UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549









FORM
10-Q/A





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





For the
quarterly period ended March 31, 2009





 ̈
            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  ̈




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  ̈
            Accelerated
      filer  ̈Non-accelerated
      filer  ̈
            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  ̈ No x





Indicate
the number of shares outstanding of each of the issuer’s classes of common
equity, as of the latest practicable date:




44,550,000
shares of common stock issued and outstanding at March 10,
2010.







ETERNAL
ENERGY CORP.


FORM
10-Q


QUARTERLY
PERIOD ENDED MARCH 31, 2009





INDEX





A
      Note About Forward Looking Statements
              
              1PART
      I - FINANCIAL INFORMATIONItem
      1 - Condensed Financial Statements (Unaudited)
              
              F-1Balance
      Sheet (Unaudited) - March 31, 2009
              
              F-3Statement
      of Operations (Unaudited) - For the three months ended March 31, 2009 and
      2008
              
              F-4Statement
      of Cash Flows (Unaudited) - For the three months ended March 31, 2009 and
      2008
              
              F-5Notes
      to the Condensed Financial Statements
(Unaudited)
              
              F-6Item
      2 - Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
              
              3Item
      4 - Controls and Procedures
              
              10PART
      II - OTHER INFORMATIONItem
      6 - Exhibits
              
              11Signatures
              
              13










A Note About Forward-Looking
Statements





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





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


1




EXPLANATORY
NOTE


In 2009,
we discovered that certain accounting errors had occurred that affected our
financial statements for the years ended December 31, 2008 and
2007.  Specifically:




·
            we
      had improperly expensed our entire interest in the North Dakota prospect
      rather than expensing only the interest owned beneficially through our
      investment in Pebble Petroleum.  We sold our beneficial
      ownership interest in 2007;




·
            amounts
      advanced to Rover Resources Inc. in 2007 were improperly recorded as
      investments in oil and gas properties and subsequently expensed upon the
      sale of the Company’s investment in Pebble
  Petroleum;




·
            a
      gain on the sale of the Company’s interest in Pebble Petroleum Inc. was
      improperly presented as a sale of an oil and gas prospect rather than as a
      gain on the sale of an equity
investment;




·
            spud
      fee revenue was not recognized in the same period during which the initial
      drilling of the wells commenced;




·
            stock-based
      compensation expense was understated for 2006, 2007 and 2008 due to an
      incorrect application of SFAS 123(R), Share-Based Payment;
      and




·
            we
      had overstated the gain associated with the sale of our Steamroller
      Prospect due to an incorrect application of the rules of the full cost
      method of accounting.




Due to
the materiality of the errors, we have elected to restate our 2008 and 2007
financial statements to reflect the correction of these errors.  The
nature and effect of the corrections of the accounting errors on the financial
statements for the year ended December 31, 2008 and for the three-month period
ended March 31, 2008 are discussed in detail in Part I, Item 7: Management’s
Discussion and Analysis and Plan of Operation (page 4) as well as in Part II,
Item 8: Financial Statements and Supplementary Data (Footnote 2, page
F-6).




This Amendment No. 1 on Form 10-Q/A
amends our Report on Form 10-Q for the quarter ended March 31, 2009 filed with
the Securities and Exchange Commission on May 15, 2009.  This
Amendment No. 1 on Form 10-Q/A amends Part I, Item 1: Financial Statements, Part
I, Item 2: Management’s Discussion and Analysis of Financial Condition and
Results of Operation and Part I, Item 4T: Controls or Procedures.  No
other Item in our Report on Form 10-Q filed on May 15, 2009 is amended, modified
or updated hereby.  Pursuant to Rule 12b-15 under the Securities
Exchange Act of 1934, new certifications of our principal executive officer and
principal financial officer are being filed as exhibits to this Form 10-Q/A.


2




PART
I. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS.




Eternal
Energy Corp.


Condensed
Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
  F-1
 
 Eternal
Energy Corp.
  Index
to the Condensed Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
 
 Condensed
      Financial Statements of Eternal Energy Corp. (Unaudited):
                          F-1Condensed
      Balance Sheet as of March 31, 2009 (Unaudited) and December 31,
      2008
                          F-3Condensed
      Statements of Operations for Each of the Three-Month Periods Ended March
      31, 2009 and 2008 (Unaudited)
                          F-4Condensed
      Statements of Cash Flows for Each of the Three-Month Periods Ended March
      31, 2009 and 2008 (Unaudited)
                          F-5Notes
      to the Condensed Financial Statements (Unaudited)
                          F-6
  F-2
 
 Eternal
Energy Corp.
  Condensed
Balance Sheets
  As
of March 31, 2009 and December 31, 2008
 
 March 31,2009
                      
                      
                      December 31,(Unaudited)
                      
                      
                      2008(Restated)
                      
                      
                      (Restated)Current
      assets:Cash
                      
                      $
                      286,364
                      
                      
                      $
                      727,701Prepaid
      expenses
                      
                      
                      5,851
                      
                      
                      
                      9,266Advances
                      
                      
                      50,000
                      
                      
                      
                      -Total
      current assets
                      
                      
                      342,215
                      
                      
                      
                      736,967Spud
      fees receivable
                      
                      
                      750,000
                      
                      
                      
                      750,000Equipment
      and leasehold improvements, net of accumulated depreciation and
      amortization of $63,902 and $54,667, respectively
                      
                      
                      72,510
                      
                      
                      
                      60,242Oil
      and gas properties – subject to amortization, net of accumulated depletion
      of $57,667 and $0, respectively
                      
                      
                      2,393,757
                      
                      
                      
                      2,324,154Oil
      and gas properties – not subject to amortization
                      
                      
                      1,324,496
                      
                      
                      
                      1,324,400Assets
      held for sale
                      
                      
                      57,000
                      
                      
                      
                      38,000Deposits
                      
                      
                      1,604,366
                      
                      
                      
                      1,604,366Total
      assets
                      
                      $
                      6,544,344
                      
                      
                      $
                      6,838,129Current
      liabilities:Accounts
      payable and accrued liabilities
                      
                      $
                      192,163
                      
                      
                      $
                      98,808Accrued
      officer's compensation
                      
                      
                      43,101
                      
                      
                      
                      43,101Accrued
      oil and gas interests
                      
                      
                      444,835
                      
                      
                      
                      444,738Total
      liabilities
                      
                      $
                      680,099
                      
                      
                      $
                      586,647Commitments
      and contingenciesStockholders'
      equity:Common
      stock, $.001 par value, 875,000,000 shares authorized, 44,550,000 shares
      issued and outstanding
                      
                      
                      44,550
                      
                      
                      
                      44,550Additional
      paid-in capital
                      
                      
                      9,149,381
                      
                      
                      
                      9,039,131Accumulated
      deficit
                      
                      
                      (3,329,686
                      )
                      
                      
                      (2,832,199
                      )Total
      stockholders' equity
                      
                      
                      5,864,245
                      
                      
                      
                      6,251,482Total
      liabilities and stockholders' equity
                      
                      $
                      6,544,344
                      
                      
                      $
                      6,838,129
 
 The
accompanying notes are an integral part of the condensed financial
statements.
 F-3
 
 Eternal
Energy Corp.
  Condensed
Statements of Operations
  For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
 
 20082009
                        
                        
                        (Restated)Spud
      fee revenue
                        
                        $
                        -
                        
                        
                        $
                        -Oil
      and gas sales
                        
                        
                        -
                        
                        
                        
                        80,257Total
      revenue
                        
                        
                        -
                        
                        
                        
                        80,257Operating
      expenses:Oil
      and gas operating expenses
                        
                        
                        30,009
                        
                        
                        
                        209,388Down-hole
      gas and water license royalties
                        
                        
                        -
                        
                        
                        
                        51,000Impairment
      of oil & gas properties
                        
                        
                        -
                        
                        
                        
                        2,281General
      and administrative expenses
                        
                        
                        221,533
                        
                        
                        
                        165,880Stock-based
      compensation
                        
                        
                        110,250
                        
                        
                        
                        102,905Professional
      fees
                        
                        
                        136,753
                        
                        
                        
                        31,152Depreciation,
      depletion and amortization
                        
                        
                        9,233
                        
                        
                        
                        29,074Total
      operating expenses
                        
                        
                        507,778
                        
                        
                        
                        591,680Total
      operating loss
                        
                        
                        (507,778
                        )
                        
                        
                        (511,423
                        )Interest
      income
                        
                        
                        10,291
                        
                        
                        
                        2,667Net
      loss
                        
                        $
                        (497,487
                        )
                        
                        $
                        (508,756
                        )Net
      loss per common share:Basic
      and diluted
                        
                        $
                        (0.01
                        )
                        
                        $
                        (0.01
                        )Weighted
      average number of shares outstanding:Basic
      and diluted
                        
                        
                        44,550,000
                        
                        
                        
                        44,550,000
 
 The
accompanying notes are an integral part of the condensed financial
statements.
 F-4
 
 Eternal
Energy Corp.
  Condensed
Statements of Cash Flows
  For
Each of Three-Month Periods Ended March 31, 2009 and 2008
 
 20082009
                  
                  
                  (Restated)Cash
      flows provided by (used for) operating activities:Net
      loss
                  
                  $
                  (497,487
                  )
                  
                  $
                  (508,756
                  )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Non
      cash transactions:Stock-based
      compensation
                  
                  
                  110,250
                  
                  
                  
                  102,905Depreciation,
      depletion and amortization
                  
                  
                  9,233
                  
                  
                  
                  29,075Changes
      in operating assets and liabilities:(Increase)
      decrease in prepaid expense
                  
                  
                  3,415
                  
                  
                  
                  (4,099
                  )Increase
      in receivables
                  
                  
                  (50,000
                  )
                  
                  
                  -Increase
      (decrease) in accounts payable and accrued liabilities
                  
                  
                  93,355
                  
                  
                  
                  2,126Net
      cash provided by (used for) operating activities
                  
                  
                  (331,234
                  )
                  
                  
                  (378,749
                  )Cash
      flows provided by (used for) investing activities:Decrease
      in deposits
                  
                  
                  -
                  
                  
                  
                  121,452Additions
      to oil and gas properties
                  
                  
                  (69,603
                  )
                  
                  
                  (254,479
                  )Additions
      to equipment and leasehold improvements
                  
                  
                  (40,500
                  )
                  
                  
                  (19,000
                  )Net
      cash provided by (used for) investing activities
                  
                  
                  (110,103
                  )
                  
                  
                  (152,027
                  )Net
      increase (decrease) in cash
                  
                  
                  (441,337
                  )
                  
                  
                  (530,776
                  )Cash
      - beginning of period
                  
                  
                  727,701
                  
                  
                  
                  791,891Cash
      - end of period
                  
                  $
                  286,364
                  
                  
                  $
                  261,115
 
 Supplemental
Disclosure of Cash Flow Information
 
 20082009
                  
                  
                  (Restated)Cash
      paid during the twelve-month periods for:Interest
                  
                  $
                  -
                  
                  
                  $
                  -Income
      taxes
                  
                  
                  -
                  
                  
                  
                  -
 
 The
accompanying notes are an integral part of the condensed financial
statements.
 F-5
 
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
  1.
              Description of
      Business
  Eternal
Energy Corp. (the "Company") was incorporated in the state of Nevada in March
2003. The Company engages in the acquisition, exploration, development and
producing of oil and gas properties. At March 31, 2009, the Company has entered
into participation agreements related to oil and gas exploration projects in the
Big Sand Spring Valley Prospect located in Nye County, Nevada, and the Pebble
Beach Prospect, located in Divide County, North Dakota, and Sheridan County,
Montana and Saskatchewan, Canada.  The Company also owns a 75% working
interest in certain leases located within the Southwest Extension of the West
Ranch Field, located in Jackson County, Texas. In addition, the Company owns
certain overriding royalty interests in oil and gas leases located in San Juan
County, Utah and San Miguel County, Colorado.
  2.
              Correction of
      Errorsand Reclassifications
  In 2009,
the Company discovered that certain transactions reported in its 2006, 2007 and
2008 financial statements were recorded
incorrectly.  Specifically:
  ·
              stock-based
      compensation expense for 2006, 2007 and 2008 was understated due to an
      incorrect application of SFAS No. 123(R), Share-Based Payment("SFAS 123(R)") (Note 3).  The impact of this correction
      includes an increase to the Company’s beginning accumulated deficit
      balance as of January 1, 2008 in the amount of
      $193,482.    The effect of this correction results in
      an increase in additional paid in capital and accumulated deficit balances
      as of December 31, 2008 of $269,762.  Stock-based compensation
      expense for the three-month period ended March 31, 2008 was understated by
      $26,038.  The correction of this error did not impact the
      Company’s statements of cash flows for the three-month period ended March
      31, 2008; and
  ·
              the
      Company had incorrectly recognized the gross proceeds from the sale of its
      Steamroller Prospect (June 2008) as revenues and written off the specific
      costs associated with the Steamroller Prospect as costs of prospects
      sold.  The Company has subsequently changed its accounting
      treatment for the sale of its Steamroller Prospect to allocate a portion
      of the sales proceeds to the portion of the Company’s full cost pool that
      is not subject to amortization, based on the relative estimated fair
      market values of the prospects included in the pool as of the date of the
      Steamroller Prospect sale.  The impact of this correction is a
      decrease in oil and gas properties, not subject to amortization, and an
      increase in accumulated deficit of $502,416 as of December 31,
      2008.  The correction of this error did not impact the Company’s
      statements of cash flows for periods presented
  herein.
  Given the
materiality of the affected transactions and related account balances, the
Company has elected to restate its 2007 and 2008 financial statements in order
to correct the errors.  The correction of these errors had the
following effects on the Company’s balance sheet as of December 31,
2008:
  F-6
 
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
 
 December 31,December 31,
                    
                    
                    20082008
                    
                    
                    as PreviouslyRestated
                    
                    
                    Reported
                    
                    
                    ChangeOil
      and gas properties (net)
                    
                    $
                    3,648,554
                    
                    
                    $
                    4,150,970
                    
                    
                    $
                    (502,417
                    )Additional
      paid in capital
                    
                    
                    9,039,131
                    
                    
                    
                    8,769,369
                    
                    
                    
                    269,762Accumulated
      deficit
                    
                    
                    (2,832,199
                    )
                    
                    
                    (2,060,020
                    )
                    
                    
                    (772,179
                    )
  The
correction of these errors had the following effects on the Company’s results of
operations for the three-month period ended March 31, 2008:
 
 March 31, 2008March 31, 2008
                    
                    
                    as PreviouslyRestated
                    
                    
                    Reported
                    
                    
                    ChangeStock-based
      compensation
                    
                    $
                    102,905
                    
                    
                    $
                    76,867
                    
                    
                    $
                    26,038Net
      loss
                    
                    
                    (508,756
                    )
                    
                    
                    (482,718
                    )
                    
                    
                    (26,038
                    )Basic
      and diluted loss per share
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.00
                    )
  Certain
amounts from the previous year have been reclassified to conform to the current
period presentation.
  3.
              Summary of Significant
      Accounting Policies
  Basis
of Presentation
  These
financial statements are presented in United States dollars and have been
prepared in accordance with accounting principles generally accepted in the
United States.
  Revenue
Recognition
  The
Company records the sale of its interests in prospects when the terms of the
transaction are final and the sales price is determinable. Spud fee revenue is
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 March
31, 2009, the Company had $36,364 on deposit in excess of the United States
(FDIC) federal insurance limit of $250,000 per bank. The Company believes this
credit risk is mitigated by the financial strength of the financial
institution.
  F-7
 
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
  Equipment
and Leasehold Improvements
  Equipment
and leasehold improvements are recorded at cost. Expenditures for major
additions and improvements are capitalized and depreciated over the estimated
useful lives of the related assets using the straight-line method for financial
reporting purposes. The Company uses other depreciation methods (generally
accelerated) for tax purposes, where appropriate. The estimated useful lives for
significant property and equipment categories are as follows:
  Equipment
                3
      yearsLeasehold
      improvements
                lesser
      of useful life or lease term
  When
equipment and improvements are retired or otherwise disposed of, the cost and
the related accumulated depreciation are removed from the Company's accounts and
any resulting gain or loss is included in the results of operations for the
respective period.
  Expenditures
for minor replacements, maintenance and repairs are charged to expense as
incurred.
  Oil
and Gas Properties
  The
Company follows the full cost method of accounting for its investments in oil
and gas properties. Under the full cost method, all costs associated with the
exploration of properties are capitalized into appropriate cost centers within
the full cost pool.  Internal costs that are capitalized are limited
to those costs that can be directly identified with acquisition, exploration,
and development activities undertaken and do not include any costs related to
production, general corporate overhead, or similar activities.  Cost
centers are established on a country-by-country basis.
  Capitalized
costs within the cost centers are amortized on the unit-of-production basis
using proved oil and gas reserves.The cost
of investments in unproved properties and major development projects are
excluded from capitalized costs to be amortizeduntil it is determined whether or not proved
reserves can be assigned to the properties.Until such a determination is made, the
properties are assessed annually to ascertain whether impairment has
occurred.The costs of drilling
exploratory dry holes are included in the amortization base immediately upon
determination that the well is dry.
  At the
end of each reporting period, capitalized costs are subject to a ceiling test,
in which the costs shall not exceed the cost center ceiling.  The cost
center ceiling is equal to i) the present value
of estimated future net revenues computed by applying current prices of oil and
gas reserves (with consideration of price changes only to the extent provided by
contractual arrangements) to estimated future production of proved oil and gas
reserves as of the date of the latest balance sheet presented, less estimated
future expenditures (based on current costs) to be incurred in developing and
producing the proved reserves computed using a discount factor of ten percent
and assuming continuation of existing economic conditions;  plus ii) the cost of properties not
being amortized; plus iii) the lower of cost
or estimated fair value of unproven properties included in the costs being
amortized; 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.
  F-8
  Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
  Fair
Value of Financial Instruments
  In
accordance with the requirements of Financial Accounting Standards Board's
(“FASB”) Statement of Financial Accounting Standards ("SFAS") No. 107, Disclosures about Fair Value of
Financial  Instruments, the Company has determined the
estimated fair value of its financial instruments using available market
information and appropriate valuation methodologies. Due to their short-term
maturity, the fair value of financial instruments classified as current assets
and current liabilities approximates their carrying values.
  Accounting
for Share-Based Compensation
  In
December 2004, the FASB issued SFAS No. 123(R) ("SFAS 123(R)"), Share-Based Payment. This
pronouncement amends SFAS No. 123, Accounting for Stock-Based
Compensation, and ("SFAS 123") and supersedes Accounting Principles Board
Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25"). SFAS 123(R) requires that companies
account for awards of equity instruments issued to employees under the fair
value method of accounting and recognize such amounts in their statements of
operations. The Company adopted SFAS 123(R) on January 1, 2006, using the
modified prospective method and, accordingly, has not restated the consolidated
statements of operations for periods prior to January 1, 2006. Under SFAS
123(R), the Company is required to measure compensation cost for all stock-based
awards at fair value on the date of grant and recognize compensation expense in
its statements of operations over the service period that the awards are
expected to vest. As permitted under SFAS 123(R), the Company has elected to
recognize compensation cost for all options with graded vesting on a
straight-line basis over the vesting period of the entire option.
  Basic
and Diluted Loss Per Share
  Basic
loss per common share is computed by dividing net loss available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted loss per common share is computed in the same way as basic
loss per common share except that the denominator is increased to include the
number of additional common shares that would be outstanding if all potential
common shares had been issued and if the additional common shares were dilutive.
Diluted loss per common share for the three-month periods ended March 31, 2009
and 2008 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 periods ended March 31, 2009 and 2008.
  F-9
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
  Income
Taxes
  The
Company follows the liability method of accounting for income taxes. Under this
method, deferred income tax assets and liabilities are recognized for the future
tax benefits and consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax balances. Deferred income tax assets and liabilities are measured
using enacted or substantially enacted tax rates expected to apply to the
taxable income in the years in which those differences are expected to be
recovered or settled. The effect on deferred income tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
date of enactment or substantive enactment.
  Use
of Estimates and Assumptions
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the use of estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosure of contingent obligations in the financial
statements and accompanying notes. The Company's most significant assumptions
are the estimates used in the determination of the deferred income tax asset
valuation allowance, the valuation of oil and gas reserves to which the Company
owns mineral rights and the valuation of the Company’s common shares that were
issued for obligations. The estimation process requires assumptions to be made
about future events and conditions, and as such, is inherently subjective and
uncertain. Actual results could differ materially from these
estimates.
  New
Accounting Pronouncements
  In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS 157"). SFAS 157 establishes a single definition of fair value and a
framework for measuring fair value, sets out a fair value hierarchy to be used
to classify the source of information used in fair value measurements and
requires new disclosures of assets and liabilities measured at fair value based
on their level in the hierarchy. SFAS 157 is effective for the Company’s year
beginning January 1, 2008 and has been applied prospectively. The adoption of
SFAS 157 has not had a material impact on the Company’s financial position or
reported results of operations.
  F-10
 
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities ("SFAS 159"). SFAS 159 permits an entity
to choose, at specified election dates, to measure eligible financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. An entity is required to report
unrealized gains and losses on items for which the fair value option has been
elected in its results of operations at each subsequent reporting date. Upfront
costs and fees related to items for which the fair value option is elected shall
be recognized in earnings as incurred and not deferred. SFAS 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. SFAS 159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 (January 1,
2008 for the Company) and interim periods within those fiscal years. At the
effective date, an entity may elect the fair value option for eligible items
that exist at that date. The entity shall report the effect of the first
remeasurement to fair value as a cumulative-effect adjustment to the opening
balance of retained earnings. The Company has not elected to measure its
financial instruments and/or other eligible assets at their fair market values.
Consequently, the adoption of SFAS 159 has not had a material impact on the
Company’s financial position or reported results of operations.
  In
December 2007, the FASB ratified the final consensuses in Emerging Issues Task
Force, or EITF, Issue No. 07-1, "Accounting for Collaborative
Arrangements," (“Issue 07-1”), which requires certain income statement
presentation of transactions with third parties and of payments between parties
to the collaborative arrangement, along with disclosure about the nature and
purpose of the arrangement. Issue 07-1 is effective for the Company’s year
beginning January 1, 2009. The Company does not expect Issue 07-1 to have a
significant impact on our financial statements.
  In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”), which
replaces SFAS No. 141, “Business Combinations.” SFAS
141(R) requires an acquiring company to recognize the assets acquired, the
liabilities assumed, and any non-controlling interest in the acquired entity at
the acquisition date, measured at their fair values as of that date, with
limited exceptions. This Statement also requires the acquiring company in a
business combination achieved in stages to recognize the identifiable assets and
liabilities, as well as the noncontrolling interest in the acquired company, at
the full amounts of their fair values. SFAS 141(R) makes various other
amendments to authoritative literature intended to provide additional guidance
or to confirm the guidance in that literature to that provided in this
Statement. This Statement is effective for the Company’s financial statements
beginning January 1, 2009. The Company does not expect the adoption of this
accounting pronouncement to have a significant impact on our financial
statements.
  F-11
 
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”), which amends Accounting
Research Bulletin No. 51, “Consolidated Financial
Statements”, to improve the relevance, comparability, and transparency of
the financial information that a reporting entity provides in its consolidated
financial statements. SFAS 160 establishes accounting and reporting standards
that require the ownership interests in subsidiaries not held by the parent to
be clearly identified, labeled and presented in the consolidated statement of
financial position within equity, but separate from the parent's equity. This
statement also requires the amount of consolidated net income attributable to
the parent and to the non-controlling interest to be clearly identified and
presented on the face of the consolidated statement of income. Changes in a
parent's ownership interest while the parent retains its controlling financial
interest must be accounted for consistently, and when a subsidiary is
deconsolidated, any retained non-controlling equity investment in the former
subsidiary must be initially measured at fair value. The gain or loss on the
deconsolidation of the subsidiary is measured using the fair value of any
non-controlling equity investment. The Statement also requires entities to
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. This
Statement applies prospectively to all entities that prepare consolidated
financial statements and applies prospectively for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008. The
Company does not expect the adoption of this accounting pronouncement to have a
significant impact on our financial statements.
  In May
2008, the FASB issued SFAS No. 162 "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"), which is effective 90 days following
the SEC's approval of the Public Company Oversight Board amendments to AU
Section 411, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting
Principles”. SFAS 162 identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles in the United States.
The Company does not expect the adoption of SFAS 162 to have a significant
impact on our financial statements.
  4.       Equipment and Leasehold
Improvements
  The
following is a summary of equipment and improvements, at cost, as of March 31,
2009:
  Office
      equipment
                      
                      $
                      88,903Leasehold
      improvements
                      
                      
                      47,509Total
      equipment and improvements
                      
                      
                      136,412Less:
      accumulated depreciation
                      
                      
                      (63,902
                      )Equipment
      and improvements, net
                      
                      $
                      72,510
  Depreciation
expense for the three-month periods ended March 31, 2009 and 2008 was $9,233 and
$8,435, respectively.
  During
2008, the Company purchased $38,000 of Down-Hole Gas/Water Separation (“DGWS”)
tools. An additional $19,000 of DGWS tools was purchased during the three-month
period ended March 31, 2009. Due to the fact that the Company was subsequently
unable to exercise its option to acquire 100% of the DGWS opportunity, as
discussed in Note 9, the Company has no plans to utilize the tools in the near
future. The Company’s management does not believe that the value of the tools
has been impaired and plans to market the tools to other exploration and
development companies. Accordingly, the down-hole tools have been classified as
Assets Held for Sale on the Company’s balance sheet as of March 31, 2009 and
December 31, 2008.
  F-12
 
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
  5.       Oil and Gas
Properties
  As of
March 31, 2009 and December 31, 2008, the Company’s cost centers are as
follows:
  March 31, 2009
                    
                    
                    December 31, 2008Amortizable
                    
                    
                    Non-Amortizable
                    
                    
                    Amortizable
                    
                    
                    Non-AmortizableUnited States
                    
                    $
                    2,393,757
                    
                    
                    $
                    1,323,053
                    
                    
                    $
                    2,324,154
                    
                    
                    $
                    1,322,957Canada
                    
                    
                    -
                    
                    
                    
                    1,443
                    
                    
                    
                    -
                    
                    
                    
                    1,443The
      North Sea
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    2,393,757
                    
                    
                    $
                    1,324,496
                    
                    
                    $
                    2,324,154
                    
                    
                    $
                    1,324,400
  Producing
Properties
  The
Company owns a 75% working interest in certain leases located within the
Southwest Extension of the West Ranch Field, located in Jackson County,
Texas.
  The net
capitalized cost of this property is summarized below:
  Acquisition
      cost
                    
                    $
                    1,894,259Development
      costs
                    
                    
                    557,1652,451,424Depletion
                    
                    
                    (57,667
                    )Balance
      at March 31, 2009
                    
                    $
                    2,393,757
  Exploratory
Prospects
  The
Company has entered into participation agreements in five exploratory oil and
gas properties. Each of the five exploratory projects is excluded from its
respective amortizable cost pool. Each prospect’s costs will be transferred into the
amortization base on an ongoing (well-by-well or property-by-property) basis as
the prospect is evaluated and proved reserves established or impairment
determined.Two of the five properties have been abandoned. The Company
has a working interest and/or overriding royalty interest in the wells on the
remaining properties, if they are successful. The Company paid certain amounts
upon execution of the agreements and is obligated to share in the drilling costs
of the exploratory wells. In addition, the Company has agreed to issue shares of
its common stock based upon the proven reserves of the property.
  F-13
 
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
  United
States
  Big Sand Spring Valley
Prospect
  In 2005,
The Company acquired a 50% working interest in the Big Sand Spring Valley
Prospect (the “BSSV Prospect”) and an option to acquire a 50% working interest
in an additional prospect, for an initial payment of $667,000 and the obligation
for a future payment of $2,000,000, which represented 50% of the estimated
initial drilling costs in the BSSV Prospect. In 2006, the Company acquired the
other 50% working interest in the BSSV Prospect in exchange for cash payments
totaling $300,000 and the transfer of the Company’s option on the additional
prospect. Under the terms of the participation agreement, the Company is
obligated to issue one million shares of its common stock for each ten million
equivalent barrels of net proven oil reserves developed on the BSSV Prospect. As
of March 31, 2009, the Company’s investment in the BSSV Prospect totals
$1,292,229. No exploratory wells have been drilled in BSSV Prospect to date.
Unless annual rentals are renewed, the oil and gas leases relating to the BSSV
Prospect will expire in August 2009. As of March 31, 2009, the Company’s
management has not yet determined if the annual rentals will be renewed. This
property is evaluated for impairment annually. There were no impairments evident
at March 31, 2009.
  Steamroller Prospect
  In
December 2007, the Company purchased a 50% interest in a 640-acre mineral lease
from the State of Utah. In the first quarter of 2008, the Company purchased a
50% interest in an additional 10,860 acre lease from the State of Utah. This
property is evaluated for impairment annually.
  In June
2008, the Company sold its 50% working interest in the Steamroller prospect.
Because the Steamroller prospect represented a significant portion of the full
cost pool, not subject to amortization and because full cost accounting rules do
not allow for the use of specific identification with respect to calculating
gains on the partial disposal of the pool, the Company has allocated the total
cost of the full cost pool, not subject to amortization, among the individual
prospects included within the pool, based on their relative fair market value as
of the date of the Steamroller disposition. The allocated basis attributed to
the Steamroller prospect as of the date of sale was $764,763. Gross proceeds
from the sale totaled $1,190,135, resulting in a $425,372 gain on the sale of
the Steamroller prospect.
  Under the
terms of the sale, the Company retained an overriding royalty interest on all
future production from the property sold, as well as an overriding royalty
interest on production from properties of mutual interest which the purchaser
may develop in the future. The Company currently owns various overriding royalty
interests under approximately 20,172 net acres in Utah and Colorado, located
within the Steamroller Prospect. In addition, the Company is entitled to receive
an overriding royalty interest on any additional leasehold interest acquired by
its working interest partners in an area of mutual interest (“AMI”) between the
parties. The AMI covers approximately 3,571,200 gross acres.
  F-14
  Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
  Pebble Beach
Prospect
  In 2006,
the Company entered into a series of agreements that resulted in the acquisition
of five percent (5%) of the capital stock of Pebble Petroleum, Inc. (“Pebble”),
as well as the following rights and interest in the Pebble Beach
Prospect:
  ·
              A
      $250,000 spud fee for each of the first eight wells drilled by
      Pebble;
  ·
              A
      five percent (5%) gross overriding royalty from each well drilled on
      certain acreage that Pebble holds rights to in SE Saskatchewan, Canada (no
      capital outlay or other expenses to be required by the Company);
      and
  ·
              A
      ten percent (10%) working interest in a joint venture with Rover
      Resources, Inc., (“Rover”), a subsidiary of Pebble; the joint venture will
      explore and develop certain prospects principally located in Divide
      County, North Dakota (the Company will pay 10% of all costs
      incurred).
  As of
March 31, 2009, Pebble owns approximately 324,590 gross and net acres in the
Pebble Beach Prospect in SE Saskatchewan, Canada in which the Company owns a
five percent (5%) gross overriding royalty.  In addition, Rover has
acquired approximately 61,572 gross and 35,264 net acres principally located in
Divide County, North Dakota, within the Pebble Peach Prospect.  The
Company owns a ten percent (10%) working interest in these properties. As of
March 31, 2009, the Company’s working interest expenditures in the North Dakota
property total $533,242, of which $444,835 is payable to Rover.
  This
property is evaluated for impairment annually.  There were no
impairments evident at March 31, 2009.  The property is currently in
an evaluation phase.  The Company does not expect that a determination
will be made on the viability of the property within the next twelve
months.
  North Sea Quad 14 and Quad
41/42 Prospects
  In 2005
and 2006, the Company acquired working interests in the Quad 14 and Quad 41/42
Prospects with the obligation to fund 12.5% and 15% of the drilling costs of two
exploratory wells, respectively. The Company placed $1.5 million on deposit for
each prospect to cover its share of the drilling costs. The exploratory wells on
both of these prospects were completed in 2007.  No economically
viable reserves were discovered.
  F-15
 
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
  Once no
viable reserves were discovered, the Company’s investment in the North Sea was
included in the amortizable cost pool and the entire capitalized cost was
charged to expense in 2007 because the costs exceeded the cost center ceiling
due to lack of future revenue or any fair value of the property. A portion of
the monies that were held on deposit relating to the Company’s working interest
in the Quad 14 Project and released to the operator in 2007were subsequently
returned to the Company in 2008 and has been recognized as revenue during the
current year.
  The
Company is disputing its obligation to participate in the drilling of the Quad
41/42 exploratory well.  As a result, no amounts held on deposit have
been released to the operator for the Quad 41/42 Prospect.  The
Company’s management is attempting to determine what amount, if any, it is
obligated to pay related to the drilling of the Quad 41/42 exploratory well and
what amount of deposited funds, if any, could be returned to the
Company.
  The
Company recorded impairments related to the North Sea projects as
follows:
  20082009
                        
                        
                        (Restated)Quad
      14
                        
                        $
                        -
                        
                        
                        $
                        2,782Quad
      41/42
                        
                        
                        -
                        
                        
                        
                        -Totals
                        
                        $
                        -
                        
                        
                        $
                        2,782
  Canada
  In June
2008, the Company acquired a 5% overriding royalty position in additional
prospects located in Saskatchewan, Canada.
  6.
              Commitments and
      Contingencies
  Financial
Results, Liquidity and Management's Plan
  The
Company has incurred net losses since inception.  This factor raises
substantial doubt about the Company's ability to continue as a going
concern.  Historically, the Company has been successful in generating
additional operating capital through the disposition of oil and gas
prospects.  However, the disposition of properties is not a viable
strategy for funding the Company’s long-term operations.  Accordingly,
the Company’s management is developing and implementing plans to sustain
the Company’s cash flow from operating activities and/or acquire additional
capital funding.
  No
assurances can be given that the Company will obtain sufficient working capital
through the sale of oil and gas properties, the issuance of common stock or by
leveraging the Company's current assets, or that the implementation of its
business plan will generate sufficient revenues in the future to sustain ongoing
operations. The financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going
concern.
  F-16
  Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
  Litigation
  The
Company's policy is to recognize amounts related to legal matters as a charge to
operations if it is probable that a liability has been incurred and the amount
of loss can be reasonably estimated, as required by SFAS 5.
  On
November 20, 2007, the Company was served with a complaint alleging breach of
contract, misappropriation of confidential and proprietary information and of
trade secrets and claims under the Colorado Uniform Trade Secrets Act, fraud,
declaratory relief declaring any agreements of release to be void and
unenforceable as they were obtained by fraudulent inducement, declaration of
accounting and constructive trust for all proceeds and profits from the alleged
misappropriation, injunctive relief for return of all allegedly misappropriated
information and cessation of use, civil theft of business values, and tortuous
interference with contract. Plaintiffs seek compensatory damages in an
unspecified amount, prejudgment interest, declaratory relief, injunctive relief,
accounting, and attorneys’ fees. The Company believes that the causes of action
are without merit and intends to defend this case vigorously. The Company has
filed a countersuit claiming abuse of process, intentional interference with an
existing business and contractual relations, commercial disparagement and
conspiracy. The lawsuit has continued to negatively impact the Company's ability
to pursue additional opportunities or acquire additional oil and gas prospects,
as discussed in Note 5. A further result of the lawsuit has been the sale of
certain assets in order to fund the Company’s ongoing operations, as discussed
on Note 5. The litigation is currently in the discovery phase and is scheduled
to go to trial in October 2009. As of the date of these financial statements,
the ultimate outcome of the litigation cannot be reasonably
estimated.
  Employment
Agreements
  In August
2007, the Company entered into a two-year employment agreement with its Vice
President of Engineering. Unless extended, the employment agreement will expire
on July 31, 2009. The Company amended its employment agreement with its Vice
President of Engineering effective October 1, 2008. The amended agreement
provides for annual compensation of $144,000 and a signing bonus of $30,000. In
addition, the Company granted to this employee options to purchase 1 million
shares of the Company’s common stock. The options have a five-year life, vest
over a two-year period and have an exercise price of $0.24 per share, which
represents the estimated market value of the shares on the date of
grant.
  In June
2008, the Company entered into a two-year employment agreement with its Chief
Financial Officer. The agreement provides for annual compensation of $138,000.
In addition, the Company granted to this employee options to purchase 1 million
shares of the Company’s common stock. The options have a five-year life, vest
over a two-year period and have an exercise price of $0.18 per share, which
represents the estimated market value of the shares on the date of
grant.
  F-17
  Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
  Lease
Obligation
  In
December 2008, the Company renegotiated its lease for its corporate offices. The
new lease has a term of 36 months and expires on December 31, 2011. Rents
remaining as of March 31, 2009 under this lease are as follows:
  Amount2009
      (remaining)
                    
                    $
                    46,9022010
                    
                    
                    62,5372011
                    
                    
                    64,1402012
                    
                    
                    -2013
                    
                    
                    -Total
                    
                    $
                    173,579
  Gross
rent expense for the three-month periods ended March 31, 2009 and 2008 was
$16,418 and $15,890, respectively.
  7.
              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 periods
ended March 31, 2009 and 2008:
  20082009
                    
                    
                    (Restated)Net
      loss
                    
                    $
                    (497,487
                    )
                    
                    $
                    (508,756
                    )Weighted-average
      number of common shares outstanding
                    
                    
                    44,550,000
                    
                    
                    
                    44,550,000Incremental
      shares from the assumed exercise of dilutive stock options
                    
                    
                    -
                    
                    
                    
                    -Diluted
      common shares outstanding
                    
                    
                    44,550,000
                    
                    
                    
                    44,550,000Net
      loss per share, basic and diluted
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.01
                    )
  The
following securities were not included in the computation of diluted net loss
per share as their effect would have been anti-dilutive:
  F-18
  Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
 
 2009
                    
                    
                    2008Stock
      Options
                    
                    
                    5,543,800
                    
                    
                    
                    3,443,800Warrants
                    
                    
                    -
                    
                    
                    
                    12,924,000
  8.
              Equity
      Transactions
  Issuance
of Stock Options
  In March
2008, the Board of Directors ratified the grant of options to purchase 100,000
of its common shares a consultant. The stock options were originally approved by
management on August 1, 2007. These options vest over 1 year, have a life of 5
years and have an exercise price of $0.20 per share, the market price on the
effective date of grant. Under the corresponding stock option agreement, 33,333
options vested at the time the agreement was executed with an additional 33,333
options vesting at the end of each six-month period from the grant date. As of
March 31, 2009, all 100,000 stock options are exercisable.
  In June
2008, the Company granted options to purchase 1,000,000 shares of its common
stock to its Chief Financial Officer. These options vest over 2 years, have a
life of 5 years and have an exercise price of $0.18 per share, the market price
on the effective date of grant. The options vest at the rate of 250,000 shares
at the end of each six-month period from the effective date of grant, and all
will be exercisable on December 2, 2010.
  In
October 2008, the Company granted options to purchase 1,000,000 shares of its
common stock to its President. These options vest over 2 years, have a life of 5
years and have an exercise price of $0.17 per share, the market price on the
effective date of grant. Fifty percent of the options vested immediately, with
the remaining 50% vesting one year from the effective date of the
grant.
  A summary
of stock option activity for the three-month period ended March 31, 2009 and the
year ended December 31, 2008 is presented below:
  F-19
 
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
 
 WeightedWeighted
                    
                    
                    AverageAverage
                    
                    
                    Remaining
                    
                    
                    AggregateExercise
                    
                    
                    Contract
                    
                    
                    IntrinsicOptions
                    
                    
                    Price
                    
                    
                    Term
                    
                    
                    ValueOutstanding
      at December 31, 2007
                    
                    
                    3,393,800
                    
                    
                    $
                    0.67
                    
                    
                    3.5
      years
                    
                    
                    
                    -Options
      granted
                    
                    
                    2,150,000
                    
                    
                    $
                    0.19
                    
                    
                    4.5
      years
                    
                    
                    
                    -Options
      exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Options
      expired
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Options
      forfeited
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      at December 31, 2008
                    
                    
                    5,543,800
                    
                    
                    $
                    0.46
                    
                    
                    3.4
      years
                    
                    
                    
                    -Options
      granted
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Options
      exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Options
      expired
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Options
      forfeited
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      at March 31, 2009
                    
                    
                    5,543,800
                    
                    
                    $
                    0.46
                    
                    
                    4.1 years
                    
                    
                    $
                    -Exercisable
      at March 31, 2009
                    
                    
                    3,793,800
                    
                    
                    $
                    0.62
                    
                    
                    4.0 years
                    
                    
                    $
                    -
  The
assumptions used in the Black-Scholes option pricing model for the stock options
granted during the year ended December 31, 2008 were as follows:
  Risk-free
      interest rate
                      
                      
                      2.77-3.25
                      %Expected
      volatility of common stock
                      
                      
                      101
                      %Dividend
      yield
                      
                      $
                      0.00Expected
      life of options
                      
                      5
      yearsWeighted
      average fair market value of options granted
                      
                      $
                      0.18
  Sale
of Equity Units
  In March
and May 2006, the Company sold 11,876,000 and 1,248,000 equity units,
respectively, through a private placement offering. Each equity unit consisted
of one share of the Company’s common stock and one warrant to purchase one share
of the Company’s common stock at $1.00 per share. The equity units had a
registration rights agreement that required the Company to file a registration
statement with the Securities and Exchange Commission covering the shares and
shares to be issued upon exercise of the warrants. The registration became stale
and was cancelled by the Company during 2008.
  F-20
 
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
  Warrants
  A summary
of warrant activity for the year ended December 31, 2008 is presented
below:
  WeightedAverageNumber of
                    
                    
                    ExerciseWarrants
                    
                    
                    PriceOutstanding,
      December 31, 2007
                    
                    
                    12,924,000
                    
                    
                    $
                    1.16Issued
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    -Expired
                    
                    
                    (12,924,000
                    )
                    
                    $
                    (1.16
                    )Forfeited
                    
                    
                    -
                    
                    
                    
                    -Outstanding, December
      31, 2008
                    
                    
                    -
                    
                    
                    $
                    -Exercisable, December
      31, 2008
                    
                    
                    -
                    
                    
                    $
                    -
  Warrants
to purchase 11,676,000 expired in March 2008.  Warrants to purchase
1,248,000 shares expired in May 2008.
  Shares
Reserved for Future Issuance
  As of
March 31, 2009, the Company has reserved shares for future issuance upon
exercise of outstanding options and warrants as follows:
  Options
                    
                    
                    5.543.800Warrants
                    
                    
                    -Total
                    
                    
                    5,543,800
  These
amounts do not include any shares that may have to be issued upon the discovery
of net proved reserves in the Nevada oil and gas property.
  9.
              Related Party
      Transaction
  In
October 2007, the Company acquired certain exploratory oil and gas leases and an
option (“Option”) to acquire 100% of a natural gas production opportunity which
employs specialty down-hole gas/water separation equipment from entities
partially-owned by our President and Chief Executive Officer.  Under
the Option agreement, the Company can, after meeting certain obligations,
purchase all of the outstanding shares of such related entity in exchange for 25
million shares of its common stock.
 
 The
Company made the following payments to acquire the Option:
 
 1)
              $125,000
      to the related entity for certain the oil and gas leases located in
      Alberta, Canada.
 
 2)
              $20,000
      to the related entity as reimbursement for amounts paid to Zavanna Canada
      Corp in connection with licenses to the DGWS
  equipment.
 
 The
Company had the following periodic obligations in order to retain the Option,
which expires on December 31, 2010:
  F-21
  Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
 
 1)
              Payments of
      $20,000 to the related entity each six months commencing on June 30, 2008
      through June 30, 2010.
 
 2)
              Payments
      to the related entity of $250,000 on each of December 31, 2008 and
      December 31, 2009.  These amounts may be paid in either cash or
      with shares of our common stock.
 
 3)
              Drill
      and equip two wells with DGWS equipment; one before June 30, 2008 and the
      other before January 15, 2009.
 
 4)
              Pay
      to one DGWS manufacturer (Kudu Industries) $25,000 in September 2007 and
      further agree to purchase ten DGWS devices each year, beginning in 2008,
      at a cost of $3,800 per device in order to maintain exclusive rights to
      equipment supply. In addition, the grantor of the license will receive a
      1% royalty on each well which utilizes the device.  The license
      expires in January 2012 and can be extended for an additional 5 years at a
      cost of $300,000.
 
 5)
              Payments
      to a second DGWS manufacturer (Down-Hole Injections, Inc.) of $35,000 on
      March 30, 2008 and future annual payments of $10,000. The Company is
      required to pay $500 for each device used and assign to the manufacturer a
      carried 5% working interest in each well using the device.  The
      Company is required to purchase and install 20 devices in Canada by March
      31, 2008.
 
 6)
              Payments
      to the second DGWS manufacturer of $6,000 by March 31 of each year and
      give to the manufacturer a 5% working interest in each well located in the
      state of Utah that utilizes the
device.
  As a
result of the on-going litigation with Zavanna LLC, et al, and its associated
negative impact on the Company’s working capital position, the Company was
unable to meet all of the obligations under the Option agreement. Consequently,
in December 2008, the Company received a notification from one of the related
entities of its desire to attempt to re-market the DGWS natural gas opportunity
to third parties. As a result, the original Option agreement between the Company
and the related entity was amended. The amended agreement relieves the Company
of its obligation to make the $250,000 payments to the related entity,
originally scheduled for December 2008 and 2009, and enables the related entity
to attempt to freely market the technology and opportunity. Furthermore, the
related entity has agreed to work in good faith to reimburse the Company for its
investment in the original technology and to secure the granting of a 1%
overriding royalty interest in favor of the Company for any wells in which the
technology is used to generate production. As a result of the amended agreement,
the Company has been relieved of its liability to the related entities and has
reduced the carrying value of the licenses by $500,000. In addition, the Company
has removed the licenses from its balance sheet and reclassified $57,000 of DGWS
tools as Assets Held for Sale as of March 31, 2009.
  F-22
  Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements
  As
of March 31, 2009 and
 For
Each of the Three-Month Periods Ended March 31, 2009 and 2008
  10.
              Subsequent
      Event
  In May
2009, the Company collected $730,000 of spud fees receivable that were
previously held in escrow (Note 5). A portion of the funds were used to settle
amounts owed to Rover Resources in connection with the Company’s working
interest in the Pebble Beach Prospect, totaling $444,835 (Note 5).


F-23




Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
  THE
FOLLOWING PRESENTATION OF OUR MANAGEMENT'S DISCUSSION AND ANALYSIS SHOULD BE
READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND OTHER FINANCIAL
INFORMATION INCLUDED ELSEWHERE IN THIS REPORT.
 
 A
Note About Forward-Looking Statements
 
 This
Quarterly Report on Form 10-Q contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995 that are based
on current management's expectations. These statements may be identified by
their use of words like “plans,” “expect,” “aim,” “believe,” “projects,”
“anticipate,” “intend,” “estimate,” “will,” “should,” “could” and other
expressions that indicate future events and trends. All statements that address
expectations or projections about the future, including statements about our
business strategy, expenditures, and financial results are forward-looking
statements. We believe that the expectations reflected in such forward-looking
statements are accurate. However, we cannot assure you that such expectations
will occur.
  Actual
results could differ materially from those in the forward looking statements due
to a number of uncertainties including, but not limited to, those discussed in
this section. Factors that could cause future results to differ from these
expectations include general economic conditions, further changes in our
business direction or strategy, competitive factors, oil and gas exploration
uncertainties, and an inability to attract, develop, or retain technical,
consulting or managerial agents or independent contractors. As a result, the
identification and interpretation of data and other information and their use in
developing and selecting assumptions from and among reasonable alternatives
requires the exercise of judgment. To the extent that the assumed events do not
occur, the outcome may vary substantially from anticipated or projected results,
and accordingly, no opinion is expressed on the achievability of those
forward-looking statements. No assurance can be given that any of the
assumptions relating to the forward-looking statements specified in the
following information are accurate, and we assume no obligation to update any
such forward-looking statements. You should not unduly rely on these
forward-looking statements, which speak only as of the date of this Annual
Report, except as required by law; we are not obligated to release publicly any
revisions to these forward-looking statements to reflect events or circumstances
occurring after the date of this report or to reflect the occurrence of
unanticipated events.
 
 Industry
Outlook
 
 The
petroleum industry is highly competitive and subject to significant volatility
due to numerous market forces. Crude oil and natural gas prices are affected by
market fundamentals such as weather, inventory levels, competing fuel prices,
overall demand and the availability of supply.
  3
  Worldwide
oil prices rose throughout 2007 and reached historical highs during the last
half of 2008, before tumbling amid worldwide economic crisis. Continued economic
instability could impact demand, thus adversely affecting crude oil
prices.
 
 Oil
prices cannot be predicted with any certainty and have significantly affected
profitability and returns for upstream producers. Historically, the WTI price
has averaged approximately $47 per barrel over the past ten years. However,
during that time, the industry has experienced wide fluctuations in prices.
While local supply/demand fundamentals are a decisive factor affecting domestic
natural gas prices over the long term, day-to-day prices may be more volatile in
the futures markets, such as on the NYMEX and other exchanges, making it
difficult to forecast prices with any degree of confidence. Over the last ten
years, the NYMEX gas price has averaged approximately $5.67 per
mcf.
 
 Restatement
of the 2008 Financial Statements
 
 In 2009,
we discovered that that certain transactions reported in our 2008 and 2007
financial statements were reported incorrectly. Given the materiality of the
affected transactions and related account balances, we have elected to restate
our 2008 and 2007 financial statements in order to correct the error. The nature
and effect of the corrections of the accounting errors on the financial
statements for the years ended December 31, 2008 and 2007 are discussed in
detail in Part II, Item 8: Financial Statements and Supplementary Data (Footnote
2, page F-__). As a result, we have revised our discussion of the results of
operations for the three-month period ended March 31, 2009 vs.
2008.
 
 Results
of Operations for the Three-Month Period Ended March 31, 2009 vs.
2008
 
 Our
business plan includes the acquisition of interests in oil and gas exploratory
prospects, and in some cases, such as the Steamroller Prospect, we may sell all
or part of our working interest and retain an overriding royalty interest in the
properties. The nature of these transactions is that they occur irregularly and,
therefore, our operating results may fluctuate significantly from period to
period.
 
 The
Company acquired a 75% working interest in the West Ranch property through a
series of transactions occurring in 2007 and began recognizing oil and gas
revenues and operating expenses relating to the West Ranch property in the
fourth quarter of 2007. Falling oil prices led us to temporarily shut-in the
producing wells on the West Ranch property during the latter part of 2008. We
also elected to temporarily delay further development of the West Ranch wells to
divert working capital to fund our legal defense in the Zavanna LLC, et al
(“Zavanna”) litigation. As of March 31, 2009, the West Ranch wells continue to
be shut in. Accordingly, the Company has not recognized any revenue from oil and
gas sales from the West Ranch property during the three-month period ended March
31, 2009, compared to oil and gas revenue of $80,257 for the three-month period
ended March 31, 2008. Oil and gas operating expenses totaled $30,009 for the
three-month period ended March 31, 2009, which represents costs necessary to
maintain the wells during the shut-in period. Oil and gas operating expenses
totaled $209,388 for the three-month period ended March 31, 2008.
  4
  As
indicated in the footnotes to the financial statements, the Company capitalizes
all acquisition and exploration related costs related to a prospect on a
country-by-country basis. Such costs are included in our non-amortizable pool
until it can be determined whether the prospect contains any economically
recoverable oil or gas reserves. We recognized $2,281 of impairment expense for
the three-month period ended March 31, 2008 which represents residual costs
associated with the abandonment of the Quad 14 property in 2007 for which we
were not billed until 2008. No exploratory wells were abandoned in 2008 or to
date in 2009. Accordingly, no impairment expense was recognized for the
three-month period ended March 31, 2009. It is possible that additional residual
costs relating to the abandonment of the Quad 14 property may be received during
2009 as the final accounting for the Quad 14 project is completed. However, we
do not expect these residual costs, if any, to have a material effect on our
2009 financial statements.
 
 As of
March 31, 2009, we had $1,599,021 on deposit relating to the drilling of the
Quad 41/ 42 Prospect. We are currently disputing our obligation to participate
in the drilling of the Quad 41/42 exploratory well. As a result, no amounts held
on deposit have been released to the project’s operator. Our management is
attempting to determine what amount, if any, we are obligated to pay related to
the drilling of the Quad 41/42 exploratory well and what amount of deposited
funds, if any, could be returned to the Company.
 
 General
and administrative expenses increased from $165,880 for the three-month period
ended March 31, 2008 to $221,533 for the three-month period ended March 31, 2009
primarily due to the following:
 
 ·
              As
      a result of the hiring our Chief Financial Officer in June 2008, the
      Company's payroll and related expenses for the three-month period ended
      March 31, 2009 increased by $34,738 from the same period in
      2008.
 
 ·
              Prior
      to October 1, 2008, we engaged a third-party consultant to provide us with
      investor relations services. Investor relations expenses totaled $18,339
      for the three-months ended March 31, 2008 compared to $0 for the
      three-month period ended March 31, 2009. All investor relations activities
      are currently performed by our Chief Financial
  Officer.
 
 ·
              We
      incurred $41,854 in consulting fees related to land management for the
      three-month period ended March 31, 2009 compared to $18,387 for the same
      period in 2008.
 
 Stock-based
compensation expense for the three-month periods ended March 31, 2009 and 2008
was $110,250 and $102,905, respectively. The increase is due to stock options
that were granted to our CFO and CEO in June and October 2008,
respectively.
 
 Professional
fees for the three-month period ended March 31, 2009 increased by $105,601 from
the same period in 2008 primarily as a result of legal fees incurred in
connection with our defense of the litigation brought forth by Zavanna. Though
there is no guarantee that we will successfully do so, we hope to recoup all of
our legal expenditures relating to this action, as well as compensation for
other damages suffered by the Company in connection with the original
suit.
  5
  Depreciation,
depletion and amortization expense for the three-month period ended March 31,
2009 decreased by $19,841 from the same period in 2008, primarily due to the
fact that we wrote off our payments made under the licenses to use specialty
down-hole gas/water separation (“DGWS”) equipment in December 2008. Amortization
related to the down-hole licenses totaled $0 and $17,100 for the three months
ended March 31, 2009 and 2008, respectively.
 
 We
recognized $10,291 of interest income for the three-month period ended March 31,
2009, an increase of $7,624 from the same period in 2008. The increase is due to
interest earned on spud fees which are being held in escrow pending the outcome
of the Zavanna litigation.
 
 Results
of Operations for the Three-Month Periods Ended March 31, 2008 vs.
2007
 
 During
2007, we acquired working interests that total 75% in the West Ranch property
located in Jackson County, Texas. We realized $80,257 in revenue from this
property in the three-month period ended March 31, 2008. We had no revenue in
the corresponding period in 2007.
 
 Our share
of the operating costs of the West Ranch Field was $209,388 for the three-month
period ended March 31, 2008. We had no similar costs in the corresponding period
in 2007, as we acquired our interest in this field after March 31,
2007.
 
 Also
during the year ended December 31, 2007, we abandoned our interests in the North
Sea Quad 14, 41, and 42 activities. Two test wells were completed, and no
economical reserves were discovered. We made a deposit of $1,500,000 to cover
our share of the drilling costs of the test well on the Quad 41 and 42
prospects. No amount of this deposit has been released to the operator, and we
have instructed the holder of the funds not to release any funds. We are
currently attempting to determine what amount, if any, will be released to the
operator. We used the full cost method to account for our exploration activities
and, therefore, do not expense any exploration costs until a prospect is
abandoned.
 
 General
and administrative expenses increased from $127,042 for the three-month period
ended March 31, 2007, to $165,880 for the corresponding period in 2008. An
analysis of the increase in general and administrative expenses, and the
relevant components, is as follows:
 
 ·
              Consulting
      fees increased from $9,114 in the three-month period ended March 31, 2007,
      to $18,387 in the corresponding period in 2008, as we began using
      consultants to monitor our West Ranch
property.
 
 ·
              Salary
      costs increased by $55,133 for the three-month period ended March 31,
      2008, compared to the corresponding period in 2007 as a result of the
      hiring of our Vice President of Engineering in the second half of 2007 and
      the hiring of additional administrative staff as a result of our increased
      activities.
  6
  ·
              We
      commenced providing health insurance benefits to our employees during 2008
      at a cost of $14,966 for the three-month period ended March 31, 2008
      compared to $0 for the three-month period ended March 31,
      2007.
 
 We
determine the value of options granted to employees and directors and amortize
that value over the vesting period of each option. Such value is recorded as
stock-based compensation, which increased from $46,046 for the three-month
period ended March 31, 2007, to $102,905 in for the three-month period ended
March 31, 2008. The increase was the result of additional stock options granted
to our employees during the second half of 2007.
 
 We
realized $2,667 in interest income in the three-month period ended March 31,
2008, compared to $15,285 in the corresponding period in 2007. The decrease in
interest income resulted from a decrease in the amounts that we have on deposit
related to the Quad 14 and Quad 41/42 properties.
 
 In
October 2007, we acquired from entities partially-owned by our Chairman and
Chief Executive Officer certain exploratory oil and gas leases and an option
(“Option”) to acquire 100% of a natural gas production opportunity which employs
specialty down-hole gas/water separation equipment. Under the Option agreement,
the Company can, after meeting certain obligations, purchase all of the
outstanding shares of such related entity in exchange for 25 million shares of
its common stock.
 
 The
Company has made the following up-front payments to acquire the
Option:
 
 1)
$125,000 to the related entity for certain the oil and gas leases in Alberta,
Canada.
 
 2)
$20,000 to the related entity as reimbursement for amounts paid to Zavanna
Canada Corp in connection with licenses to the DGWS equipment.
 
 The
Company has the following periodic obligations in order to retain the Option
which expires on December 31, 2010:
 
 1)
              Payments
      of $20,000 to the related entity each six months commencing on June 30,
      2008 through June 30, 2010.
 
 2)
              Payments
      to the related entity of $250,000 on each of December 31, 2008 and
      December 31, 2009. These amounts may be paid in either cash or with shares
      of our common stock.
 
 3)
              Drill
      and equip two wells with DGWS equipment; one before December 31, 2008 and
      the other before December 31, 2010.
 
 4)
              Pay
      to one DGWS manufacturer $25,000 in September 2007 and further to purchase
      ten DGWS devices each year, beginning in 2008, at a cost of $3,800 per
      device in order to maintain exclusive equipment supply. In addition, the
      grantor of the license will receive a 1% royalty on each well using the
      device. The license expires in January 2012 and can be extended for 5
      years at a cost of $300,000.
  7
  5)
              Payments to a second DGWS
      manufacturer of $35,000 on March 30, 2008 and future annual payments of
      $10,000. The Company is required to pay $500 for each device used and give
      to the grantor of the license a 5% working interest in each well using the
      device. The Company is required to purchase and install in Canada 20
      devices by March 31, 2008.
 
 6)
              Payments to the second DGWS
      manufacturer of $6,000 by March 31 of each year and give to the grantor of
      the license a 5% working interest in each well using the device in the
      state of Utah.
 
 As a
result of the on-going litigation with Zavanna, and its associated negative
impact on the Company’s working capital position, the Company was unable to meet
all of the obligations under the Option agreement. Consequently, in December
2008, we received a notification from one of the related entities of its desire
to remarket the DGWS natural gas opportunity to third parties. As a result, the
original Option agreement between the Company and the related entity was
amended. The amended agreement relieves the Company of its obligation to make
the $250,000 payments to the related entity, originally scheduled for December
2008 and 2009, and enables the related entity to freely market the technology.
Furthermore, the related entity has agreed to work in good faith to reimburse
the Company for its investment in the original technology and to secure the
granting of a 1% overriding royalty interest in favor of the Company for any
wells in which the technology is used to generate production. As a result of the
amended agreement, the Company has been relieved of its liability to the related
entities and has reduced the carrying value of the licenses by $500,000. In
addition, the Company has removed the licenses from its balance sheet and
reclassified its DGWS tools as Assets Held for Sale as of December 31,
2008.
 
 Liquidity and Capital
Resources
 
 As of
March 31, 2009, our assets totaled $6,544,344, which included cash balances of
$286,364 and investments in oil and gas properties of $3,718,253, net of
accumulated depletion. In addition, we have recorded a $750,000 receivable for
spud fees earned in 2008 and have $1,599,021 on deposit related to our interest
in the Quad 41/42 prospect. In May 2009, we collected $730,000 of the spud fees
owed to us that were previously held in escrow. A portion of these funds was
used to settle amounts owed to Rover Resources Inc. in connection with our
working interest in the Pebble Beach Prospect, totaling $444,835.
 
 We
anticipate spending $2,245,000 for improvement to our West Ranch property over
the next several years. Since the Company has historically generated net losses
and negative cash flows, it is likely that we will need to obtain additional
working capital in order to fund these expenditures. Historically, we have
successfully raised additional operating capital through private equity funding
sources. With that in mind, our management is refining its business plan
regarding various funding options. However, no assurances can be given that the
Company will be able to obtain sufficient working capital through the sale of
its common stock and/or borrowing or that the development and implementation of
the Company’s business plan will generate sufficient future revenues to sustain
ongoing operations. In addition, as discussed below, our ability to pursue
additional revenue-generating opportunities has been hampered by our involvement
in the Zavanna litigation. It is likely that we will continue to incur
significant legal fees until the litigation is ultimately resolved. The
combination of these factors raises substantial doubt with our auditor about the
Company’s ability to continue as a going concern.
  8
  On
November 2007, we were served with a complaint alleging breach of contract,
misappropriation of confidential and proprietary information and of trade secret
and claims under the Colorado Uniform Trade Secrets Act, fraud, declaratory
relief declaring any agreements of release to be void and unenforceable as they
were obtained by fraudulent inducement, declaration of accounting and
constructive trust for all proceeds and profits from the alleged
misappropriation, injunctive relief for return of all allegedly misappropriated
information and cessation of use, civil theft of business values, and tortuous
interference with contract. The Plaintiffs seek compensatory and punitive
damages in an unspecified amount, prejudgment interest, declaratory relief,
injunctive relief, accounting, and attorneys’ fees. Management believes the
causes of action are without merit and intends to defend its rights vigorously.
In January 2008, we filed a countersuit claiming abuse of process, intentional
interference with an existing business and contractual relations, commercial
disparagement and conspiracy.  The lawsuit has continued to negatively
impact our ability to pursue additional opportunities and/or acquire additional
oil and gas prospects.  A further result of the lawsuit has been the
sale of certain assets in order to fund our ongoing operations.  As of
the date of the initial Quarterly Report, the litigation was in the discovery
phase and the ultimate outcome of the litigation could not be reasonably
estimated.  Subsequently, in July 2009, the litigation was favorably
settled.  As part of the settlement agreement, we will receive
$255,000 in settlement proceeds as partial reimbursement of legal fees incurred
in connection with the litigation.  The entire amount of the
settlement proceeds is expected to be received during the third quarter of
2009.
  Off-Balance
Sheet Arrangements
 
 The
Company had no off-balance sheet arrangements at March 31, 2009.


9





ITEM 4T. CONTROLS AND PROCEDURES.





We
carried out an evaluation, under the supervision and with the participation of
our management, including our Principal Executive Officer and our Principal
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report.  Based on the foregoing, our Principal Executive Officer and
our Principal Financial Officer initially concluded that our disclosure controls
and procedures were effective at the reasonable assurance
level.  Based on these evaluations, our certifying Officers initially
concluded, subject to the limitations noted below, that, as of the end of the
period covered by this Quarterly Report on Form 10-Q:





(a)           Our
disclosure controls and procedures were effective to provide reasonable
assurance that material information required to be disclosed by us in the
reports we file or submit under the Securities Exchange Act of 1934 was
recorded, processed, summarized, and reported within the time periods specified
in the SEC’s rules and forms; and





(b)           Our
disclosure controls and procedures were effective to provide reasonable
assurance that material information required to be disclosed by us in the
reports we file or submit under the Securities Exchange Act was accumulated and
communicated to our management, including the Certifying Officers, as
appropriate to allow timely decisions regarding required
disclosure.





However,
during 2009, we discovered that we had inadvertently omitted certain disclosures
regarding our controls and procedures and that certain 2008 transactions were
not accounted for properly, as discussed in the Explanatory section located on
page 2 of this Quarterly Report.  The discovery of these omissions and
errors is an indication that our disclosure controls and procedures were, in
fact, not effective at the time of our original filing.





Inherent
Limitations on Effectiveness of Controls





Our
management, including our Chief Executive Officer and our Chief Financial
Officer, do not expect that our disclosure controls and procedures will prevent
or detect all error and all fraud.  A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
that the control system’s objectives will be met.  The design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their
costs.  Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, have been detected.  These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or
mistake.  Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people or by management override of
the controls.  The design of any system of controls is based in part
on certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions.  Projections of any evaluation of
controls effectiveness to future periods are subject to risks.  Over
time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or
procedures.





Changes
in Internal Control over Financial Reporting





There were no changes made
to our internal controls over financial reporting during the quarter ended March
31, 2009.During the fourth quarter of 2009, we implemented
processes to strengthen the review of our accounting policies and the
applicability of these policies to individual transactions and disclosures
included in our financial statements.


10





Part
II - OTHER INFORMATION





ITEM
6. EXHIBITS.




Exhibit
            
            Description of Exhibit3(i).1
            
            Articles
      of Incorporation filed with the Nevada Secretary of State on July 25,
      2003. (Incorporated by reference to Exhibit 3.1 of our Form 10-SB filed
      August 18, 2004.)3(i).2
            
            Certificate
      of Change filed with the Nevada Secretary of State effective November 7,
      2005. (Incorporated by reference to Exhibit 3(i).2 of our Current Report
      on Form 8-K filed November 9, 2005.)3(i).3
            
            Articles
      of Merger filed with the Nevada Secretary of State effective November 7,
      2005. (Incorporated by reference to Exhibit 3(i).3 of our Current Report
      on Form 8-K filed November 9, 2005.)3(ii).1
            
            Bylaws,
      adopted July 18, 2003. (Incorporated by reference to Exhibit 3.2 of our
      Form 10-SB filed August 18, 2004.)3(ii).2
            
            Amendment
      No. 1 to Bylaws, adopted November 4, 2005. (Incorporated by reference to
      Exhibit 3(ii) of our Current Report on Form 8-K filed November 9,
      2005.)10.1
            
            Agreement
      and Plan of Merger between Golden Hope Resources Corp. (renamed Eternal
      Energy Corp.) and Eternal Energy Corp., filed with the Nevada Secretary of
      State effective November 7, 2005. (Incorporated by reference to Exhibit
      10.1 of our Current Report on Form 8-K filed November 9,
      2005.)10.2
            
            Purchase
      and Sale Agreement between Eternal Energy Corp. and Merganser Limited,
      dated November 7, 2005. (Incorporated by reference to Exhibit 10.2 of our
      Current Report on Form 8-K filed November 9, 2005.)10.3
            
            Form
      of Subscription Agreement for November 2005 private placement.
      (Incorporated by reference to Exhibit 10.3 of our Current Report on Form
      8-K filed November 9, 2005.)10.4
            
            Form
      of Common Stock Purchase Warrant for November 2005 private placement.
      (Incorporated by reference to Exhibit 10.4 of our Current Report on Form
      8-K filed November 9, 2005.)10.5
            
            Registration
      Rights Agreement for November 2005 private placement. (Incorporated by
      reference to Exhibit 10.5 of our Current Report on Form 8-K filed November
      9, 2005.)10.6
            
            Letter
      Agreement by and between Eternal Energy Corp. and International Frontier
      Resources Corporation. (Incorporated by reference to Exhibit 10.1 of our
      Current Report on Form 8-K filed December 5, 2005.)10.7
            
            Employment
      Agreement by and between Eternal Energy Corp. and Bradley M. Colby.
      (Incorporated by reference to Exhibit 10.1 of our Amended Current Report
      on Form 8-K/A filed June 29, 2006).10.7(b)
            
            Excerpt
      from the minutes of the Board of Directors meeting on July 26, 2007,
      setting forth the terms of the Second Amendment to Employment Agreement by
      and between Eternal Energy Corp. and Bradley M. Colby. (Incorporated by
      reference to Exhibit 10.1b of our Current Report on Form 8-K filed
      September 27, 2007.)10.8
            
            First
      Amendment to Employment Agreement by and between Eternal Energy Corp. and
      Bradley M. Colby (Incorporated by reference to Exhibit 10.1(a) of our
      Current Report on Form 8-K filed December 8, 2006).10.9
            
            Letter
      Agreement by and between Eternal Energy Corp. and International Frontier
      Resources Corporation Relating to Quad 41 and Quad 42 dated January 30,
      2006. (Incorporated by reference to Exhibit 10.1 of our Current Report on
      Form 8-K filed February 3, 2006.)




11





10.10
            
            Amended
      and Restated Letter Agreement by and between Eternal Energy Corp. and
      International Frontier Resources Corporation Relating to Quad 14 dated
      January 30, 2006. (Incorporated by reference to Exhibit 10.2 of our
      Current Report on Form 8-K filed February 3, 2006.)10.11
            
            Finder’s
      Fee Agreement by and between Eternal Energy Corp. and Taverham Company
      Ltd. dated January 30, 2006. (Incorporated by reference to Exhibit 10.3 of
      our Current Report on Form 8-K filed February 3, 2006.)10.12
            
            Form
      of Subscription Agreement for March 2006 private placement. (Incorporated
      by reference to Exhibit 10.1 of our Current Report on Form 8-K filed March
      8, 2006.)10.13
            
            Form
      of Common Stock Purchase Warrant for March 2006 private placement.
      (Incorporated by reference to Exhibit 10.2 of our Current Report on Form
      8-K filed March 8, 2006.)10.14
            
            Form
      of Registration Rights Agreement for March 2006 private placement.
      (Incorporated by reference to Exhibit 10.1 of our Amended Current Report
      on Form 8-K/A filed March 29, 2006.)10.15
            
            Letter
      Agreement between us and Eden Energy Corp. dated April 14, 2006
      (Incorporated by reference to Exhibit 10.1 our Current Report on Form 8-K
      filed April 21, 2006).10.16
            
            Letter
      Agreement effective as of May 19, 2006, by and among Eternal Energy Corp.,
      International Frontier Resources Corporation, Palace Exploration Company
      Limited, Oilexco Incorporated, and Challenger Minerals (North Sea) Limited
      (Incorporated by reference to Exhibit 10.1 of our Current Report on Form
      8-K filed May 23, 2006).10.17**
            
            Letter
      Agreement dated October 15, 2006, by and among Eternal Energy Corp.,
      Fairway Exploration, LLC, Prospector Oil, Inc., and 0770890 B.C. Ltd.
      (Incorporated by reference to Exhibit 10.17 of our Registration Statement
      on Form 10-KSB filed April 16, 2007).10.18**
            
            Letter
      Agreement dated October 26, 2006, by and among Eternal Energy Corp.,
      Fairway Exploration, LLC, Prospector Oil, Inc., 0770890 B.C. Ltd., and
      Rover Resources Inc. (Incorporated by reference to Exhibit 10.18 of our
      Registration Statement on Form 10-KSB filed April 16,
    2007).10.19
            
            Letter
      Agreement dated February 28, 2007, by and among Eternal Energy Corp.,
      Pebble Petroleum Inc., Emerald Bay Holdings Ltd., and Heartland Resources
      Inc. (Incorporated by reference to Exhibit 10.19 of our Registration
      Statement on Form 10-KSB filed April 16, 2007).10.20
            
            Agreement
      To Terminate DGWS Option (Incorporated by reference to Exhibit 10.20 of
      our Quarterly Report on Form 10-Q filed May 15, 2009).10.21
            
            Amended
      and Restated Employment Agreement by and between Eternal Energy Corp. and
      Craig Phelps dated August 1, 2007 (Incorporated by reference to Exhibit
      10.21 of our Quarterly Report on form 10-Q filed May 15,
      2009).10.22
            
            Employment
      Agreement by and between Eternal Energy Corp. and Kirk A. Stingley dated
      June 2, 2008 (Incorporated by reference to Exhibit 10.22 of our Quarterly
      Report on form 10-Q filed May 15, 2009).31.1*
            
            Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act31.2*
            
            Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act32.1*
            
            Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act32.2*
            
            Certification
      pursuant to Section 906 of the Sarbanes-Oxley
  Act







* Filed
herewith.




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


12





SIGNATURES





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




ETERNAL
      ENERGY CORP.
              (Registrant)March
      10, 2010
            
            /s/ Bradley M. ColbyBradley
      M. Colby
              President
      and Chief Executive Officer




13