
                  (599,280
                  )Cash
      flows used for financing activities:Repurchase
      and retirement of shares
                  
                  
                  (111,535
                  )
                  
                  
                  -Net
      cash used for financing activities
                  
                  
                  (111,535
                  )
                  
                  
                  -Net
      increase (decrease) in cash
                  
                  
                  2,559,938
                  
                  
                  
                  (430,010
                  )Cash
      - beginning of period
                  
                  
                  1,508,754
                  
                  
                  
                  727,701Cash
      - end of period
                  
                  $
                  4,068,692
                  
                  
                  $
                  297,691
  F-5
  Eternal
Energy Corp.
  Condensed
Statements of Cash Flows (Unaudited)
  For
Each of the Six-Month Periods Ending June 30, 2010 and 2009
 
 Supplemental
Disclosure of Cash Flow Information
 
 2010
                  
                  
                  2009Cash
      paid for:Interest
                  
                  $
                  -
                  
                  
                  $
                  -Income
      taxes
                  
                  $
                  892,112
                  
                  
                  $
                  -
  F-6
  Eternal
Energy Corp.
  Notes
to the Financial Statements (Unaudited)
 
 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, 2010, the Company has entered
into participation agreements related to oil and gas exploration projects in the
Pebble Beach and Spyglass Prospects, located in Divide County, North Dakota, and
Sheridan County, Montana and the Hardy Property, located in southeastern
Saskatchewan, Canada.  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. 
     Summary of Significant
Accounting Policies
 
 Basis
of Presentation
 
 These
condensed financial statements are presented in United States dollars and have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Securities and Exchange Commission (“SEC”) Form 10-Q and Article 8 of SEC
Regulation S-X. The principles for interim financial information do not require
the inclusion of all the information and footnotes required by generally
accepted accounting principles for complete financial statements. Therefore,
these financial statements should be read in conjunction with the Company’s
Annual Report on Form 10-K for the year ended December 31, 2009. The condensed
financial statements included herein are unaudited; however, in the opinion of
management, they contain all normal recurring adjustments necessary for a fair
statement of the condensed results for the interim periods. Operating results
for the three-month and six-month periods ended June 30, 2010 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2010.
 
 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, 2010, the Company had $3,561,161 on deposit that exceeded United States
(FDIC) federally insurance limit of $250,000 per bank. The Company believes this
credit risk is mitigated by the financial strength of the financial institutions
with which the Company has placed its funds on deposit.
  F-7
  Eternal
Energy Corp.
  Notes
to the Financial Statements (Unaudited)
 
 Receivables
 
 Receivables
are stated at the amount the Company expects to collect. The Company considers
the following factors when evaluating the collectability of specific receivable
balances: credit-worthiness of the debtor, past transaction history with the
debtor, current economic industry trends, and changes in debtor payment terms.
If the financial condition of the Company’s debtors were to deteriorate,
adversely affecting their ability to make payments, additional allowances would
be required.
 
 The
Company maintains an estimated allowance for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
Changes to the allowance for doubtful accounts made as a result of management’s
determination regarding the ultimate collectability of such accounts are
recognized as a charge to the Company’s earnings.  Specific receivable
balances that remain outstanding after the Company has used reasonable
collection efforts are written off through a charge to the valuation allowance
and a credit to receivable.
 
 At June
30, 2010, the Company has determined that all receivable balances are fully
collectible and, accordingly, no allowance for doubtful accounts has been
recorded.
 
 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 expensed 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.
  F-8
  Eternal
Energy Corp.
  Notes
to the Financial Statements (Unaudited)
 
 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.
 
 As of the
end of each reporting period, the capitalized costs of each cost center 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; lessiv) 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.
 
 Asset
Retirement Obligations
 
 The
Company records asset retirement obligations in the period in which the
obligation is incurred and when a reasonable estimate of fair value can be
determined. The initial recording of an asset retirement obligation results in
an increase in the carrying amount of the related long-lived asset and the
creation of a liability.  The portion of the asset retirement obligation
expected to be realized during the next 12 month period is classified as a
current liability, while the portion of the asset retirement obligation expected
to be realized during subsequent periods is discounted and recorded at its net
present value.  The discount factor used to determine the net present value
of the Company’s asset retirement obligation is 10%, which is consistent with
the discount factor that is applied to oil and gas reserves when performing the
periodic ceiling tests.
 
 Changes
in the noncurrent portion of the asset retirement obligation due to the passage
of time are measured by applying an interest method of allocation. The amount of
change is recognized as an increase in the liability and an accretion expense in
the statement of operations. Changes in either the current or noncurrent portion
of the Company’s asset retirement obligation resulting from revisions to the
timing or the amount of the original estimate of undiscounted cash flows are
recognized as an increase or a decrease to the carrying amount of the liability
and the related long-lived asset.   Changes in the current and
noncurrent portion of the asset retirement obligation due to the disposal of
related long-lived assets are included in the calculation of the gain or loss on
the sale of the assets.
  F-9
  Eternal
Energy Corp.
  Notes
to the Financial Statements (Unaudited)
 
 Treasury
Stock
 
 The
Company has implemented a stock repurchase program and utilizes the cost method
to account for shares reacquired under the program.  Under the cost method,
common stock is reduced by the par value of the shares repurchased.  The
difference between the total consideration given to reacquire the shares,
including any broker commissions or other transaction costs, is recorded as a
reduction of additional paid in capital.  The Company immediately retires
all repurchased shares.
 
 Fair
Value of Financial Instruments
  Fair
value is defined as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. Valuation techniques used to
measure fair value must maximize the use of observable inputs and minimize the
use of unobservable inputs.
  The
Company utilizes the market approach to measure fair value for our financial
assets and liabilities. The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable
assets or liabilities. The standard describes a fair value hierarchy based on
three levels of inputs, of which the first two are considered observable and the
last unobservable, that may be used to measure fair value which are the
following:
  Level
1:  Quoted prices (unadjusted) in active markets that are accessible at the
measurement date for assets or liabilities. The fair value hierarchy gives the
highest priority to Level 1 inputs.
  Level
2:  Observable prices that are based on inputs not quoted on active
markets, but corroborated by market data.
  Level
3:  Unobservable inputs are used when little or no market data is
available. The fair value hierarchy gives the lowest priority to Level 3
inputs.
  In
determining fair value, the Company utilizes valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs to the
extent possible as well as the consideration of counterparty credit risk in its
assessment of fair value.
  The
adoption of this statement did not have a material impact on our results of
operations and financial condition. The carrying values of our cash, cash
equivalents and marketable securities, carried at fair value as of June 30,
2010, are classified in the table below in one of the three categories described
above:
  F-10
  Eternal
Energy Corp.
  Notes
to the Financial Statements (Unaudited)
  Fair
Value Measurements at June 30, 2010:
  Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3
                    
                    
                    TotalCash
      & equivalents
                    
                    $
                    4,068,692
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    4,068,692Marketable
      securities
                    
                    
                    904,324
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    904,324$
                    4,973,016
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    4,973,016
 
 Accounting
for Share-Based Compensation
 
 The
Company measures compensation cost for all stock-based awards at fair value on
the date of grant and recognizes compensation expense in its statements of
operations over the service period that the awards are expected to vest. 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 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 loss per common share for the three-month
and six-month periods ended June 30, 2009 is computed in the same way as basic
loss per common share, as the inclusion of additional common shares that would
be outstanding if all potential common shares had been issued would be
anti-dilutive.  See Note 7 for the calculation of basic and diluted
weighted average common shares outstanding for the three-month and six-month
periods ended June 30, 2010 and 2009.
 
 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.
  F-11
  Eternal
Energy Corp.
  Notes
to the Financial Statements (Unaudited)
 
 Use
of Estimates and Assumptions
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the use of estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosure of contingent obligations in the financial
statements and accompanying notes. The Company’s most significant assumptions
are the estimates used in the determination of the deferred income tax asset
valuation allowance and the allocation of proceeds received from the disposition
of certain oil and gas prospects to the remaining prospects included in the
Company’s full-cost pool.  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
June 2009, the FASB established the FASB Accounting Standards
Codification (the “Codification” or “ASC”) as the official single source of
authoritative U.S. generally accepted accounting principles (“GAAP”). All
guidance contained in the Codification carries an equal level of
authority.  The Codification also includes all relevant SEC guidance
organized using the same topical structure in separate sections within the
Codification.  The Codification is not intended to change GAAP, but it will
change the way GAAP is organized and presented.  Except for the disclosure
requirements, the adoption of this statement did not have an impact on the
determination or reporting of the Company’s financial statements.  The
Company is providing the Codification cross-reference alongside the references
to the standards issued and adopted prior to the adoption of the
Codification.
 
 In
January 2010, the FASB issued Accounting Standards Update 2010-06, Improving Disclosures about Fair
Value Measurements (“FASB 2010-06”), which amends ASC 820-10 and
requires, among other things, new disclosures regarding the transfers in and out
of hierarchy levels 1 and 2 as well as the gross presentation of changes in
estimated measurements for level 3 measurements.  In addition, FASB 2010-06
provides clarifying direction with respect to disclosures regarding the various
levels of disaggregation and about specific inputs and valuation
techniques.  FASB 2010-06 is effective for interim and annual reporting
periods beginning after December 31, 2009, except for the gross presentation of
level 3 measurement activities, which is effective for fiscal years beginning
after December 15, 2010.  The adoption of FASB 2010-06 is not expected to
have a material effect on the Company’s financial statements.
 
 ASC
808-10 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.  ASC
808-10 is effective for the Company’s year beginning January 1, 2009.  The
adoption of ASC 808-10 has not had a material impact on the Company’s financial
statements.
  F-12
  Eternal
Energy Corp.
  Notes
to the Financial Statements (Unaudited)
 
 ASC 805
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.  ASC 805 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.  ASC 805 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.  ASC 805 is effective for the Company’s financial statements
beginning January 1, 2009.  The adoption of ASC 805 has not had a material
impact on the Company’s financial statements.
 
 ASC
810-10-65 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
(January 1, 2009 for the Company).  The adoption of ASC 810-10-65 has not
had a material impact on the Company’s financial statements.
 
 Under ASC
855-10, 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
10.
 
 In
February 2010, the FASB issued Accounting Standards Update 2010-09, Amendments to Certain Recognition
and Disclosure Requirements, which amended ASC 855 and which requires
issuers of financial statements to evaluate subsequent events through the date
on which the financial statements are issued.  FASB 2010-09 defines the
term “SEC Filer” and eliminates the requirement that an SEC filer disclose the
date through which subsequent events have been evaluated.  This change was
made to alleviate potential conflicts between ASC 855-10 and the reporting
requirements of the SEC.  FASB 2010-09 is effective immediately, but is not
expected to have a material effect on the Company’s financial
statements.
  F-13
  Eternal
Energy Corp.
  Notes
to the Financial Statements (Unaudited)
 
 In
January 2010, the FASB issued Accounting Standards Update 2010-03, Oil and Gas Reserve Estimation and
Disclosures (“FASB 2010-03”), which amended Extractive Activities – Oil
and Gas (Topic 932).  Among other things, FASB 2010-03 expands the
definition of oil and gas producing activities and requires companies to use a
twelve-month average price, rather than a year-end price, when estimating
whether reserve quantities are economical to produce.  In addition, FASB
2010-03 requires separate reserve disclosures for geographical areas that
contain more than fifteen percent of an entity's total reserves and provides
guidance with respect to the applicability of reporting requirements for equity
investments in oil and gas producing entities.  FASB 2010-03 is effective
for annual reporting periods ending on or after December 31, 2009.  The
adoption of FASB 2010-03 is not expected to have a material effect on the
Company’s financial statements.
 
 In April
2010, the FASB issued Accounting Standards Update 2010-14, Amendments to Paragraph
932-10-S99-1 (FASB 2010-14), which amended ASC 932.  FASB 2010-14
revises the definitions of certain definitions contained in SEC Regulation
S-X.  FASB 2010-14 is effective for annual reporting periods beginning
after December 15, 2009.  The adoption of FASB 2010-14 is not expected to
have a material effect on the Company’s financial statements.
 
 3.     
 Equipment and
Leasehold Improvements
 
 The
following is a summary of equipment and improvements, at cost, as of June 30,
2010:
 
 Office
      equipment
                    
                    $
                    104,046Leasehold
      improvements
                    
                    
                    47,509Total
      equipment and improvements
                    
                    
                    151,555Less:
      accumulated depreciation
                    
                    
                    (123,788
                    )Equipment
      and improvements, net
                    
                    $
                    27,767
 
 Depreciation
expense for the three-month periods ended June 30, 2010 and 2009 was $11,801 and
$10,819, respectively.  Depreciation expense for the six-month periods
ended June 30, 2010 and 2009 was $28,060 and $20,054, respectively.
 
 The
Company purchased $19,000 of down-hole tools during 2009 and $38,000 of
down-hole tools during 2008.  Because the Company no longer possesses
exclusive rights to utilize the down-hole gas and water separation technology,
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 is marketing 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 sheets as of June 30, 2010 and December
31, 2009.
  F-14
  Eternal
Energy Corp.
  Notes
to the Financial Statements (Unaudited)
 
 4.    
  Oil and
Gas Properties
 
 As of
June 30, 2010 and December 31, 2009, the Company’s cost centers are as
follows:
 
 June 30, 2010
                    
                    
                    December 31, 2009Amortizable
                    
                    
                    Non-Amortizable
                    
                    
                    Amortizable
                    
                    
                    Non-AmortizableUnited
      States
                    
                    $
                    -
                    
                    
                    $
                    257,574
                    
                    
                    $
                    -
                    
                    
                    $
                    411,751Canada
                    
                    
                    126,029
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,046Total
                    
                    $
                    126,029
                    
                    
                    $
                    257,574
                    
                    
                    $
                    -
                    
                    
                    $
                    412,797
 
 Producing
Properties
 
 Through
various transactions that occurred during 2007, the Company acquired a 75%
working interest in the South West Extension of the West Ranch Field (the “South
West Extension”), located in Jackson County, Texas.  In August 2009,
certain leases included in the West Ranch Field expired and, as a result, the
reserves associated with these leases contained in the Glasscock Reservoir are
no longer available to the Company.  These leases were pivotal to the
implementation of a waterflood program designed to stimulate production
throughout the South West Extension.  Because there was no reasonable
certainty that the Company would seek to extract the underlying reserves
associated with the remaining West Ranch leases, the economic value of these
reserves could not be used to evaluate the recoverability of the Company’s
investment in the West Ranch property.  Accordingly, the Company fully
impaired its full-cost pool, subject to amortization in August
2009.
 
 Because
the wells were shut-in, the Company recognized no depletion expense related to
the West Ranch property for the three-month and six-month periods ended June 30,
2010 and 2009.
 
 In June
2010, the Company sold its interest in the West Ranch property for $262,500 in
cash and the assumption, by the purchaser, of all plugging, abandonment and
environmental reclamation liabilities.  Because the Company had fully
impaired its investment in the West Ranch Field, and because the West Ranch
Field represented the only property in the US cost center of the full-cost pool,
subject to amortization, the Company recognized a gain on the transaction of
$509,934.
 
 Exploratory
Prospects
 
 The
Company has entered into participation agreements in a number of exploratory oil
and gas properties. Unproven exploratory prospects are excluded from its
respective amortizable cost pool. Each prospect’s costs are transferred into the
amortization base on an ongoing (well-by-well or property-by-property) basis as
the prospect is evaluated and proved reserves are established or impairment is
determined. Three exploratory prospects have been abandoned as of June 30, 2010.
The Company has a working interest and/or overriding royalty interest in the
wells on the remaining prospects, 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.
  F-15
  Eternal
Energy Corp.
  Notes
to the Financial Statements (Unaudited)
 
 United
States
 
 Steamroller
Prospect
 
 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 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).
 
 The last
of the eight exploratory wells drilled by Pebble was completed in August
2008.  As of December 31, 2009, the Company had received all but $20,000 of
the spud fees related to the initial eight exploratory wells.  The
remaining $20,000 of spud fees was collected in March 2010.
 
 In April
2010, the Company sold its working interest in approximately 700 net acres
located within the Pebble Beach Prospect to Rover Resources for cash
consideration totaling $1 million.  Pursuant to full-cost accounting
guidelines, the Company allocated a portion of the gross gain from the sale
($277,355) to the remaining property in the US cost center of the full-cost
pool, not subject to amortization, based on the relative fair market values of
the properties at the time of the sale, and recognized a net gain on the sale of
$722,645.
  F-16
  Eternal
Energy Corp.
  Notes
to the Financial Statements (Unaudited)
 
 As of
June 30, 2010, the Company still owns a 10% working interest in approximately
2,800 net acres located within the Pebble Peach Prospect.  The carrying
value of the Company’s interest in the Pebble Beach prospect totaled $31,355 as
of June 30, 2010.  Management is currently in the process of developing its
exploration strategy relative to the remaining acreage within the Pebble Beach
Prospect.  No definite timetable has been established for exploratory
drilling activities within the Pebble Beach Prospect, nor does the Company
expect that a determination will be made on the ultimate viability of the Pebble
Beach Prospect within the next twelve months.
 
 Spyglass
Prospect
 
 In June
2010, the Company sold 50% of its working interest in the Hardy Prospect to
American Eagle Energy Inc. in exchange for a 50% working interest in
approximately 6,851 net acres located within Divide County, North Dakota (the
“Spyglass Prospect”).  The Company reclassified 50% of the carrying value
of its investment in the Hardy Prospect ($126,029) to the Spyglass Prospect at
the time of the sale.  Because no proven reserves have been identified, the
Spyglass Prospect has been assigned to the full-cost pool that is not subject to
amortization as of June 30, 2010.  Management is currently in the process
of developing its exploration strategy relative to the Spyglass Prospect. 
No definite timetable has been established for exploratory drilling activities
within the Spyglass Prospect, nor does the Company expect that a determination
will be made on the ultimate viability of the Spyglass Prospect within the next
twelve months.
 
 Impairment
Reviews
 
 All of
the Company’s oil and gas properties are evaluated for impairment on a quarterly
basis.  There were no impairments evident at June 30, 2010.
 
 Canada
 
 In June
2008, the Company acquired a five percent working interest in an additional
prospect located in Saskatchewan, Canada for $1,046.  The Company fully
impaired its investment in the Canada Prospect in June 2010 citing a lack of
proven reserves and no definitive exploration plans relative to the Canadian
Prospect.  The impairment was netted against the aforementioned gains from
the sale of oil and gas properties, not subject to amortization.
 
 Hardy
Property
 
 In April
2010, the Company sold certain gross overriding royalty interests in property
located in southeastern Saskatchewan to Ryland Oil Corporation (“Ryland”). 
Proceeds from the sale of the gross overriding royalty interest included cash
consideration of $2.9 million, 2,145,883 shares of Ryland’s common stock, valued
at $874,973 and an assignment of Ryland’s 100% working interest in approximately
4,480 net acres located in Saskatchewan (the “Hardy Property”), which included
related equipment valued at approximately $238,681.  Because the gross
overriding royalty interests sold represented the only property in the Canadian
cost center of the full-cost pool, not subject to amortization, the Company
recognized a gain on the full value of the sales proceeds received, totaling
$4,013,654.
  F-17
  Eternal
Energy Corp.
  Notes
to the Financial Statements (Unaudited)
 
 The Hardy
Property contains one existing oil well that was shut-in as of June 30, 2010 due
to mechanical issues.  However, the area in which the Hardy well is located
is known to contain proven oil and gas reserves.  The Company intends to
re-enter the Hardy well during the third quarter of 2010 in an attempt to
restore the well to production.
 
 5.     
 Asset Retirement
Obligation
 
 As of
December 31, 2009, the Company had recorded an aggregate asset retirement
obligation associated with its investment in the West Ranch Field in the amount
in the amount of $242,955.  The asset retirement obligation represented
estimated discounted future plugging and abandonment costs associated with each
of the thirty wells located within the Southwest Extension of the West Ranch
Field.  The estimated liability was based on the assumption that the wells
would have to be plugged and abandoned over a three-year period.
 
 The
following table summarized the estimated plugging liability by year in which, in
the absence of production, the respective wells were projected to be plugged and
abandoned:
 
 Amount2010
                    
                    $
                    65,2582011
                    
                    
                    93,2252012
                    
                    
                    121,193Gross
      amount of liability
                    
                    
                    279,676Discount
      factor
                    
                    
                    (32,241
                    )Net
      present value of asset retirement obligation
                    
                    $
                    247,435
 
 As
discussed in Note 4, the Company sold its interest in the West Ranch Field in
June 2010.  Pursuant to the terms of the sale agreement, the purchaser
assumed all future plugging liabilities associated with the West Ranch
wells.  Accordingly, the Company has removed its asset retirement
obligation from its books and considered the extinguishment of this debt in
calculating the gross gain realized on the sale.  As of June 30, 2010, the
Company has not recorded any asset retirement obligations related to its newly
acquired Hardy Property nor its unproven prospects.
  F-18
  Eternal
Energy Corp.
  Notes
to the Financial Statements (Unaudited)
 
 6.     
 Commitments and
Contingencies
 
 Drilling
Obligations
 
 The
Company has an option to fund its share of future exploratory drilling costs
related to its 10% working interest in the Pebble Beach Prospect should any
exploratory wells be proposed by the other working interest owner.
 
 Employment
Agreements
 
 In August
2009, the Company renewed its two-year employment agreement with its Vice
President of Engineering.  The financial terms of the renewed employment
agreement are substantially the same as the previous employment agreements,
which provide for annual compensation of $144,000.
 
 In
October 2009, the Company amended its employment agreement with its Chief
Financial Officer to extend the contract through September 1, 2010.  The
employment agreement provides for annual compensation in the amount of
$138,000.
 
 Effective
November 1, 2009, the Company renewed its two-year employment agreement with its
President and Chief Executive Officer.  The financial terms of the renewed
employment agreement are substantially the same as the previous employment
agreements, which provide for annual compensation of $174,000.
 
 Lease
Obligation
 
 In June
2007, the Company executed an agreement to lease certain office equipment from
Banc of America leasing.  The lease agreement expired in June
2010.
 
 Effective
January 1, 2009, the Company entered into an agreement to lease its current
office space.  The new lease has a term of 36 months and expires in
December 31, 2011. Future lease payments related to the Company’s office and
equipment leases are as follows:
 
 Amount2010
                    
                    $
                    31,2682011
                    
                    
                    64,1402012
                    
                    
                    -2013
                    
                    
                    -2014
                    
                    
                    -Total
                    
                    $
                    95,408
 
 Gross
office rent expense for each of the three-month periods ended June 30, 2010 and
2009 was $19,418.  Gross office rent expense for each of the six-month
periods ended June 30, 2010 and 2009 was $38,837.  Copier lease expense
totaled $1,237 and $1,264 for the three-month periods ended June 30, 2010 and
2009.  Copier lease expense totaled $2,056 and $2,387 for the six-month
periods ended June 30, 2010 and 2009
  F-19
  Eternal
Energy Corp.
  Notes
to the Financial Statements (Unaudited)
 
 7.     
 Earnings (Loss)
Per Share
 
 The
following is a reconciliation of the number of shares used in the calculation of
basic loss per share and diluted loss per share for the three-month and
six-month periods ended June 30, 2010 and 2009:
 
 For
      the Three-Month
                    
                    
                    For
      the Six-MonthPeriod Ended June 30,
                    
                    
                    Period Ended June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Net
      income (loss)
                    
                    $
                    4,044,779
                    
                    
                    $
                    (336,012
                    )
                    
                    $
                    3,713,044
                    
                    
                    $
                    (833,499
                    )Weighted-average
      number of common shares outstanding
                    
                    
                    43,532,612
                    
                    
                    
                    44,550,000
                    
                    
                    
                    44,043,152
                    
                    
                    
                    44,550,000Incremental
      shares from the assumed exercise of dilutive stock options
                    
                    
                    891,892
                    
                    
                    
                    33,333
                    
                    
                    
                    2.125.000
                    
                    
                    
                    -Diluted
      common shares outstanding
                    
                    
                    44.424.504
                    
                    
                    
                    44,583,333
                    
                    
                    
                    46.168.152
                    
                    
                    
                    44,550,000Basic
      earnings (loss) per share
                    
                    $
                    0.09
                    
                    
                    $
                    (0.01
                    )
                    
                    $
                    0.08
                    
                    
                    $
                    (0.02
                    )Diluted
      earnings (loss) per share
                    
                    $
                    0.09
                    
                    
                    $
                    (0.01
                    )
                    
                    $
                    0.08
                    
                    
                    $
                    (0.02
                    )
 
 The
following securities were not included in the computation of diluted net loss
per share as their effect would have been anti-dilutive:
 2010
                    
                    
                    2009Stock
      Options
                    
                    
                    -
                    
                    
                    
                    5,543,800
 
 8. 
     Equity
Transactions
 
 Stock
Repurchases
 
 In March
2010, the Company’s Board of Directors authorized implementation of a stock
repurchase program, pursuant to which the Company may repurchase up to $500,000
of its then outstanding common shares at prevailing market prices.  During
the three-month and six-month periods ended June 30, 2010, the Company
repurchased and retired 1,788,000 and 1,881,000 shares, respectively, of its
previously issued and outstanding common stock at an average price of $0.06 per
share.  The aggregate cost associated with the repurchase of these shares
was $111,504.  As of June 30, 2010, the Company has 42,669,000 shares of
common stock outstanding.  As discussed in Note 10, the Company has
continued to repurchase shares subsequent to June 30, 2010.
  F-20
  Eternal
Energy Corp.
  Notes
to the Financial Statements (Unaudited)
 
 Issuance
and Cancellation of Restricted Stock and Cancellation of Stock
Options
 
 In
September 2009, the Company announced that it had granted 6,500,000 restricted
shares of common stock to its directors and officers in exchange for the return
and cancellation of 5,393,800 unexercised options to purchase shares of common
stock.  In October 2009, the Company’s board of directors rescinded the
grant of the restricted common shares, effective on the original grant
date.  Because the restricted stock certificates were never delivered to
the intended recipients, management has determined that the title to the shares
never transferred.  Accordingly, no stock-based compensation has been
recorded in connection with the issuance of the restricted shares.  The
stock options remained cancelled.
 
 Issuance
of Stock Options
 
 In
October 2009, the Company granted 6,000,000 options to purchase shares of the
Company’s common stock to its directors and officers.  The stock options
have a five-year life, vest immediately and have an exercise price of $0.05,
which exceeded the volume weighted average closing price of the Company’s common
stock for the five-day period preceding the grant.  The Company accounted
for the new stock option grant as a modification of the previously outstanding
stock options and immediately recognized stock-based compensation expense of
$145,190 associated with the new grant and the remaining $67,071 of unamortized
stock-based compensation associated with the original stock options.  There
were no additional stock options granted during the six-month period ended June
30, 2010.  Accordingly, the Company did not recognize any stock-based
compensation expense for the six-month period then ended.
 
 A summary
of stock option activity for the year ended December 31, 2009 and the six-month
period ended June 30, 2010 is presented below:
 WeightedWeighted
                    
                    
                    AverageAverage
                    
                    
                    RemainingExercise
                    
                    
                    ContractOptions
                    
                    
                    Price
                    
                    
                    TermOutstanding
      at December 31, 2008
                    
                    
                    5,543,800
                    
                    
                    $
                    0.46
                    
                    
                    3.1
      yearsOptions
      forfeited
                    
                    
                    (5,543,000
                    )
                    
                    $
                    0.05
                    
                    
                    
                    -Options
      granted
                    
                    
                    6,000,000
                    
                    
                    $
                    0.05
                    
                    
                    
                    -Outstanding
      at December 31, 2009 and June 30, 2010
                    
                    
                    6,000,000
                    
                    
                    $
                    0.05
                    
                    
                    4.3 yearsExercisable
      at June 30, 2010
                    
                    
                    6,000,000
                    
                    
                    $
                    0.05
                    
                    
                    4.3 years
  F-21
  Eternal
Energy Corp.
  Notes
to the Financial Statements (Unaudited)
 
 The
assumptions used in the Black-Scholes option pricing model for the stock options
granted during the year ended December 31, 2009 were as follows:
 
 Risk-free
      interest rate
                    
                    
                    2.37
                    %Expected
      volatility of common stock
                    
                    
                    101
                    %Dividend
      yield
                    
                    $
                    0.00Expected
      life of options
                    
                    5
      yearsWeighted
      average fair market value of options granted
                    
                    $
                    0.03
 
 Shares
Reserved for Future Issuance
 
 As of
June 30, 2010, the Company has reserved 6,000,000 shares for future issuance
upon exercise of outstanding options.
 
 9. 
     Income
Taxes
 
 For the
six-month period ended June 30, 2009, the Company incurred a net operating loss
and, accordingly, no provision for income taxes was recorded.  In addition,
no benefit for income taxes was recorded due to the uncertainty of the
realization of any tax assets.
 
 The
Company has recognized net income of $3,713,044 for the six-month period ended
June 30, 2010.  However, as discussed below, the Company has sufficient net
operating loss carryforwards (“NOL’s”) to offset any current year taxable
income.  As a result, the Company has not recognized any US income tax
expense for the current period.
 
 As of
December 31, 2009, the Company had cumulative net loss carryforwards (“NOL’s”)
of approximately $6,453,000 available to offset future US taxable
earnings.  The NOL’s, if not utilized, will begin to expire in
2023.
 
 In June
2010, the Company remitted $892,112 to the Canadian Revenue Agency in June 2010
in connection with the sale of certain gross overriding royalty interests. 
A foreign tax credit related to the payment of the Canadian taxes is available
to reduce future US tax liabilities, once the Company’s NOL’s have expired or
fully utilized.
 
 June
      30,2010
                      
                      
                      December
      31(Unaudited)
                      
                      
                      2009Tax
      effect of NOL’s
                      
                      $
                      957,000
                      
                      
                      $
                      2,194,020Estimated
      foreign tax credits
                      
                      
                      892,000
                      
                      
                      
                      -Total
      deferred tax assets
                      
                      
                      1,849,000
                      
                      
                      
                      2,194,000Less:
      Valuation allowance
                      
                      
                      (1,849,000
                      )
                      
                      
                      (2,194,000
                      )Net
      deferred tax assets
                      
                      $
                      -
                      
                      
                      $
                      -
  F-22
  Eternal
Energy Corp.
  Notes
to the Financial Statements (Unaudited)
 
 Prior to
recognizing income for the six-month period ended June 30,2010, the Company
recognized net losses in each fiscal year since inception.  Based on the
Company’s history of net losses, management believes that it is more likely than
not that the net deferred tax assets will not be fully realizable. 
Accordingly, the Company has provided for a full valuation allowance against its
net deferred tax assets as of June 30, 2010.
 
 A
reconciliation between the amount of income tax (benefit) expense for the
six-month periods ended June 30, 2010 and 2009, determined by applying the
applicable US statutory income tax rates, is as follows:
 
 2010
                    
                    
                    2009Net
      income (loss) before taxes
                    
                    $
                    3,713,044
                    
                    
                    $
                    (833,499
                    )US
      statutory tax rate
                    
                    
                    34
                    %
                    
                    
                    34
                    %Estimated
      tax expense (benefit)
                    
                    
                    1,262,435
                    
                    
                    
                    (283,390
                    )Provision
      for deferred taxes
                    
                    
                    (1,262,435
                    )
                    
                    
                    283,390
                    )Net
      income tax expense (benefit)
                    
                    $
                    -
                    
                    
                    $
                    -
 
 10. 
   Asset and
Royalty Purchases by Ryland Oil Corporation
 
 In
November 2009, the Company entered into a letter agreement (the “Letter
Agreement”) with Ryland Oil Corporation (“Ryland”), a Canadian oil and gas
company whose shares are listed on the TSX Venture Exchange, whereby Ryland
proposed to acquire all of the then-outstanding shares of the Company’s common
stock in exchange for approximately 17,793,000 shares of Ryland’s common stock,
at a ratio of 0.352 shares of Ryland stock for every 1.000 share of the
Company’s stock.
 
 On March
26, 2010, the Company and Ryland mutually agreed to terminate the Letter
Agreement and, instead, entered into two new asset purchase agreements whereby
the Company agreed to sell to Ryland its interest in certain acreage located in
North Dakota, as well as its gross overriding royalty interest in certain lands
located in Saskatchewan.  The material terms of each agreement were as
follows:
 
 1.
              Purchase
      and Sale Agreement – Effective April 1, 2010, the Company sold its ten
      percent working interest in approximately 700 net acres located in North
      Dakota to Rover for $1 million
cash.
  2.
              Purchase
      of Royalty Agreement – Effective April 1, 2010 the Company sold to Ryland
      all of its gross overriding royalty interest in approximately 264,000 net
      acres within an area of mutual interest located in southeastern
      Saskatchewan for $2.9 million in cash, 2,145,883 shares of Ryland’s common
      stock, which were valued at approximately $874,973 and an assignment of
      Ryland’s 100% working interest in approximately 4,480 net acres located in
      Saskatchewan (the “Hardy Prospect”) and related machinery, valued at
      $238,681.
  F-23
  Eternal
Energy Corp.
  Notes
to the Financial Statements (Unaudited)
 
 11. 
   Subsequent
Events
 
 During
the period from July 1 through August 13, 2010, the Company repurchased an
additional 1,149,000 shares of its previously outstanding common stock on the
open market pursuant to its stock repurchase program.  The aggregate
consideration paid for these shares totaled approximately $87,000, resulting in
an average repurchase price of $0.076 per acquired share.
  F-24





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 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.





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.


2





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.





Results
of Operations for the Three-Month Period Ended June 30, 2010 vs.
2009





We began
receiving royalty payments associated with our 5% gross overriding royalty
interest in certain properties located in Saskatchewan, Canada in April
2009.  As a result, we recognized $4,533 of oil and gas sales revenue for
the three-month period ended June 30, 2009.  Revenues from our overriding
royalty positions would continue to grow throughout the remainder of 2009 as
additional wells were drilled in the area.  In April 2010, we sold our
gross overriding royalty interest in the Saskatchewan property to Ryland Oil
Corporation (“Ryland”).  Consequently, we only recognized $2,999 of oil and
gas sales revenue during the three-month period ended June 30, 2010.  We do
not anticipate recognizing any further oil and gas sales revenue from the
Saskatchewan property during the remainder of 2010.  We may or may not
recognize additional oil and gas sales revenues during the remainder of 2010,
depending on whether or not we can successfully drill producing wells in any of
our other properties.





In April
2010, we sold our 5% gross overriding royalty interest in certain lands located
in southeastern Saskatchewan to Ryland.  As a result of the sale, we
received cash consideration of $2,900,000, shares of Ryland’s common stock
valued at $874,973 as of the date of closing, and a 100% working interest in
approximately 4,480 net acres, also located in southeastern Saskatchewan (the
“Hardy Project”), valued at $238,681.   Because we have no other
properties in the Canadian cost center of our full-cost pool, not subject to
amortization, we recognized a full gain on the sale totaling
$4,013,654.





Also in
April 2010, we sold our 10% working interest in approximately 7,000 gross acres
(700 net acres) located in Divide County, North Dakota, to Rover Resources Inc.,
a wholly owned subsidiary of Ryland.  Proceeds from the sale of the 700
acres totaled $1,000,000 in cash.  We allocated a portion of the proceeds
to reduce our 10% working interest in the remaining approximate 28,000 gross
acres (2,800 net acres) that we own in Divide County and recognized a gain on
the sale of the 700 acres, totaling $277,355.





In June
2010, we sold our 75% working interest in the West Ranch property.  Cash
proceeds from the sale totaled $262,500.  In addition, the purchaser agreed
to assume all plugging and abandonment liabilities related to the West Ranch
wells, which totaled $247,434.  Because we had fully impaired our
investment in the West Ranch property, and because we have no other properties
in the US cost center of our full-cost pool, subject to amortization, we
recognized a full gain on the sale totaling $509,934.


3





As a
result of these transactions, we recognized aggregate gains from the sale of
certain oil and gas assets totaling $5,245,187 for the three-month period ended
June 30, 2010.





Falling
oil prices and increasing production costs caused us to shut-in our West Ranch
wells in June 2009.  The wells remained shut-in until the West Ranch
property was sold in June 2010.  As a result, we did not recognize any oil
and gas operating expenses for the three-month period ended June 30, 2010,
compared to $3,326 of oil and gas operating expenses that were incurred during
the same period in 2009.





General
and administrative expenses increased from $167,511 for the three-month period
ended June 30, 2009 to $218,150 for the three-month period ended June 30, 2010,
primarily as a result of additional consulting fees incurred during 2010 related
to the evaluation of the Hardy Project and land services received in connection
with our new Hardy Project holdings.  In addition, prior to October 2009,
we provided shared CFO services to Roadrunner Oil & Gas, Inc.
(“Roadrunner”), for which Roadrunner paid us amounts ranging from $3,000 to
$4,000 per month.  Fees received from Roadrunner reduced our gross salaries
expense by $10,000 for the three-month period ended June 30, 2009.  Because
the shared CFO services arrangement terminated in October 2009, we recognized no
such savings for the three-month period ended June 30, 2010.





Stock-based
compensation expense for the three-month period ended June 30, 2009 totaled
$89,025.  In September 2009, we cancelled all of our then-outstanding stock
options in connection with the issuance of restricted shares to the option
holders.  In October 2009, we rescinded the issuance of the restricted
shares and granted new stock options to the previous option holders. 
Pursuant to accounting rules, the granting of the new options was treated as a
modification of the terms of the cancelled options.  All stock-based
compensation attributable to the newly issued options was fully recognized at
the time of grant.  Further, all remaining, unamortized stock-based
compensation of the cancelled options was also recognized.  As a result, no
stock-based compensation expense was recognized during the three-month period
ended June 30, 2010, as all compensation related to our outstanding stock
options had already been recognized.





Professional
fees for the three-month period ended June 30, 2010 decreased by $2,565 from the
same period in 2009.





Depreciation,
depletion and amortization expense for the three-month period ended June 30,
2010 increased by $982 from the same period in 2009 primarily due to the normal
accretion of our asset retirement obligations.  We wrote off our remaining
asset retirement obligations in June 2010 in connection with the sale of the
West Ranch property.





Interest
income for the three-month period ended June 30, 2010 totaled $2,677, compared
to $16,722 for the three-month period ended June 30, 2009.  The decrease is
due to reduced interest rates available for the Company’s excess cash, as well
as the fact that the Company’s North Sea deposits were invested in long-term
investments during 2009, as required by law.  The Company collected the
deposits in November 2009.   Since that time, the funds previously
held on deposit were invested at normal money-market rates, which are lower that
the rates previously received when the funds were invested in longer-term
maturity instruments.


4





In June
2010, we remitted $892,112 in foreign taxes to the Canadian Revenue Agency in
connection with our sale of the Saskatchewan gross overriding royalties. 
..  The payment of the Canadian taxes created a foreign tax credit, which
would be available to reduce the Company’s US tax liability on future earnings,
once the Company’s net operating loss carryforwards have expired or been fully
utilized.





Results
of Operations for the Six-Month Period Ended June 30, 2010 vs. 2009





Oil and
gas revenues associated with our 5% gross overriding royalty interest in certain
properties located in Saskatchewan totaled $74,485 for the six-month period
ended June 30, 2010, compared to $4,533 for the first six months of 2009. 
In April 2010, we sold our gross overriding royalty interest in the Saskatchewan
property to Ryland.  We do not anticipate recognizing any further oil and
gas sales revenue from the Saskatchewan property during the remainder of
2010.  We may or may not recognize additional oil and gas sales revenues
during the remainder of 2010, depending on whether or not we can successfully
drill producing wells in any of our other properties.





As noted
above, we sold our 5% gross overriding royalty interest in certain lands located
in southeastern Saskatchewan, as well as our working interests in 700 net acres
in North Dakota and our West Ranch property during the six-month period ended
June 30, 2010.  Aggregate gains recognized on the sales totaled
$5,245,187.  We did not sell any properties during 2009.





Falling
oil prices and increasing production costs caused us to shut-in our West Ranch
wells in June 2009.  The wells remained shut-in until the West Ranch
property was sold in June 2010.  As a result, we did not recognized any oil
and gas operating expenses for the six-month period ended June 30, 2010,
compared to $33,334 of oil and gas operating expenses that were incurred during
the same period in 2009.





General
and administrative expenses increased from $389,046 for the six-month period
ended June 30, 2009 to $452,402 for the six-month period ended June 30, 2010,
primarily as a result of the following:




·
              Amounts
      received from Roadrunner for shared CFO services and office space rental
      effectively reduced our 2009 general and administrative expenses by
      $37,400.  We did not provide such services or sublease any office
      space to Roadrunner in 2010.
 
 ·
              Filing
      fees for the period increased by $10,175 as a result of filing responses
      to questions received from the SEC as well as multiple Form 8-K’s related
      to the sales transactions with
Ryland.
 
 ·
              Consulting
      fees for the period increased by $17,947 from 2009 to 2010, primarily as a
      result of additional landman and
      operational services being
contracted.


5





Stock-based
compensation expense for the six-month period ended June 30, 2009 totaled
$199,275.  We did not recognize any stock-based compensation expense during
the six-month period ended June 30, 2010 as all compensation related to our
outstanding stock options has already been recognized.





Professional
fees for the six-month period ended June 30, 2010 increased by $15,087 from the
same period in 2009.  The increase is primarily due to incurring $49,850 in
2010 to obtain a fairness opinion related to the potential merger with
Ryland.  This amount was partially offset by a reduction of legal fees due
to the favorable settlement of our then-litigation with Zavanna Corp. in July
2010.





Depreciation,
depletion and amortization expense for the six-month period ended June 30, 2010
increased by $8,008 from the same period in 2009 primarily due to the normal
accretion of our asset retirement obligations.  We wrote off our remaining
asset retirement obligations in June 2010 in connection with the sale of the
West Ranch property.





Interest
income for the six-month period ended June 30, 2010 totaled $4,372, compared to
$27,014 for the six-month period ended June 30, 2009.  As discussed above,
the interest rates available to the Company for its short-term investments had
declined significantly since the middle of 2009.





In June
2010, we remitted $892,112 in foreign taxes to the Canadian Revenue Agency in
connection with our sale of the Saskatchewan gross overriding royalties. 
The payment of the Canadian taxes created a foreign tax credit, which would be
available to reduce the Company’s US tax liability on future earnings, once the
Company’s net operating loss carryforwards have expired or been fully
utilized.





Liquidity and Capital Resources





As of
June 30, 2010, our assets totaled $5,533,807, which included cash balances of
$4,068,692 and investments in marketable securities valued at $904,324.  As
of June 30, 2010, we have working capital totaling $4,042,330 available to us to
fund operations and potential drilling activities.





We also
own working interests in prospective oil and gas leases located in North Dakota
and southeastern Saskatchewan which could be liquidated, in part or in total, if
necessary, to fund future operations.





Off-Balance
Sheet Arrangements





The
Company had no off-balance sheet arrangements at June 30, 2010.





ITEM 4T. CONTROLS AND PROCEDURES.





The
Company, under the supervision and with the participation of its management,
including the Chief Executive Officer and the Chief Financial Officer, evaluated
the effectiveness of the design and operation of the Company’s "disclosure
controls and procedures" (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended, as of the end of the period covered by this
report.  Based on that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective as of June 30, 2010.  There has been no change in
the Company’s internal control over financial reporting during the quarter ended
June 30, 2010, that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.


6


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 by and between Eternal Energy Corp., PNP Petroleum I,
      LP., Cibolo Energy Operating, Inc. and Century Assets Corporation, dated
      June 25, 2010.10.3*
              
              Letter
      Agreement between Eternal Energy Corp. and American Eagle Energy Inc.
      dated June 18, 2010.10.4
              
              Reserved
      for future use.10.5
              
              Reserved
      for future use.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
              
              Reserved
      for future use.10.8
              
              Reserved
      for future use.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
              
              Reserved
      for future use.10.12
              
              Reserved
      for future use.10.13
              
              Reserved
      for future use.10.14
              
              Reserved
      for future use.10.15
              
              Reserved
      for future use.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).


7





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).10.23
              
              Amended
      and Restated Employment Agreement by and between Eternal Energy Corp. and
      Bradley M. Colby dated November 1, 2009 (Incorporated by reference to
      Exhibit 10.23 of our   ).10.24
              
              First
      Amendment to the Amended and Restated Employment Agreement by and between
      Eternal Energy Corp. and Craig H. Phelps dated August 1, 2009
      (Incorporated by reference to Exhibit 10.24 of our Quarterly Report on
      Form 10-Q filed November 23, 2009).10.25
              
              First
      Amendment to the Employment Agreement by and between Eternal Energy Corp.
      and Kirk. A. Stingley dated October 30, 2009 (Incorporated by reference to
      Exhibit 10.25 of our Form Quarterly Report on Form 10-Q filed November 23,
      2009).10.26
              
              Form
      Of Letter Agreement dated November 25, 2009, between the Registrant and
      Ryland Oil Corporation in respect of a potential acquisition of the
      registrant (Incorporated by reference to Exhibit 10.26 of our Current
      Report on Form 8-K filed March 10, 2010).10.27
              
              Lease
      Agreement dated January 2, 1009 by and between Eternal energy Corp. and
      Oakley Ventures, LLC (Incorporated by Reference to Exhibit 10.27 of our
      Annual Report on Form 10-K filed March 23, 2010).10.28
              
              Purchase
      and Sale Agreement by and between Eternal Energy Corp. and Ryland Oil
      Corporation dated March 26, 2010 (Incorporated by reference to Exhibit
      10.28 of our Current Report on Form 8-K filed March 29,
    2010).10.29
              
              Purchase
      of Royalty Agreement by and between Eternal Energy Corp. and Ryland Oil
      Corporation dated March 26, 2010 (Incorporated by reference to Exhibit
      10.29 of our Current Report on Form 8-K filed March 29,
    2010).10.29a
              
              Amending
      Agreement to the Ryland/Eternal Royalty Purchase Agreement by and between
      Eternal Energy Corp. and Ryland Oil Corporation dated April 20, 2010
      (Incorporated by reference to Exhibit 10.29a of our Current Report on Form
      8-K filed March 29, 2010).10.30
              
              Termination
      Agreement (of the US Pebble Acquisition Agreement) by and between Eternal
      Energy Corp., Fairway Exploration LLC, Prospector Oil, Inc., Pebble
      Petroleum Inc. and Rover Resources Inc. dated April 29,
    2010.10.31
              
              Termination
      Agreement (of the Canadian Pebble Acquisition Agreement) by and between
      Eternal Energy Corp., Fairway Exploration LLC, Prospector Oil, Inc. and
      Pebble Petroleum Inc. dated April 29, 2010.10.32
              
              Termination
      Agreement (of the US Prospect Acquisition Agreement) by and between
      Eternal Energy Corp., Fairway Exploration LLC, Prospector Oil, Inc.,
      Pebble Petroleum Inc., Rover Resources Inc., Steven Swanson, Richard L.
      Findley, Thomas G. Lantz and Ryland Oil Corporation dated May 11,
      2010.10.33
              
              Termination
      Agreement (of the Canadian Prospect Acquisition Agreement) by and between
      Eternal Energy Corp., Fairway Exploration LLC, Prospector Oil, Inc.,
      Pebble Petroleum Inc., Steven Swanson, Richard L. Findley, Thomas G. Lantz
      and Ryland Oil Corporation dated May 11, 2010.10.34
              
              Termination
      of Management Services Agreement by and between Eternal Energy Corp.,
      Ryland Oil Corporation and Brad Colby dated December 1,
    2009.


8





10.35
              
              Amendment
      to the Consulting Agreement by and between Eternal Energy Corp., Rover
      Resources Inc. and Brad Colby dated April 1, 2010.31.1*
              
              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.


9


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)August
      13, 2010
            /s/ Bradley M. ColbyBradley
      M. ColbyPresident
      and Chief Executive Officer


10