UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549







FORM
10-Q





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





For the
quarterly period ended June 30,
2009





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





For the
transition period from ______________ to ______________





Commission
File Number:000-50906









ETERNAL
ENERGY CORP.


(Exact
name of registrant as specified in its charter)





Nevada
            20-0237026(State
      or other jurisdiction of incorporation or
organization)
            (I.R.S.
      Employer Identification No.)








2549 West Main Street, Suite 202,
      Littleton, Colorado
            80120(Address
      of principal executive offices)
            (Zip
      Code)





(303)
798-5235


(Registrant’s
telephone number, including area code)





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




Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.





(Check
one):





Large
      accelerated filer o
            Accelerated
      filer oNon-accelerated
      filer o
            Smaller
      reporting company x




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


Yes
o No x





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




44,550,000
shares of common stock issued and outstanding at August 13, 2009.









ETERNAL
ENERGY CORP.


FORM
10-Q


QUARTERLY
PERIOD ENDED JUNE 30, 2009





INDEX





A
      Note About Forward Looking Statements
            
            
            2PART
      I - FINANCIAL INFORMATIONItem
      1 - Condensed Financial Statements (Unaudited)
            
            
            3Condensed
      Balance Sheets – June 30, 2009 (Unaudited) and December 31,
      2008
            
            
            F-2Condensed
      Statements of Operations (Unaudited) - For Each of the Three- and
      Six-Month Periods Ended June 30, 2009 and 2008
            
            
            F-3Condensed
      Statements of Cash Flows (Unaudited) - For Each of the Three- and
      Six-Month Periods Ended June 30, 2009 and 2008
            
            
            F-4Notes
      to the Condensed Unaudited Financial Statements
(Unaudited)
            
            
            F-6Item
      2 - Management’s Discussion and Analysis of Financial Condition or Results
      of Operations
            
            
            4Item
      4 - Controls and Procedures
            
            
            10PART
      II - OTHER INFORMATIONItem
      6 – Exhibits
            
            
            11Signatures
            
            
            13





1





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.





2




PART I. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS.





Eternal
Energy Corp.
  Condensed
Financial Statements (Unaudited)
  As
of June 30, 2009,
 For
Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
2008
 
 3
 
 Eternal
Energy Corp.
  Index
to the Condensed Financial Statements (Unaudited)
  As
of June 30, 2009,
 For
Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
2008
 
 Condensed
      Financial Statements of Eternal Energy Corp. (Unaudited):Condensed
      Balance Sheets as of June 30, 2009 (Unaudited) and December 31,
      2008
              
              F-2Condensed
      Statements of Operations For Each of the Three-Month and Six-Month Periods
      Ended June 30, 2009 and 2008 (Unaudited)
              
              F-3Condensed
      Statements of Cash Flows For Each of the Six-Month Periods Ended June 30,
      2009 and 2008 (Unaudited)
              
              F-4Notes
      to the Condensed Financial Statements (Unaudited)
              
              F-6
 
 F-1
 
 Eternal
Energy Corp.
  Condensed
Balance Sheet
  June
30, 2009
 
 ASSETSJune
      30,
                2009
                (Unaudited)
              
              
              December
      31,
                2008Current
      assets:Cash
              
              $
              297,691
              
              
              $
              727,701Accounts
      receivable
              
              
              20,833
              
              
              
              -Prepaid
      expenses
              
              
              6,054
              
              
              
              9,266Total
      current assets
              
              
              324,578
              
              
              
              736,967Receivable
              
              
              20,000
              
              
              
              750,000Equipment
      and leasehold improvements, net of accumulated depreciation and
      amortization of $74,721 and $63,902 respectively
              
              
              61,692
              
              
              
              60,242Oil
      and gas properties – subject to amortization, net of accumulated depletion
      of $57,667
              
              
              2,438,097
              
              
              
              2,320,501Oil
      and gas properties – not subject to amortization
              
              
              1,826,913
              
              
              
              1,830,469Assets
      held for sale
              
              
              57,000
              
              
              
              38,000Deposits
              
              
              1,620,366
              
              
              
              1,604,366Total
      assets
              
              $
              6,348,646
              
              
              $
              7,340,545LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued liabilities
              
              $
              185,870
              
              
              $
              98,807Accrued
      officer’s compensation
              
              
              43,101
              
              
              
              43,101Accrued
      oil and gas interests
              
              
              -
              
              
              
              444,738Total
      liabilities
              
              $
              228,971
              
              
              $
              586,646Commitments
      and contingenciesStockholders'
      equity:Common
      stock, $.001 par value, 875,000,000 shares authorized, 44,550,000 shares
      issued and outstanding, respectively
              
              
              44,550
              
              
              
              44,550Additional
      paid-in capital
              
              
              8,968,644
              
              
              
              8,769,369Accumulated
      deficit
              
              
              (2,893,519
              )
              
              
              (2,060,020
              )Total
      stockholders' equity
              
              
              6,119,675
              
              
              
              6,753,899Total
      liabilities and stockholders' equity
              
              $
              6,348,646
              
              
              $
              7,340,545
  The
accompanying notes are an integral part of the financial
statements.
  F-2
  Eternal
Energy Corp.
  Condensed
Statements of Operations (Unaudited)
  For
Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
2008
 
 For
      the Three-Month
                Period
      Ended
              
              
              For
      the Six-Month
                Period
      EndedJune
      30, 2009
              
              
              June
      30, 2008
              
              
              June
      30, 2009
              
              
              June
      30, 2008Gain
      on sale of prospects
              
              
              
              
              
              
              1,100,139
              
              
              
              
              
              1,100,139Oil
      and gas sales
              
              
              4,533
              
              
              
              56,816
              
              
              
              4,533
              
              
              
              137,073Spud
      fee revenue
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              250,000Total
      revenue
              
              
              4,533
              
              
              
              1,156,955
              
              
              
              4,533
              
              
              
              1,487,212Operating
      expenses:Oil
      and gas operating expenses
              
              
              3,326
              
              
              
              187,838
              
              
              
              33,334
              
              
              
              397,226Down-hole
      gas and water license royalties
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              51,000Impairment
      of oil and gas properties
              
              
              -
              
              
              
              (1,194
              )
              
              
              -
              
              
              
              1,087General
      and administrative
              
              
              167,511
              
              
              
              158,934
              
              
              
              389,046
              
              
              
              288,016Stock
      based compensation
              
              
              89,025
              
              
              
              78,871
              
              
              
              199,275
              
              
              
              155,737Professional
      fees
              
              
              86,586
              
              
              
              132,954
              
              
              
              223,339
              
              
              
              200,915Depreciation,
      amortization and depletion expense
              
              
              10,819
              
              
              
              35,812
              
              
              
              20,052
              
              
              
              64,886Total
      operating costs
              
              
              357,267
              
              
              
              593,225
              
              
              
              865,046
              
              
              
              1,158,867Total
      operating income (loss)
              
              
              352,734
              
              
              
              563,730
              
              
              
              (860,513
              )
              
              
              328,345Interest
      income
              
              
              16,722
              
              
              
              705
              
              
              
              27,014
              
              
              
              3,372Net income
      (loss)
              
              $
              (336,012
              )
              
              $
              564,435
              
              
              $
              (833,499
              )
              
              $
              331,717Net
      income (loss) per common share -Basic
              
              $
              (0.01
              )
              
              $
              0.01
              
              
              $
              (0.02
              )
              
              $
              0.01Diluted
              
              $
              (0.01
              )
              
              $
              0.01
              
              
              $
              (0.02
              )
              
              $
              0.01Weighted
      average number of shares outstanding -Basic
              
              
              44,550,000
              
              
              
              44,550,000
              
              
              
              44,550,000
              
              
              
              44,550,000Diluted
              
              
              44,550,000
              
              
              
              44,583,333
              
              
              
              44,550,000
              
              
              
              44,572,222
 
 The
accompanying notes are an integral part of the financial
statements.
 
 F-3
  Eternal
Energy Corp.
  Condensed
Statements of Cash Flows (Unaudited)
  For
the Six-Month Periods Ended June 30, 2009 and 2008
  For
      the
                Six-Month
                Period
      Ended
                June 30, 2009
              
              
              For
      the
                Six-Month
                Period
      Ended
                June 30, 2008Cash
      flows provided by (used in) operating activities:Net
      income (loss)
              
              $
              (833,499
              )
              
              $
              331,717Adjustments
      to reconcile net loss to net cash used by operating
      activities:Non
      cash transactions:Stock-based
      compensation
              
              
              199,275
              
              
              
              155,738Depreciation,
      depletion and amortization
              
              
              20,052
              
              
              
              64,886Changes
      in operating assets and liabilities:(Increase)
      decrease in receivables
              
              
              709,167
              
              
              
              (266,319
              )Decrease
      in prepaid expense
              
              
              3,212
              
              
              
              14,242Increase
      in deposits
              
              
              (16,000
              )
              
              
              -Increase
      (decrease) in accounts payable and accrued liabilities
              
              
              87,063
              
              
              
              (68,740
              )Net
      cash used in operating activities
              
              
              169,270
              
              
              
              231,524Cash
      flows used in investing activities:Return
      of drilling deposits
              
              
              -
              
              
              
              121,452Additions
      to oil and gas properties
              
              
              (558,778
              )
              
              
              (57,628
              )Additions
      to equipment and leasehold improvements
              
              
              (40,502
              )
              
              
              (22,479
              )Net
      cash used in investing activities
              
              
              (599,280
              )
              
              
              41,345Net
      increase in cash
              
              
              (430,010
              )
              
              
              272,869Cash
      - beginning of period
              
              
              727,701
              
              
              
              791,891Cash
      - end of period
              
              $
              297,691
              
              
              $
              1,064,760
  The
accompanying notes are an integral part of the financial
statements.
  F-4
  Eternal
Energy Corp.
  Condensed
Statements of Cash Flows (Unaudited)
  For
the Six-Month Periods Ended June 30, 2009 and 2008
 Supplemental
Disclosure of Cash Flow Information
 
 For
      the
                Six-Month
                Period
      Ended
                June 30, 2009
              
              
              For
      the
                Six-Month
                Period
      Ended
                June 30, 2008Cash
      paid during the three-month and six-month period for:Interest
              
              $
              -
              
              
              $
              -Income
      taxes
              
              $
              -
              
              
              $
              -
  The
accompanying notes are an integral part of the financial
statements.
  F-5
  Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements (Unaudited)
  As
of June 30, 2009, and
 For
Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
2008
  1.       Description of
Business
  Eternal
Energy Corp. (the "Company") was incorporated in the state of Nevada in March
2003. The Company engages in the acquisition, exploration, development and
producing of oil and gas properties. At June 30, 2009, the Company has entered
into participation agreements related to oil and gas exploration projects in the
Big Sand Spring Valley Prospect located in Nye County, Nevada, and the Pebble
Beach Prospect, located in Divide County, North Dakota, and Sheridan County,
Montana and Saskatchewan, Canada.  The Company also owns a 75% working
interest in certain leases located within the Southwest Extension of the West
Ranch Field, located in Jackson County, Texas. In addition, the Company owns
certain overriding royalty interests in oil and gas leases located in San Juan
County, Utah and San Miguel County, Colorado.
  2.       Correction of an Error
and Reclassifications
  In March
2009, the Company discovered that certain transactions reported in its 2008
interim financial statements were recorded incorrectly.  Specifically,
the Company has amended its timing with respect to the recognition of certain
spud fee revenue to better match the revenues with the corresponding drilling
activities and has revised its cost of prospects sold figure for 2008 to include
only that portion of the Pebble Beach Prospect that was owned beneficially
through its investment in Pebble Petroleum.  In addition, amounts
advanced to Rover Resources Inc. were improperly recorded as investments in oil
and gas properties and subsequently expensed upon the sale of the Company’s
investment in Pebble Petroleum.  Given the materiality of the affected
transactions and related account balances, the Company has elected to restate
its 2008 interim financial statements in order to correct the
errors
  Certain
amounts from the previous year have been reclassified to conform to the current
period presentation.
  3.       Summary of Significant
Accounting Policies
  Basis
of Presentation
  These
financial statements are presented in United States dollars and have been
prepared in accordance with accounting principles generally accepted in the
United States.
  The
Company has evaluated subsequent events through August 13, 2009, the date that
the financial statements were issued and included in the Company’s Quarterly
Report on Form 10-Q for the period ended June 30, 2009.
  F-6
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements (Unaudited)
  As
of June 30, 2009, and
 For
Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
2008
 Revenue
Recognition
  The
Company records the sale of its interests in prospects as a reduction to the
cost pool when the terms of the transaction are final and the sales price is
determinable. Spud fee revenue is recognized when drilling
commences.  Working interest, royalty and net profit interests are
recognized as revenue when oil and gas is sold.
  Concentration
of Credit Risk
  At June
30, 2009, the Company had $47,691 on deposit in excess of the United States
(FDIC) federal insurance limit of $250,000 per bank. The Company believes this
credit risk is mitigated by the financial strength of the financial
institution.
  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.
  F-7
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements (Unaudited)
  As
of June 30, 2009, and
 For
Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
2008
 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.
  For each
cost center, capitalized costs are subject to an annual 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.
  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.
  F-8
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements (Unaudited)
  As
of June 30, 2009, and
 For
Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
2008
 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 share-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
share-based employee compensation, using the straight-line method for all
options outstanding, for the following periods:
  For
      the Three-Month
                Period
      Ended
              
              
              For
      the Six-Month
                Period
      EndedJune
      30, 2009
              
              
              June
      30, 2008
              
              
              June
      30, 2009
              
              
              June
      30, 2008Net
      income (loss), as reported
              
              $
              (336,012
              )
              
              $
              564,435
              
              
              $
              (833,499
              )
              
              $
              331,717Total
      stock-basedemployee
      compensationexpense
      determinedunder
      fair value basedmethod
      for all awards, netof
      related tax effect
              
              
              -
              
              
              
              (15,605
              )
              
              
              -
              
              
              
              (31,210
              )Pro
      forma net income (loss)
              
              $
              (336,012
              )
              
              $
              548,830
              
              
              $
              (833,499
              )
              
              $
              300,507Income
      (loss) per share:Basic
      and diluted – asreported
              
              $
              (0.01
              )
              
              $
              0.01
              
              
              $
              (0.02
              )
              
              $
              0.01Basic
      and diluted – proforma
              
              $
              (0.01
              )
              
              $
              0.01
              
              
              $
              (0.02
              )
              
              $
              0.01
  Basic
and Diluted Earnings (Loss) Per Share
  Basic
earnings (loss) per common share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per common share is
computed in the same way as basic earnings (loss) per common share except that
the denominator is increased to include the number of additional common shares
that would be outstanding if all potential common shares had been issued and if
the additional common shares were dilutive. Diluted earnings (loss) per common
share for the three-month and six month periods ended June 30, 2009 and 2008 is
computed in the same way as basic earnings (loss) per common share, as the
inclusion of additional common shares that would be outstanding if all potential
common shares had been issued would be anti-dilutive.  See Note 7 for
the calculation of basic and diluted weighted average common shares outstanding
for the three-month and six month periods ended June 30, 2009 and
2008.
  F-9
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements (Unaudited)
  As
of June 30, 2009, and
 For
Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
2008
 Income
Taxes
  The
Company follows the liability method of accounting for income taxes. Under this
method, deferred income tax assets and liabilities are recognized for the future
tax benefits and consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax balances. Deferred income tax assets and liabilities are measured
using enacted or substantially enacted tax rates expected to apply to the
taxable income in the years in which those differences are expected to be
recovered or settled. The effect on deferred income tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
date of enactment or substantive enactment.
  Use
of Estimates and Assumptions
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the use of estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosure of contingent obligations in the financial
statements and accompanying notes. The Company's most significant assumptions
are the estimates used in the determination of the deferred income tax asset
valuation allowance, the valuation of oil and gas reserves to which the Company
owns mineral rights and the valuation of the Company’s common shares that were
issued for obligations. The estimation process requires assumptions to be made
about future events and conditions, and as such, is inherently subjective and
uncertain. Actual results could differ materially from these
estimates.
  New
Accounting Pronouncements
  In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS 157"). SFAS 157 establishes a single definition of fair value and a
framework for measuring fair value, sets out a fair value hierarchy to be used
to classify the source of information used in fair value measurements and
requires new disclosures of assets and liabilities measured at fair value based
on their level in the hierarchy. SFAS 157 is effective for the Company’s year
beginning January 1, 2008 and has been applied prospectively. The adoption of
SFAS 157 has not had a material impact on the Company’s financial position or
reported results of operations.
  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.
  F-10
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements (Unaudited)
  As
of June 30, 2009, and
 For
Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
2008
 In
December 2007, the FASB ratified the final consensuses in Emerging Issues Task
Force, or EITF, Issue No. 07-1, "Accounting for Collaborative
Arrangements," (“Issue 07-1”), which requires certain income statement
presentation of transactions with third parties and of payments between parties
to the collaborative arrangement, along with disclosure about the nature and
purpose of the arrangement.  Issue 07-1 is effective for the Company’s year
beginning January 1, 2009.  The Company does not expect Issue 07-1 to have
a significant impact on our financial statements.
  In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
141(R)”), which replaces SFAS No. 141, “Business Combinations.” SFAS
141(R) requires an acquiring company to recognize the assets acquired, the
liabilities assumed, and any non-controlling interest in the acquired entity at
the acquisition date, measured at their fair values as of that date, with
limited exceptions.  This Statement also requires the acquiring company in
a business combination achieved in stages to recognize the identifiable assets
and liabilities, as well as the noncontrolling interest in the acquired company,
at the full amounts of their fair values.  SFAS 141(R) makes various other
amendments to authoritative literature intended to provide additional guidance
or to confirm the guidance in that literature to that provided in this
Statement.  This Statement is effective for the Company’s financial
statements beginning January 1, 2009.  The Company does not expect the
adoption of this accounting pronouncement to have a significant impact on our
financial statements.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”), which amends Accounting
Research Bulletin No. 51, “Consolidated Financial
Statements”, to improve the relevance, comparability, and transparency of
the financial information that a reporting entity provides in its consolidated
financial statements.  SFAS 160 establishes accounting and reporting
standards that require the ownership interests in subsidiaries not held by the
parent to be clearly identified, labeled and presented in the consolidated
statement of financial position within equity, but separate from the parent's
equity.  This statement also requires the amount of consolidated net income
attributable to the parent and to the non-controlling interest to be clearly
identified and presented on the face of the consolidated statement of
income.  Changes in a parent's ownership interest while the parent retains
its controlling financial interest must be accounted for consistently, and when
a subsidiary is deconsolidated, any retained non-controlling equity investment
in the former subsidiary must be initially measured at fair value.  The
gain or loss on the deconsolidation of the subsidiary is measured using the fair
value of any non-controlling equity investment.  The Statement also
requires entities to provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
non-controlling owners. This Statement applies prospectively to all entities
that prepare consolidated financial statements and applies prospectively for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008.  The Company does not expect the adoption of this
accounting pronouncement to have a significant impact on our financial
statements.
  F-11
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements (Unaudited)
  As
of June 30, 2009, and
 For
Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
2008
 In May
2008, the FASB issued SFAS No. 162 "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"), which is effective 90 days following
the SEC's approval of the Public Company Oversight Board amendments to AU
Section 411, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting
Principles”.  SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States.  The Company does not expect the adoption of SFAS 162 to
have a significant impact on our financial statements.
  In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events.” This
standard incorporates into authoritative accounting literature certain guidance
that already existed within generally accepted auditing standards, with the
requirements concerning recognition and disclosure of subsequent events
remaining essentially unchanged. This guidance addresses events which occur
after the balance sheet date but before the issuance of financial statements.
Under SFAS No.165, as under previous practice, an entity must record the effects
of subsequent events that provide evidence about conditions that existed at the
balance sheet date and must disclose but not record the effects of subsequent
events which provide evidence about conditions that did not exist at the balance
sheet date. This standard added an additional required disclosure relative to
the date through which subsequent events have been evaluated and whether that is
the date on which the financial statements were issued. As it relates to the
Company, this standard was effective beginning April 1, 2009. The
additional disclosures required by this standard are included in Note
3.
  In
June 2009, the FASB issued SFAS No. 168, “The FASB Accounting
Standards CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB
Statement No. 162,” and approved the FASB Accounting Standards
CodificationTM (Codification)
as the single source of authoritative nongovernmental US GAAP. The Codification
does not change current US GAAP, but is intended to simplify user access to all
authoritative US GAAP by providing all the authoritative literature related to a
particular topic in one place. All existing accounting standard documents will
be superseded and all other accounting literature not included in the
Codification will be considered non-authoritative. As it relates to the Company,
the Codification is effective July 1, 2009 and will require future
references to authoritative US GAAP to coincide with the appropriate section of
the Codification. Accordingly, this standard will not have an impact on the
Company’s results of operations or financial condition.
  F-12
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements (Unaudited)
  As
of June 30, 2009, and
 For
Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
2008
  4.       Equipment and Leasehold
Improvements
  The
following is a summary of equipment and improvements, at cost, as of June 30,
2009:
  Office
      equipment
              
              $
              88,904Leasehold
      improvements
              
              
              47,509Total
      equipment and improvements
              
              
              136,413Less:
      accumulated depreciation
              
              
              (74,721
              )Equipment
      and improvements, net
              
              $
              61,692
  Depreciation
expense for the six-month periods ended June 30, 2009 and 2008 was $20,502 and
$17,591, respectively.
  During
2008, the Company purchased $38,000 of Down-Hole Gas/Water Separation (“DGWS”)
tools.  An additional $19,000 of DGWS tools was purchased during the
six-month period ended June 30, 2009.  Due to the fact that the
Company was subsequently unable to exercise its option to acquire 100% of the
DGWS opportunity, as discussed in Note 9, the Company has no plans to utilize
the tools in the near future.  The Company’s management does not
believe that the value of the tools has been impaired and plans to market the
tools to other exploration and development companies.  Accordingly,
the down-hole tools have been classified as Assets Held for Sale on the
Company’s balance sheet as of June 30, 2009 and December 31,
2008.
  5.       Oil and Gas
Properties
  As of
June 30, 2009 and 2008, the Company’s cost centers are as follows:
  2009
              
              
              2008Amortizable
              
              
              Non-Amortizable
              
              
              Amortizable
              
              
              Non-AmortizableUnited
      States
              
              $
              2,495,764
              
              
              $
              1,825,470
              
              
              $
              2,354,864
              
              
              $
              1,446,980Canada
              
              
              -
              
              
              
              1,443
              
              
              
              -
              
              
              
              1,443The
      North Sea
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              2,495,764
              
              
              $
              1,826,913
              
              
              $
              2,365,864
              
              
              $
              1,448,423
 
 F-13
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements (Unaudited)
  As
of June 30, 2009, and
 For
Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
2008
  Producing
Properties
  The
Company owns a 75% working interest in certain leases located within the
Southwest Extension of the West Ranch Field, located in Jackson County,
Texas.
  The net
capitalized cost of this property is summarized below:
  Acquisition
      cost
              
              $
              1,906,764Development
      costs
              
              
              589,0002,495,764Depletion
              
              
              (57,667
              )Balance
      at June 30, 2009
              
              $
              2,438,097
  Exploratory
Prospects
  The
Company has entered into participation agreements in five exploratory oil and
gas properties. Each of the five exploratory projects is excluded from its
respective amortizable cost pool.  Each prospect’s costs 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.
  United
States
  Big SandSpring ValleyProspect
  In 2005,
The Company acquired a 50% working interest in the Big Sand Spring Valley
Prospect (the “BSSV Prospect”) and an option to acquire a 50% working interest
in an additional prospect, for an initial payment of $667,000 and the obligation
for a future payment of $2,000,000, which represented 50% of the estimated
initial drilling costs in the BSSV Prospect. In 2006, the Company acquired the
other 50% working interest in the BSSV Prospect in exchange for cash payments
totaling $300,000 and the transfer of the Company’s option on the additional
prospect.  Under the terms of the participation agreement, the Company
is obligated to issue one million shares of its common stock for each ten
million equivalent barrels of net proven oil reserves developed on the BSSV
Prospect. As of June 30, 2009, the Company’s investment in the BSSV Prospect
totals $1,292,229.  No exploratory wells have been drilled in BSSV
Prospect to date.  Unless annual rentals are renewed, the oil and gas
leases relating to the BSSV Prospect will expire in August 2009.  As
of June 30, 2009, the Company’s management has not yet determined if the annual
rentals will be renewed.  This property is evaluated for impairment
annually.  There were no impairments evident at June 30,
2009.
  F-14
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements (Unaudited)
  As
of June 30, 2009, and
 For
Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
2008
 Steamroller
Prospect
  The
Company currently owns various overriding royalty interests under approximately
20,172 net acres in Utah and Colorado, located within the Steamroller
Prospect.  In addition, the Company is entitled to receive an
overriding royalty interest on any additional leasehold interest acquired by its
working interest partners in an area of mutual interest (“AMI”) between the
parties.  The AMI covers approximately 3,571,200 gross
acres.  This property is evaluated for impairment
annually.  There were no impairments evident at June 30,
2009.
  PebbleBeachProspect
  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 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).
  In April
2007, as previously reported, the Company sold its stock in Pebble to Heartland
Resources Inc., a petroleum and natural gas exploration company whose shares are
listed on the TSX-Venture Exchange (“Heartland”).  The Company
received payment on a CDN $882,000 convertible note due from Pebble, and
retained all of its other interests as described above.  Furthermore,
during the five-year period following the closing of the agreement with
Heartland, for every 1,000 barrels of oil that Pebble produces on average per
day for 30 consecutive days, Heartland will issue to the Company 250,000 shares
of Heartland’s common stock, up to a maximum of 1,250,000 shares.
  In August
2007, Heartland changed its name to Ryland Oil Corporation
(“Ryland”).  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, Ryland’s US subsidiary, Rover Resources Inc.
(“Rover”) has acquired approximately 61,572 gross and 35,264 net acres
principally located in Divide County, North Dakota, within the Pebble Peach
Prospect.  The Company owns a ten percent (10%) working interest in
these properties. As of June 30, 2009, the Company’s working interest
expenditures in the North Dakota property total $533,242.
  F-15
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements (Unaudited)
  As
of June 30, 2009, and
 For
Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
2008
 This
property is evaluated for impairment annually.  There were no
impairments evident at June 30, 2009.  The property is currently in an
evaluation phase.  The Company does not expect that a determination
will be made on the viability of the property within the next twelve
months.
  Prospects
Sold
  In May
2007, the Company sold its 5% equity interest in Pebble. Per the terms of the
Pebble sale, the Company retained a 5% gross overriding royalty interest in each
well drilled on certain acreage that Pebble holds rights to in SE Saskatchewan,
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
recognizes these amounts as “spud fee” revenue when drilling
commences.  As of June 30, 2009, all eight of the initial wells have
been drilled, for which the Company has earned $2,000,000 in spud
fees.  As of June 30, 2009, the purchaser is holding $20,000 in spud
fees owed to the Company in escrow.
  In June
2008, the Company sold its 50% working interest in the Steamroller
Prospect.  Gross proceeds from the sale were $1,190,160, resulting in
a $936,678 gain on the transaction. Once the prospect was sold, the capitalized
costs were moved from the group excluded from amortization to the amortizable
group.  The Company did not record the sales of the unproven prospect as an
adjustment to capitalized costs because the gain on the sale would have
significantly altered the relationship between capitalized costs and proved
reserves of oil and gas in the United States cost center.  Under the
terms of the sale, the Company retained an overriding royalty on production from
the property sold, as well as an overriding royalty on production from any
properties acquired in an area of mutual interest which the purchaser may
develop in the future.
  North SeaQuad 14 and Quad 41/42
Prospects
  In 2005
and 2006, the Company acquired working interests in the Quad 14 and Quad 41/42
Prospects with the obligation to fund 12.5% and 15% of the drilling costs of two
exploratory wells, respectively. The Company placed $1.5 million on deposit for
each prospect to cover its share of the drilling costs. The exploratory wells on
both of these prospects were completed in 2007.  No economically
viable reserves were discovered.
  Once no
viable reserves were discovered, the Company’s investment in the North Sea was
included in the amortizable cost pool and the entire capitalized cost was
charged to expense in 2007 because the costs exceeded the cost center ceiling
due to lack of future revenue or any fair value of the property. A portion of
the monies that were held on deposit relating to the Company’s working interest
in the Quad 14 Project and released to the operator in 2007were subsequently
returned to the Company in 2008 and has been recognized as revenue during the
current year.
  F-16
  The
Company is disputing its obligation to participate in the drilling of the Quad
41/42 exploratory well.  As a result, no amounts held on deposit have
been released to the operator for the Quad 41/42 Prospect.  The
Company’s management is attempting to determine what amount, if any, it is
obligated to pay related to the drilling of the Quad 41/42 exploratory well and
what amount of deposited funds, if any, could be returned to the
Company.
  The
Company recorded impairments related to the North Sea projects as
follows:
  Restated2009
              
              
              2008Quad
      14
              
              $
              -
              
              
              $
              1,087Quad
      41/42
              
              
              -
              
              
              
              -Totals
              
              $
              -
              
              
              $
              1,087
  Canada
  In June
2008, the Company acquired a 5% overriding royalty position in additional
prospects located in Saskatchewan, Canada.
  6.       Commitments and
Contingencies
  Financial
Results, Liquidity and Management's Plan
  The
Company has incurred net losses since inception.  This factor raises
substantial doubt about the Company's ability to continue as a going
concern.  Historically, the Company has been successful in generating
additional operating capital through the disposition of oil and gas
prospects.  However, the disposition of properties is not a viable
strategy for funding the Company’s long-term operations.  Accordingly,
the Company’s management is developing and implementing plans to sustain the
Company’s cash flow from operating activities and/or acquire additional capital
funding.
  No
assurances can be given that the Company will obtain sufficient working capital
through the sale of oil and gas properties, the issuance of common stock or by
leveraging the Company's current assets, or that the implementation of its
business plan will generate sufficient revenues in the future to sustain ongoing
operations. The financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going
concern.
  Litigation
  The
Company's policy is to recognize amounts related to legal matters as a charge to
operations if it is probable that a liability has been incurred and the amount
of loss can be reasonably estimated, as required by SFAS 5.
  F-17
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements (Unaudited)
  As
of June 30, 2009, and
 For
Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
2008
 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.
  As
discussed in Note 10, the litigation was favorably settled in July
2009.
  Employment
Agreements
  In August
2007, the Company entered into a two-year employment agreement with its Vice
President of Engineering.  Unless extended, the employment agreement
will expire on July 31, 2009.  The Company amended its employment
agreement with its Vice President of Engineering effective October 1,
2008.  The amended agreement provides for annual compensation of
$144,000 and a signing bonus of $30,000.  In addition, the Company
granted to this employee options to purchase 1 million shares of the Company’s
common stock.  The options have a five-year life, vest over a two-year
period and have an exercise price of $0.24 per share, which represents the
estimated market value of the shares on the date of grant.
  In June
2008, the Company entered into a two-year employment agreement with its Chief
Financial Officer.  The agreement provides for annual compensation of
$138,000.  In addition, the Company granted to this employee options
to purchase 1 million shares of the Company’s common stock.  The
options have a five-year life, vest over a two-year period and have an exercise
price of $0.18 per share, which represents the estimated market value of the
shares on the date of grant.
  F-18
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements (Unaudited)
  As
of June 30, 2009, and
 For
Each of the Three-Month and Six-Month Periods Ended June 30, 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 June 30, 2009 under this lease are as follows:
  Amount2009
      (remaining)
              
              $
              31,2682010
              
              
              62,5372011
              
              
              64,1402012
              
              
              -2013
              
              
              -Total
              
              $
              157,945
  Gross
rent expense for the three-month periods ended June 30, 2009 and 2008 was
$19,418 and $16,158, respectively.  Gross rent expense for the
six-month periods ended June 30, 2009 and 2008 was $38,837 and $32,049,
respectively.
  7.       Earnings
(Loss) Per
Share
  The
following is a reconciliation of the number of shares used in the calculation of
basic earnings (loss) per share and diluted earnings (loss) per share for the
three-month and six-month periods ended June 30, 2009 and 2008:
  For
      the Three-Month Period
                Ended
      June 30,
              
              
              For
      the Six-Month Period
                Ended
      June 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Net
      income (loss)
              
              $
              (336,012
              )
              
              $
              564,435
              
              
              $
              (833,499
              )
              
              $
              331,717Weighted-average
      number ofcommon
      shares outstanding
              
              
              44,550,000
              
              
              
              44,550,000
              
              
              
              44,550,000
              
              
              
              44,550,000Incremental
      shares from theassumed
      exercise of dilutive stockoptions
              
              
              -
              
              
              
              66,666
              
              
              
              -
              
              
              
              66,666Diluted
      common shares outstanding
              
              
              44,550,000
              
              
              
              44,616,666
              
              
              
              44,550,000
              
              
              
              44,616,666Diluted
      earnings (loss) per share
              
              $
              (0.01
              )
              
              $
              0.01
              
              
              $
              (0.02
              )
              
              $
              0.01
  The
following securities were not included in the computation of diluted net
earnings (loss) per share as their effect would have been
anti-dilutive:
  June
                2009
              
              
              June
                2008Stock
      Options
              
              
              5,543,800
              
              
              
              4,543,800Warrants
              
              
              -
              
              
              
              12,924,000
 
 F-19
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements (Unaudited)
  As
of June 30, 2009, and
 For
Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
2008
  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 June 30, 2009, all 100,000 stock options are
exercisable.
  In June
2008, the Company granted options to purchase 1,000,000 shares of its common
stock to its Chief Financial Officer.  These options vest over 2
years, have a life of 5 years and have an exercise price of $0.18 per share, the
market price on the effective date of grant.  The options vest at the
rate of 250,000 shares at the end of each six-month period from the effective
date of grant, and all will be exercisable on December 2, 2010.
  In
October 2008, the Company granted options to purchase 1,000,000 shares of its
common stock to its President.  These options vest over 2 years, have
a life of 5 years and have an exercise price of $0.17 per share, the market
price on the effective date of grant.  Fifty percent of the options
vested immediately, with the remaining 50% vesting one year from the effective
date of the grant.
  A summary
of stock option activity for the six-month period ended June 30, 2009 and the
year ended December 31, 2008 is presented below:
 Optionse
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price
                    
                    Weighted
                      Average
                      Remaining
                      Contract
                      TermOutstanding
      at December 31, 2007
                    
                    
                    3,393,800
                    
                    
                    $
                    0.67
                    
                    3.5
      yearsOptions
      granted
                    
                    
                    2,150,000
                    
                    
                    $
                    0.19
                    
                    4.5
      yearsOptions
      exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    -Options
      expired
                    
                    
                    -
                    
                    
                    
                    -
                    
                    -Options
      forfeited
                    
                    
                    -
                    
                    
                    
                    -
                    
                    -Outstanding
      at December 31, 2008
                    
                    
                    5,543,800
                    
                    
                    $
                    0.46
                    
                    3.4
      yearsOptions
      granted
                    
                    
                    -
                    
                    
                    
                    -
                    
                    -Options
      exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    -Options
      expired
                    
                    
                    -
                    
                    
                    
                    -
                    
                    -Options
      forfeited
                    
                    
                    -
                    
                    
                    
                    -
                    
                    -Outstanding
      at June 30, 2009
                    
                    
                    5,543,800
                    
                    
                    $
                    0.46
                    
                    2.9
      yearsExercisable
      at June 30, 2009
                    
                    
                    4,093,800
                    
                    
                    $
                    0.55
                    
                    2.5
      years
 F-20
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements (Unaudited)
  As
of June 30, 2009, and
 For
Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
2008
  The
assumptions used in the Black-Scholes option pricing model for the stock options
granted during the year ended December 31, 2008 were as follows:
  Risk-free
      interest rate
              
              
              2.77-3.25
              %Expected
      volatility of common stock
              
              
              101
              %Dividend
      yield
              
              $
              0.00Expected
      life of options
              
              5
      yearsWeighted
      average fair market value of options granted
              
              $
              0.18
  Warrants
  A summary
of warrant activity for the six-month period ended June 30, 2009 and the year
ended December 31, 2008 is presented below:
  Number
      of
                Warrants
              
              
              Weighted
                Average
                Exercise
                PriceOutstanding,
      December 31, 2007
              
              
              12,924,000
              
              
              $
              1.16Issued
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Expired
              
              
              (12,924,000
              )
              
              $
              (1.16
              )Forfeited
              
              
              -
              
              
              
              -Outstanding, December
      31,2008
              
              
              -
              
              
              $
              -Issued
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Expired
              
              
              -
              
              
              
              -Forfeited
              
              
              -
              
              
              
              -Outstanding,
      June 30, 2009
              
              
              -
              
              
              $
              -Exercisable,
      June 30, 2009
              
              
              -
              
              
              $
              -
  Warrants
to purchase 11,676,000 expired in March 2008.  Warrants to purchase
1,248,000 shares expired in May 2008.
  F-21
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements (Unaudited)
  As
of June 30, 2009, and
 For
Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
2008
 Shares
Reserved for Future Issuance
  As of
June 30, 2009, the Company has reserved shares for future issuance upon exercise
of outstanding options and warrants as follows:
  Options
              
              
              5.543.800Warrants
              
              
              -Total
              
              
              5,543,800
  These
amounts do not include any shares that may have to be issued upon the discovery
of net proved reserves in the Nevada oil and gas property.
  9.       Related Party
Transaction
  In
October 2007, the Company acquired certain exploratory oil and gas leases and an
option (“Option”) to acquire 100% of a natural gas production opportunity which
employs specialty down-hole gas/water separation equipment from entities
partially-owned by our President and Chief Executive Officer.  Under
the Option agreement, the Company can, after meeting certain obligations,
purchase all of the outstanding shares of such related entity in exchange for 25
million shares of its common stock.
 
 The
Company made the following payments to acquire the Option:
 
 1)
              $125,000
      to the related entity for certain the oil and gas leases located in
      Alberta, Canada.
 
 2)
              $20,000
      to the related entity as reimbursement for amounts paid to Zavanna Canada
      Corp in connection with licenses to the DGWS
  equipment.
 
 The
Company had the following periodic obligations in order to retain the Option,
which expires on December 31, 2010:
 
 1)
              Payments
      of $20,000 to the related entity each six months commencing on June 30,
      2008 through June 30, 2010.
 
 2)
              Payments
      to the related entity of $250,000 on each of December 31, 2008 and
      December 31, 2009.  These amounts may be paid in either cash or
      with shares of our common stock.
 
 3)
              Drill
      and equip two wells with DGWS equipment; one before June 30, 2008 and the
      other before January 15, 2009.
  F-22
 Eternal
Energy Corp.
  Notes
to the Condensed Financial Statements (Unaudited)
  As
of June 30, 2009, and
 For
Each of the Three-Month and Six-Month Periods Ended June 30, 2009 and
2008
 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 June 30, 2009.
  10.     
Subsequent
Event
  In July
2009, the Company favorably settled its litigation with Zavanna LLC, et
al.  Under the terms of the settlement agreement, the plaintiffs
agreed to pay the Company $255,000 and to dismiss with prejudice all claims
against the Company and its President, Brad Colby, in exchange for the Company’s
dismissal with prejudice of all counterclaims made by the
Company.  The Company anticipates that the full amount of the
settlement proceeds will be received during the third quarter of
2009.
  F-23


ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.





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-Q contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995 that are based
on current management's expectations. These statements may be identified by
their use of words like “plans,” “expect,” “aim,” “believe,” “projects,”
“anticipate,” “intend,” “estimate,” “will,” “should,” “could” and other
expressions that indicate future events and trends. All statements that address
expectations or projections about the future, including statements about our
business strategy, expenditures, and financial results are forward-looking
statements. We believe that the expectations reflected in such forward-looking
statements are accurate. However, we cannot assure you that such expectations
will occur.
  Actual
results could differ materially from those in the forward looking statements due
to a number of uncertainties including, but not limited to, those discussed in
this section. Factors that could cause future results to differ from these
expectations include general economic conditions, further changes in our
business direction or strategy, competitive factors, oil and gas exploration
uncertainties, and an inability to attract, develop, or retain technical,
consulting or managerial agents or independent contractors. As a result, the
identification and interpretation of data and other information and their use in
developing and selecting assumptions from and among reasonable alternatives
requires the exercise of judgment. To the extent that the assumed events do not
occur, the outcome may vary substantially from anticipated or projected results,
and accordingly, no opinion is expressed on the achievability of those
forward-looking statements. No assurance can be given that any of the
assumptions relating to the forward-looking statements specified in the
following information are accurate, and we assume no obligation to update any
such forward-looking statements. You should not unduly rely on these
forward-looking statements, which speak only as of the date of this Annual
Report, except as required by law; we are not obligated to release publicly any
revisions to these forward-looking statements to reflect events or circumstances
occurring after the date of this report or to reflect the occurrence of
unanticipated events.
 
 Industry
Outlook
 
 The
petroleum industry is highly competitive and subject to significant volatility
due to numerous market forces. Crude oil and natural gas prices are affected by
market fundamentals such as weather, inventory levels, competing fuel prices,
overall demand and the availability of supply.
  4
 
 Worldwide
oil prices rose throughout 2007 and reached historical highs during the last
half of 2008, before tumbling amid worldwide economic
crisis.  Continued economic instability could impact demand, thus
adversely affecting crude oil prices.
 
 Oil
prices cannot be predicted with any certainty and have significantly affected
profitability and returns for upstream producers. Historically, the WTI price
has averaged approximately $47 per barrel over the past ten years. However,
during that time, the industry has experienced wide fluctuations in prices.
While local supply/demand fundamentals are a decisive factor affecting domestic
natural gas prices over the long term, day-to-day prices may be more volatile in
the futures markets, such as on the NYMEX and other exchanges, making it
difficult to forecast prices with any degree of confidence. Over the last ten
years, the NYMEX gas price has averaged approximately $5.67 per
mcf.
 
 Restatement
of the 2008 Financial Statements
 
 In March
2009, we discovered that certain transactions reported in our 2008 interim
financial statements were reported incorrectly.  Given the materiality
of the affected transactions and related account balances, we have elected to
restate our 2008 interim financial statements in order to correct the
error.
 
 Results
of Operations for the Three-Month Period Ended June 30, 2009 vs.
2008
 
 Our
business plan includes the acquisition of interests in oil and gas exploratory
prospects, and in some cases, such as the Pebble Beach Prospect and Steamroller
Prospect, we may sell all or part of our working interest and retain an
overriding royalty interest in the properties. The nature of these transactions
is that they occur irregularly and, therefore, our operating results may
fluctuate significantly from period to period.
 
 The
Company acquired a 75% working interest in the West Ranch property through a
series of transactions occurring in 2007 and began recognizing oil and gas
revenues and operating expenses relating to the West Ranch property in the
fourth quarter of 2007.  Falling oil prices led us to temporarily
shut-in the producing wells on the West Ranch property during the latter part of
2008.  We also elected to temporarily delay further development of the
West Ranch wells to divert working capital to fund our legal defense in the
Zavanna LLC, et al (“Zavanna”) litigation. As of June 30, 2009, the West Ranch
wells continue to be shut in.  Accordingly, the Company has not
recognized any revenue from oil and gas sales during the three-month period
ended June 30, 2009, compared to oil and gas revenue of $56,816 for the
three-month period ended June 30, 2008.  Oil and gas operating
expenses totaled $3,326 for the three-month period ended June 30, 2009,
which represents costs necessary to maintain the wells during the shut-in
period.  Oil and gas operating expenses totaled $187,838 for the
three-month period ended June 30, 2008.
 
 5
  As of
June 30, 2009, we had $1,615,021 on deposit relating to the drilling of the Quad
41/ 42 Prospect.  We are currently disputing our obligation to
participate in the drilling of the Quad 41/42 exploratory well.  As a
result, no amounts held on deposit have been released to the project’s
operator.  Our management is attempting to determine what amount, if
any, we are obligated to pay related to the drilling of the Quad 41/42
exploratory well and what amount of deposited funds, if any, could be returned
to the Company.
 
 General
and administrative expenses increased from $158,934 for the three-month period
ended June 30, 2008 to $167,511 for the three-month period ended June 30, 2009
primarily due to the following:
 
 ·
              As
      a result of the hiring our Chief Financial Officer in June 2008, the
      Company's payroll and related expenses for the three-month period ended
      June 30, 2009 increased by $24,753 from the same period in
      2008.
 
 ·
              Prior
      to October 1, 2008, we engaged a third-party consultant to provide us with
      investor relations services.  Investor relations expenses
      totaled $12,034 for the three-months ended June 30, 2008 compared to $0
      for the three-month period ended June 30, 2009.   All
      investor relations activities are currently performed by our Chief
      Financial Officer.
 
 ·
              Consulting
      fees for the three-month period ended June 30, 2009 related to land
      management declined by $16,688 from the same period in 2008.  We
      reduced our lease acquisition activity in 2009 in order to fund our
      defense of the Zavanna litigation, as discussed
  below.
 
 Stock-based
compensation expense for the three-month periods ended June 30, 2009 and 2008
was $89,025 and $78,871, 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 June 30, 2009 decreased by $46,368 from
the same period in 2008 primarily as a result lower audit fees as well as lower
legal fees incurred in connection with our defense of the litigation brought
forth by Zavanna.  As discussed below, the litigation with Zavanna
LLC, et al was favorably settled in July 2009.  Legal fees for May and
June 2009 declined as settlement talks neared their conclusion.
  6
 
 Depreciation,
depletion and amortization expense for the three-month period ended June 30,
2009 decreased by $24,993 from the same period in 2008, primarily due to the
fact that we wrote off our payments made under the licenses to use specialty
down-hole gas/water separation (“DGWS”) equipment in December
2008.  Amortization related to the down-hole licenses totaled $0 and
$17,100 for the three months ended June 30, 2009 and 2008,
respectively.  In addition, we did not recognize any depletion expense
related to the West Ranch property as there was no production during the current
quarter.
 
 We
recognized $16,722 of interest income for the three-month period ended June 30,
2009, primarily related to our North Sea deposit.  Interest income
related to the North Sea deposit was not accrued in the first half of 2008, but
rather, was recognized in the fourth quarter.
 
 Results
of Operations for the Six-Month Period Ended June 30, 2009 vs. 2008
 
 As noted
above, our West Ranch wells have been temporarily shut in since late
2008.  Accordingly, we have not recognized any oil and gas sales
revenue related to the West Ranch property in 2009.  We are currently
refining our strategy to waterflood the wells in order to stimulate production
from these wells.  We anticipate reinstating our waterflood activities
during the second half of 2009.  The Company has incurred $33,334 of
oil and gas operating expenses related to the West Ranch property during the
six-month period ended June 30, 2009.  The incurrence of these costs
was required in order to maintain the wells during the shut-in
period.
 
 In April
2009, we began receiving royalty payments associated with our 5% gross
overriding royalty interest in certain properties located in Saskatchewan,
Canada.  We recognized $4,533 of oil and gas sales revenue associated
with these overrides during the six-month period ended June 30,
2009.
 
 General
and administrative expenses increased from $288,016 for the six-month period
ended June 30, 2008 to $389,046 for the six-month period ended June 30, 2009
primarily due to the following:
 
 ·
              Payroll
      and related expenses for the six-month period ended June 30, 2009
      increased by $74,817 from that of the prior year primarily as a result of
      the hiring our Chief Financial Officer in June 2008 as well granting a
      salary increase to our Vice President of Engineering in October
      2008.
  7
  ·
              Prior
      to October 1, 2008, we engaged a third-party consultant to provide us with
      investor relations services.  Investor relations expenses
      totaled $30,374 for the six-months ended June 30, 2008 compared to $0 for
      the six-month period ended June 30, 2009.   All investor
      relations activities are currently performed by our Chief Financial
      Officer.
 
 ·
              Office
      rent expense increased by $7,388 for the six-month period ended June 30,
      2009 compared to the same period in the prior year as a result of entering
      into to a new office lease in January
2009.
 
 ·
              Travel
      and entertainment expenses for the six-month period ended June 30, 2009
      and 2008 were $5,372 and $16,085, respectively.  The decrease is
      primarily due to management’s decision to reduce business development
      activities until the Company’s cash position can be
      strengthened.
 
 Stock-based
compensation expense for the six-month periods ended June 30, 2009 and 2008 was
$199,275 and $155,737, 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 six-month period ended June 30, 2009 increased by $22,424 from the
same period in 2008 primarily as a result of legal fees incurred in connection
with our defense of the litigation brought forth by Zavanna.
 
 Depreciation,
depletion and amortization expense for the six-month period ended June 30, 2009
decreased by $44,834 from the same period in 2008, primarily due to the fact
that we wrote off our payments made under the licenses to use specialty
down-hole gas/water separation (“DGWS”) equipment in December
2008.  Amortization related to the down-hole licenses totaled $0 and
$34,200 for the six months ended June 30, 2009 and 2008,
respectively.  In addition, we have not recognized any depletion
expense in 2009 related to our West Ranch wells due to the fact that the wells
remain shut-in.  Depletion expense related to our West Ranch wells
totaled $13,095 for the six-month period ended June 30, 2008.
 
 We
recognized $27,014 of interest income for the six-month period ended June 30,
2009, an increase of $23,642 from the same period in 2008.  The
increase is due to interest earned on our North Sea deposit as well as on spud
fees which were being held in escrow pending the outcome of the Zavanna
litigation.  Interest income related to the North Sea deposit was not
recognized in 2008 until the fourth quarter.
 
 Liquidity and Capital
Resources
 
 As of
June 30, 2009, our assets totaled $6,348,646, which included cash balances of
$297,691 and investments in oil and gas properties of $4,265,010, net of
accumulated depletion.  In addition, we have recorded a $20,000
receivable for spud fees earned in 2008 and have $1,615,021 on deposit related
to our interest in the Quad 41/42 prospect.  In May 2009, we collected
$730,000 of the spud fees owed to us that were previously held in
escrow.  A portion of these funds was used to settle amounts owed to
Rover Resources Inc. in connection with our working interest in the Pebble Beach
Prospect, totaling $444,835.
  8
 
 We
anticipate spending $2,245,000 for improvement to our West Ranch property over
the next several years.  Since the Company has historically generated
net losses and negative cash flows, it is likely that we will need to obtain
additional working capital in order to fund these
expenditures.   Historically, we have successfully raised
additional operating capital through private equity funding
sources.  With that in mind, our management is refining its business
plan regarding various funding options.  However, no assurances can be
given that the Company will be able to obtain sufficient working capital through
the sale of its common stock and/or borrowing or that the development and
implementation of the Company’s business plan will generate sufficient future
revenues to sustain ongoing operations. In addition, we continue to dispute our
participation of the drilling of the Quad 41/42 exploratory well and are
pursuing the release funds held on deposit associated with this
prospect.  As of June 30, 2009, it is uncertain how much, if any, of
the funds held on deposit will ultimately be returned to the
Company.  The combination of these factors raises substantial doubt
with our auditor about the Company’s ability to continue as a going
concern.
 
 On
November 2007, we were served with a complaint alleging breach of contract,
misappropriation of confidential and proprietary information and of trade secret
and claims under the Colorado Uniform Trade Secrets Act, fraud, declaratory
relief declaring any agreements of release to be void and unenforceable as they
were obtained by fraudulent inducement, declaration of accounting and
constructive trust for all proceeds and profits from the alleged
misappropriation, injunctive relief for return of all allegedly misappropriated
information and cessation of use, civil theft of business values, and tortuous
interference with contract. The Plaintiffs sought compensatory and punitive
damages in an unspecified amount, prejudgment interest, declaratory relief,
injunctive relief, accounting, and attorneys’ fees. From the onset, Management
believed that the causes of action were without merit and defended its rights
vigorously. In January 2008, we filed a countersuit claiming abuse of process,
intentional interference with an existing business and contractual relations,
commercial disparagement and conspiracy.  The lawsuit continued to
negatively impact our ability to pursue additional opportunities and/or acquire
additional oil and gas prospects during 2008 and 2009.  A further
result of the lawsuit was the sale of certain assets in order to fund our
ongoing operations.  The litigation was favorably settled in July
2009.  As part of the settlement agreement, the Company will receive
$255,000 in settlement proceeds as partial reimbursement of legal fees incurred
in connection with the litigation.  The entire amount of the
settlement proceeds is expected to be received during the third quarter of
2009.
  Off-Balance
Sheet Arrangements
 
 The
Company had no off-balance sheet arrangements at June 30, 2009.
 
 9





ITEM 4T. CONTROLS AND PROCEDURES.





The
Company, under the supervision and with the participation of its management,
including the Chief Executive Officer and the Chief Financial Officer, evaluated
the effectiveness of the design and operation of the Company’s "disclosure
controls and procedures" (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended, as of the end of the period covered by this
report.  Based on that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective as of June 30, 2009.  There has been no
change in the Company’s internal control over financial reporting during the
quarter ended June 30, 2009, that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.




10


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).




10.9
            Letter
      Agreement by and between Eternal Energy Corp. and International Frontier
      Resources Corporation Relating to Quad 41 and Quad 42 dated January 30,
      2006. (Incorporated by reference to Exhibit 10.1 of our Current Report on
      Form 8-K filed February 3, 2006.)




10.10
            Amended
      and Restated Letter Agreement by and between Eternal Energy Corp. and
      International Frontier Resources Corporation Relating to Quad 14 dated
      January 30, 2006. (Incorporated by reference to Exhibit 10.2 of our
      Current Report on Form 8-K filed February 3,
  2006.)




10.11
            Finder’s
      Fee Agreement by and between Eternal Energy Corp. and Taverham Company
      Ltd. dated January 30, 2006. (Incorporated by reference to Exhibit 10.3 of
      our Current Report on Form 8-K filed February 3,
  2006.)




10.12
            Form
      of Subscription Agreement for March 2006 private placement. (Incorporated
      by reference to Exhibit 10.1 of our Current Report on Form 8-K filed March
      8, 2006.)




10.13
            Form
      of Common Stock Purchase Warrant for March 2006 private placement.
      (Incorporated by reference to Exhibit 10.2 of our Current Report on Form
      8-K filed March 8, 2006.)




11




10.14
            Form
      of Registration Rights Agreement for March 2006 private placement.
      (Incorporated by reference to Exhibit 10.1 of our Amended Current Report
      on Form 8-K/A filed March 29,
2006.)




10.15
            Letter
      Agreement between us and Eden Energy Corp. dated April 14, 2006
      (Incorporated by reference to Exhibit 10.1 our Current Report on Form 8-K
      filed April 21, 2006).




10.16
            Letter
      Agreement effective as of May 19, 2006, by and among Eternal Energy Corp.,
      International Frontier Resources Corporation, Palace Exploration Company
      Limited, Oilexco Incorporated, and Challenger Minerals (North Sea) Limited
      (Incorporated by reference to Exhibit 10.1 of our Current Report on Form
      8-K filed May 23, 2006).




10.17**
            Letter
      Agreement dated October 15, 2006, by and among Eternal Energy Corp.,
      Fairway Exploration, LLC, Prospector Oil, Inc., and 0770890 B.C. Ltd.
      (Incorporated by reference to Exhibit 10.17 of our Registration Statement
      on Form 10-KSB filed April 16,
2007).




10.18**
            Letter
      Agreement dated October 26, 2006, by and among Eternal Energy Corp.,
      Fairway Exploration, LLC, Prospector Oil, Inc., 0770890 B.C. Ltd., and
      Rover Resources Inc. (Incorporated by reference to Exhibit 10.18 of our
      Registration Statement on Form 10-KSB filed April 16,
    2007).




10.19
            Letter
      Agreement dated February 28, 2007, by and among Eternal Energy Corp.,
      Pebble Petroleum Inc., Emerald Bay Holdings Ltd., and Heartland Resources
      Inc. (Incorporated by reference to Exhibit 10.19 of our Registration
      Statement on Form 10-KSB filed April 16, 2007).10.20
            Agreement To Terminate DGWS
      Option (incorporated by reference to Exhibit 10.20 of our Quarterly
      Report on Form 10-Q for the quarter ended March 31,
  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 for the quarter ended March 31,
      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 for the quarter ended March 31,
  2009).




31.1*
            Certification
      pursuant to Section 302 of the Sarbanes-Oxley
  Act




31.2*
            Certification
      pursuant to Section 302 of the Sarbanes-Oxley
  Act




32.1*
            Certification
      pursuant to Section 906 of the Sarbanes-Oxley
  Act




32.2*
            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)August
      13, 2009
            /s/
      Bradley M. ColbyBradley
      M. ColbyPresident
      and Chief Executive Officer





13