**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**









**FORM
      10-QSB/A**


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




**For
      the fiscal quarter ended March 31, 2008**




**OR**




**o**
            
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934.**




**For
      the transition period
      from                                  to**






**Commission
      File No. 000-50906**







**ETERNAL
      ENERGY CORP.**


(Exact
      Name of Small Business Issuer in its Charter)





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





**2549
      West Main Street, Suite 202**


**Littleton,
      CO 80120**


(Address
      and telephone number of Principal Executive Offices)





**(303)
      798-5235**


(Issuer’s
      Telephone Number, Including Area Code)









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





Yes ý No o





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





Yes o No ý





Number
      of
      shares outstanding as of the close of business on August 8, 2008:





**TITLE
                OF CLASS**
            
            **NUMBER
                OF SHARES**
              **OUTSTANDING**Common
                Stock, $0.001 par value.
            
            44,550,000





Transitional
      Small Business Disclosure Format (Check one):


Yes o No ý







**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





**Eternal
        Energy Corp.**
  **Financial
        Statements**
  ***As
        of March 31, 2008 and***
 ***For
        Each of the Three-Month Periods Ended March 31, 2008 and
        2007***
 
 
  **Eternal
        Energy Corp.**
  **Index
        to the Financial Statements**
  ***As
        of March 31, 2008 and***
 ***For
        Each of the Three-Month Periods Ended March 31, 2008 and
        2007***
 
 Financial
                    Statements of Eternal Energy Corp.:Balance
                    Sheet as of March 31, 2008
                1Statements
                    of Operations For Each of the Three-Month Periods Ended March
                    31, 2008 and
                    2007
                2Statements
                    of Cash Flows For Each of the Three-Month Periods Ended March
                    31, 2008 and
                    2007
                3Notes
                    to the Financial Statements as of March 31, 2008 and For Each
                    of the
                    Three-Month Periods Ended March 31, 2008 and 2007
                5
  
  **Eternal
        Energy Corp.**
  **Balance
        Sheet**
  ***March
        31, 2008***
 
 Restated*ASSETS*Current
                    assets:Cash
                
                $
                261,115Prepaid
                    expenses
                
                
                51,065Total
                    current assets
                
                
                312,180Receivable
                
                
                750,000Equipment
                    and leasehold improvements, net of accumulated depreciation and
                    amortization of $28,060
                
                
                100,847Oil
                    and gas properties, net of accumulated depletion of
                    $33,647
                
                
                3,777,129Licenses,
                    net of accumulated amortization of $17,100
                
                
                666,900Deposit
                
                
                1,414,677**Total
                    assets**
                
                **$**
                **7,021,733***LIABILITIES
                    AND STOCKHOLDERS' EQUITY*Current
                    liabilities:Accounts
                    payable and accrued liabilities
                
                $
                179,434Accrued
                    officer's payroll
                
                
                43,101Due
                    to a related party - current portion
                
                
                250,000Total
                    current liabilities
                
                
                472,535Due
                    to a related party - non-current portion
                
                
                250,000**Total
                    liabilities**
                
                **$**
                **722,535**Commitments
                    and contingenciesStockholders'
                    equity:Common
                    stock, $.001 par value, 875,000,000 shares authorized, 44,550,000
                    shares
                    issued and outstanding
                
                
                44,550Additional
                    paid-in capital
                
                
                8,472,189Accumulated
                    deficit
                
                
                (2,217,541
                )Total
                    stockholders' equity
                
                
                6,299,198**Total
                    liabilities and stockholders' equity**
                
                **$**
                **7,021,733**
  The
        accompanying notes are an integral part of the financial
        statements.
  1
  **Eternal
        Energy Corp.**
  **Statements
        of Operations**
  ***For
        Each of the Three-Month Periods Ended March 31, 2008 and
        2007***
 
  For thePeriod Ended March 31,2008Restated
                
                2007Spud
                    fee revenue
                
                $
                250,000
                
                
                -Oil
                    and gas sales
                
                
                80,257
                
                
                -Total
                    revenue
                
                
                330,257
                
                
                -Operating
                    expenses:Downhole
                    gas & water license royalties
                
                
                51,000
                
                
                -Oil
                    and gas operating costs
                
                
                209,388
                
                
                -Dry
                    hole costs
                
                
                2,281
                
                
                -General
                    and administrative
                
                
                224,360
                
                $
                127,042Professional
                    fees
                
                
                49,539
                
                
                30,020Depreciation,
                    amortization and depletion expense
                
                
                29,074
                
                
                972Total
                    operating expenses
                
                
                565,642
                
                
                158,034Total
                    operating loss
                
                
                (235,385
                )
                
                (158,034
                )Interest
                    income
                
                
                2,667
                
                
                15,285**Net
                    loss**
                
                **$**
                **(232,718**
                **)**
                **$**
                **(142,749**
                **)****Net
                    loss per common share, basic and diluted**
                
                **$**
                **(0.01**
                **)**
                **$**
                **(0.00**
                **)****Weighted
                        average number of shares outstanding, basic and
                        diluted**
                
                
                **44,550,000**
                
                
                **42,550,000**
  The
        accompanying notes are an integral part of the financial
        statements.
  2
  **Eternal
        Energy Corp.**
  **Statements
        of Cash Flows**
  ***For
        Each of the Three-Month Periods Ended March 31, 2008 and
        2007***
 
  For thePeriod Ended March 31,2008Restated
                
                2007*Cash
                    flows used in operating activities:*Net
                    loss
                
                $
                (232,718
                )
                $
                (142,749
                )Adjustments
                    to reconcile net loss to net cash used in operating
                    activities:Stock-based
                    compensation
                
                
                76,868
                
                
                46,045Depreciation
                    and amortization
                
                
                25,535
                
                
                972Depletion
                    of oil & gas property
                
                
                3,540
                
                
                -Increase
                    in receivable
                
                
                (250,000
                )
                
                -Changes
                    in operating assets and liabilities:Increase
                    in prepaid compensation
                
                
                -
                
                
                (183
                )(Increase)
                    Decrease in prepaid expenses
                
                
                (4,099
                )
                
                12,828Increase
                    (decrease) in accounts payable and accrued liabilities
                
                
                2,125
                
                
                (5,874
                )**Net
                    cash used in operating activities**
                
                
                **(378,749**
                **)**
                
                **(88,961**
                **)***Cash
                    flows used in investing activities:*Additions
                    to oil and gas properties
                
                
                (254,479
                )
                
                (375,599
                )Additions
                    to equipment and leasehold improvements
                
                
                (19,000
                )
                
                (5,632
                )Decrease
                    in deposit
                
                
                121,452
                
                
                -**Net
                    cash used in investing activities**
                
                
                **(152,027**
                **)**
                
                **(381,231**
                **)****Net
                    decrease in cash**
                
                
                **(530,776**
                **)**
                
                **(431,436**
                **)****Cash
                    - beginning of period**
                
                
                **791,891**
                
                
                **2,366,810****Cash
                    - end of period**
                
                **$**
                **261,115**
                
                **$**
                **1,935,374**
  The
        accompanying notes are an integral part of the financial
        statements.
  3
  **Eternal
        Energy Corp.**
  **Statements
        of Cash Flows**
  ***As
        of March 31, 2008 and***
 ***For
        Each of the Three-Month Periods Ended March 31, 2008 and
        2007***
 
 
 *Supplemental
        Disclosure of Cash Flow Information*
 For thePeriod Ended March 31,2008Restated
                
                2007Cash
                    paid for:Interest
                
                
                -
                
                
                -Income
                    taxes
                
                
                -
                
                
                -
  The
        accompanying notes are an integral part of the financial
        statements.
  4
  **Eternal
        Energy Corp.**
  **Notes
        to the Financial Statements**
  ***As
        of March 31, 2008 and***
 ***For
        Each of the Three-Month Periods Ended March 31, 2008 and 2007***
 
  **1.**
              **Interim
                  Presentation**
  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, 2008, the Company has entered
        into participation agreements related to oil and gas exploration projects
        in the
        Big Sand Spring Valley Prospect and the Cherry Creek Project, both located
        in
        Nye County, Nevada. The Company has also acquired a 75% working interest
        in West
        Ranch Field in Jackson County, Texas.
  The
        results of operations for the three-month periods ended March 31, 2008 and
        2007
        are not necessarily indicative of the results to be expected for the full
        year.
        The interim financial statements should be read in conjunction with the
        Company's annual report on Form 10-KSB as of December 31, 2007.
  Certain
        quarterly amounts from the previous year have been reclassified to conform
        to
        the current period presentation.
  **2.**
              **Summary
                  of Significant Accounting
                  Policies**
  *Basis
        of Presentation*
  These
        financial statements are presented in United States dollars and have been
        prepared in accordance with accounting principles generally accepted in the
        United States.
  *Revenue*
  The
        Company records the sale of its interests in prospects when the terms of
        the
        transaction are final and the sales price is determinable. Spud fee revenue
        is
        recorded when drilling commences. Working interest, royalty, and net profit
        interests are recorded as revenue when oil and gas is sold.
  *Concentration
        of Credit Risk*
  At
        March
        31, 2008, the Company had $161,115 on deposit that exceeded United States
        (FDIC)
        federally insurance limit of $100,000 per bank. The Company believes this
        credit
        risk is mitigated due to the financial strength of the financial
        institution.
  *Equipment
        and Leasehold Improvements*
  Equipment
        and leasehold improvements are recorded at cost. Expenditures for major
        additions and improvements are capitalized and depreciated over their useful
        lives. Depreciation is provided over the estimated useful lives of the related
        assets using the straight-line method for financial statement purposes. The
        Company uses other depreciation methods (generally accelerated) for tax purposes
        where appropriate. The estimated useful lives for significant property and
        equipment categories are as follows:
  5
  **Eternal
        Energy Corp.**
  **Notes
        to the Financial Statements**
  ***As
        of March 31, 2008 and***
 ***For
        Each of the Three-Month Periods Ended March 31, 2008 and
        2007***
 
  **2.**
              **Summary
                  of Significant Accounting Policies,
                  Continued**
  Equipment
              3
                  yearsLeasehold
                  improvements
              lesser
                  of useful life or lease term
  When
        equipment and improvements are retired or otherwise disposed of, the cost
        and
        the related accumulated depreciation are removed from the Company's accounts
        and
        any resulting gain or loss is included in the results of operations for the
        respective period.
  Expenditures
        for minor replacements, maintenance, and repairs are charged to expense as
        incurred.
  *Oil
        and Gas Properties*
  The
        Company follows the full cost method of accounting for its investments in
        oil
        and gas properties. Accordingly, all costs associated with the acquisition,
        exploration and development of oil and gas reserves are capitalized as incurred.
        The Company has not capitalized any interest or any of its internal costs
        related to its investments in oil and gas properties.
  In
        addition, the capitalized costs are subject to a "ceiling test," which limits
        such costs to the aggregate of the "estimated present value" of future net
        revenues from proved reserves, discounted at a 10 percent interest rate,
        based
        on current economic and operating conditions, plus the lower of cost or fair
        market value of unproved properties.
  Costs
        are
        accumulated by specific prospect, or cost center, and if economically
        recoverable reserves are not discovered in a prospect, the costs incurred
        are
        charged to expense as "dry hole costs."
  Depreciation
        and depletion of producing oil and gas properties is determined by the units
        of
        production method.
  *Fair
        Value of Financial Instruments*
  In
        accordance with the requirements of Financial Accounting Standards Board's
        Statement of Financial Accounting Standards ("SFAS") No. 107, *Disclosures
        about Fair Value of Financial Instruments* ,
        the
        Company has determined the estimated fair value of its financial instruments
        using available market information and appropriate valuation methodologies.
        Due
        to their short-term maturity, the fair value of financial instruments classified
        as current liabilities approximates their carrying values.
 
 6
  **Eternal
        Energy Corp.**
  **Notes
        to the Financial Statements**
  ***As
        of March 31, 2008 and***
 ***For
        Each of the Three-Month Periods Ended March 31, 2008 and
        2007***
 
  **2.**
              **Summary
                  of Significant Accounting Policies,
                  Continued**
  *Accounting
        for Share-Based Payment*
  In
        December 2004, the FASB issued SFAS No. 123(R) ("SFAS 123(R)"), *Share-Based
        Payment* .
        This
        pronouncement amends SFAS No. 123, *Accounting
        for Stock-Based Compensation* ,
        ("SFAS
        123") and supersedes Accounting Principles Board Opinion No. 25, *Accounting
        for Stock Issued to Employees* ("APB
        25"). SFAS 123(R) requires that companies account for awards of equity
        instruments issued to employees under the fair value method of accounting
        and
        recognize such amounts in their statements of operations. The Company adopted
        SFAS 123(R) on January 1, 2006, using the modified prospective method and,
        accordingly, has not restated the consolidated statements of operations for
        periods prior to January 1, 2006. Under SFAS 123(R), the Company is required
        to
        measure compensation cost for all stock-based awards at fair value on the
        date
        of grant and recognize compensation expense in our consolidated statements
        of
        operations over the service period that the awards are expected to vest.
        As
        permitted under SFAS 123(R), the Company has elected to recognize compensation
        cost for all options with graded vesting on a straight-line basis over the
        vesting period of the entire option.
  Prior
        to
        January 1, 2006, the Company accounted for share-based payment, as permitted
        by
        SFAS 123, under the intrinsic value method described in APB 25. Under the
        intrinsic value method, no stock-based employee compensation cost is recorded
        when the exercise price is equal to, or higher than, the market value of
        the
        underlying common stock on the date of grant.
  The
        following table illustrates the effect on net loss and loss per share if
        the
        Company had applied the fair value recognition provisions of SFAS 123(R)
        to
        stock-based employee compensation, using the straight-line method, for the
        following periods.
  7
 **Eternal
          Energy Corp.**
  **Notes
          to the Financial Statements**
  ***As
          of March 31, 2008 and***
 ***For
          Each of the Three-Month Periods Ended March 31, 2008 and
          2007***
  **2.**
                **Summary
                    of Significant Accounting Policies,
                    Continued**
  For
                    thePeriod Ended March 31,2008Restated
                
                2007Net
                    loss, as reported
                
                $
                (232,718
                )
                $
                (142,749
                )Total
                    stock-based employee compensation expense determined under fair
                    value
                    based method for all awards, net of related tax effect
                
                
                (46,046
                )
                
                (15,605
                )Pro
                    forma net loss
                
                $
                (278,764
                )
                $
                (158,354
                )Loss
                    per share:Basic
                    and diluted – as reported
                
                $
                (0.01
                )
                $
                (0.00
                )Basic
                    and diluted – pro forma
                
                $
                (0.01
                )
                $
                (0.00
                )
  There
          was
          no material effect on net loss or loss per share in the three-month period
          ended
          March 31, 2008.
  *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.
            As of March 31, 2008, the Company had outstanding stock options and warrants
            that can be converted into 4,791,800 shares
            of common stock. The exercise price of the warrants and options is greater
            than
            the market price of shares of the Company's common stock at March 31,
            2008.
            Therefore, the options and warrants would have an anti-dilutive effect
            and,
            accordingly, are not included in diluted loss per share.
 *Income
          Taxes*
  The
          Company follows the liability method of accounting for income taxes. Under
          this
          method, deferred income tax assets and liabilities are recognized for the
          future
          tax consequences attributable to differences between the financial statement
          carrying amounts of existing assets and liabilities and their respective
          tax
          balances. Deferred income tax assets and liabilities are measured using
          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.
 8
  **Eternal
        Energy Corp.**
  **Notes
        to the Financial Statements**
  ***As
        of March 31, 2008 and***
 ***For
        Each of the Three-Month Periods Ended March 31, 2008 and 2007***
  **2.**
              **Summary
                  of Significant Accounting Policies,
                  Continued**
  *Use
        of Estimates and Assumptions*
  The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires the use of estimates and
        assumptions that affect the reported amounts of assets, liabilities, revenues
        and expenses and disclosure of contingent obligations in the financial
        statements and accompanying notes. The Company's most significant assumptions
        are the estimates used in the determination of the deferred income tax asset
        valuation allowance and the determination of the value of the Company’s common
        shares that were issued for obligations. The estimation process requires
        assumptions to be made about future events and conditions, and as such, is
        inherently subjective and uncertain. Actual results could differ materially
        from
        our estimates.
  *New
        Accounting Pronouncements*
  In
        June
        2006, the FASB issued Interpretation No. 48 (FIN 48), *Accounting
        for Uncertainty in Income Taxes, an interpretation of FASB Statement No.
        109* .
        This
        interpretation was effective and adopted by the Company as of January 1,
        2007.
  In
        September 2006, the FASB issued SFAS No. 157, *Fair
        Value Measurements* ("SFAS
        157"). SFAS 157 establishes a single definition of fair value and a framework
        for measuring fair value, sets out a fair value hierarchy to be used to classify
        the source of information used in fair value measurements, and requires new
        disclosures of assets and liabilities measured at fair value based on their
        level in the hierarchy. SFAS 157 is effective for the Company’s year beginning
        January 1, 2008 and is to be applied prospectively. The Company is currently
        evaluating the impacts and disclosures of this standard, but would not expect
        SFAS 157 to have a material impact on its results of operations or financial
        condition.
  In
        February 2007, the FASB issued SFAS No. 159, *The
        Fair Value Option for Financial Assets and Financial
        Liabilities* ("SFAS
        159"). SFAS 159 permits an entity to choose, at specified election dates,
        to
        measure eligible financial instruments and certain other items at fair value
        that are not currently required to be measured at fair value. An entity shall
        report unrealized gains and losses on items for which the fair value option
        has
        been elected in earnings at each subsequent reporting date. Upfront costs
        and
        fees related to items for which the fair value option is elected shall be
        recognized in earnings as incurred and not deferred. SFAS 159 also establishes
        presentation and disclosure requirements designed to facilitate comparisons
        between entities that choose different measurement attributes for similar
        types
        of assets and liabilities. SFAS 159 is effective for financial statements
        issued
        for fiscal years beginning after November 15, 2007 (January 1, 2008 for the
        Company) and interim periods within those fiscal years. At the effective
        date,
        an entity may elect the fair value option for eligible items that exist at
        that
        date. The entity shall report the effect of the first remeasurement to fair
        value as a cumulative-effect adjustment to the opening balance of retained
        earnings. The Company is currently evaluating the impacts and disclosures
        of
        this standard, but would not expect SFAS 159 to have a material impact on
        its
        results of operations.
  9
  **Eternal
        Energy Corp.**
  **Notes
        to the Financial Statements**
  ***As
        of March 31, 2008 and***
 ***For
        Each of the Three-Month Periods Ended March 31, 2008 and 2007***
 **3.**
              **Change
                  of Accounting
                  Principal**
  FASB
        Staff Position ("FSP") EITF 00-19-2, *Accounting
        for Registration Payment Arrangements* ,
        specifies that the contingent obligation to make future payments or otherwise
        transfer consideration under a registration payment arrangement, whether
        issued
        as a separate agreement or included as a provision of a financial instrument
        or
        other agreement, should be separately recognized and measured in accordance
        with
        SFAS No. 5 ("SFAS 5"), *Accounting
        for Contingencies* .
        This
        FSP further clarifies that a financial instrument subject to a registration
        payment arrangement should be accounted for in accordance with other applicable
        Generally Accepted Accounting Principles without regard to the contingent
        obligation to transfer consideration pursuant to the registration payment
        arrangement. This FSP is effective immediately for registration payment
        arrangements and the financial instruments subject to those arrangements
        that
        are entered into or modified subsequent to December 21, 2006. For registration
        payment arrangements and financial instruments subject to those arrangements
        that were entered into prior to December 21, 2006, the guidance in the FSP
        is
        effective for financial statements issued for fiscal years beginning after
        December 15, 2006, and interim periods within those fiscal years.
  On
        January 1, 2007, the Company recorded a cumulative effect of change in
        accounting principle and increased additional paid in capital by $6,091,061,
        decreased financial instrument derivative liability by $2,069,949 and increased
        accumulated deficit at December 31, 2007 by $4,021,112.
  **4.**
              **Equipment
                  and Leasehold
                  Improvements**
  The
        following is a summary of equipment and improvements, at cost as of March
        31,
        2008:
  RestatedOffice
                  equipment
              
              $
              71,151Downhole
                  gas and water equipment
              
              
              19,000Leasehold
                  improvements
              
              
              38,756Total
                  equipment and improvements
              
              
              128,907Less:
                  accumulated depreciation
              
              
              (28,060
              )**Equipment
                  and improvements, net**
              
              **$**
              **100,847**
  Depreciation
        expense for the three month periods ended March 31, 2008 and 2007 was $8,435,
        and $972, respectively.
  10
 
 **Eternal
        Energy Corp.**
  **Notes
        to the Financial Statements**
  ***As
        of March 31, 2008 and***
 ***For
        Each of the Three-Month Periods Ended March 31, 2008 and 2007***
  **5.**
              **Oil
                  and Gas Properties**
  *Producing
        Properties*
  In
        2007,
        the Company acquired a 75% working interest in the South West extension of
        the
        West Ranch Field, located in Jackson County, Texas.
  The
        net
        capitalized cost of this property is summarized below:
  RestatedAcquisition
                  cost
              
              $
              1,894,259Improvement
                  costs
              
              
              459,8892,354,148Depletion
              
              
              (33,647
              )**Balance
                  at March 31, 2008**
              
              **$**
              **2,320,501**
  *Exploratory
        Prospects*
  The
        Company has also entered into participation agreements in three exploratory
        oil
        and gas properties. Two of these properties have been abandoned. The Company
        has
        a 50% working interest in the wells on the remaining property, if they are
        successful. The Company paid certain amounts upon execution of the agreements,
        and is obligated to share in the drilling costs of the exploratory wells.
        In
        addition, the Company has agreed to issue shares of its common stock based
        upon
        the proven reserves of the property. A description of the oil and gas properties
        follows.
  Big
        Sand Spring Valley and Cherry Creek Prospect
  The
        Company acquired a 50% working interest in these properties for an initial
        payment of $667,000 and the obligation for a future payment of $2,000,000,
        which
        represents 50% of the estimated initial drilling costs. The Company is obligated
        to pay 50% of future drilling costs on this property. In addition, the Company
        is obligated to issue one million shares of its common stock for each ten
        million equivalent barrels of net proven oil reserves developed on the Big
        Sand
        Spring Valley Prospect. At March 31, 2008, the Company was not obligated
        to fund
        any additional drilling costs nor are there any net proven oil reserves on
        these
        properties. This participation agreement has a term of ten years, which expires
        in November 2015.
  North
        Sea Quad 41 and Quad 42
  The
        Company acquired 10% working interests in these prospects with the obligation
        to
        fund 15% of exploratory wells. The Company placed $1.5 million for the Quad
        41
        and 42 prospect on deposit to cover its share of these costs. The exploratory
        wells on both of these prospects have been completed and no economically
        recoverable reserves were discovered.
  11
  **Eternal
        Energy Corp.**
  **Notes
        to the Financial Statements**
  ***As
        of March 31, 2008 and***
 ***For
        Each of the Three-Month Periods Ended March 31, 2008 and 2007***
  **5.**
              **Oil
                  and Gas Properties,
                  Continued**
  No
        amounts have been released to the operator for the Quad 41 and 42 prospect
        and
        the Company has instructed the holder of the funds not to make any
        distributions. The Company is attempting to determine what amounts, if any,
        it
        is obligated to pay related to this prospect.
  The
        following table summarizes the activity of exploratory costs for the three-month
        periods ended March 31, 2008 and 2007:
  2008Restated
              
              2007Balance
                  at the beginning of the period
              
              $
              2,513,733
              
              $
              1,620,808Additions
                  to exploratory costs
              
              
              287,009
              
              
              -Dry
                  hole costs
              
              
              -
              
              
              -Costs
                  of prospects sold
              
              
              -
              
              
              -Balance
                  at the end of the period
              
              $
              2,800,742
              
              $
              1,620,808
  Utah
  In
        December 2007, the Company purchased a 640-acre mineral lease from the State
        of
        Utah, and in the first quarter of 2008, purchased an additional 10,860 acre
        lease from the State of Utah. The Company has a 50% interest in this prospect.
  *Prospects
        Sold*
  In
        May
        2007, the Company sold its 15% equity interest in Pebble Petroleum, Inc.,
        ("Pebble"), which held a working interest in the Pebble Beach prospect. Proceeds
        from the sale totaled $877,353, resulting in a gain on the disposition of
        the
        Pebble Beach investment of $619,901. An additional $163,150 of sales proceeds
        were received in the second quarter of 2008 relating to this transaction.
        Per
        the terms of the Pebble sale, the Company retained a 5% gross overriding
        royalty
        from each well drilled on certain acreage that Pebble holds rights to in
        western
        Canada. In addition, the Company obtained the right to receive $250,000 for
        each
        of the first eight wells drilled on the property. The Company records these
        amounts as “spud fees” when drilling commences. As of June 30, 2008, six wells
        have been drilled, for which the Company has earned $1,500,000 in spud
        fees.
  As
        a
        result of the litigation as described in Note 6, the purchaser is holding
        the
        spud fees due to the Company on the last two wells commenced in 2007 and
        the
        well commenced in January 2008 until the legal matter is resolved. As stated
        in
        Note 6, the Company does not believe that there is any merit in the claim
        and
        expects that the spud fees due to the Company will eventually be received.
        The
        timeframe for the settlement of this lawsuit is unsure and, accordingly,
        the
        receivable is not classified as current.
  12
 
 **Eternal
        Energy Corp.**
  **Notes
        to the Financial Statements**
  ***As
        of March 31, 2008 and***
 ***For
        Each of the Three-Month Periods Ended March 31, 2008 and 2007***
  **6.**
              **Commitments
                  and Contingencies**
  *Financial
        Results, Liquidity and Management's Plan*
  The
        Company has incurred net losses for the three-month periods ended March 31,
        2008
        and 2007 of $232,718 and $142,749, respectively. These factors raise substantial
        doubt about the Company's ability to continue as a going concern. The Company
        also had a negative cash flow from operations of $378,749 for the three-month
        period ended March 31, 2008, further enhancing the Company's need for additional
        capital. The Company has been able to obtain additional operating capital
        through private equity funding sources. Management's plans include the continued
        development and implementation of its business plan.
  No
        assurances can be given that the Company can obtain sufficient working capital
        through the sale of the Company's common stock and borrowing or that the
        implementation of its business plan will generate sufficient revenues in
        the
        future to sustain ongoing operations. The financial statements do not include
        any adjustments that might be necessary if the Company is unable to continue
        as
        a going concern.
  *Litigation*
  The
        Company's policy is to accrue amounts related to legal matters as a charge
        to
        operations if it is probable that a liability has been incurred and the amount
        of loss can be reasonably estimated, as required by SFAS 5.
  On
        November 20, 2007, the Company was served with a complaint alleging breach
        of
        contract, misappropriation of confidential and proprietary information and
        of
        trade secret and claims under the Colorado Uniform Trade Secrets Act, fraud,
        declaratory relief declaring any agreements of release to be void and
        unenforceable as they were obtained by fraudulent inducement, declaration
        of
        accounting and constructive trust for all proceeds and profits from the alleged
        misappropriation, injunctive relief for return of all allegedly misappropriated
        information and cessation of use, civil theft of business values, and tortuous
        interference with contract. Plaintiffs seek compensatory and punitive 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 of the date of these financial statements, the ultimate outcome of the
        litigation cannot be reasonably estimated.
  13
 
 **Eternal
        Energy Corp.**
  **Notes
        to the Financial Statements**
  ***As
        of March 31, 2008 and***
 ***For
        Each of the Three-Month Periods Ended March 31, 2008 and 2007***
  **6.**
              **Commitments
                  and Contingencies,
                  Continued**
  *Drilling
        Cost Obligations*
  As
        discussed in Note 5, the Company is obligated to fund its share of drilling
        costs related to its participation in three exploratory oil and gas wells.
        The
        minimum future obligation on the wells on this property is $2
        million.
  *Employment
        Agreement*
  The
        Company has entered into an employment agreement with its president. This
        agreement, as amended, terminates on October 31, 2009, provides for annual
        compensation of $174,000 and a signing bonus of $125,000 of which $90,000
        has
        been paid at March 31, 2008. In addition, the Company granted to its president
        options to purchase 1,443,800 shares of the Company’s common stock at an
        exercise price of $1.00 per share.
  In
        August
        2007, the Company entered into a two year employment agreement with its vice
        president of engineering. The agreement provides for annual compensation
        of
        $120,000 and a signing bonus of $30,000. In addition, the Company granted
        to
        this employee options to purchase 1 million shares of the Company’s common
        stock. The options have an exercise price of $0.24 per share.
  *Minimum
        Future Rents*
  In
        February 2007, the Company entered into a lease for its corporate offices.
        The
        lease has a term of 48 months. As of March 31, 2008, rents due under this
        lease
        are as follows:
  Amount2008
                  (remaining)
              
              $
              37,2812009
              
              
              51,1782010
              
              
              52,7822011
              
              
              4,4102012
              
              
              -**Total**
              
              **$**
              **145,651**
  14
 
 **Eternal
        Energy Corp.**
  **Notes
        to the Financial Statements**
  ***As
        of March 31, 2008 and***
 ***For
        Each of the Three-Month Periods Ended March 31, 2008 and 2007***
  **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, 2008 and 2007:
  For
                  thePeriod Ended March 31,2008Restated
              
              2007Net
                  loss
              
              $
              (232,718
              )
              $
              (142,749
              )Weighted-average
                  number of common shares outstanding
              
              
              44,550,000
              
              
              42,550,000Incremental
                  shares from the assumed exercise of dilutive stock options
              
              
              -
              
              
              -Diluted
                  common shares outstanding
              
              
              44,550,000
              
              
              42,550,000Net
                  loss per share, basic and diluted
              
              $
              (0.01
              )
              $
              (0.00
              )
  The
        following securities were not included in the computation of diluted net
        loss
        per share as their effect would have been anti-dilutive:
  For
                  thePeriod
                  Ended March 31,2008Restated
              
              2007Options
                  to purchase common stock
              
              
              3,543,800
              
              
              2,093,800Warrants
                  to purchase common stock
              
              
              1,248,000
              
              
              12,924,000
  **8.**
              **Share-Based
                  Payment**
  In
        November 2005, the Company granted options to purchase 1,443,800 shares of
        its
        common stock to its president. The exercise price of these options is $1.00
        per
        share, which exceeded the market price on the effective date of grant. The
        options vest at the rate of 240,633 shares at the end of each six-month period
        from the effective date of grant, and all become exercisable on November
        7,
        2008.
  In
        February 2006, the Company granted options to purchase 500,000 shares of
        its
        common stock to a director. In
        December 2006, the Company exchanged the original 500,000 stock options shares
        for a new option to purchase 350,000 shares of common stock.In
        addition, this director was granted an option to purchase an additional 300,000
        shares of common stock. The exercise price of these options is $0.78 per
        share,
        which was the market price on the effective date of grant. The
        Company recognized $33,513 in compensation expense during the three-month
        period
        ended March 31, 2008 related to this grant. The options vest at the rate
        of 116,667 shares at the date of grant and 108,333 at the end of each six-month
        period from the effective date of grant, and all become exercisable on February
        27, 2009.
 In
          December 2006, the Company granted options to purchase an additional 300,000
          shares of its common stock to this same director. The exercise price of
          these
          options is $0.80 per share, which was the market price on the effective
          date of
          grant. The Company recognized $12,532 as compensation expense during the
          three-month period ended March 31, 2008 related to this grant. The options
          vest
          at the rate of 50,000 at the end of each six-month period from the effective
          date of grant, and all become exercisable on December 4,
          2009.
  15
  **Eternal
        Energy Corp.**
  **Notes
        to the Financial Statements**
  ***As
        of March 31, 2008 and***
 ***For
        Each of the Three-Month Periods Ended March 31, 2008 and 2007***
  **8.**
              **Share-Based
                  Payment, Continued**
  In
        July
        2007, the Company granted options to purchase 300,000 shares of it common
        stock
        to a director. These options vest over three years, have a life of five years
        and have an exercise price of $0.25 per share, the market price on the effective
        date of grant.
  In
        August
        2007, the Company granted options to purchase 1 million shares of its common
        stock to an officer. These options vest over 2 years, have a life of 5 years
        and
        have an exercise price of $0.24 per share, the market price on the effective
        date of grant.
  In
        March
        2008, the Board of Directors ratified the grant of options to purchase 50,000
        of
        its common shares to a consultant. The stock options were originally approved
        by
        management on August 1, 2006. These options vest over 1 year, have a life
        of 5
        years and have an exercise price of $0.97 per share, the market price on
        the
        effective date of grant. Under the corresponding stock option agreement,
        16,667
        options vested at the time the agreement was executed with an additional
        16,667
        options vesting at the end of each six month period from the grant date.
        As of
        June 30, 2008, all 50,000 stock options are exercisable.
  Also
        in
        March 2008, the Board of Directors ratified the grant of options to purchase
        100,000 of its common shares to the same consultant. The stock options were
        originally approved by management on August 1, 2007. These options vest over
        1
        year, have a life of 5 years and have an exercise price of $0.20 per share,
        the
        market price on the effective date of grant. Under the corresponding stock
        option agreement, 33,333 options vested at the time the agreement was executed
        with an additional 33,333 options vesting at the end of each six month period
        from the grant date, and all will be exercisable on July 31, 2008.
  A
        summary
        of stock option activity, as of March 31, 2008, and changes during the
        three-month period then ended is presented below:
  Weighted
              
              Weighted
              
              AverageAverage
              
              Remaining
              
              AggregateExercise
              
              Contract
              
              IntrinsicShares
              
              Price
              
              Term
              
              ValueOutstanding
                  at December 31, 2007
              
              
              3,393,800
              
              $
              0.67
              
              
              3.5 years
              
              $
              -Options
                  granted
              
              
              150,000
              
              $
              0.46
              
              
              -
              
              
              -Options
                  exercised
              
              
              -
              
              
              -
              
              
              -
              
              
              -Options
                  expired
              
              
              -
              
              
              -
              
              
              -
              
              
              -Options
                  forfeited
              
              
              -
              
              
              -
              
              
              -
              
              
              -Outstanding
                  at March 31, 2008
              
              
              3,543,800
              
              $
              0.66
              
              
              2.8
                  years
              
              $
              -Exercisable
                  at March 31, 2008
              
              
              1,662,532
              
              $
              0.79
              
              
              2.1
                  years
              
              $
              -
  16
  **Eternal
        Energy Corp.**
  **Notes
        to the Financial Statements**
  ***As
        of March 31, 2008 and***
 ***For
        Each of the Three-Month Periods Ended March 31, 2008 and 2007***
  **8.**
              **Share-Based
                  Payment, Continued**
  The
        assumptions used in the Black-Scholes option pricing model for the stock
        options
        granted during the three-month period ended March 31, 2008 were as
        follows:
  Risk-free
                  interest rate
              
              
              2.37
              %Expected
                  volatility of common stock
              
              
              101
              %Dividend
                  yield
              
              $
              0.00Expected
                  life of options
              
              
              5 yearsWeighted
                  average fair market value of options granted
              
              $
              0.06
  **9.**
              **Equity
                  Transactions**
  *Issue
        of Shares for Working Interest*
  In
        October 2007, the Company acquired an additional 25% working interest in
        the
        West Ranch Field in exchange for 2 million shares of its common stock, valued
        at
        $629,513.
  *Sale
        of Equity Units*
  In
        March
        and May 2006, the Company sold 11,876,000 and 1,248,000 equity units,
        respectively, through a private placement offering. Each equity unit consisted
        of one share of the Company’s common stock and one warrant to purchase a share
        of the Company’s common stock at $1.00 per share. The per equity unit price was
        $0.50 with net proceeds of $6,562,000. The Company paid $440,240 as finders
        fees
        related to this offering. The equity units have a registration rights agreement
        that required the Company to file a registration statement with the Securities
        and Exchange Commission covering the shares and shares to be issued upon
        exercise of the warrants. The registration rights agreement provides for
        liquidated damages equal to $72,500, which was paid during the year ended
        December 31, 2007. The registration became effective and no additional penalties
        will be due.
  *Warrants*
  WeightedAverageNumber
                  of
              
              ExerciseWarrants
              
              Price**Outstanding,
                  December 31, 2007**
              
              
              **12,924,000**
              
              **$**
              **1.16**Issued
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -Expired
              
              
              (11,676,000
              )
              
              (1.16
              )Forfeited
              
              
              -
              
              
              -**Outstanding,
                  March 31, 2008**
              
              
              1,248,000
              
              **$**
              **1.16****Exercisable,
                  March 31, 2008**
              
              
              1,248,000
              
              **$**
              **1.16**
  17
  **Eternal
        Energy Corp.**
  **Notes
        to the Financial Statements**
  ***As
        of March 31, 2008 and***
 ***For
        Each of the Three-Month Periods Ended March 31, 2008 and 2007***
  **9.**
              **Equity
                  Transactions,
                  Continued**
  The
          warrants are exercisable at anytime until they expire two years from grant.
          Warrants to purchase 11,676,000 shares expired in March 2008 and the balance
          expire in May 2008.
  *Warrant
        Derivative Liability*
  The
        holders of the warrants to purchase shares of the Company’s common stock have
        registration rights that require the Company to file a registration statement
        with the Securities and Exchange Commission to register for resale the common
        stock to be issued upon exercise of the warrants. Because the ability to
        register the shares to be issued upon exercise is deemed to be outside the
        control of the Company, the initial fair value of the warrants were recorded
        as
        a financial instrument derivative liability and are marked to market at the
        end
        of each reporting period. The registration statement became effective in
        the
        first quarter of 2007.
  The
        Company estimated the fair value of the warrants using the Black-Scholes
        valuation model with the following assumptions:
  December
                  31,Inception
              
              2005Term
              
              24
                  months
              
              22
                  monthsRisk
                  free interest rate
              
              
              4.30% to 4.92
              %
              
              4.34
              %Volatility
              
              
              101
              %
              
              101
              %Dividend
              
              
              -0-
              
              
              -0-
  *Shares
        Reserved for Future Issuance*
  The
        Company has reserved shares for future issuance upon exercise of outstanding
        options and warrants as follows:
  Options
              
              
              3,543,800Warrants
              
              
              1,248,000**Total**
              
              
              4,791,800
  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.
  18
 
 **Eternal
        Energy Corp.**
  **Notes
        to the Financial Statements**
  ***As
        of March 31, 2008 and***
 ***For
        Each of the Three-Month Periods Ended March 31, 2008 and
        2007***
  **10.**
              **Related
                  Party Transaction**
  In
        October 2007, the Company acquired certain exploratory oil and gas leases
        and
        exclusive licenses to use a down-hole gas/water device from entities owned
        by
        its Chairman and Chief Executive Officer. The Company paid $125,000 for the
        oil
        and gas leases and is obligated to pay to a related entity $250,000 on each
        of
        December 31, 2008 and December 31, 2009. The Company may pay these amounts
        either in cash or with shares of its common stock. In addition, the Company
        reimbursed one of the related entities $20,000 for amounts paid to Zavanna
        Canada Corp. The Company is required to drill and equip two wells, and may
        cancel this agreement after the two required wells have been drilled and
        the
        first $250,000 payment has been made.
  One
        license agreement required the Company to pay $25,000 in September 2007 and
        further requires the Company to purchase ten devices each year, beginning
        in
        2008, at a cost of $4,000 per device. In addition, the grantor of the license
        will receive a 2% royalty on each well using the device. The license expires
        in
        January 2012 and can be extended for 5 years at a cost of $300,000.
  The
        second license required a payment of $35,000 on March 30, 2008 and an annual
        payment of $10,000. The Company is required to pay $500 for each device used
        and
        give to the grantor of the license a 5% working interest in each well using
        the
        device. In order to retain exclusive rights to the device license, the Company
        was required to purchase and install 20 devices in Canada by March 31, 2008.
        The
        Company did not purchase and install the required number of devices and
        therefore the license is no longer exclusive.
  The
        third
        license requires the Company to make an annual payment of $6,000 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 order to retain exclusive rights to the device
        license, the Company was required to purchase and install five devices in
        the
        United States by March 31, 2008. The Company did not purchase and install
        the
        required number of devices and therefore the license is no longer
        exclusive.
  As
        part
        of the acquisition of the licenses from the related entity, the Company acquired
        an option to purchase all of the outstanding shares of such related entity
        in
        exchange for 25 million shares of its common stock. The Company is required
        to
        make a $20,000 payment each six months commencing on June 30, 2008 through
        June
        30, 2010 to retain this option, which expires on December 31, 2010.
  19




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




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





*A
      Note About Forward-Looking Statements*





This
      Quarterly Report on Form 10-QSB/A 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
      the Management’s Discussion and Analysis or Plan of Operation section. Factors
      that could cause future results to differ from these expectations include
      general economic conditions, further changes in our business direction or
      strategy, competitive factors, oil and gas exploration uncertainties, and an
      inability to attract, develop, or retain technical, consulting or managerial
      agents or independent contractors. As a result, the identification and
      interpretation of data and other information and their use in developing and
      selecting assumptions from and among reasonable alternatives requires the
      exercise of judgment. To the extent that the assumed events do not occur, the
      outcome may vary substantially from anticipated or projected results, and
      accordingly, no opinion is expressed on the achievability of those
      forward-looking statements. No assurance can be given that any of the
      assumptions relating to the forward-looking statements specified in the
      following information are accurate, and we assume no obligation to update any
      such forward-looking statements. You should not unduly rely on these
      forward-looking statements, which speak only as of the date of this Quarterly
      Report; except as required by law, we are not obligated to release publicly
      any
      revisions to these forward-looking statements to reflect events or circumstances
      occurring after the date of this report or to reflect the occurrence of
      unanticipated events.





*Industry
      Outlook*





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





Worldwide
      oil prices rose throughout 2007 and during the first quarter of 2008 and reached
      historical highs during the first quarter of 2008. Continued economic growth,
      resulting in increased demand and concerns about supply availability, could
      result in continued high prices. A lower demand growth rate could result in
      lower crude oil prices.





Oil
      prices have significantly affected profitability and returns for upstream
      producers. Oil prices cannot be predicted with any certainty. The WTI price
      has
      averaged approximately $38 per barrel over the past ten years; however, the
      industry has historically experienced wide fluctuations in prices. While local
      supply/demand fundamentals are a decisive factor affecting domestic natural
      gas
      prices over the long-term, day-to-day prices may be more volatile in the futures
      markets, such as on the NYMEX and other exchanges, making it difficult to
      forecast prices with any degree of confidence. Over the last ten years, the
      NYMEX gas price has averaged approximately $5.03 per Mcf.





*Results
      of Operations for the Three-Month Periods Ended March 31, 2008 and
      2007*





In
      May
      2007, we sold our 15% interest in Pebble Petroleum, Inc. which held a working
      interest in the Pebble Beach prospect. Proceeds from the sale totaled $877,353,
      resulting in a gain on the disposition of the Pebble Beach investment of
      $619,901. Per the terms of the Pebble sale, the Company retained a 5% gross
      overriding royalty from each well drilled on certain acreage that Pebble holds
      rights to in western Canada. In addition, the Company obtained the right to
      receive $250,000 for each of the first eight wells drilled on the property.
      The
      first five wells commenced during the year ended December 31, 2007. One
      additional well commenced in January 2008.





20




Our
      business plan includes the acquisition of interests in oil and gas exploratory
      prospects, and in some cases, such as the Pebble prospect, we may sell all
      or
      part of our interest. The nature of these transactions are that they occur
      irregularly and, therefore, our revenues may fluctuate significantly from period
      to period.





At
      various times during the year ended December 31, 2007, we acquired working
      interests that total 75% in the West Ranch property located in 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.





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





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





The
      second license required a payment of $35,000 on March 30, 2008, and an annual
      payment of $10,000. We are required to pay $500 for each device that we use
      and
      give to the grantor of the license a 5% working interest in each well using
      the
      devise. We were required to purchase and install in Canada 20 devises by March
      31, 2008, in order to maintain exclusivity under the license. We did not
      purchase and install the required number of devices and, therefore, the license
      is no longer exclusive.





The
      third
      license requires us to make an annual payment of $6,000 by March 31 of each
      year
      and gives to the grantor of the license a 5% working interest in each well
      using
      the devise. We were required to purchase and install in the United States five
      devises by March 31, 2008, in order to maintain exclusivity under the license.
      We did not purchase and install the required number of devices and, therefore,
      the license is no longer exclusive.





As
      part
      of the acquisition of the licenses from the related entity, we acquired an
      option to purchase all of the outstanding shares of such related entity in
      exchange for 25 million shares of our common stock. We are required to make
      a
      $20,000 payment each six months commencing on June 30, 2008, through June 30,
      2010, to retain this option, which expires on December 31, 2010.





General
      and administrative expenses increased from $127,042
      for the three-month period ended March 31, 2007, to $224,360for
      the corresponding period in 2008. An analysis of the increase in general and
      administrative expenses, and the relevant components, 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 or West Ranch
                  property.
 ·
              Salary
                  costs increased $55,133 in the three-month period ended March 31,
                  2008, as
                  compared to the corresponding period in 2007, from $24,480 to $79,613,
                  as
                  a result of the hiring of our new Chief Operating Officer in the
                  second
                  half of 2007 and the hiring of additional administrative staff
                  as a result
                  of our increased activities.
  21
 ·
                We
                    commenced providing health insurance benefits to our employees
                    during the
                    quarter-ended March 31, 2008; the related costs totaled $14,966 for
                    the first quarter of 2008.
 ·
                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
                    in the
                    quarter-ended March 31, 2007, to $76,867 in the quarter-ended
                    March 31,
                    2008. The increase in 2008 was the result of additional stock
                    options
                    granted to our employees and
                    consultants.
 ·
                We
                    realized $2,667 in interest income in the three-month period
                    ended March
                    31, 2008, as 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.




*Liquidity
      and Capital Resources*





As
      of
      March 31, 2008, our total assets amounted to $7,021,733. We had cash balances
      of
      $261,115 and had invested $3,777,129 in oil and gas prospects. In addition,
      we
      had $1,410,268 on deposit related to our North Sea prospect, which has been
      abandoned. We had commitments for future drilling costs totaling at least $2
      million.





Our
      cash
      flows used in operations was $378,749 for the three-month period ended March
      31,
      2008. We have minimum drilling costs associated with our oil and gas exploration
      participations of $2 million, and we expect to spend $2,850,000 in improvement
      costs in our West Ranch property. While we have been able to obtain additional
      operating capital through private equity funding sources since inception, as
      of
      March 31, 2008, we did not have the financial resources to meet these
      obligations. Management’s plan includes the continued development and eventual
      implementation of our business plan.





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





On
      November 20, 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. We believe the causes of
      action are without merit and intend to defend our rights vigorously. On January
      17, 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
      the Company’s ability to pursue additional opportunities or acquire additional
      oil and gas prospects. As of the date of these financial statements, the
      ultimate outcome of the litigation cannot be reasonably estimated.





*Off-Balance
      Sheet Arrangements*





We
      have
      no off-balance sheet arrangements at March 31, 2008.





**Item
      3. Controls and Procedures**




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




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




22


**PART
      II. OTHER INFORMATION**





**Item
      6. Exhibits**





**Exhibit**
              
              **Description
                  of Exhibit**3(i).1
              
              Articles
                  of Incorporation filed with the Nevada Secretary of State on July
                  25,
                  2003. (Incorporated by reference to Exhibit 3.1 of our Form 10-SB
                  filed
                  August 18, 2004.)3(i).2
              
              Certificate
                  of Change filed with the Nevada Secretary of State effective November
                  7,
                  2005. (Incorporated by reference to Exhibit 3(i).2 of our Current
                  Report
                  on Form 8-K filed November 9, 2005.)3(i).3
              
              Articles
                  of Merger filed with the Nevada Secretary of State effective November
                  7,
                  2005. (Incorporated by reference to Exhibit 3(i).3 of our Current
                  Report
                  on Form 8-K filed November 9, 2005.)3(ii).1
              
              Bylaws,
                  adopted July 18, 2003. (Incorporated by reference to Exhibit 3.2
                  of our
                  Form 10-SB filed August 18, 2004.)3(ii).2
              
              Amendment
                  No. 1 to Bylaws, adopted November 4, 2005. (Incorporated by reference
                  to
                  Exhibit 3(ii) of our Current Report on Form 8-K filed November
                  9,
                  2005.)10.1
              
              Agreement
                  and Plan of Merger between Golden Hope Resources Corp. (renamed
                  Eternal
                  Energy Corp.) and Eternal Energy Corp., filed with the Nevada Secretary
                  of
                  State effective November 7, 2005. (Incorporated by reference to
                  Exhibit
                  10.1 of our Current Report on Form 8-K filed November 9,
                  2005.)10.2
              
              Purchase
                  and Sale Agreement between Eternal Energy Corp. and Merganser Limited,
                  dated November 7, 2005. (Incorporated by reference to Exhibit 10.2
                  of our
                  Current Report on Form 8-K filed November 9, 2005.)10.3
              
              Form
                  of Subscription Agreement for November 2005 private placement.
                  (Incorporated by reference to Exhibit 10.3 of our Current Report
                  on Form
                  8-K filed November 9, 2005.)10.4
              
              Form
                  of Common Stock Purchase Warrant for November 2005 private placement.
                  (Incorporated by reference to Exhibit 10.4 of our Current Report
                  on Form
                  8-K filed November 9, 2005.)10.5
              
              Registration
                  Rights Agreement for November 2005 private placement. (Incorporated
                  by
                  reference to Exhibit 10.5 of our Current Report on Form 8-K filed
                  November
                  9, 2005.)10.6
              
              Letter
                  Agreement by and between Eternal Energy Corp. and International
                  Frontier
                  Resources Corporation. (Incorporated by reference to Exhibit 10.1
                  of our
                  Current Report on Form 8-K filed December 5, 2005.)10.7
              
              Employment
                  Agreement by and between Eternal Energy Corp. and Bradley M. Colby.
                  (Incorporated by reference to Exhibit 10.1 of our Amended Current
                  Report
                  on Form 8-K/A filed June 29, 2006).10.7(b)
              
              Excerpt
                  from the minutes of the Board of Directors meeting on July 26,
                  2007,
                  setting forth the terms of the Second Amendment to Employment Agreement
                  by
                  and between Eternal Energy Corp. and Bradley M. Colby. (Incorporated
                  by
                  reference to Exhibit 10.1b of our Current Report on Form 8-K filed
                  September 27, 2007.)10.8
              
              First
                  Amendment to Employment Agreement by and between Eternal Energy
                  Corp. and
                  Bradley M. Colby (Incorporated by reference to Exhibit 10.1(a)
                  of our
                  Current Report on Form 8-K filed December 8,
                  2006).
  23
 
 10.9
              
              Letter
                  Agreement by and between Eternal Energy Corp. and International
                  Frontier
                  Resources Corporation Relating to Quad 41 and Quad 42 dated January
                  30,
                  2006. (Incorporated by reference to Exhibit 10.1 of our Current
                  Report on
                  Form 8-K filed February 3, 2006.)10.10
              
              Amended
                  and Restated Letter Agreement by and between Eternal Energy Corp.
                  and
                  International Frontier Resources Corporation Relating to Quad 14
                  dated
                  January 30, 2006. (Incorporated by reference to Exhibit 10.2 of
                  our
                  Current Report on Form 8-K filed February 3, 2006.)10.11
              
              Finder’s
                  Fee Agreement by and between Eternal Energy Corp. and Taverham
                  Company
                  Ltd. dated January 30, 2006. (Incorporated by reference to Exhibit
                  10.3 of
                  our Current Report on Form 8-K filed February 3, 2006.)10.12
              
              Form
                  of Subscription Agreement for March 2006 private placement. (Incorporated
                  by reference to Exhibit 10.1 of our Current Report on Form 8-K
                  filed March
                  8, 2006.)10.13
              
              Form
                  of Common Stock Purchase Warrant for March 2006 private placement.
                  (Incorporated by reference to Exhibit 10.2 of our Current Report
                  on Form
                  8-K filed March 8, 2006.)10.14
              
              Form
                  of Registration Rights Agreement for March 2006 private placement.
                  (Incorporated by reference to Exhibit 10.1 of our Amended Current
                  Report
                  on Form 8-K/A filed March 29, 2006.)10.15
              
              Letter
                  Agreement between us and Eden Energy Corp. dated April 14, 2006
                  (Incorporated by reference to Exhibit 10.1 our Current Report on
                  Form 8-K
                  filed April 21, 2006).10.16
              
              Letter
                  Agreement effective as of May 19, 2006, by and among Eternal Energy
                  Corp.,
                  International Frontier Resources Corporation, Palace Exploration
                  Company
                  Limited, Oilexco Incorporated, and Challenger Minerals (North Sea)
                  Limited
                  (Incorporated by reference to Exhibit 10.1 of our Current Report
                  on Form
                  8-K filed May 23, 2006).10.17
              
              Letter
                  Agreement dated October 15, 2006, by and among Eternal Energy Corp.,
                  Fairway Exploration, LLC, Prospector Oil, Inc., and 0770890 B.C.
                  Ltd.**
                  (Incorporated by reference to Exhibit 10.17 of our Registration
                  Statement
                  on Form 10-KSB filed April 16, 2007).10.18
              
              Letter
                  Agreement dated October 26, 2006, by and among Eternal Energy Corp.,
                  Fairway Exploration, LLC, Prospector Oil, Inc., 0770890 B.C. Ltd.,
                  and
                  Rover Resources Inc.** (Incorporated by reference to Exhibit 10.18
                  of our
                  Registration Statement on Form 10-KSB filed April 16,
                  2007).10.19
              
              Letter
                  Agreement dated February 28, 2007, by and among Eternal Energy
                  Corp.,
                  Pebble Petroleum Inc., Emerald Bay Holdings Ltd., and Heartland
                  Resources
                  Inc. (Incorporated by reference to Exhibit 10.19 of our Registration
                  Statement on Form 10-KSB filed April 16, 2007).31.1*
              
              Certification
                  pursuant to Section 302 of the Sarbanes-Oxley Act31.2*
              
              Certification
                  pursuant to Section 302 of the Sarbanes-Oxley Act32.1*
              
              Certification
                  pursuant to Section 906 of the Sarbanes-Oxley Act32.2*
              
              Certification
                  pursuant to Section 906 of the Sarbanes-Oxley Act99.1*
              
              Press Release
                regarding
                amendment of 10-QSB


*Filed
      with this report.


24


**SIGNATURES**





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





ETERNAL
                ENERGY CORP.(Registrant)August
                11, 2008
            /s/Bradley
                M. ColbyBradley
                M. ColbyPresident
                and Chief Executive Officer




25