UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549






FORM
10-Q/A





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





For the
quarterly period ended September 30,
2009





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





For the
transition period from  
to





Commission
File Number:000-50906






ETERNAL
ENERGY CORP.


(Exact
name of registrant as specified in its charter)




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








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





(303)
798-5235





(Registrant’s
telephone number, including area code)





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


Yes x No o




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





(Check
one):





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




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


Yes o No x





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


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










ETERNAL
ENERGY CORP.


FORM
10-Q


QUARTERLY
PERIOD ENDED SEPTEMBER 30, 2009





INDEX





A
      Note About Forward Looking Statements
                                      1PART
      I - FINANCIAL INFORMATIONItem
      1 - Condensed Financial Statements (Unaudited)
                                      3Condensed
      Balance Sheets – September 30, 2009 (Unaudited) and December 31,
      2008
                                      F-1Condensed
      Statements of Operations (Unaudited) - For Each of the Three- and Nine
      Month Periods Ended September 30, 2009 and 2008
                                      F-2Condensed
      Statements of Cash Flows (Unaudited) - For Each of the Three- and
      Nine-Month Periods Ended September 30, 2009 and 2008
                                      F-3Notes
      to the Condensed Unaudited Financial Statements
(Unaudited)
                                      F-5Item
      2 - Management’s Discussion and Analysis of Financial Condition or Results
      of Operations
                                      4Item
      4 - Controls and Procedures
                                      11PART
      II - OTHER INFORMATIONItem
      6 – Exhibits
                                      12Signatures
                                      14







A Note About Forward-Looking
Statements





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





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





1




EXPLANATORY
NOTE


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




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




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




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




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




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




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




Due to
the materiality of the errors, we have elected to restate our 2008 and 2007
financial statements to reflect the correction of these errors.  The
nature and effect of the corrections of the accounting errors on the financial
statements for the year ended December 31, 2008 and for the three-month and
nine-month periods ended September  30, 2008 are discussed in detail
in Part I, Item 7: Management’s Discussion and Analysis or Plan of Operation
(page 4) as well as in Part II, Item 8: Financial Statements and Supplementary
Data (Footnote 2, page F-5).




This
Amendment No. 1 on Form 10-Q/A amends our Report on Form 10-Q for the quarter
ended September 30, 2009 filed with the Securities and Exchange Commission on
November 23, 2009.  This Amendment No. 1 on Form 10-Q/A amends Part I,
Item 1: Financial Statements, Part I, Item 2: Management’s Discussion and
Analysis of Financial Condition and Results of Operation and Part I, Item 4T:
Controls or Procedures.  No other Item in our Report on Form 10-Q
filed on November 23, 2009 is amended, modified or updated
hereby.  Pursuant to Rule 12b-15 under the Securities Exchange Act of
1934, new certifications of our principal executive officer and principal
financial officer are being filed as exhibits to this Form 10-Q/A.




2




PART
I. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS.




Eternal
Energy Corp.
  Condensed
Financial Statements (Unaudited)
  As
of September 30, 2009 and December 31, 2008 and
 For
Each of the Three-Month and Nine-Month Periods Ended September 30, 2009 and
2008
  3
 
 Eternal
Energy Corp.
  Index
to the Condensed Financial Statements (Unaudited)
  As
      of September 30, 2009 and December 31, 2008 andFor Each of the Three-Month and Nine-Month Periods
      Ended September 30, 2009 and
2008
 
 Condensed
      Financial Statements of Eternal Energy Corp. (Unaudited):Condensed
      Balance Sheets as of September 30, 2009 (Unaudited) and December 31,
      2008
                    
                    F-1Condensed
      Statements of Operations For Each of the Three-Month and Nine-Month
      Periods Ended September 30, 2009 and 2008 (Unaudited)
                    
                    F-2Condensed
      Statements of Cash Flows For Each of the Nine-Month Periods Ended
      September 30, 2009 and 2008 (Unaudited)
                    
                    F-3Notes
      to the Condensed Financial Statements (Unaudited)
                    
                    F-5
  
 
 Eternal
Energy Corp.
 Condensed
      Balance Sheets
 
 September 30,
                  
                  
                  December 31,2009
                  
                  
                  2008(Unaudited)
                  
                  
                  (Restated)ASSETSCurrent
      assets:Cash
                  
                  $
                  252,939
                  
                  
                  $
                  727,701Accounts
      receivable
                  
                  
                  20,833
                  
                  
                  
                  -Prepaid
      expenses
                  
                  
                  6,292
                  
                  
                  
                  9,266Total
      current assets
                  
                  
                  280,064
                  
                  
                  
                  736,967Spud
      fees receivable
                  
                  
                  20,000
                  
                  
                  
                  750,000Equipment
      and leasehold improvements, net of accumulated depreciation and
      amortization of $85,238 and $54,667 respectively
                  
                  
                  51,174
                  
                  
                  
                  60,242Oil
      and gas properties – subject to amortization, net of accumulated depletion
      of $57,667 at December 31, 2008
                  
                  
                  -
                  
                  
                  
                  2,324,154Oil
      and gas properties – not subject to amortization
                  
                  
                  387,642
                  
                  
                  
                  1,324,400Assets
      held for sale
                  
                  
                  57,000
                  
                  
                  
                  38,000Deposits
                  
                  
                  1,609,445
                  
                  
                  
                  1,604,366Total
      assets
                  
                  $
                  2,405,325
                  
                  
                  $
                  6,838,129LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued liabilities
                  
                  $
                  130,381
                  
                  
                  $
                  98,808Accrued
      officer’s compensation
                  
                  
                  43,101
                  
                  
                  
                  43,101Accrued
      oil and gas interests
                  
                  
                  -
                  
                  
                  
                  444,738Total
      liabilities
                  
                  $
                  173,482
                  
                  
                  $
                  586,647Commitments
      and contingenciesStockholders'
      equity:Common
      stock, $.001 par value, 875,000,000 shares authorized, 44,550,000 shares
      issued and outstanding, respectively
                  
                  
                  44,550
                  
                  
                  
                  44,550Additional
      paid-in capital
                  
                  
                  9,312,048
                  
                  
                  
                  9,039,131Accumulated
      deficit
                  
                  
                  (7,124,755
                  )
                  
                  
                  (2,832,199
                  )Total
      stockholders' equity
                  
                  
                  2,231,843
                  
                  
                  
                  6,251,482Total
      liabilities and stockholders' equity
                  
                  $
                  2,405,325
                  
                  
                  $
                  6,838,129
 
 The
accompanying notes are an integral part of the financial
statements.
  F-1
  Eternal
Energy Corp.
 Condensed
      Statements of Operations (Unaudited)
 
 For the Three-Month
                        
                        
                        For the Nine-MonthPeriodEndedSeptember30,
                        
                        
                        PeriodEndedSeptember30,2008
                        
                        
                        
                        
                        
                        20082009
                        
                        
                        (Restated)
                        
                        
                        2009
                        
                        
                        (Restated)Gain
      on sale of oil and gas property – excluded from amortizable pool, net of
      costs
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        425,372Oil
      and gas sales
                        
                        
                        7,524
                        
                        
                        
                        -
                        
                        
                        
                        12,057
                        
                        
                        
                        137,073Spud
      fee revenue
                        
                        
                        -
                        
                        
                        
                        750,000
                        
                        
                        
                        -
                        
                        
                        
                        750,000Litigation
      settlement income
                        
                        
                        255,000
                        
                        
                        
                        -
                        
                        
                        
                        255,000
                        
                        
                        
                        -Total
      revenue
                        
                        
                        262,524
                        
                        
                        
                        750,000
                        
                        
                        
                        267,057
                        
                        
                        
                        1,312,445Operating
      expenses:Oil
      and gas operating expenses
                        
                        
                        8,382
                        
                        
                        
                        70,303
                        
                        
                        
                        41,716
                        
                        
                        
                        467,528Down-hole
      gas and water license royalties
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        51,000Impairment
      of oil and gas properties
                        
                        
                        3,393,998
                        
                        
                        
                        1,697
                        
                        
                        
                        3,393,998
                        
                        
                        
                        2,784General
      and administrative
                        
                        
                        176,680
                        
                        
                        
                        195,646
                        
                        
                        
                        565,725
                        
                        
                        
                        513,120Stock
      based compensation
                        
                        
                        73,642
                        
                        
                        
                        115,512
                        
                        
                        
                        272,917
                        
                        
                        
                        320,163Professional
      fees
                        
                        
                        48,039
                        
                        
                        
                        125,272
                        
                        
                        
                        271,378
                        
                        
                        
                        289,379Depreciation,
      amortization and depletion expense
                        
                        
                        10,517
                        
                        
                        
                        26,015
                        
                        
                        
                        30,571
                        
                        
                        
                        90,902Total
      operating costs
                        
                        
                        3,711,258
                        
                        
                        
                        534,445
                        
                        
                        
                        4,576,305
                        
                        
                        
                        1,734,876Total
      operating income (loss)
                        
                        
                        (3,448,734
                        )
                        
                        
                        215,555
                        
                        
                        
                        (4,309,248
                        )
                        
                        
                        (422,431
                        )Interest
      income (expense)
                        
                        
                        (10,322
                        )
                        
                        
                        6,253
                        
                        
                        
                        16,692
                        
                        
                        
                        9,625Net
      income (loss)
                        
                        $
                        (3,459,056
                        )
                        
                        $
                        221,808
                        
                        
                        $
                        (4,292,556
                        )
                        
                        $
                        (412,806
                        )Net
      loss per common share - basic and diluted
                        
                        $
                        (0.08
                        )
                        
                        $
                        0.00
                        
                        
                        $
                        (0.10
                        )
                        
                        $
                        (0.01
                        )Weighted
      average number of shares outstanding - basic and
    diluted
                        
                        
                        44,550,000
                        
                        
                        
                        44,550,000
                        
                        
                        
                        44,550,000
                        
                        
                        
                        44,550,000
 
 The
accompanying notes are an integral part of the financial
statements.
  F-2
  Eternal
Energy Corp.
 Condensed
      Statements of Cash Flows (Unaudited)
 
 For theFor the
                  
                  
                  Nine-MonthNine Month
                  
                  
                  Period EndedPeriod Ended
                  
                  
                  September 30,September 30,
                  
                  
                  20082009
                  
                  
                  (Restated)Cash
      flows provided by (used in) operating activities:Net
      income (loss)
                  
                  $
                  (4,292,556
                  )
                  
                  $
                  (412,806
                  )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Non
      cash transactions:Stock-based
      compensation
                  
                  
                  272,917
                  
                  
                  
                  320,163Depreciation,
      depletion and amortization
                  
                  
                  30,571
                  
                  
                  
                  90,902Impairment
      of oil and gas properties
                  
                  
                  3,391,965
                  
                  
                  
                  -Gain
      on the sale of oil and gas property, excluded from
      amortization
                  
                  
                  -
                  
                  
                  
                  (425,372
                  )Changes
      in operating assets and liabilities:(Increase)
      decrease in receivables
                  
                  
                  709,167
                  
                  
                  
                  (585,000
                  )Decrease
      in prepaid expense
                  
                  
                  2,974
                  
                  
                  
                  23,465Increase
      in deposits
                  
                  
                  (5,079
                  )
                  
                  
                  -Increase
      (decrease) in accounts payable and accrued liabilities
                  
                  
                  31,573
                  
                  
                  
                  (32,840
                  )Net
      cash provided by (used) in operating activities
                  
                  
                  141,532
                  
                  
                  
                  (1,021,488
                  )Cash
      flows used in investing activities:Return
      of drilling deposits
                  
                  
                  -
                  
                  
                  
                  121,452Proceeds
      from the sale of oil and gas property, excluded from
      amortization
                  
                  
                  -
                  
                  
                  
                  1,190,135Additions
      to oil and gas properties
                  
                  
                  (575,791
                  )
                  
                  
                  (386,717
                  )Additions
      to equipment and leasehold improvements
                  
                  
                  (40,503
                  )
                  
                  
                  (24,004
                  )Net
      cash provided by (used in) investing activities
                  
                  
                  (616,294
                  )
                  
                  
                  900,866Net
      decrease in cash
                  
                  
                  (474,762
                  )
                  
                  
                  (120,622
                  )Cash
      - beginning of period
                  
                  
                  727,701
                  
                  
                  
                  791,891Cash
      - end of period
                  
                  $
                  252,939
                  
                  
                  $
                  671,269
  The
accompanying notes are an integral part of the financial
statements.
  F-3
  Eternal
Energy Corp.
 Condensed
      Statements of Cash Flows (Unaudited)
 
 Supplemental
Disclosure of Cash Flow Information
 
 For theFor the
                  
                  
                  Nine-MonthNine-Month
                  
                  
                  Period EndedPeriod Ended
                  
                  
                  September 30,September 30,
                  
                  
                  20082009
                  
                  
                  (Restated)Cash
      paid during the nine-month period for:Interest
                  
                  $
                  -
                  
                  
                  $
                  -Income
      taxes
                  
                  $
                  -
                  
                  
                  $
                  -
 
 The
accompanying notes are an integral part of the financial
statements.
  F-4
 
 Eternal
      Energy Corp.Notes
      to the Condensed Financial Statements (Unaudited)
 
 1.
              Description of
      Business
  Eternal
Energy Corp. (the "Company") was incorporated in the state of Nevada in March
2003. The Company engages in the acquisition, exploration, development and
producing of oil and gas properties. At September 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 2009,
the Company discovered that certain transactions reported in its 2006, 2007 and
2008 financial statements were recorded incorrectly. 
Specifically:
  ·
              stock-based
      compensation expense for 2006, 2007 and 2008 was understated due to an
      incorrect application of SFAS No. 123(R), Share-Based Payment("SFAS 123(R)") (Note 3).  The impact of this correction
      includes an increase to the Company’s beginning accumulated deficit
      balance as of January 1, 2008 in the amount of $193,482. The effect of
      this correction results in an increase in additional paid in capital and
      accumulated deficit balances as of December 31, 2008 of $269,762 and an
      increase in stock-based compensation expense for the three- and nine-month
      periods ended September 30, 2008 of $19,739 and $68,653,
      respectively.  The correction of this error does not impact the
      Company’s statements of cash flows for the nine-month period ended
      September 30, 2008;
  ·
              the
      Company had incorrectly recognized the gross proceeds from the sale of its
      Steamroller Prospect (June 2008) as revenues and written off the specific
      costs associated with the Steamroller Prospect as costs of prospects
      sold.  The Company has subsequently changed its accounting treatment
      for the sale of its Steamroller Prospect to allocate a portion of the
      sales proceeds to the portion of the Company’s full cost pool that is not
      subject to amortization, based on the relative estimated fair market
      values of the prospects included in the pool as of the date of the
      Steamroller Prospect sale.  The impact of this correction is a
      decrease in oil and gas properties, not subject to amortization, and an
      increase in accumulated deficit of $502,417 as of December 31, 2008. 
      This correction also results in a decrease in revenue from the sale of
      prospects of $1,353,645, a decrease in the cost of prospects sold of
      $251,457, a decrease in general and administrative expenses of $9,400 and
      an increase in the gain recognized on the sale of an oil and gas prospect
      of $425,372 for the nine-month period ended September 30, 2008.  The
      correction of this error further results in a decrease in the amount of
      cash provided by operations and a decrease in the amount of cash used for
      investing activities, respectively, in the amount of $972,790 for the
      nine-month period ended September 30,
2008;
  F-5
 
 Eternal
      Energy Corp.Notes
      to the Condensed Financial Statements (Unaudited)
 
 ·
              spud
      fee revenue was improperly recognized in June 2008 although initial
      drilling of the corresponding well did not commence until July 2008. 
       The Company has corrected this error by recording the spud fee
      revenue in the three-month period ended September 30, 2009.  The
      impact of this correction is an increase in spud fees revenue of $250,000
      for the three-month period ended September 30, 2008.   The
      correction of this error did not impact the Company’s statement of cash
      flows for the nine-month period ended September 30, 2008;
    and
  ·
              the
      Company incorrectly recognized revenue in connection with the receipt of
      monies previously advanced to Rover Resources.  The impact of this
      correction is a decrease in advances as of September 30, 2008 and a
      decrease of revenue from the sale of oil and gas property in the amount of
      $163,510 for the three- and nine-months ended September 30,
      2008.
  Given the
materiality of the affected transactions and related account balances, the
Company has elected to restate its 2007 and 2008 financial statements in order
to correct the errors.  The correction of these errors had the following
effects on the Company’s balance sheet as of December 31, 2008:
  December 31,December 31,
                      
                      
                      20082008
                      
                      
                      as PreviouslyRestated
                      
                      
                      Reported
                      
                      
                      ChangeOil
      and gas properties (net)
                      
                      $
                      3,648,554
                      
                      
                      $
                      4,150,970
                      
                      
                      $
                      (502,417
                      )Additional
      paid in capital
                      
                      
                      9,039,131
                      
                      
                      
                      8,769,369
                      
                      
                      
                      269,762Accumulated
      deficit
                      
                      
                      (2,832,199
                      )
                      
                      
                      (2,060,020
                      )
                      
                      
                      (772,179
                      )
 
 The
correction of these errors had the following effects on the Company’s results of
operations for the three- and nine-month periods ended September 30,
2008:
 
 For TheFor The
                    
                    
                    Three-MonthThree-Month
                    
                    
                    Period EndedPeriod Ended
                    
                    
                    September 30,September 30,
                    
                    
                    20082008
                    
                    
                    as PreviouslyRestated
                    
                    
                    Reported
                    
                    
                    ChangeSpud
      fee revenue
                    
                    $
                    750,000
                    
                    
                    $
                    500,000
                    
                    
                    $
                    250,000General
      and administrative
                    
                    
                    195,646
                    
                    
                    
                    193,079
                    
                    
                    
                    2,567Stock-based
      compensation
                    
                    
                    115,512
                    
                    
                    
                    95,773
                    
                    
                    
                    19,739Net
      earnings (loss)
                    
                    
                    221,808
                    
                    
                    
                    (8,453
                    )
                    
                    
                    230,261Basic
      and diluted loss per share
                    
                    $
                    (0.00
                    )
                    
                    $
                    0.00
                    
                    
                    $
                    (0.00
                    )
  F-6
  Eternal
      Energy Corp.Notes
      to the Condensed Financial Statements (Unaudited)
  For TheFor The
                    
                    
                    Nine-MonthNine-Month
                    
                    
                    Period EndedPeriod Ended
                    
                    
                    September 30,September 30,
                    
                    
                    20082008
                    
                    
                    as PreviouslyRestated
                    
                    
                    Reported
                    
                    
                    ChangeSale
      of prospects
                    
                    $
                    -
                    
                    
                    $
                    1,353,645
                    
                    
                    $
                    (1,353,645
                    )Gain
      on sale of oil and gas property
                    
                    
                    425,372
                    
                    
                    
                    -
                    
                    
                    
                    425,372Cost
      of prospects sold
                    
                    
                    -
                    
                    
                    
                    251,457
                    
                    
                    
                    (251,457
                    )General
      and administrative
                    
                    
                    513,120
                    
                    
                    
                    481,096
                    
                    
                    
                    (32,024
                    )Stock-based
      compensation
                    
                    
                    320,163
                    
                    
                    
                    251,510
                    
                    
                    
                    68,653Net
      earnings (loss)
                    
                    
                    (412,806
                    )
                    
                    
                    323,263
                    
                    
                    
                    (736,069
                    )Basic
      and diluted loss per share
                    
                    $
                    (0.01
                    )
                    
                    $
                    0.01
                    
                    
                    $
                    (0.02
                    )
  Certain
amounts from the previous year have been reclassified to conform to the current
period presentation.
  3.
              Summary of Significant
      Accounting Policies
  Basis
of Presentation
  These
condensed financial statements are presented in United States dollars and have
been  prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with the
instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article
8 of SEC Regulation S-X. The principles for interim financial information do not
require the inclusion of all the information and footnotes required by generally
accepted accounting principles for complete financial statements. Therefore,
these financial statements should be read in conjunction with the Company’s
Annual Report on Form 10-K for the year ended December 31, 2008. The condensed
financial statements included herein are unaudited; however, in the opinion of
management, they contain all normal recurring adjustments necessary for a fair
statement of the condensed results for the interim periods. Operating results
for the three month and nine month periods ended September 30, 2009 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2009.
  The
Company has evaluated subsequent events through November 23, 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 September 30, 2009.
  Revenue
Recognition
  The
Company records the sale of its interests in prospects as a reduction to the
cost pool when the terms of the transaction are final and the sales price is
determinable. Spud fee revenue is recognized when drilling commences. 
Working interest, royalty and net profit interests are recognized as revenue
when oil and gas is sold.
  Concentration
of Credit Risk
  At
September 30, 2009, the Company had $2,939 on deposit in excess of the United
States (FDIC) federal insurance limit of $250,000 per bank. The Company believes
this credit risk is mitigated by the financial strength of the financial
institution.
  F-7
 
 Eternal
      Energy Corp.Notes
      to the Condensed Financial Statements (Unaudited)
 
 Equipment
and Leasehold Improvements
  Equipment
and leasehold improvements are recorded at cost. Expenditures for major
additions and improvements are capitalized and depreciated over the estimated
useful lives of the related assets using the straight-line method for financial
reporting purposes. The Company uses other depreciation methods (generally
accelerated) for tax purposes, where appropriate. The estimated useful lives for
significant property and equipment categories are as follows:
  Equipment
                3
      yearsLeasehold
      improvements
                lesser
      of useful life or lease term
  When
equipment and improvements are retired or otherwise disposed of, the cost and
the related accumulated depreciation are removed from the Company's accounts and
any resulting gain or loss is included in the results of operations for the
respective period.
  Expenditures
for minor replacements, maintenance and repairs are charged to expense as
incurred.
  Oil
and Gas Properties
  The
Company follows the full cost method of accounting for its investments in oil
and gas properties. Under the full cost method, all costs associated with the
exploration of properties are capitalized into appropriate cost centers within
the full cost pool.  Internal costs that are capitalized are limited to
those costs that can be directly identified with acquisition, exploration, and
development activities undertaken and do not include any costs related to
production, general corporate overhead, or similar activities.  Cost
centers are established on a country-by-country basis.
  Capitalized
costs within the cost centers are amortized on the unit-of-production basis
using proved oil and gas reserves.   The cost of investments in
unproved properties and major development projects are excluded from capitalized
costs to be amortized until it is determined whether or not proved reserves can
be assigned to the properties.  Until such a determination is made,
the properties are assessed annually to ascertain whether impairment has
occurred.  The costs of drilling exploratory dry holes are included in
the amortization base immediately upon determination that the well is
dry.
  At the
end of each reporting period, capitalized costs are subject to a ceiling test,
in which the costs shall not exceed the cost center ceiling.  The cost
center ceiling is equal to i) the present value of estimated future net revenues
computed by applying current prices of oil and gas reserves (with consideration
of price changes only to the extent provided by contractual arrangements) to
estimated future production of proved oil and gas reserves as of the date of the
latest balance sheet presented, less estimated future expenditures (based on
current costs) to be incurred in developing and producing the proved reserves
computed using a discount factor of ten percent and assuming continuation of
existing economic conditions;  plus ii) the cost of properties not
being amortized; plus iii) the lower of cost or estimated fair value of unproven
properties included in the costs being amortized; less iv) income tax effects
related to differences between the book and tax basis of the
properties.  If unamortized costs capitalized within a cost center,
less related deferred income taxes, exceed the cost center ceiling, the excess
is charged to expense and separately disclosed during the period in which the
excess occurs.
  F-8
 
 Eternal
      Energy Corp.Notes
      to the Condensed Financial Statements (Unaudited)
 
 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(ASC 825), 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.
  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 nine-month periods ended September 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 nine-month periods ended September 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.
  F-9
 
 Eternal
      Energy Corp.Notes
      to the Condensed Financial Statements (Unaudited)
 
 New
Accounting Pronouncements
  In
June 2009, the FASB issued SFAS No. 168, “The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles - a replacement of FASB Statement No. 162,” and also issued
Accounting Standards No. 2009-01, “Generally Accepted Accounting Principles”
(ASC Topic 105-10), which establishes the FASB Accounting Standards
Codification (the “Codification” or “ASC”) as the official single source of
authoritative U.S. generally accepted accounting principles (“GAAP”). All
guidance contained in the Codification carries an equal level of
authority.  The Codification also includes all relevant SEC guidance
organized using the same topical structure in separate sections within the
Codification.  The Codification is not intended to change GAAP, but it will
change the way GAAP is organized and presented.  The Codification is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009.  Except for the disclosure requirements, the
adoption of this statement did not have an impact on the determination or
reporting of the Company’s financial statements.  The Company is providing
the Codification cross-reference alongside the references to the standards
issued and adopted prior to the adoption of the Codification. 
  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.
  In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("ASC
820-10”). ASC 820-10 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. ASC 820-10 is effective for the Company’s year
beginning January 1, 2008 and has been applied prospectively. The adoption of
ASC 820-10 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 ("ASC 825-10").  ASC 825-10 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. ASC 825-10 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. ASC 825-10 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 ASC 825-10 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)
 
 In
December 2007, the FASB ratified the final consensuses in Emerging Issues Task
Force, or EITF, Issue No. 07-1, "Accounting for Collaborative
Arrangements," (“ASC 808-10”), 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.  ASC 808-10 is effective for the Company’s year
beginning January 1, 2009.  The Company does not expect ASC 808-10 to have
a significant impact on our financial statements.
  In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“ASC
805”), which replaces SFAS No. 141, “Business Combinations.” ASC
805 requires an acquiring company to recognize the assets acquired, the
liabilities assumed, and any non-controlling interest in the acquired entity at
the acquisition date, measured at their fair values as of that date, with
limited exceptions.  ASC 805 also requires the acquiring company in a
business combination achieved in stages to recognize the identifiable assets and
liabilities, as well as the noncontrolling interest in the acquired company, at
the full amounts of their fair values.  ASC 805 makes various other
amendments to authoritative literature intended to provide additional guidance
or to confirm the guidance in that literature to that provided in this
Statement.  ASC 805 is effective for the Company’s financial statements
beginning January 1, 2009.  The 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” (“ASC 810-10-65”), 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.  ASC 810-10-65 establishes accounting and reporting
standards that require the ownership interests in subsidiaries not held by the
parent to be clearly identified, labeled and presented in the consolidated
statement of financial position within equity, but separate from the parent's
equity.  This statement also requires the amount of consolidated net income
attributable to the parent and to the non-controlling interest to be clearly
identified and presented on the face of the consolidated statement of
income.  Changes in a parent's ownership interest while the parent retains
its controlling financial interest must be accounted for consistently, and when
a subsidiary is deconsolidated, any retained non-controlling equity investment
in the former subsidiary must be initially measured at fair value.  The
gain or loss on the deconsolidation of the subsidiary is measured using the fair
value of any non-controlling equity investment.  The Statement also
requires entities to provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
non-controlling owners. This Statement applies prospectively to all entities
that prepare consolidated financial statements and applies prospectively for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008 (January 1, 2009 for the Company).  The 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)
 
 In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“ASC
855-10”). 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 ASC 855-10, as under previous practice, an entity
must record the effects of subsequent events that provide evidence about
conditions that existed at the balance sheet date and must disclose but not
record the effects of subsequent events which provide evidence about conditions
that did not exist at the balance sheet date. This standard added an additional
required disclosure relative to the date through which subsequent events have
been evaluated and whether that is the date on which the financial statements
were issued. As it relates to the Company, this standard was effective beginning
April 1, 2009. The additional disclosures required by this standard are
included in Note 3.
  4.
              Equipment and
      Leasehold Improvements
  The
following is a summary of equipment and improvements, at cost, as of September
30, 2009:
  Office
      equipment
                      
                      $
                      88,903Leasehold
      improvements
                      
                      
                      47,509Total
      equipment and improvements
                      
                      
                      136,412Less:
      accumulated depreciation
                      
                      
                      (85,238
                      )Equipment
      and improvements, net
                      
                      $
                      51,174
  Depreciation
expense for the three-month periods ended September 30, 2009 and 2008 was
$10,517 and $8,726, respectively.  Depreciation expense for the nine-month
periods ended September 30, 2009 and 2008 was $30,571 and $26,318,
respectively.
  F-12
 
 Eternal
      Energy Corp.Notes
      to the Condensed Financial Statements (Unaudited)
 
 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
nine-month period ended September 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 balances
sheet as of September 30, 2009 and December 31, 2008.
  5.
              Oil and Gas
      Properties
  As of
September 30, 2009 and December 31, 2008, the Company’s cost centers are as
follows:
  September 30, 2009
                        
                        
                        December 31, 2008Amortizable
                        
                        
                        Non-Amortizable
                        
                        
                        Amortizable
                        
                        
                        Non-AmortizableUnited
      States
                        
                        $
                        -
                        
                        
                        $
                        386,199
                        
                        
                        $
                        2,324,154
                        
                        
                        $
                        1,322,957Canada
                        
                        
                        -
                        
                        
                        
                        1,443
                        
                        
                        
                        -
                        
                        
                        
                        1,443The
      North Sea
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Total
                        
                        $
                        -
                        
                        
                        $
                        387,642
                        
                        
                        $
                        2,324,154
                        
                        
                        $
                        1,324,400
  Producing
Properties
  The
Company owns a 75% working interest in certain leases located within the
Southwest Extension of the West Ranch Field, located in Jackson County, Texas.
In August 2009, certain leases included in the West Ranch Field expired and, as
a result, the reserves associated with these leases contained in the Glasscock
Reservoir are no longer available to the Company.  These leases were
pivotal to the implementation of a waterflood program designed to stimulate
production throughout the West Ranch Field.  The Company has no immediate
plans to recomplete any of the remaining wells located in the West Ranch
Field.  Because there is no reasonable certainty that the Company will seek
to extract the underlying reserves associated with the remaining West Ranch
leases, accounting rules stipulate that the economic value of these reserves may
not be used to evaluate the recoverability of the Company’s investment in the
West Ranch property.  Accordingly, the Company has fully impaired its full
cost pool, subject to amortization, as of September 30, 2009.
  The net
capitalized cost of the West Ranch property is summarized below:
  Acquisition
      cost
                    
                    $
                    1,923,874Development
      costs
                    
                    
                    589,000Total
      capitalized costs
                    
                    
                    2,512,874Historical
      depletion
                    
                    
                    (57,667
                    )Impairment
                    
                    
                    (2,455,207
                    )Balance
      at September 30, 2009
                    
                    $
                    -
  F-13
  Eternal
      Energy Corp.Notes
      to the Condensed Financial Statements (Unaudited)
  Exploratory
Prospects
  The
Company has entered into participation agreements in five exploratory oil and
gas properties. Each of the five exploratory prospects 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.Three of the five prospects have been abandoned. The Company
has a working interest and/or overriding royalty interest in the wells on the
remaining prospects, if they are successful. The Company paid certain amounts
upon execution of the agreements and is obligated to share in the drilling costs
of the exploratory wells. In addition, the Company has agreed to issue shares of
its common stock based upon the proven reserves of the property.
  United
States
  Big Sand Spring Valley
Prospect
  In 2005,
The Company acquired a 50% working interest in the Big Sand Spring Valley
Prospect (the “BSSV Prospect”) and an option to acquire a 50% working interest
in an additional prospect, for an initial payment of $667,000 and the obligation
for a future payment of $2,000,000, which represented 50% of the estimated
initial drilling costs in the BSSV Prospect. In 2006, the Company acquired the
other 50% working interest in the BSSV Prospect in exchange for cash payments
totaling $300,000 and the transfer of the Company’s option on the additional
prospect.  Under the terms of the participation agreement, the Company is
obligated to issue one million shares of its common stock for each ten million
equivalent barrels of net proven oil reserves developed on the BSSV
Prospect.
  No
exploratory wells were drilled in the BSSV Prospect prior to the expiration of
the Company’s leases in August 2009.  Pursuant to the rules of the full
cost method of accounting, the cost basis of the BSSV Prospect was transferred
into the amortizable pool.  As noted above, the entire full cost pool,
subject to amortization, was fully impaired as of September 30,
2009.
  Steamroller
Prospect
  In
December 2007, the Company purchased a 50% interest in a 640-acre mineral lease
from the State of Utah. In the first quarter of 2008, the Company purchased a
50% interest in an additional 10,860 acre lease from the State of Utah. 
 This property is evaluated for impairment annually.
  In June
2008, the Company sold its 50% working interest in the Steamroller
prospect.  Because the Steamroller prospect represented a significant
portion of the full cost pool, not subject to amortization, and because full
cost accounting rules do not allow for the use of specific identification with
respect to calculating gains on the partial disposal of the pool, the Company
has allocated the total cost of the full cost pool, not subject to amortization,
among the individual prospects included within the pool, based on their relative
fair market value as of the date of the Steamroller disposition.  The
allocated basis attributed to the Steamroller prospect as of the date of sale
was $764,763.  Gross proceeds from the sale totaled $1,190,135, resulting
in a $425,372 gain on the sale of the Steamroller prospect.
  F-14
 
 Eternal
      Energy Corp.Notes
      to the Condensed Financial Statements (Unaudited)
 
 Under the
terms of the sale, the Company retained an overriding royalty interest on all
future production from the property sold, as well as an overriding royalty
interest on production from properties of mutual interest which the purchaser
may develop in the future.  The Company currently owns various overriding
royalty interests under approximately 20,172 net acres in Utah and Colorado,
located within the Steamroller Prospect.  In addition, the Company is
entitled to receive an overriding royalty interest on any additional leasehold
interest acquired by its working interest partners in an area of mutual interest
(“AMI”) between the parties.  The AMI covers approximately 3,571,200 gross
acres.
  Pebble Beach
Prospect
  In 2006,
the Company entered into a series of agreements that resulted in the acquisition
of five percent (5%) of the capital stock of Pebble Petroleum, Inc. (“Pebble”),
as well as the following rights and interest in the Pebble Beach
Prospect:
  ·
              A
      $250,000 spud fee for each of the first eight wells drilled by
      Pebble;
  ·
              A
      five percent (5%) gross overriding royalty from each well drilled on
      certain acreage that Pebble holds rights to in SE Saskatchewan, Canada (no
      capital outlay or other expenses to be required by the Company);
      and
  ·
              A
      ten percent (10%) working interest in a joint venture with Rover
      Resources, Inc., (“Rover”), a subsidiary of Pebble; the joint venture will
      explore and develop certain prospects principally located in Divide
      County, North Dakota (the Company will pay 10% of all costs
      incurred).
  As of
March 31, 2009, Pebble owns approximately 324,590 gross and net acres in the
Pebble Beach Prospect in SE Saskatchewan, Canada in which the Company owns a
five percent (5%) gross overriding royalty.  In addition, Rover has
acquired approximately 61,572 gross and 35,264 net acres principally located in
Divide County, North Dakota, within the Pebble Peach Prospect.  The Company
owns a ten percent (10%) working interest in these properties. As of September
30, 2009, the Company’s working interest expenditures in the North Dakota
property total $533,242.
  This
property is evaluated for impairment annually.  There were no impairments
evident at September 30, 2009.  The property is currently in an evaluation
phase.  The Company does not expect that a determination will be made on
the ultimate viability of the property within the next twelve
months.
  F-15
 
 Eternal
      Energy Corp.Notes
      to the Condensed Financial Statements (Unaudited)
 
 North Sea Quad 14 and Quad
41/42 Prospects
  In 2005
and 2006, the Company acquired working interests in the Quad 14 and Quad 41/42
Prospects with the obligation to fund 12.5% and 15% of the drilling costs of two
exploratory wells, respectively. The Company placed $1.5 million on deposit for
each prospect to cover its share of the drilling costs. The exploratory wells on
both of these prospects were completed in 2007.  No economically viable
reserves were discovered.
  Once no
viable reserves were discovered, the Company’s investment in the North Sea was
included in the amortizable cost pool and the entire capitalized cost was
charged to expense in 2007 because the costs exceeded the cost center ceiling
due to lack of future revenue or any fair value of the property. A portion of
the monies that were held on deposit relating to the Company’s working interest
in the Quad 14 Project and released to the operator in 2007 were subsequently
returned to the Company in 2008 and has been recognized as revenue during the
current year.
  The
Company is disputing its obligation to participate in the drilling of the Quad
41/42 exploratory well.  As a result, no amounts held on deposit have been
released to the operator for the Quad 41/42 Prospect.
  The
Company recorded impairments related to the North Sea projects during the
nine-month periods ended September 30, 2009 and 2008 as follows:
  20082009
                            
                            
                            (Restated)Quad
      14
                            
                            $
                            1,937
                            
                            
                            $
                            2,784Quad
      41/42
                            
                            
                            -
                            
                            
                            
                            -Totals
                            
                            $
                            1,937
                            
                            
                            $
                            2,784
 
 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.
  F-16
 
 Eternal
      Energy Corp.Notes
      to the Condensed Financial Statements (Unaudited)
 
 No
assurances can be given that the Company will obtain sufficient working capital
through the sale of oil and gas properties, the issuance of common stock or by
leveraging the Company's current assets, or that the implementation of its
business plan will generate sufficient revenues in the future to sustain ongoing
operations. The financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going
concern.
  Litigation
  The
Company's policy is to recognize amounts related to legal matters as a charge to
operations if it is probable that a liability has been incurred and the amount
of loss can be reasonably estimated, as required by SFAS 5.
  On
November 20, 2007, the Company was served with a complaint alleging breach of
contract, misappropriation of confidential and proprietary information and of
trade secrets and claims under the Colorado Uniform Trade Secrets Act, fraud,
declaratory relief declaring any agreements of release to be void and
unenforceable as they were obtained by fraudulent inducement, declaration of
accounting and constructive trust for all proceeds and profits from the alleged
misappropriation, injunctive relief for return of all allegedly misappropriated
information and cessation of use, civil theft of business values, and tortuous
interference with contract. Plaintiffs sought compensatory damages in an
unspecified amount, prejudgment interest, declaratory relief, injunctive relief,
accounting, and attorneys’ fees.  The Company filed a countersuit claiming
abuse of process, intentional interference with an existing business and
contractual relations, commercial disparagement and conspiracy.  The
lawsuit and countersuits were favorably settled in July 2009, resulting in the
Company receiving $255,000 of settlement proceeds.  The lawsuit negatively
impacted 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.
  Employment
Agreements
  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 had a
five-year life, were schedule to vest over a two-year period and had an exercise
price of $0.18 per share, which represented the estimated market value of the
shares on the date of grant. As discussed in Note 8, these options were
cancelled in September 2009.
  Effective
August 1, 2009, the Company renewed its two-year employment agreement with its
Vice President of Engineering.  The renewed contract provides for annual
compensation of $144,000.
  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 September 30, 2009 under this lease are as follows:
  Amount2009
      (remaining)
                          
                          $
                          15,6342010
                          
                          
                          62,5372011
                          
                          
                          64,1402012
                          
                          
                          -2013
                          
                          
                          -Total
                          
                          $
                          142,311
  F-17
 
 Eternal
      Energy Corp.Notes
      to the Condensed Financial Statements (Unaudited)
 
 Gross
rent expense for the three-month periods ended September 30, 2009 and 2008 was
$19,418 and $18,293, respectively.  Gross rent expense for the nine-month
periods ended September 30, 2009 and 2008 was $58,255 and $50,342,
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 nine-month periods ended September 30, 2009 and
2008:
  For the Three-Month
                    
                    
                    For the Nine-MonthPeriodEndedSeptember30,
                    
                    
                    PeriodEndedSeptember30,2008
                    
                    
                    
                    
                    
                    20082009
                    
                    
                    (Restated)
                    
                    
                    2009
                    
                    
                    (Restated)Net
      income (loss)
                    
                    $
                    (3,459,056
                    )
                    
                    $
                    221,808
                    
                    
                    $
                    (4,292,556
                    )
                    
                    $
                    (412,806
                    )Weighted-average
      number of common shares outstanding
                    
                    
                    44,550,000
                    
                    
                    
                    44,550,000
                    
                    
                    
                    44,550,000
                    
                    
                    
                    44,550,000Incremental
      shares from the assumed exercise of dilutive stock options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Diluted
      common shares outstanding
                    
                    
                    44,550,000
                    
                    
                    
                    44,550,000
                    
                    
                    
                    44,550,000
                    
                    
                    
                    44,550,000Diluted
      earnings (loss) per share
                    
                    $
                    (0.08
                    )
                    
                    $
                    0.00
                    
                    
                    $
                    (0.10
                    )
                    
                    $
                    (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:
  September 30,September 30,
                    
                    
                    20082009
                    
                    
                    (Restated)Stock
      Options
                    
                    
                    -
                    
                    
                    
                    4,543,800Warrants
                    
                    
                    -
                    
                    
                    
                    12,924,000
  F-18
 
 Eternal
      Energy Corp.Notes
      to the Condensed Financial Statements (Unaudited)
 
 8.
              Equity
      Transactions
  Issuance
and Cancellation of Restricted Stock
  In
September 2009, the Company announced that it had granted 6,500,000 restricted
shares of common stock to its directors and officers in exchange for the return
and cancellation of 5,393,800 unexercised options to purchase shares of common
stock.  In October 2009, the Company’s board of directors rescinded the
grant of the restricted common shares, effective on the original grant
date.  Because the restricted stock certificates were never delivered to
the intended recipients, Management has determined that the title to the shares
never transferred.  Accordingly, no stock-based compensation has been
recorded in connection with the issuance of the restricted shares.  The
stock options remained cancelled.
  Issuance
of Stock Options
  In 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.  The contract between the Company and the consultant was
terminated in August 2009, at which time, all of the outstanding and unexercised
options held by the consultant expired.
  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 would have been 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% scheduled to vest one year from the
effective date of the grant.
  F-19
  Eternal
      Energy Corp.Notes
      to the Condensed Financial Statements (Unaudited)
  A summary
of stock option activity for the nine-month period ended September 30, 2009 and
the year ended December 31, 2008 is presented below:
  WeightedWeighted
                      
                      
                      AverageAverage
                      
                      
                      RemainingExercise
                      
                      
                      ContractOptions
                      
                      
                      Price
                      
                      
                      TermOutstanding
      at December 31, 2007
                      
                      
                      3,393,800
                      
                      
                      $
                      0.67
                      
                      
                      3.5
      yearsOptions
      granted
                      
                      
                      2,150,000
                      
                      
                      
                      -
                      
                      
                      
                      -Options
      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
                      
                      
                      (5,543,800
                      )
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      at September 30, 2009
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      -Exercisable
      at September 30, 2009
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      -
  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 nine-month period ended September 30, 2009 and the
year ended December 31, 2008 is presented below:
  WeightedAverageNumber of
                    
                    
                    ExerciseWarrants
                    
                    
                    PriceOutstanding,
      December 31, 2007
                    
                    
                    12,924,000
                    
                    
                    $
                    1.16Issued
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    -Expired
                    
                    
                    (12,924,000
                    )
                    
                    $
                    (1.16
                    )Forfeited
                    
                    
                    -
                    
                    
                    
                    -Outstanding, December
      31, 2008
                    
                    
                    -
                    
                    
                    $
                    -Issued
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    -Expired
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    -
                    
                    
                    
                    -Outstanding,
      September 30, 2009
                    
                    
                    -
                    
                    
                    $Exercisable,
      September 30, 2009
                    
                    
                    -
                    
                    
                    $
                    -
  Warrants
to purchase 11,676,000 expired in March 2008.  Warrants to purchase
1,248,000 shares expired in May 2008.
  F-20
  Eternal
      Energy Corp.Notes
      to the Condensed Financial Statements (Unaudited)
  Shares
Reserved for Future Issuance
  As of
September 30, 2009, the Company has not reserved any shares for future issuance
upon exercise of outstanding options and warrants.  This amount does not
include 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.
 
 4)
              Pay
      to one DGWS manufacturer (Kudu Industries) $25,000 in September 2007 and
      further agree to purchase ten DGWS devices each year, beginning in 2008,
      at a cost of $3,800 per device in order to maintain exclusive rights to
      equipment supply. In addition, the grantor of the license will receive a
      1% royalty on each well which utilizes the device.  The license
      expires in January 2012 and can be extended for an additional 5 years at a
      cost of $300,000.
 
 5)
              Payments
      to a second DGWS manufacturer (Down-Hole Injections, Inc.) of $35,000 on
      March 30, 2008 and future annual payments of $10,000. The Company is
      required to pay $500 for each device used and assign to the manufacturer a
      carried 5% working interest in each well using the device.  The
      Company is required to purchase and install 20 devices in Canada by March
      31, 2008.
  F-21
 
 Eternal
      Energy Corp.Notes
      to the Condensed Financial Statements (Unaudited)
 
 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 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 September 30, 2009.
  10.
              Subsequent
      Events
  In
October 2009, the Company granted 6,000,000 options to purchase shares of the
Company’s common stock to its directors and officers.  The stock options
have a five-year life, vest immediately and have an exercise price of $0.05,
which exceeded the volume weighted average closing price of the Company’s common
stock for the five-day period preceding the grant.  Pursuant to the rules
of ASC 718, the Company will treat the new stock option grant as a modification
of the previously outstanding stock options and will recognize stock-based
compensation expense of $145,190 associated with the new grant and the remaining
$67,071 of unamortized stock-based compensation associated with the original
stock options during the fourth quarter of 2009.
  Also in
October 2009, the Company renewed its two-year employment agreement with its
President and Chief Executive Officer and extended its employment agreement with
its Chief Financial Officer.  The financial terms of the renewed and
amended employment agreements are substantially the same as the previous
employment agreements, which provide for annual compensation of $174,000 and
$138,000, respectively.
  In
November 2009, the Company collected $1,604,100 that was previously held on
deposit in connection with the Company’s North Sea Quad 41/42 Prospect (Note
5).
  F-22




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




THE
FOLLOWING PRESENTATION OF OUR MANAGEMENT'S DISCUSSION AND ANALYSIS SHOULD BE
READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND OTHER FINANCIAL
INFORMATION INCLUDED ELSEWHERE IN THIS REPORT.
 
 A
Note About Forward-Looking Statements
 
 This
Quarterly Report on Form 10-Q contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995 that are based
on current management's expectations. These statements may be identified by
their use of words like “plans,” “expect,” “aim,” “believe,” “projects,”
“anticipate,” “intend,” “estimate,” “will,” “should,” “could” and other
expressions that indicate future events and trends. All statements that address
expectations or projections about the future, including statements about our
business strategy, expenditures, and financial results are forward-looking
statements. We believe that the expectations reflected in such forward-looking
statements are accurate. However, we cannot assure you that such expectations
will occur.
  Actual
results could differ materially from those in the forward looking statements due
to a number of uncertainties including, but not limited to, those discussed in
this section. Factors that could cause future results to differ from these
expectations include general economic conditions, further changes in our
business direction or strategy, competitive factors, oil and gas exploration
uncertainties, and an inability to attract, develop, or retain technical,
consulting or managerial agents or independent contractors. As a result, the
identification and interpretation of data and other information and their use in
developing and selecting assumptions from and among reasonable alternatives
requires the exercise of judgment. To the extent that the assumed events do not
occur, the outcome may vary substantially from anticipated or projected results,
and accordingly, no opinion is expressed on the achievability of those
forward-looking statements. No assurance can be given that any of the
assumptions relating to the forward-looking statements specified in the
following information are accurate, and we assume no obligation to update any
such forward-looking statements. You should not unduly rely on these
forward-looking statements, which speak only as of the date of this Quarterly
Report, except as required by law; we are not obligated to release publicly any
revisions to these forward-looking statements to reflect events or circumstances
occurring after the date of this report or to reflect the occurrence of
unanticipated events.
 
 Industry
Outlook
 
 The
petroleum industry is highly competitive and subject to significant volatility
due to numerous market forces. Crude oil and natural gas prices are affected by
market fundamentals such as weather, inventory levels, competing fuel prices,
overall demand and the availability of supply.
 
 4
  Worldwide
oil prices rose throughout 2007 and reached historical highs during the last
half of 2008, before tumbling amid worldwide economic crisis.  Though
oil prices have stabilized in 2009, continued economic instability could impact
demand, thus adversely affecting crude oil prices.
 
 Oil
prices cannot be predicted with any certainty and have significantly affected
profitability and returns for upstream producers. Historically, the WTI price
has averaged approximately $47 per barrel over the past ten years. However,
during that time, the industry has experienced wide fluctuations in prices.
While local supply/demand fundamentals are a decisive factor affecting domestic
natural gas prices over the long term, day-to-day prices may be more volatile in
the futures markets, such as on the NYMEX and other exchanges, making it
difficult to forecast prices with any degree of confidence. Over the last ten
years, the NYMEX gas price has averaged approximately $5.67 per
mcf.
 
 Restatement
of the 2008 Financial Statements
 
 In 2009,
we discovered that that certain transactions reported in our 2008 and 2007
financial statements were reported incorrectly.  Given the materiality
of the affected transactions and related account balances, we have elected to
restate our 2008 and 2007 financial statements in order to correct the
error.  The nature and effect of the corrections of the accounting
errors on the financial statements for the years ended December 31, 2008 and
2007 are discussed in detail in Part II, Item 8: Financial Statements and
Supplementary Data (Footnote 2, page F-__). As a result, we have revised our
discussion of the results of operations for the three-month and nine-month
periods ended September 30, 2009 vs. 2008.
 
 Results
of Operations for the Three-Month Period Ended September 30, 2009 vs.
2008
 
 Our
business plan includes the acquisition of interests in oil and gas exploratory
prospects, and in some cases, such as the Steamroller Prospect, we may sell all
or part of our working interest and retain an overriding royalty interest in the
properties. The nature of these transactions is that they occur irregularly and,
therefore, our operating results may fluctuate significantly from period to
period.
 
 We began
receiving royalty payments associated with our 5% gross overriding royalty
interest in certain properties located in Saskatchewan, Canada in April
2009.  We recognized $7,524 of oil and gas sales revenue associated
with these overriding interests during the three-month period ended September
30, 2009.  We expect revenues from our overriding royalty positions to
continue to grow as additional wells are drilled in the area.
 
 In July
2009, we successfully settled the lawsuit against our Company brought forth by
Zavanna Corporation LLC, et al (“Zavanna” or the “Zavanna
litigation”).  Under the terms of the settlement agreement, we
received settlement proceeds totaling $255,000 and the release and dismissal of
all claims against our Company and our CEO in exchange for the Company’s
dismissal, with prejudice, of all counter claims made by the
Company.  The $255,000 of settlement proceeds is presented as
litigation settlement revenue on our statements of operations for the
three-month period ended September 30, 2009.
 
 5
  In June
2008, we recognized a gain of $425,372 on the sale of our 50% working interest
in the Steamroller Prospect.  Net proceeds received from the sale
totaled $1,190,135.
 
 In 2006,
we entered into a series of agreements with Pebble Petroleum that resulted in
our right to receive spud fees for each of the first eight wells drilled on
leases previously owned by our Company.  In August 2008, we recognized
$750,000 in spud fee revenue, which represents spud fees for the final three
wells covered under these agreements.  No further spud fee revenue
will be recognized by us as spud fees have now been earned for all eight of the
initial wells drilled pursuant to our agreement with Pebble
Petroleum.
 
 The
Company acquired a 75% working interest in the West Ranch property through a
series of transactions occurring in 2007.  Falling oil prices and the
need to scale down our equipment to better suit our well compression needs led
us to temporarily shut-in the producing wells on the West Ranch property in June
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 litigation.
 
 In August
of 2009, certain leases included in the West Ranch field expired.  In
our attempt to re-lease these properties, we were unable to reach mutually
acceptable terms with the mineral rights owners and, as a result, the proven oil
and gas reserves associated with these leases are no longer available to
us.  Because these leases were located near the crest of the Glasscock
reservoir structure and, thus, were essential to performing the planned
peripheral waterflood, we no longer plan to implement a waterflood program in
the Glasscock reservoir.
 
 As of
September 30, 2009, the remaining West Ranch wells continue to be shut
in.  Accordingly, we have not recognized any revenue from oil and gas
sales from the West Ranch property during the three-month periods ended
September 30, 2009 and 2008.  Oil and gas operating expenses totaled
$8,382 for the three-month period ended September 30, 2009, which represents
costs necessary to maintain the wells during the shut-in period.  Oil
and gas operating expenses totaled $70,303 for the three-month period ended
September 30, 2008.
 
 Through a
series of transactions that occurred in 2005 and 2006, we acquired a 100%
working interest in the Big Sand Spring Valley Prospect (the “BSSV Prospect”),
located in Nevada.   No exploratory wells have been drilled in
the BSSV Prospect as a result of cash constraints and the lack of successful
drilling efforts by other oil and gas exploration companies in the
area.  In August 2009, our leases associated with the BSSV Prospect
expired.  Pursuant to accounting rules under the full cost method of
accounting, we transferred the cost of the BSSV Prospect into the portion of our
full cost pool that is subject to amortization and evaluated the total pool for
impairment.
 
 Because
there is no reasonable certainty we will seek to extract the underlying reserves
associated with the remaining West Ranch leases, accounting rules stipulate that
we exclude the economic value of these reserves when evaluating the
recoverability of our investment in the West Ranch
property.  Accordingly, we recognized $3,393,998 of impairment expense
during the three-month period associated with our full cost pool, which is now
fully impaired as of September 30, 2009.
 
 6
  General
and administrative expenses decreased from $195,646 for the three-month period
ended September 30, 2008 to $176,680 for the three-month period ended September
30, 2009 primarily due to the following:
 
 ·
              Insurance
      expense for the three-month period ended September 30, 2009 decreased by
      $11,962 from the same period in 2008 primarily due to lower employee
      medical insurance premiums, which were negotiated in July 2009, as well as
      the reduction of certain liability coverage deemed unnecessary due to the
      our current business strategy.
 
 ·
              Prior
      to October 1, 2008, we engaged a third-party consultant to provide us with
      investor relations services.  Investor relations expenses
      totaled $12,595 for the three-months ended September 30, 2008 compared to
      $0 for the three-month period ended September 30, 2009.  All
      investor relations activities are currently performed by our Chief
      Financial Officer.
 
 ·
              We
      began providing shared CFO services to Roadrunner Oil & Gas, Inc.
      (“Roadrunner”) in October 2008, for which Roadrunner pays us $4,000 per
      month.  The fees received from Roadrunner reduced our gross
      salaries expense by $12,000 for the three months ended September 30, 2009
      compared to the same period in
2008.
 
 ·
              In
      August 2009, we paid $16,500 in bonuses to members of our senior
      management in recognition of their successful efforts to defend the
      Company in the litigation brought forth by Zavanna
      Corporation.
 
 Stock-based
compensation expense for the three-month period ended September 30, 2009
decreased by $41,870 from the same period in 2008 due to the normal vesting of
certain stock options during the fourth quarter of 2008 and the first three
quarters of 2009.
 
 Professional
fees for the three-month period ended September 30, 2009 decreased by $77,233
from the same period in 2008, primarily as a result lower legal fees incurred in
connection with our defense of the Zavanna litigation.  As discussed
below, the Zavanna litigation was favorably settled in July 2009.
 
 Depreciation,
depletion and amortization expense for the three-month period ended September
30, 2009 decreased by $15,498 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 September 30, 2009 and 2008,
respectively.
 
 7
  In
September 2009, we recorded an adjustment to reduce the amount of year-to-date
interest income earned associated with the funds held on deposit in connection
with the Quad 41/42 project.  The adjustment resulted in the
recognition of negative interest income for the three-month period ended
September 30, 2009.  On a year-to-date basis, interest income
associated with the deposited funds has decreased due to falling short-term
investment rates.  On a comparative basis, interest income from our
time deposits for the three-month period ended September 30, 2009 decreased by
$5,654 from the same period in 2008 due to lower levels of cash on hand during
the period.
 
 As of
September 30, 2009, we had $1,604,100 on deposit relating to the drilling of the
Quad 41/ 42 Prospect.  In November 2009, we entered into an agreement
to indemnify the entity controlling the funds on deposit in exchange for the
release and return of the funds on deposit to us.  As of the date of
this filing, the funds previously held on deposit have been fully
collected.
 
 Results
of Operations for the Nine-Month Period Ended September 30, 2009 vs.
2008
 
 We began
receiving royalty payments associated with our 5% gross overriding royalty
interest in certain properties located in Saskatchewan, Canada in April
2009.  We recognized $12,057 of oil and gas sales revenue associated
with these overrides during the nine-month-month period ended September 30, 2009
compared to $0 for the same period in 2008.
 
 In July
2009, we successfully settled the lawsuit against our Company brought forth by
Zavanna, which resulted in the recognition of $255,000 of litigation settlement
revenue in our statements of operations for the nine-month period ended
September 30, 2009.
 
 As noted
above, our West Ranch wells have been temporarily shut in since June
2008.  Prior to being shut in, these wells generated $137,073 of
revenue from oil and gas sales and incurred $467,528 of operating costs for the
nine-month period ending September 30, 2008. As of September 30, 2009, the West
Ranch wells continue to be shut in.  As a result, we have not
recognized any revenue from oil and gas sales during 2009.  We
incurred $41,716 of oil and gas operating expenses related to the West Ranch
property during the nine-month period ended September 30, 2009, which represent
costs necessary to maintain the wells while they are shut in.
 
 In June
2008, we recognized a gain of $425,372 on the sale of our 50% working interest
in the Steamroller Prospect.  Net proceeds received from the sale
totaled $1,190,135.
 
 As a
result of the expiration of our leases in the BSSV Prospect, the expiration of
certain leases in the West Ranch Field and the reasonable uncertainty about
whether we will recomplete the remaining West Ranch wells, we recognized
impairment expense of $3,393,998 during the nine-month period ended September
30, 2009 to impair our full cost pool assets fully.
 
 We
recognized $750,000 of spud fee revenue during the nine-month period ended
September 30, 2008.  As previously discussed, no such revenue was
recorded in 2009 as spud fees have now been earned on all eight of the initial
wells drilled pursuant to our agreement with Pebble Petroleum.
 
 General
and administrative expenses increased from $513,120 for the nine-month period
ended September 30, 2008 to $565,725 for the nine-month period ended September
30, 2009 primarily due to the following:
  8
  ·
              Payroll
      and related expenses for the nine-month period ended September 30, 2009
      increased by $98,241 from the same period in 2008, primarily as a result
      of the hiring our Chief Financial Officer in June 2008, granting a salary
      increase to our Vice President of Engineering in October 2008 and, as
      discussed previously, the granting of bonuses to management in recognition
      of the successful defense of the Zavanna litigation.  These
      increases were partially offset by $31,000 in fees that we received for
      providing shared CFO services to Roadrunner for the nine-months ended
      September 30, 2009.
 
 ·
              Prior
      to October 1, 2008, we engaged a third-party consultant to provide us with
      investor relations and website management services.  All
      investor relations activities are currently performed by our Chief
      Financial Officer. Investor relations and website management expenses for
      the nine-month period ended September 30, 2009 decreased by $33,879 from
      the same period in 2008.
 
 ·
              Travel
      and entertainment expenses for the nine-month period ended September 30,
      2009 decreased by $17,147 from the same period in 2008 due to management’s
      decision to reduce business development activities until the Company’s
      cash position could be
strengthened.
 
 ·
              In
      late 2008, we engaged a third party to serve as our resident agent and
      legal representative for certain contemplated Canadian
      transactions.  As a result, foreign agent expense for the
      nine-month period ended September 30, 2009 increased by $6,775 from the
      same period in 2008.  We terminated the foreign agent
      arrangement as in August 2009 as we decided not to pursue the contemplated
      transactions.
 
 Stock-based
compensation expense for the nine-month period ended September 30, 2009 totaled
$272,917 compared to $320,163 for the nine-month period ended September 30,
2008.  The decrease was due to the normal vesting of certain stock
options during the fourth quarter of 2008 and the first three quarters of
2009.
 
 Professional
fees for the nine-month period ended September 30, 2009 decreased by $18,001
from the same period in 2008 primarily as a result of the settlement of the
Zavanna litigation in July 2009.
 
 Depreciation,
depletion and amortization expense for the nine-month period ended September 30,
2009 decreased by $60,331 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
$51,300 for the nine-month period ended September 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 $13,284 for the nine-month period ended September 30, 2008.
 
 9
  We
recognized $16,692 of interest income for the nine-month period ended September
30, 2009, an increase of $7,067 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
September 30, 2009, our assets totaled $2,405,325, which included cash balances
of $252,939 and investments in oil and gas properties of $387,642.  In
addition, we have recorded a $20,000 receivable for spud fees earned in 2008 and
have $1,604,100 on deposit related to our interest in the Quad 41/42
Prospect.
 
 We have
begun receiving royalties in connection with our gross over-riding royalty
positions in Saskatchewan and expect such royalties to continue for the
foreseeable future.
 
 In
November 2009, we collected the $1,604,100 that was previously held on deposit
related to our interest in the Quad 41/42 Prospect.
 
 As a
result of the expiration of certain leases in the West Ranch Field, we no longer
expect to spend $2,245,000 to implement a waterflood program to stimulate
production of the remaining wells.  No decision has been made reached
regarding the possible recompletion of the remaining wells.
 
 On
November 2007, we were served with a complaint alleging breach of contract,
misappropriation of confidential and proprietary information and of trade secret
and claims under the Colorado Uniform Trade Secrets Act, fraud, declaratory
relief declaring any agreements of release to be void and unenforceable as they
were obtained by fraudulent inducement, declaration of accounting and
constructive trust for all proceeds and profits from the alleged
misappropriation, injunctive relief for return of all allegedly misappropriated
information and cessation of use, civil theft of business values, and tortuous
interference with contract. The Plaintiffs sought compensatory and punitive
damages in an unspecified amount, prejudgment interest, declaratory relief,
injunctive relief, accounting, and attorneys’ fees. From the onset, Management
believed that the causes of action were without merit and defended its rights
vigorously. In January 2008, we filed a countersuit claiming abuse of process,
intentional interference with an existing business and contractual relations,
commercial disparagement and conspiracy.  The lawsuit continued to
negatively impact our ability to pursue additional opportunities and/or acquire
additional oil and gas prospects during 2008 and 2009.  A further
result of the lawsuit was the sale of certain assets in order to fund our
ongoing operations.  The litigation was favorably settled in July
2009.  As part of the settlement agreement, we collected $255,000 in
settlement proceeds, the majority which were used to settle outstanding legal
bills incurred in connection with our defense of the litigation as well as to
fund our current operations.
  Off-Balance
Sheet Arrangements
 
 The
Company had no off-balance sheet arrangements at September 30,
2009.
  10




ITEM 4T. CONTROLS AND PROCEDURES.





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





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





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





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





Inherent
Limitations on Effectiveness of Controls





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





Changes
in Internal Control over Financial Reporting





There were no changes made
to our internal controls over financial reporting during the quarter ended
September 30, 2009.During the fourth quarter of 2009, we
implemented processes to strengthen the review of our accounting policies and
the applicability of these policies to individual transactions and disclosures
included in our financial statements.




11


Part II - OTHER INFORMATION





ITEM
6. EXHIBITS.





Exhibit
                    
                    Description
      of Exhibit3(i).1
                    
                    Articles
      of Incorporation filed with the Nevada Secretary of State on July 25,
      2003. (Incorporated by reference to Exhibit 3.1 of our Form 10-SB filed
      August 18, 2004.)3(i).2
                    
                    Certificate
      of Change filed with the Nevada Secretary of State effective November 7,
      2005. (Incorporated by reference to Exhibit 3(i).2 of our Current Report
      on Form 8-K filed November 9, 2005.)3(i).3
                    
                    Articles
      of Merger filed with the Nevada Secretary of State effective November 7,
      2005. (Incorporated by reference to Exhibit 3(i).3 of our Current Report
      on Form 8-K filed November 9, 2005.)3(ii).1
                    
                    Bylaws,
      adopted July 18, 2003. (Incorporated by reference to Exhibit 3.2 of our
      Form 10-SB filed August 18, 2004.)3(ii).2
                    
                    Amendment
      No. 1 to Bylaws, adopted November 4, 2005. (Incorporated by reference to
      Exhibit 3(ii) of our Current Report on Form 8-K filed November 9,
      2005.)10.1
                    
                    Agreement
      and Plan of Merger between Golden Hope Resources Corp. (renamed Eternal
      Energy Corp.) and Eternal Energy Corp., filed with the Nevada Secretary of
      State effective November 7, 2005. (Incorporated by reference to Exhibit
      10.1 of our Current Report on Form 8-K filed November 9,
      2005.)10.2
                    
                    Purchase
      and Sale Agreement between Eternal Energy Corp. and Merganser Limited,
      dated November 7, 2005. (Incorporated by reference to Exhibit 10.2 of our
      Current Report on Form 8-K filed November 9, 2005.)10.3
                    
                    Form
      of Subscription Agreement for November 2005 private placement.
      (Incorporated by reference to Exhibit 10.3 of our Current Report on Form
      8-K filed November 9, 2005.)10.4
                    
                    Form
      of Common Stock Purchase Warrant for November 2005 private placement.
      (Incorporated by reference to Exhibit 10.4 of our Current Report on Form
      8-K filed November 9, 2005.)10.5
                    
                    Registration
      Rights Agreement for November 2005 private placement. (Incorporated by
      reference to Exhibit 10.5 of our Current Report on Form 8-K filed November
      9, 2005.)10.6
                    
                    Letter
      Agreement by and between Eternal Energy Corp. and International Frontier
      Resources Corporation. (Incorporated by reference to Exhibit 10.1 of our
      Current Report on Form 8-K filed December 5, 2005.)10.7
                    
                    Employment
      Agreement by and between Eternal Energy Corp. and Bradley M. Colby.
      (Incorporated by reference to Exhibit 10.1 of our Amended Current Report
      on Form 8-K/A filed June 29, 2006).10.7(b)
                    
                    Excerpt
      from the minutes of the Board of Directors meeting on July 26, 2007,
      setting forth the terms of the Second Amendment to Employment Agreement by
      and between Eternal Energy Corp. and Bradley M. Colby. (Incorporated by
      reference to Exhibit 10.1b of our Current Report on Form 8-K filed
      September 27, 2007.)10.8
                    
                    First
      Amendment to Employment Agreement by and between Eternal Energy Corp. and
      Bradley M. Colby (Incorporated by reference to Exhibit 10.1(a) of our
      Current Report on Form 8-K filed December 8, 2006).10.9
                    
                    Letter
      Agreement by and between Eternal Energy Corp. and International Frontier
      Resources Corporation Relating to Quad 41 and Quad 42 dated January 30,
      2006. (Incorporated by reference to Exhibit 10.1 of our Current Report on
      Form 8-K filed February 3, 2006.)10.10
                    
                    Amended
      and Restated Letter Agreement by and between Eternal Energy Corp. and
      International Frontier Resources Corporation Relating to Quad 14 dated
      January 30, 2006. (Incorporated by reference to Exhibit 10.2 of our
      Current Report on Form 8-K filed February 3, 2006.)10.11
                    
                    Finder’s
      Fee Agreement by and between Eternal Energy Corp. and Taverham Company
      Ltd. dated January 30, 2006. (Incorporated by reference to Exhibit 10.3 of
      our Current Report on Form 8-K filed February 3, 2006.)10.12
                    
                    Form
      of Subscription Agreement for March 2006 private placement. (Incorporated
      by reference to Exhibit 10.1 of our Current Report on Form 8-K filed March
      8, 2006.)10.13
                    
                    Form
      of Common Stock Purchase Warrant for March 2006 private placement.
      (Incorporated by reference to Exhibit 10.2 of our Current Report on Form
      8-K filed March 8,
2006.)




12





10.14
            Form
      of Registration Rights Agreement for March 2006 private placement.
      (Incorporated by reference to Exhibit 10.1 of our Amended Current Report
      on Form 8-K/A filed March 29, 2006.)10.15
            Letter
      Agreement between us and Eden Energy Corp. dated April 14, 2006
      (Incorporated by reference to Exhibit 10.1 our Current Report on Form 8-K
      filed April 21, 2006).10.16
            Letter
      Agreement effective as of May 19, 2006, by and among Eternal Energy Corp.,
      International Frontier Resources Corporation, Palace Exploration Company
      Limited, Oilexco Incorporated, and Challenger Minerals (North Sea) Limited
      (Incorporated by reference to Exhibit 10.1 of our Current Report on Form
      8-K filed May 23, 2006).10.17**
            Letter
      Agreement dated October 15, 2006, by and among Eternal Energy Corp.,
      Fairway Exploration, LLC, Prospector Oil, Inc., and 0770890 B.C. Ltd.
      (Incorporated by reference to Exhibit 10.17 of our Registration Statement
      on Form 10-KSB filed April 16, 2007).10.18**
            Letter
      Agreement dated October 26, 2006, by and among Eternal Energy Corp.,
      Fairway Exploration, LLC, Prospector Oil, Inc., 0770890 B.C. Ltd., and
      Rover Resources Inc. (Incorporated by reference to Exhibit 10.18 of our
      Registration Statement on Form 10-KSB filed April 16,
    2007).10.19
            Letter
      Agreement dated February 28, 2007, by and among Eternal Energy Corp.,
      Pebble Petroleum Inc., Emerald Bay Holdings Ltd., and Heartland Resources
      Inc. (Incorporated by reference to Exhibit 10.19 of our Registration
      Statement on Form 10-KSB filed April 16, 2007).10.20
            Agreement
      To Terminate DGWS Option (Incorporated by reference to Exhibit 10.20 of
      our Quarterly Report on Form 10-Q filed May 15, 2009).10.21
            Amended
      and Restated Employment Agreement by and between Eternal Energy Corp. and
      Craig Phelps dated August 1, 2007 (Incorporated by reference to Exhibit
      10.21 of our Quarterly Report on Form 10-Q filed May 15,
      2009).10.22
            Employment
      Agreement by and between Eternal Energy Corp. and Kirk A. Stingley dated
      June 2, 2008 (Incorporated by reference to Exhibit 10.22 of our Quarterly
      Report on Form 10-Q filed May 15, 2009).10.23*
            Amended
      and Restated Employment Agreement by and between Eternal Energy Corp. and
      Bradley M. Colby  dated November 1, 2009.10.24*
            First
      Amendment to the Amended and Restated Employment Agreement by and between
      Eternal Energy Corp. and  Craig H. Phelps dated August 1,
      2009.10.25*
            First
      Amendment to the Employment Agreement by and between Eternal Energy Corp.
      and Kirk. A. Stingley dated  October 30,
2009.31.1*
            Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act31.2*
            Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act32.1*
            Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act32.2*
            Certification
      pursuant to Section 906 of the Sarbanes-Oxley
  Act





*
            Filed
      herewith.


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




13


SIGNATURES





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





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




14