NEWS

August 23, 2006

EERG Files Quarterly Report

Management's Discussion and Analysis

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

A Note About Forward-Looking Statements

This Quarterly Report on Form 10-QSB 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, 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.

Overview of the Company

We are a start-up, development stage company and have not yet generated or realized any revenues from our business operations. During the fourth quarter 2005, we amended our name from Golden Hope Resources, Inc. to Eternal Energy Corp. and changed our business plan to focus on the exploration for oil and gas resources. Since then, we have altered our management, raised $7,275.760 through June 30, 2006 via the private placement of shares of our common stock and warrants to purchase shares of common stock and invested in three oil and gas exploration ventures.

The purchasers of the common shares and warrants to purchase shares of the Company's common stock have registration rights that require the Company to file a registration statement with the Securities and Exchange Commission to register for resale the common stock issued and to be issued upon exercise of the warrants. Because the ability to register the shares to be issued upon exercise is deemed to be outside the control of the Company, the initial fair value of the warrants were recorded as a financial instrument derivative liability and are marked to market at the end of each reporting period. This results in the recordation of a warrant derivative liability of $8,033,810 at June 30, 2006, a gain on warrant derivatives of $2,130,700 during the three month period ended June 30, 2006 and a loss on warrant derivatives of $1,788,132 for the six month period ended June 30, 2006. At August 21, 2006, the registration statement is not effective.

There is no historical financial information about us upon which to base an evaluation of our performance. We are a development stage company and have not generated any revenues from our current operations. We cannot guarantee we will be successful in our new core business or in any business operations. Our business is subject to risks inherent in the establishment of a new business enterprise, specifically in the exploration of oil and gas reserves, including limited capital resources.

We have no assurance that future financing will be available on acceptable terms. If financing is not available on satisfactory terms, we may be unable to continue with our current business plan. If equity financing is available to us on acceptable terms, it could result in additional dilution to our existing stockholders.

Results of Operations for the Three and Six Month Periods Ended June 30, 2006 and 2005

From inception to June 30, 2006, we had a loss of $2,470,121, including loss on warrant derivates of $1,778,585. Of this amount, $2,191,660, including loss on warrant derivatives of $1,788,132, was generated in the six month period ended June 30, 2006 and $195,433, including gain on warrant derivatives of $9,458, was generated during the fourth quarter of 2005.

We recognized a gain on warrant derivatives of $2,130,700 during the three month period ended June 30, 2006, compared to a loss on these derivatives of $3,918,832 during the prior three month period. The dramatic change between the periods is because the value of the warrants issued during the prior three month period exceeded the net proceeds of the offering by $4,102,790, which was partially offset by the decrease in the value of the warrants at March 31, 2006. The fair value of the warrants decreased in fair value at June 30, 2006, resulting in the gain during the three month period ended June 30, 2006. We determined the fair value of these warrants using the Black Scholes valuation model, and we believe that the decline in the price of our common shares has had a major effect on the fair value of our warrants. We believe that the warrant value may increase significantly in future periods due the volatility in the trading price of our common shares. We had no derivative instruments during the three and six month periods in 2005.

Operating expenses increased significantly during the three and six month periods in 2006 from the comparable periods in 2005, exclusive of the gain and loss on warrant derivatives, as we commenced our current oil and gas exploration activities after June 30, 2005. We had no activities during the comparable periods in 2005.

The increase in general and administrative expenses in the three and six month periods ended June 30, 2006 include payroll costs related to our new officer of $ 76,043 and $125,440, including the amortization of the value of options granted to a director in February 2006 of $33,513 and $45,800 in the three and six month periods in 2006, respectively. We incurred travel costs related to our investments in the North Sea exploration programs of $25,512 and $51,842 during the three and six month periods in 2006, respectively. The balance of these expenses relate to office-related costs. Professional fees were $1145,570, substantially all of which were incurred during the three month period ended March 31, 2006. These fees related to the costs associated with the filing of our registration statement and those associated with our investments in oil and gas ventures.

Liquidity and Capital Resources

As of June 30, 2006, our total assets were $6,732,211, which included cash balances of $2,865,211. Our total liabilities were $8,086,118 including warrant derivative liability of $8,033,810. All of our liabilities were current; however, we do not expect to pay the balance of the warrant derivative liability, as we expect that this liability will be transferred to equity when the registration statement covering the shares to be issued upon exercise is effective, when the warrants are exercised, or when the warrants lapse. As of December 31, 2005, our total assets were $950,509, of which $193,509 are current, and our total liabilities were $137,871, including the warrant derivative liability of $75,442. All of our liabilities are current. The increase in total assets is a result of an increase in cash from the sale of our equity units, $3 million of which was deposited to be used for future drilling costs in our North Sea oil and gas exploratory projects. During the year ended December 31, 2005, the Company sold equity units with net proceeds of $1,126,000; and during the six month period ended June 30, 2006, the Company sold equity units with net proceeds of $6,149,760. Each of these equity unit sales consisted of one share of our common stock and a warrant to purchase one share of our common stock. The warrant exercise price of the warrants sold in 2005 was $1.20 per share, and the warrant exercise price of the warrants sold in March 2006 is $1.00 per share. Due to the registration rights agreement, the total proceeds of these offerings are recorded as warrant derivative liability.

Despite our negative cash flows from operation of $326,598 and $628,339 for the six month period ended June 30, 2006 and the period from July 25, 2003 (inception) to June 30, 2006, respectively, and our minimum drilling costs associated with our oil and gas exploration participations of $2 million, net of the $3 million we currently have on deposit, we have been able to obtain additional operating capital through private equity funding sources. Management's plan includes the continued development and eventual implementation of our business plan. We have relied upon equity funding since inception.

As of the date of this Quarterly Report, we have yet to generate any revenues from our business operations.

Plan of Operation for the Next Twelve Months

Since inception, we had funded our operations from the private placement of common stock and warrants. Although we expect that, during the next 12 months, our operating capital needs will be met by our current economic resources and, if required, by additional private capital stock transactions, there can be no assurance that funds required will be available on terms acceptable to us or at all. If we are unable to raise sufficient funds on terms acceptable to us, we may be unable to complete our business plan. If equity financing is available to us on acceptable terms, it could result in additional dilution to our existing stockholders.

Off-Balance Sheet Arrangements

We have no off balance sheet arrangements at June 30, 2006.

Current Conditions

In November 2005, we entered an oil and gas exploration participation agreement related to the drilling of an exploratory wells on two sites in Nevada. Our initial payment on the agreement was $667,000, and we are obligated to participate in future drilling costs on these projects of at least $2 million. We are obligated to issue one million shares of our common stock for each ten million equivalent net barrels of proved reserves developed on one of these sites.

In December 2005, we entered into a participation agreement related to the drilling of an exploratory well on a prospect site in the North Sea. Our initial payment was $90,000, and our share of future minimum drilling costs on this site is $1.5 million.

In January 2006, we entered into a participation agreement related to the drilling of an exploratory well on a second prospect site in the North Sea. Our initial payment was $75,000, and our share of future minimum drilling costs on this site is $1.5 million.