UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)
[x]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2010
	OR
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

UEternal Image, Inc.

(Exact name of registrant as specified in its charter)


Delaware	000-18889	20-4433227
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)


28800 Orchard Lake Road, Suite 130, Farmington, Hills, MI	48334
(Address of principal executive offices)	(Zip Code)

248- 932-3333

(Registrant's telephone number, including area code)

U N/A

(Former name, former address & former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings for the past 90 days. YES [X] NO [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [ ] Yes [X] No N/A

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.


Large accelerated filer	¨		Accelerated filer	¨
Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company	[x]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of June 30, 2010, the number of the Company's shares of par value, $0.001, common stock outstanding was 713,528.

INDEX

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

ITE M 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATION

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4T - CONTROLS AND PROCEDURES

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

ITEM 1A. RISK FACTORS.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

ITEM 4. (Removed and Reserved).

ITEM 5. OTHER INFORMATION.

ITEM 6. EXHIBITS.

SIGNATURES

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS


ETERNAL IMAGE, INC. (A DELAWARE CORPORATION)
BALANCE SHEETS

ASSETS
		June 30, 2010		December 31, 2009
		(Unaudited)		(Audited)
Current Assets:
Cash	$	1,052	$	2,102
Accounts Receivable, net of allowance of
$20,000 and $10,000 respectively		11,940		13,016
Inventories		468,490		513,900
Total Current Assets		481,481		529,018
Fixed Assets:
Furniture, Office Equipment, Molds, Tooling and
and Dies, and Design Fees, net		41,112		48,185
Other Assets:
Other Assets, net		-		(3,494)
Total Other Assets		-		(3,494)
Total Assets	$	522,594	$	573,709

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable and Accrued Expenses	$	1,498,588	$	1,301,346
Notes Payable, Current Portion		443,065		452,947
Total Current Liabilities and Total Liabilities		1,941,653		1,754,293
Stockholders' Equity (Deficit)
Preferred Stock - $.001 par value:
50,000,000 and 220,000,000 shares authorized,
issued and outstanding as of December 31, 2009
and 2008 respectively.		50,000		50,000
Common Stock - $.001 par value:
750,000,000 shares authorized
713,527,877 and 672,386,666 shares
issued and outstanding as of June 30, 2010,
and December 31, 2009		713,528		672,387
Discount on Stock		(4,853)		(4,853)
Additional Paid in Capital		19,797,862		19,593,389
Accumulated Deficit		(16,824,795)		(16,340,706)
Accumulated Deficit During Development Stage		(5,150,801)		(5,150,801)
Total Stockholders' Equity (Deficit)		(1,419,059)		(1,010,584)
Total Liabilities and Stockholders' Equity (Deficit)	$	522,594	$	573,709

See accompanying notes to these interim financial statements.


ETERNAL IMAGE, INC. (A DELAWARE CORPORATION)
STATEMENTS OF OPERATIONS

			Quarter Ended		Quarter Ended
		June 30, 2010			June 30, 2009
		(Unaudited)			(Unaudited)

Revenue	$	56,611		$	84,488

Cost of Goods Sold		(44,053)			(31,915)

Gross Profit	$	12,558		$	52,573

Operating Expenses:
Salaries		51,272			72,200
Stock Based Compensation		-			47,269
Travel and Entertainment		3,155			1,868
Professional Fees		50,761			50,345
Payroll Taxes and Employee Benefits		4,562			1,749
Consulting Fees and Commissions		9,435			18,515
Rent		10,358			10,933
Public Relations and Marketing		1,913			3,687
Product Licensing and Royalties		44,409			23,500
General and Administrative		16,009			33,943
Depreciation and Amortization		7,302			13,111
Total Operating Expenses		199,176			277,120

Loss Before Other Income and (Expense)		(186,618)			(224,546)

Other Income (Expenses):
Interest Expense		(18,113)			(1,691)
Total Other Income (Expenses)		(18,113)			(1,691)

Net Loss	$	(204,731)		$	(266,237)

Basic and diluted net loss per common share	$	(0.00)		$	(0.00)

Weighted average common shares outstanding		371,315,127			68,181,826

See accompanying notes to these interim financial statements.


ETERNAL IMAGE, INC. (A DELAWARE CORPORATION)
STATEMENTS OF OPERATIONS

			Six Months Ending		Six Months Ending
		June 30, 2010			June 30, 2009
		(Unaudited)			(Unaudited)

Revenue	$	108,577		$	210,504

Cost of Goods Sold		(77,334)			(128,700)

Gross Profit	$	31,243		$	81,804

Operating Expenses:
Salaries		102,522			158,625
Common Stock Issued for Fees & Services		11,500			-
Stock Based Compensation		-			116,538
Travel and Entertainment		3,155			1,971
Professional Fees		76,091			164,775
Payroll Taxes and Employee Benefits		7,054			3,285
Consulting Fees and Commissions		9,467			24,669
Rent		27,058			29,407
Public Relations and Marketing		6,378			92,477
Product Licensing and Royalties		102,845			37,500
General and Administrative		28,201			67,831
Bad Debts		2494			-
Depreciation and Amortization		14,603			25,764
Total Operating Expenses		391,368			722,842

Loss Before Other Income and (Expense)		(360,125)			(641,038)

Other Income (Expenses):
Loss on Conversion of Securities		(101,750)			(2,887,987)
Interest Expense		(22,214)			(72,735)
Total Other Income (Expenses)		(123,964)			(2,960,722)

Net Loss	$	(484,089)		$	(3,601,760)

Basic and diluted net loss per common share	$	(0.00)		$	(0.05)

Weighted average common shares outstanding		371,315,127			68,181,826

See accompanying notes to these interim financial statements.


ETERNAL IMAGE, INC. (A DELAWARE CORPORATION) STATEMENTS OF CASH FLOWS

		Six Months Ended		Six Months Ended
		June 30, 2010 (Unaudited)		June 31, 2009 (Unaudited)

Cash Flows from Operating Activities:
Net Loss	$	(484,089)	$	(3,601,760)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operations:
Loss Common Stock Issued for Debt Conversion		101,750		2,887,987
Stock Options Expense		-		94,538
Common Stock Issued for Executive Compensation		-		22,000
Common Stock Issued for Fees and Services		18,572		13,322
Provided by (Used in) Operating Activities:
Depreciation		14,603		13,111
(Increase) Decrease in:
Accounts Receivable		1,076		60,196
Inventories		45,411		(132,272)
Increase (Decrease) in:
Cash Overdraft		-		(33,672)
Advance Royalties		-		39,500
Accounts Payable and Accrued Expenses		65,895		395,982
Net Cash Used in Operating Activities		(236,782)		(243,068)

Cash Flows from Financing Activities:
Proceeds from Sale of Common Stock		245,614		228,600
Payments on Notes Payable		(9,882)		(72,482)
Proceeds from Notes Issued		-		59,725
Net Cash Provided by Financing Activities		235,732		215,843

Net (Decrease) Increase in Cash		(1,050)		27,625

Cash, Beginning		2,102		34,158
Cash, Ending	$	1,052	$	6,533

Cash Paid During the Year for:
Interest	$	22,215	$	-

Non-Cash Transactions:
Surrender of Certificate of Deposit to pay Loan	$		$	35,585
Common Stock Issued for Executive Compensation		-		22,000
Common Stock Issued for Other Fees and Services		-		-
Common Stock Issued for Debt Conversion		101,750		2,887,987

The accompanying footnotes are an integral part of the financial statements

ETERNAL IMAGE, INC. (A DELAWARE CORPORATION)

NOTES TO FINANCIAL STATEMENTS

FOR THE QUARTER ENDED June 30, 2010

(Unaudited)

Nature of Operations

Eternal Image was incorporated January 31, 2006 in the State of Delaware. Eternal Image, Inc. ("Eternal Image") ("The Company") and is one of the first manufacturers of branded, licensed funerary products for humans and pets and has established it as its one reportable segment. Eternal Image secures license agreements with appropriate brand licensors and develops funerary products (such as caskets, urns, and vaults) using the brand logo and images prominently in the design of the product.

Once a license is secured, Eternal Image works with designers and engineers to create product drawings and prototypes. The prototypes are then approved by the brand license holder. Once approval has been received by the brand licensor, Eternal Image then sends the specifications for that product to its third party manufacturers/suppliers for quotation before a manufacturer/supplier is chosen to commence production. Eternal Image utilizes a distribution network that in turn supplies funeral homes throughout the United States.

From inception until December 31, 2006 the Company was in the development stage and had accumulated a deficit of $5,150,801. In January, 2007 the Company had achieved planned operations and began generating revenue from sales. For year-ending December 31, 2009, the Company had posted a positive gross-profit figure for the first time.

1. Summary of Significant Accounting Policies:

Basis of Presentation and Principles of Consolidation

These financial statements have been prepared in conformity with (i) accounting principles generally accepted in the United States of America; and (ii) the rules and regulations of the United States Securities and Exchange Commission.

Unaudited Financial Statements

The accompanying financial statements of Eternal Image, Inc. (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted. The results for the periods indicated are unaudited, but reflect all adjustments (consisting only of normally recurring adjustments) which management considers necessary for a fair presentation of operating results.

The operating results for the three-month period ending June 30, 2010 are not necessarily indicative of the results that may be expected for the year ended December 31, 2010. These unaudited financial statements should be read in conjunction with the financial statements and footnotes thereto included in the Company's Annual Report on form 10-K for the year ended December 31, 2009.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

The company does not anticipate the adoption of recently issued accounting pronouncements to have a significant impact on the Company's results of operations, financial position or cash flows.

ETERNAL IMAGE, INC. (A DELAWARE CORPORATION)

NOTES TO FINANCIAL STATEMENTS

FOR THE QUARTER ENDED June 30, 2010

(Unaudited)

2. Going Concern

The Company has suffered losses from operations that may raise doubt about the Company's ability to continue as a going concern. As of June 30, 2010, the Company has both negative working capital and a stockholders' deficiency. The Company may raise capital through the sale of its equity securities, through debt securities, or through borrowings from financial institutions. Management believes that actions presently being taken to obtain additional funding provide the opportunity for the Company to continue as a going concern. There can be no assurance that additional financing which is necessary for the Company to continue its business will be available to the Company on acceptable terms, or at all. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

3. Long Term Debt

Long term debt consists of the following:


	June 30, 2010	December 31, 2009
8.25% unsecured note payable to Woodrow Browne, in three installments of $25,000. Final payment was due October, 2007. Note has been extended through December 31, 2010. No periodic payments are required.	50,000	50,000
5% unsecured note payable to Donna Shatter, shareholder and officer of Eternal Image, Inc., in monthly installments of $959, including interest. Note has been extended through December 31, 2010.	15,758	9,156
Non-Interest bearing note payable to Nick Popravsky, shareholder and officer of Eternal Image, Inc., due on demand.	4,100	1,583
Credit Card Interest rate bearing note payable to James Parliament, a shareholder and former officer of Eternal Image, Inc., due on demand.	46,696	46,696
10% unsecured note payable to Dorenda Boggs, a shareholder of Eternal Image, Inc, payable in full September, 2008. Note has been extended through December 31, 2010. No periodic payments are required.	50,000	50,000
8% unsecured note payable to Emerald Asset Advisors. Note has been extended through December 31, 2010.	10,000	10,000
8% unsecured note payable to Emerald Asset Advisors. Note has been extended through December 31, 2010.	27,000	27,000
8% unsecured note payable to Emerald Asset Advisors. Note has been extended through December 31, 2010.	200,000	200,000
Non-interest bearing note payable to Frank Colapinto. Note has been extended through December 31, 2010.	12,012	12,012
12% unsecured note payable to HighWater Capital. Note was converted to common stock on March 15, 2010.	-	37,000
8% unsecured note payable to Ralph Mizrahi. Note was converted to common stock on March 17, 2010.	-	6,000
10% unsecured note payable to Edward Shatter, a shareholder of Eternal Image payable in full January 2009. The creditor has agreed to an extension of this debit until December 31, 2010.	2,500	2,500
10% unsecured note payable to Devon Block, a shareholder of Eternal Image payable in full (DATE).	25,000	-
Non-interest bearing note payable to Nicholas Popravsky, Jr.. Note was converted to common stock on March 18, 2010	-	1,000
Long Term Debt	$ 443,066	$ 452,947

ETERNAL IMAGE, INC. (A DELAWARE CORPORATION)

NOTES TO FINANCIAL STATEMENTS

FOR THE QUARTER ENDED June 30, 2010

(Unaudited)

Maturities of long term debt are as follows:


	June 30, 2010	December 31, 2009
2010	$443,066	$452,947
TOTAL	$443,066	$452,947

The Company has no financial or non-financial covenants or agreements on any of its debt instruments.

4. Risks and Uncertainties

The Company is subject to risk and uncertainty common to start-up companies including, but not limited to, successful development, promotion, and sale of products, protection of proprietary technology, and expansion of market coverage.

As reflected in the accompanying financial statements, the Company has incurred significant losses from operations and negative operating cash flows, which have been financed primarily by proceeds from stock and debt issuance. As a result the Company had accumulated deficits of approximately $16,620,099 and $16,340,706 at June 30 2010 and December 31, 2009 respectively.

Management plans to provide for additional working capital and funds for the continued development and promotion of its products through public sale of the Company's common stock, debt securities or borrowing from financial institutions. Management is also attempting to expand its number of third party manufacturers/suppliers to help get better product prices which could increase cash flow during early stages of sales growth. No assurance can be given that the Company will successfully expand its number of third party manufacturers/suppliers.

5. Subsequent Events

The company has evaluated subsequent events from the period June 30, 2010, the date of these financial statements, to the date these are being filed with the Commission.

Pursuant to the requirements of FASB ASC topic 855, there were no events or transactions occurring during this subsequent event reporting period that require recognition or disclosure in the financial statements.

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following should be read in conjunction with the consolidated financial statements of the Company included elsewhere herein.

FORWARD-LOOKING STATEMENTS

When used in this report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “intend,” “plans”, and similar expressions are intended to identify forward-looking statements regarding events, conditions and financial trends which may affect our future plans of operations, business strategy, operating results and financial position. Forward looking statements in this report include without limitation statements relating to trends affecting our financial condition or results of operations, our business and growth strategies and our financing plans.

Such statements are not guarantees of future performance and are subject to risks and uncertainties and actual results may differ materially from those included within the forward-looking statements as a result of various factors. Such factors include, among other things, general economic conditions; cyclical factors affecting our industry; lack of growth in our industry; our ability to comply with government regulations; a failure to manage our business effectively; our ability to sell products at profitable yet competitive prices; and other risks and factors set forth from time to time in our filings with the Securities and Exchange Commission.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly release the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events.

Overview

We are in the business of manufacturing (through third party manufacturers/suppliers) and marketing of branded, licensed funerary products (such as funeral caskets, urns and covers) for humans and pets. We started our operational phase and began selling product and having revenues in the first quarter of 2007. Prior to this, we were in the development stage trying to creating our own market within the funerary products industry. Management believes that we have no direct competition in this market. We have secured license agreements with appropriate brand licensors and develop funerary products using the brand logo and images prominently in the design of the funerary product. Currently, we have license agreements with such brand name entities as Major League Baseball, Precious Moments, the Vatican Observatory Foundation, Star Trek, The Collegiate Licensing Company (colleges and universities), American Kennel Club, and Cat Fanciers’ Association. The long term plans of the Company are to pursue and secure other license arrangements with reputable, household brand names that will be a good fit with our products.

Currently, we produce (through third party manufacturers/suppliers) and market five logo designed products: caskets, urns, vault covers (Major League Baseball and Star Trek), garden memorial stones (American Kennel Club and Cat Fanciers’ Association), and cemetery medallions* (Major League Baseball, Star Trek, Precious Moments and Collegiate Licensing Company.) (*A medallion is a solid bronze medallion that is affixed to a headstone.)

In June, 2010, we established a new division known as the New World Gift Company. It’s plan is to produce (through third party manufacturers/suppliers) and market retail candles, liturgical candles, registry books, and memorial prayer cards to funeral homes. As of June 30, 2010, we had gross revenues from this division of $0.00 and a net profit (loss) of ($3,771).

Overall, we have a twofold marketing strategy. Our primary targets are funeral homes, directors, distributors and funeral home conglomerates to which we sell our products. We reach these targets through the use of independent sales representatives. Our second target is the American public, who we attempt to expose to our products through channel appropriate advertising such as in “Catholic Digest”, “Baseball Digest”, “Dog Fancy Magazine” and public relations positioning efforts.

To date, our revenues have been insufficient to fund our operations, and we anticipate this continuing for the foreseeable future. Accordingly, we have been dependent upon debt and equity financing and will continue to be so.

Recent Developments

On February 16, 2010, we entered into a two year, binding Letter of Understanding (“LOU”) with Mathews International Corporation, a publicly held designer, manufacturer and distributor of memorialization products. The LOU requires Matthews to make certain minimum purchases from the Company during its term. See our Current Report on Form 8-K filed on February 25, 2010.

On February 19, 2010, we entered into a five year sublicensing agreement which grants the Company a sublicense to design, manufacture, and distribute Vatican Observatory collection funerary products. See our Current Report on Form 8-K filed on February 22, 2010.

In June, 2010 we announced the establishment of our new division called New World Gift Company as mentioned above. New World will handle the manufacturing and sales of gift-related funeral items such as candles, prayer cards, and registry books.

Plan of Operation

We did not have revenues during our fiscal years ended December 31, 2005 and 2006, and only began having revenues in the quarter ended March 31, 2007. Prior to us having revenues, our only sources of capital were through the private sale of our securities and loans including loans from officers and directors. Since our reverse merger in February 2006 through December 31, 2009, we have received $2,170,168 in gross proceeds from the sale of our common stock. For the quarters ending March 31, 2010 and June 30, 2010, we received an additional $82,027 and $17,163, respectively, in gross proceeds from the sale of our common stock for a total of $99,190for the six months ended June 30, 2010. Similarly, for the quarters ending March 31, 2010 and June 30, 2010, we received an additional $0.00 and $0.00, respectively, in gross loan proceeds for a total of $0.00 for the six months ended June 30, 2010.

As a company in the early stage of developing a new business—the manufacturing and marketing of designer funerary products such as funeral caskets and urns—our primary efforts have been devoted to developing our new business and raising capital. Accordingly, we have limited capital resources and have experienced net losses and negative cash flows from operations since the time of our reverse merger in February 2006 and expect these conditions to continue for the foreseeable future. As of June 30, 2010, the Company had approximately $474,409 in other current assets. Management believes that cash and other current assets on hand as of June 30, 2010, are not sufficient to fund operations for the next 12 months and will likely be sufficient for only three months. Accordingly, we will be required to raise additional funds to meet our short and long-term planned goals. There can be no assurance that such funds, if available at all, can be obtained on terms reasonable to us. In this regard, we have obtained and will continue to attempt to obtain raise funds through the private sale of our securities and (short and long term) loans for inventory purchases, new product development, expansion, advertising and marketing. We cannot predict if and when we will become profitable and less dependent upon outside financing sources.

Currently, we do not have sufficient financial resources to implement or complete our business plan. We anticipate that we will need a minimum of $1,500,000 to satisfy our cash requirements over the next 12 months. Since we did not obtain sufficient funding or revenues during the quarter ending June 30, 2010, our minimum of $1,500,000 in anticipated cash requirements for the next 12 months remains virtually the same as the estimate contained in our Annual Reports (Form 10-K) for the years ended December 31, 2008 and 2009. We cannot be assured that revenue from operations, if any, will be sufficient to fund our activities during the next 12 months. Accordingly, if there is a shortfall of funds, we will have to seek alternate sources of capital, including private placements, a public offering, and/or loans from officers and/or third party lenders. We can offer no assurance that we will be able to raise additional funds if needed, on acceptable terms to us on a timely basis or otherwise. If we are unsuccessful in our attempts to raise sufficient capital, we may have to cease operations, seek joint

venture partners or postpone our plans to initiate or complete our business plan. In that case, you may lose your entire investment in our company. If the funds become available, we intend to apply, over the next 12 months as follows:

•

Funding next wave of production orders for the next 12 months. Estimated Cost: $830,000

•

Commence and establish marketing, advertising and promotion programs to increase brand equity and awareness. Estimated cost: $150,000.

•

Salaries, including for present employees and possible new hiring of additional management personnel and appropriate operating and sales staff. Estimated cost: $250,000.

•

Partial (or full) repayment of loans. Estimated cost: $120,000.

•

Secure additional strategic licenses to support our long term growth strategy. Estimated Cost: $150,000

These are only estimates and no assurance can be given regarding either statement as to timing or actual eventuality. If more than the minimum amounts indicated above are raised, we anticipate spending increased amounts on establishing and expanding our distribution network, marketing, advertising and promotions.

Results of Operations – Eternal Image, Inc

Since the New World Gift Company was only established in June of 2010, the following comparative period information does not include information about the new division. As of June 30, 2010, there have been no sales, no revenues, and total operating and administrative expenses of $3,771 (net loss).

The following summarizes changes in our operations for the three-months ended June 30, 2010 and 2009.

Sales and Cost of Goods Sold


	For three months ended June 30,
	2010	2009
Sales	$56,611	$84,488
Cost of Goods Sold	$44,053	$31,915
Gross Profit	$12,558	$52,573

Sales. Sales decreased by $27,877 or approximately 67%, from $84,488 in the three months ended June 30, 2009 to $56,611 for the three months ended June 30 2010. This decrease was due to the following factors:


	·	Resources were reallocated to gearing up for new product launches in Quarter Three, and less was spent on marketing and selling to our core customers

Cost of Goods Sold. Cost of goods sold increased by $12,138 or approximately 38%, from approximately $31,915 in the three months ended June 30, 2009 to $44,053 for the three months ended June 30, 2010. This increase was directly related to a batch of urns that was returned damaged from a particular customer.

Gross Profit. Gross profit was $12,558, or approximately 22% of our sales for the three months ended June 30, 2010, compared to gross profit of $52,573 or 62% for the three months ended June 30, 2009.

Units Sold


	For three months ended June 30,
	2010	% of total	2009	% of total
Caskets	26	14%	18	15%
Urns	137	76%	86	73%
Medallions	8	4%	7	5%
Vault Covers	10	5%	0	0%
TOTAL	181	100%	117	100%

The reasons for this 64-unit increase in sales for the three months ended June 30, 2010 from the three months ended June 30, 2009 is increased distribution through market awareness with the general public; and from the posting of vault cover sales for the first time.

Operating Expenses


	For three months ended June 30,
	2010	2009
Operating Expenses	$175,865	$230,066
Administrative	$16,009	$33,943
Depreciation & Amortization	$7,302	$13,111
Total Operating Expenses	$199,176	$277,120

Operating Expenses . Operating expenses decreased by $54,201or approximately 24%, from $230,066 in the three months ended June 30, 2009 to $175,865 for the three months ended June 30, 2010. The primary reasons for this decrease were less staff on hand and less professional fees paid out.

Administrative Expenses. Administrative expenses decreased by $17,934, or approximately 53% from $33,943 in the three months ended June 30, 2009 to $16,009 for the three months ended June 30, 2010. The principal reason for the decrease was there was less staff on hand, and the three officers of the Company continue to forego any salary.

Other Income (Expense). Other Income (Expense) increased $16,422 or 971% to $(18,113) in the three months ended June 30, 2010 from ($1,691) in three months ended June 30, 2009. This increase is primarily due to the fact that the Company started paying interest on guaranteed royalties due.

Net Loss. Net Loss decreased $61,506 or 23% to ($204,731) in the three months ended June 30, 2010 from ($266,237) in the three months ended June 30, 2009. This decrease in loss was primarily related to less stock issued for debt conversions.

The following summarizes changes in our operations for the six-months ended June 30, 2010 and 2009.

Sales and Cost of Goods Sold


	For six months ended June 30,
	2010	2009
Sales	$108,577	$210,504
Cost of Goods Sold	$77,334	$128,700
Gross Profit	$31,243	$81,804

Sales. Sales decreased by $101,927 or approximately 48%, from $210,504 in the six months ended June 30, 2009 to $108,577 for the six months ended June 30, 2010. This decrease was due to the following factors:


	·	Quarter1 2009 marked the first quarter that Eternal Image had caskets available to sell. There was an influx of orders in Quarter1 2009 as distributors stocked up on casket models

Cost of Goods Sold. Cost of goods sold decreased by $51,366 or approximately 40%, from approximately $128,700 in the six months ended June 30, 2009 to $77,334 for the six months ended June 30, 2010. This decrease was directly related to lower sales volume and the sale of items already paid for that are in inventory.

Gross Profit. Gross profit was $31,243, or approximately 29% of our sales for the six months ended June 30, 2010, compared to gross profit of $81,804 or 39% for the three months ended June 30, 2009.

Units Sold


	For six months ended June 30,
	2010	% of total	2009	% of total
Caskets	49	15%	78	23%
Urns	263	79%	246	73%
Medallions	10	3%	12	3%
Vault Covers	10	3%	0	0%
TOTAL	332	100%	336	100%

The reason for the 4-unit decrease in the sales for the three months ended June 30, 2010 from the three months ended June 30, 2009 is a slight decrease in total caskets sold, as many distributors were still selling through current inventory and not placing new orders. However, note that unit sales did increase for urns; and we have posted sales for vault covers for the first time.

Operating Expenses


	For six months ended June 30,
	2010	2009
Operating Expenses	$348,564	$629,247
Administrative	$28,201	$67,831
Depreciation & Amortization	$14,603	$25,764
Total Operating Expenses	$391,368	$722,842

Operating Expenses . Operating expenses decreased by $280,683 or approximately 45%, from $629,247 in the six months ended June 30, 2009 to $348,564 for the six months ended June 30, 2010. The primary reasons for this decrease were less staff on hand and less professional fees paid out.

Administrative Expenses. Administrative expenses decreased by $39,630, or approximately 42%, from $67,831 in the six months ended June 30, 2009 to $28,201 for the six months ended June 30, 2010. The principal reason for the increase was there was less staff on hand, and the three officers of the Company continue to forego any salary.

Other Income (Expense). Other Income (Expense) decreased $2,836,758 or 95% to $(123,964) in the six months ended June 30, 2010 from ($2,960,722) in six months ended June 30, 2009. This decrease is primarily due to the fact that the Company did not convert as much debt into equity as the previous reporting period.

Net Loss. Net Loss decreased $3,117,671 or 87% to ($484,089) in the six months ended June 30, 2010 from ($3,601,760) in the six months ended June 30, 2009. This decrease in loss was primarily related to less stock issued for debt conversions.

Liquidity and Capital Resources

Since our reverse merger in February 2006 through December 31, 2009, we have received $2,170,168 in gross proceeds from the sale of our common stock. For the quarter ending June 30, 2010, we received an additional $17,163 in gross proceeds from the sale of our common stock.

As of June 30, 2010, we had $481,481 of current assets on hand. Also, as of that date, we had accounts payable and accrued expenses of $1,598,589 including $234,274 in guaranteed minimum royalty and license payments. In addition, as of June 30, 2010, we had a total notes payable principal balance of $443,066. To date, we have not been in default under the terms, provisions and/or covenants of said loans.

There are no financial or non-financial covenants with regard to any of the debt instruments. Furthermore, the notes are simple promissory bearing interest ranging from 5% - 20% with accrued interest and principal payable

at the end of the term of each note, except that the Shatter note requires monthly payments of interest and principal of $1,836 and calls for 5% per annum. Each holder of a note with a term that has expired or is expiring in the near future has agreed to an extension under the same terms. Ms. Shatter and Mr. Popravsky, Sr. are officers and directors of the Company, and Mr. Parliament is a former officer of the Company. The notes are as follows:


Note Holder	Note Date	Due Date	Principal Amount
W. Browne**	12/21/2006	3/31/2009	$50,000
N. Popravsky, Sr.	1/30/2008	3/31/2009	4,100
Emerald Asset Advisors	9/17/09	11/17/2009	10,000
Emerald Asset Advisors	12/01/09	12/15/09	200,000
Emerald Asset Advisors	11/13/09	12/13/09	27,000
Frank Colapinto	12/01/09	12/1/10	12,012
D. Boggs	6/9/2008	3/31/2009	50,000
E. Shatter (1)	10/10/2008	1/10/2009	2,500
D. Shatter	5/8/2008	5/1/2009	15,758
J. Parliament	9/13/2008	12/31/2009	46,696
Devon Block	4/12/2010	7/12/2010	$25,000
Total			$443,066

**$50,000 is the remaining principal balance of this note. The original note amount was $75,000. However, the Company made a payment toward the principal balance ($25,000) on August 24, 2007.

⁽¹⁾Edward Shatter is the father of Donna Shatter, the Company’s VP of Operations

The cash resources on June 30, 2010, are not sufficient to meet anticipated working capital requirements for at least the next three months. We intend to seek additional funding (debt or equity) for pursuing our business plan, expansion of existing operations or other purposes, or to the extent that our operations do not generate sufficient levels of profitability and cash flow. Should we seek to raise additional capital, there can be no assurances that such capital can be raised on satisfactory terms, on a timely basis, or at all. In the event that we are unable to raise the additional capital (or a significant portion of it) that we require, we will not be able to execute our business plan which may result in the termination of our operations.

Our future capital requirements will depend upon many factors, including the expansion of our business operations.

Currently, because we are a relatively new business with limited credit history, we generally pay for our purchases “up front” (in most cases) and are not granted extended credit terms at this time. This will continue until we have established a satisfactory credit history. We cannot estimate, with any certainty, how long this may take, or if it will occur at all. In this regard, recently, our major supplier has agreed (orally) to allow us to pay for our product supplies “net 30 days”. This has enabled us to utilize these funds for other purposes and improves our liquidity. Our inability to obtain credit from other such providers has a significant impact upon our liquidity and our ability to utilize funds for other purposes. Similarly, if and when we hire additional personnel, including management and sales personnel, the cost related to such hiring’s will have a significant impact on our liquidity and deployment of funds.

Off-Balance Sheet Arrangements

At June 30, 2010, we did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements in accordance with generally accepted accounting principles requires our management to make estimates and assumptions that affect the

reported amounts of assets and liabilities, including the recoverability of tangible and intangible assets, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of expenses during the periods covered. A summary of accounting policies that have been applied to the historical financial statements can be found in the notes to our consolidated financial statements.

We evaluate our estimates on an on-going basis. The most significant estimates relate to intangible assets, deferred financing and issuance costs, and the fair value of financial instruments. We base our estimates on historical company and industry experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which, form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from those estimates.

The following is a brief discussion of our critical accounting policies and methods, and the judgments and estimates used by us in their application.

Inventories - Inventories are stated at the lower of cost or market, determined on a average cost basis.

Stock-based Compensation – Under current accounting standards, employee stock awards under the company’s compensation plan are expensed based at fair value.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 4T - CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of June 30, 2010, management performed, with the participation of our Chief Executive Officer/Chief Financial Officer (who is the same person), an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the report we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer/Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation and the identification of the material weaknesses in our internal control over financial reporting described below, our Chief Executive Officer/Chief Financial Officer concluded that, as of December 31, 2009 and June 30, 2010, our disclosure controls and procedures were not effective. The aforementioned material weaknesses were first identified on or about April 13, 2009, by the Company's Chief Financial Officer in connection with the review of our financial statements as of December 31, 2008 and communicated the matters to our management.

Changes in Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None.

ITEM 1A. RISK FACTORS.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

The above statement notwithstanding, shareholders and prospective investors should be aware that certain risks exist with respect to the Company and its business, which risks include: its limited assets, lack of revenues and only losses since inception, industry risks, the need for additional capital; risks inherent in obtaining its products; among other factors. The Company management is aware of these risks and has attempted to establish the minimum controls and procedures to insure adequate risk assessment and execution to reduce loss exposure. For more specific detail regarding the risks inherent in an investment in the Company, shareholders and prospective investors are also referred to the “Risk Factors” section of the Company’s registration statement filed with the Securities and Exchange Commission on Form SB-2, as amended on Form S-1. See www.sec.gov.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

During the three month period ended June 30, 2010, the Company issued the following unregistered securities:


Name	Amount of Principal & Interest on Conversion	Number of Shares
Michael Arsenault for a stock purchase	$2,500.00	818,330
Highwater Capital for fees related to a loan	$15,000.00	6,000,000
Paul Alter for a stock purchase	$10,000	3,623,188

The securities issuances referred to above were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Act").

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4. (Removed and Reserved).

ITEM 5. OTHER INFORMATION.

None

ITEM 6. EXHIBITS.

Exhibit 31.1

Certification required by Rule 13a-14(a) or Rule 15d-14(a) and section 302 of the Sarbanes-Oxley Act of 2002, CEO/CFO

Exhibit 32.1

Certification required by Rule 13a-14(b) or Rule 15d-14(b) and section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, CEO/CFO

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Eternal Image, Inc.

(Registrant)


Date: August 23, 2010	/s/ Clint Mytych
	Clint Mytych, President, Chief Financial Officer, Chairman of the Board and Director (Principal Executive and Financial Officer)

Date: August 23, 2010	/s/ Donna Shatter
	Donna Shatter, Vice President, Secretary/Treasurer and Director

Date: August 23, 2010	/s/ Nick Popravsky
	Wallace “Nick” Popravsky, Vice President and Director

Eternal Image Inc 10-Q